SLIDE principles of marketing chapter 6

COST – BASED PRICING Break-even pricing/ Target profit pricing  Setting price to break even on the costs of making and marketing a product or setting price to make a target return.. 3

LEARNING OBJECTIVES

 Answer the question “What is a price?” and

discuss the importance of pricing in today’s changing environment.

fast- Internal and external considerations affecting price decisions

 Major pricing strategies

 New product pricing strategies

 Product mix pricing strategies

 Price adjustment strategies

 Price changes

1 WHAT IS A PRICE?

 Definition of price

 In the narrowest sense, price = the amount of money

charged for a product or a service

 More broadly, price = the sum of all the values that

customers give up to gain the benefits of having or using a product or service

IMPORTANCE OF PRICING

 Importance of pricing

 The only element in the marketing mix that produces revenue; all other elements represent costs.

 One of the most flexible marketing mix elements.

 A key strategic tool for creating and capturing customer value.

 Have a direct impact on a firm’s financial performance.

 Play a key role in creating customer value and building

customer relationships

2 FACTORS AFFECTING PRICE DECISIONS

EXTERNAL FACTORS

Nature of the market

DemandCompetitors' strategies and

pricesOther environment forces

PRICE DECISIONS

2.1 EXTERNAL FACTORS

 EXTERNAL FACTORS

 Types of markets

2.1 EXTERNAL FACTORS

 EXTERNAL FACTORS

 Demand curve

• Each price the company might charge will lead

to a different level of demand

• The demand curve shows the number of units

the market will buy in a given time period at different prices that might be charged

• In the normal case, all else being equal, demand

and price are inversely related.

2.1 EXTERNAL FACTORS

 Price elasticity of demand

• Price elasticity of demand – a measure of the sensitivity of demand to changes in price.

% Change in Price

 Competitors’ strategies and prices

 Marketing strategy, objectives, and mix

 Nature of the market and demand

CUSTOMER VALUE– BASED PRICING

3.1 COST – BASED PRICING

 Setting prices based on the costs of producing, distributing,

and selling the product plus a fair rate of return for effort and

risk.

 Types of costs

FIXED COSTS (OVERHEAD)

COSTS

Costs that do not vary with production or sales level

Costs that vary directly with

the level of production

The sum of the fixed and variable costs for any given level of production

COST – BASED PRICING

 Costs at different levels of production

A Cost behavior in a fixed-size plant

B Cost behavior over different-size plants

Quantity produced per day

COST – BASED PRICING

 Cost-plus pricing/ Markup pricing

 The simplest pricing method

 Adding a standard markup to the cost of the product.

Unit sales

(1 – % desired return on sales)

COST – BASED PRICING

 Advantages

 Sellers are more certain about costs than about demand => sellers simplify pricing; they do not need to make frequent adjustments as demand

changes.

 Many people feel that cost-plus pricing is fairer to both buyers and sellers

 When all firms in the industry use this pricing method, prices tend to be similar, so price competition is minimized

 Limitations:

 Any pricing method that ignores demand and competitor prices is not

likely to lead to the best price.

COST – BASED PRICING

 Break-even pricing/ Target profit pricing

 Setting price to break even on the costs of making and marketing a

product or setting price to make a target return.

 Target return pricing uses the concept of a break-even chart, which shows

the total cost and total revenue expected at different sales volume levels.

COST – BASED PRICING

 Break-Even Chart

Target return ($200.000)

At the break-even point,here 30,000 units, totalrevenue equals total cost

Sales volume in units (thousands)

COST – BASED PRICING

 Break-even pricing/ Target profit pricing

 Break-even volume can be calculated using the following formula:

Break-even

Fixed cost(Price – Variable cost)

3.2 CUSTOMER VALUE – BASED PRICING

 Customer value – based pricing

 Setting price based on buyers’ perceptions of value rather than

on the seller’s cost.

 Effective customer-oriented pricing involves understanding

how much value consumers place on the benefits they receive from the product and setting a price that captures that value.

 Value-based pricing means that the marketer cannot design a product and marketing program and then set the price Price is considered along with all other marketing mix variables before the marketing program is set.

CUSTOMER VALUE – BASED PRICING

 Customer value – based pricing

Design agood product

Determineproduct costs

Set price based

on cost

Convince buyers

of product’svalue

Cost-based

pricing

Assess customerneeds and valueperceptions

Set target price tomatch customer-perceived value

Determine coststhat can beincurred

Design product

to deliver desiredvalue at target

price

Value-based

pricing

CUSTOMER VALUE – BASED PRICING

 Customer value – based pricing

 Hard to measure the value customers attach to its product: subjective and varies both for different consumers and

CUSTOMER VALUE – BASED PRICING

 Customer value – based pricing

 Good-value pricing: Offering just the right combination of quality and

good service at a fair price.

• Everyday low pricing – EDLP

• Good-value pricing at the retail level

• Charging a constant, everyday low price with few or no temporary price discounts

4 NEW PRODUCT PRICING STRATEGIES

 New product pricing strategies:

New product pricing strategies

Định giá SP đi kèm tùy chọn

Market-skimming pricing/

Price skimming

Định giá phó phẩm

Market-penetration pricing

NEW PRODUCT PRICING STRATEGIES

 New product pricing strategies

 Setting a high price for a new product to skim maximum revenues layer by layer from the segments willing to pay the high price.

 The company makes fewer but more profitable sales.

NEW PRODUCT PRICING STRATEGIES

 Market-penetration pricing

 Setting a low price for a new product in order to attract a large number of buyers and a large market share.

 Companies penetrate the market quickly and deeply.

 The high sales volume results in falling costs, allowing companies to cut their prices even further.

 Conditions:

• The market must be highly price sensitive so that a low price produces more market growth

• Production and distribution costs must decrease as sales volume increases

• The low price must help keep out the competition, and the penetration pricer must maintain its low-price position

5 PRODUCT MIX PRICING STRATEGIES

 Product mix pricing strategies:

Product mix

pricing strategies

Optional-product pricing Product line pricing

By-product pricing Captive-product pricing

Product bundle pricing

PRODUCT MIX PRICING STRATEGIES

 Product line pricing

 Setting the price steps between various products in a

product line based on cost differences between the

products, customer evaluations of different features,

and competitors’ prices.

Garden view 270 Seaview 349

PRODUCT MIX PRICING STRATEGIES

 Optional-product pricing

 The pricing of optional or accessory products along

with a main product.

New car with ordinary rims

$59,000

New car with sports rims

$60,000

PRODUCT MIX PRICING STRATEGIES

 Captive-product pricing

 Setting a price for products that must be used along with a main product

 Producers of the main products often price them low and set high

markups on the supplies.

 Captive products can account for a substantial portion of a brand’s sales and profits.

 Two-part pricing

 In the case of services, captive-product pricing is called two-part pricing

 The price of the service is broken into a fixed fee plus a variable usage

rate.

PRODUCT MIX PRICING STRATEGIES

 By-product pricing

 Producing products and services often

generates by-products

 Setting a price for by-products to:

• help offset the costs of disposing of them

• help make the main product’s price more competitive

 The company need to seek a market for these

by-products.

PRODUCT MIX PRICING STRATEGIES

 Product bundle pricing

 Combining several products and offering

the bundle at a reduced price.

 Price bundling can promote the sales of

products consumers might not otherwise

buy, but the combined price must be low

enough to get them to buy the bundