MARKETING

SUMMARY
Chapter 11
Price The
Product

Price is the assignment of value, or the amount the consumer must exchange to
receive the offering or product.
Elements of Price Planning:

Step 1: Set Pricing Objectives

1 Objectives
Profit

The
is net
on a
target
level of profit growth
or a focus
desired
profit
margin.

2than
Marketers
develop
strategies
thatofrather
maximize
the
profits
of
theor
entire
portfolio
focusing
on
thepricing
costs
profitability
each
individual
product.
Sales as
orother
Marketing
firms mayShare Objectives
satisfy sales objectives

Competitive Effect Objectives

1ofA afirm
may deliberately try to reduce the impact
rivalspricingchanges
Customer satisfaction

1result
Manyfrom
quality-focused
firms believe
that long-term
profits
making customer
satisfaction
the primary
objective

1 Enhancement Objectives
Image

image(or
enhancement
function
pricing
isThe
particularly
important
prestige
products
luxury
that of
have
a
high
price and
appealproducts)
to with
status-conscious
consumers.

2must
In order
to set the
right
price,
marketers
understand
afor
variety
of
quantitative
and
qualitative
factors
that
can
mean
success
or failure
the
pricing
strategy.
Step 2: Estimate Demand
Demand Curves

demand curve is used to illustrate the effect of

price on the quantity demanded of a product.

Shifts in Demand
Changes in the environment or in company efforts can a shift in the demand curve. A
great advertising campaign, for example, can shift the demand curve upward.

Estimate Demand

1. Identifying the number of buyers or potential buyers for their product and then
2.

multiplying that estimate times the average amount each member of the target
market is likely to purchase
Predict what the companys market share is likely

Price Elasticity of Demand

1 Marketers want to know this because it will influence the decision to raise of lower prices.
2 Products that are considered discretionary in nature tend to have elastic demand curves.
3 The demand for staple products or those that we have no choice in
consuming, such as prescription drugs tend to be price inelastic.

Assuming the goal is to maximize revenues (and profits), then for a price elastic
product, it would pay to lower price to increase demand, while for a price
inelastic product, it would pay to raise the price, because demand will decrease
relatively little in response to that change

5 Cross-elasticity of demand: When changes in the price of one product

affect the demand for another item

Ex: when products are complements an increase in the price of one decreases
the demand for the second.

Step 3: Determine Costs

Variable and Fixed Costs

1 Variable costs: the costs of production (raw and processed materials, parts, and
2
3

labour) that are tied to, and vary depending on, the number of units produced.
Fixed costs: costs of production that do not change with the number of
units produced. Example: costs related to the building and property.
Average fixed cost: The fixed cost per unit produced.

Break-even analysis is a technique marketers use to examine the relationship

between
costs andwhat
price.
1completely
determine
the
company
reach
at aa given
cover itssales
total volume
costs and
past
which it must
will begin
to turn
profit price before it will

point is the point at which the company doesnt los any profit
1Break-even
Contribution
unit:is The
difference
between
product and
the variableper
costs->
needed
to determine
BEPthe price the firm charges for
1price.
provides
howwhether
many units
the firm
to quantity
break even
and
to makeBEP
a profit
butanswers
withoutabout
knowing
demand
will must
equalsell
that
at that

1
Marginal
analysis

2
3

Marginal
analysis: A method that uses cost and demand to identify the price that will
maximize profits.

Marketers
examine
the relationship
marginal
cost
(the increase
total
costs
from
producing
one
additional
of of
afrom
product)
toone
marginal
revenue
(the
increase
in total
income
or
revenue
that unit
results
selling
additional
unit ofin
a product)
Marginal
analysis
allows marketers to consider both costs and demand in calculating a price
that
maximizes
profits.

4at different
Thislevels
method
can be difficult to use because of the uncertainty of cost information
of demand.
1
Markups
and Margins: Pricing through the Channel

Markup
An sell
amount
added to the cost of a product to create the price at which a channel
member will
the product.

2costs of the
Gross
margin:
The markup
to for
theacost
of a product to cover the fixed
retailer
or wholesaler
andamount
leave anadded
amount
profit.

1
2

Retailer margin: The margin added to the cost of a product by a retailer.

Wholesaler margin: The amount added to the cost of a product by a wholesaler.

by the manufacturer; also referred to as the suggested retail price.

The appropriate price for the end customer to pay as determined by the manufacturer.

The channel of distribution must be able to mark up the product in order to pay for his
fixed costs and profits.

Step 4: Examine the Pricing Environment

1 Companies must consider the influence of their external environment when
choosing the pricing strategy that will offer the best chance to maximize profits.

2 Factors within the external environment:

1 The state of the economy (The business cycle, inflation, economic growth,
and consumer confidence)

1 The competition
2 Consumer trends such as increased attention to value for money spent
3 Global influences such as currency exchange rates, and trade restrictions
3 Price subsidies: government payments made to protect domestic businesses
or to reimburse them when they must price at or below cost to make a sale. The
subsidy can be a cash payment or tax relief.

Step 5: Choose a Pricing Strategy

1
Pricing
Strategies
Based
on Cost
Simple
to calculate and
are relatively
risk free
2

Do not consider
factors life
such
as the
nature
market,Drawbacks:
demand, competition,
the product
cycle,
and
the of the target
productsandaccurateimagecostestimating
may
prove
difficult.

Marketers develop successful pricing programs by choosing from a variety of pricing

strategies and tactics.

Cost-plus pricing
A method of setting
prices in which the
seller
totals all the costs for the
product and then
adds an amount to arrive
at the selling price.

Pricing Strategies Based on Demand

Demand-based
different prices. pricing : A price-setting method based on estimates of demand at

Target
costing:
A process
in which
firms
identify
the
quality
functionality
needed
todesigned;
satisfy
customers
and
price
theyonly
are
to and
pay
before
the
the
product
is what
manufactured
ifwilling
the
firm
can
control
costsproduct
to
meetisthe
required
price.

Yield management pricing: A practice of charging different prices to different

customers in order to manage capacity while maximizing revenues.

Pricing Strategies Based on the Competition price leadership A pricing

strategy in which one firm first sets its price and other firms in the industry follow with the
same or very similar prices.

Pricing Strategies Based

onvalueCustomerspricingoreverydaylowNeedspricing (EDLP) A pricing
strategy in which a firm sets prices that provide ultimate value to customers.

New
1Product Pricing

Skimming
price: A very high, premium price that a firm charges for its new, highly
desirable product

Penetration
pricing: more
A pricing
strategy
which ait.firm introduces a new product at a very
low
price to encourage
customers
to in
purchase

3risk for aTrial

pricing Pricing a new product low for a limited period of time in order to lower the
customer.
Step 6: Develop Pricing Tactics
Pricing for Individual Products

Two-part pricing requires two separate types of payments to purchase the product.

Ex: many cellular phone service providers offer customers a set number of
minutes for a monthly fee plus a per-minute rate for extra usage.
Payment pricing makes the consumer- ablethinkbybreakingtheupthe totalpriceintois do
smaller amounts payable over time.
Ex: The monthly lease amount
1
Pricing
forbundling:
Multiple
Products
Price
Selling
two or more goods or services as a single package for one price.

2one item
Captive pricing: A pricing tactic for two items that must be used together;
is priced very low, and the firm makes its profit on another, high-margin
item essential to the operation of the first item.

Distribution-Based Pricing

1product from
F.O.B.
A pricing
tactic in which the cost of customer.
transporting
theorigin
factorypricing:
to locationthe
iscustomerstheresponsibilityofthe
1

the

F.O.B.
delivered
pricing:
A pricing
tactic in in
which
cost price
of loading
transporting
the
product
to the
customer
is included
the the
selling
and and
is paid
by the
manufacturer.

basing-point
pricing:whether
A pricing
customers
pay these
shipping
charges
basing-point locations,
the tactic
goods in
arewhich
actually
shipped from
points
or not.from set

Uniform
delivered
pricing:regardless
A pricing tactic
in which a firm adds a standard shipping charge
to
the price
for all customers
of location.

4total costFreight
absorption
of transportation.

pricing: A pricing tactic in which the seller absorbs the

1
Discounting
for Channel Members

Trade
discounts:
Discounts
list price
of products to members of the channel of
distribution
who perform
variousoff
marketing
functions.

3
4

Quantity
discounts:
quantities of
a product. A pricing tactic of charging reduced prices for purchases of larger
Cash discounts:
A discount
offered to offered
a customer
entice
them times
to payof
their
quickly.
Seasonal
discounts:
Price reductions
only to
during
certain
the bill
year.

1
Pricing
and Electronic Commerce
The Internet provides an opportunity to use some unique pricing strategies.

Dynamic
pricing: A pricing strategy in which the price can easily be adjusted to meet changes
in
the marketplace.

On-line
auctions: E-commerce that allows shoppers to purchase products through
online bidding.

4because Freenomics:
A business model that encourages giving products away for free
of the increase in profits that can be achieved by getting more people to
participate in a market.

Psychological, Legal, and Ethical Aspects of Pricing

Psychological Issues in Setting Prices

In the real world consumers arent nearly as rational

1
Buyers
Pricingbase
Expectations
Often consumers
their perceptions of price on what they perceive to be the customary or fair price

When the price of a product is above orexpect,eventheyaresometimes less willing to purchase the
product.

Internal Reference Prices: A set price or a pricemindsthat theyrangereferto in evaluatingconsumersa

products price.

assimilation effect: if the prices (and other characteristics) of the two products are fairly
close, the consumer will probably feel the product quality is similar.

PriceQuality Inferences: Consumers make pricequality inferences about a product

when they use price as a cue or an indicator of quality.

Psychological Pricing Strategies

1
OddEven
Pricing
Research
on argument
the difference
in perceptions
of rather
odd versus
even
indeed
supports
the
that prices
ending in 99
than 00
leadprices
to increased
sales

2calledPrice
ofproduct
setting line.
a limited number of different specific prices,
pricelining
points,The
for practice
items in a

Prestige
1thePricing
Sometime
luxury goods
use relationships
a prestige pricing strategy that turns
typical
assumption
about marketers
price-demand

Legal and Ethical Considerations in B2C Pricing

Deceptive
Pricing
Practices:
Bait-and-Switch
1higher-priced
An get
illegal
marketing
practice
in which
price
special them
is used
bait to
customers
into
the store
with an
theadvertised
intention of
switching
toas
a
item.
1
Loss-Leader
Pricing
and Unfair Sales Acts
Loss-leader
pricing
The pricing policy of setting prices very low or even below cost to attract
customers into a store.
2

Unfair sales acts

State laws that prohibit suppliers from selling products below cost to protect
small businesses from larger competitors.

Legal Issues in B2B Pricing

1

Illegal Business-to-Business Price Discrimination

Price discrimination regulations prevent firms from selling the same product to
different retailers and wholesalers at different prices if such practices lessen
competition.
Price-fixing

The collaboration of two or more firms in setting prices, usually to keep prices high.
3

Predator pricing

Illegal pricing strategy in which a company sets a very low price for the
purpose of driving competitors out of business.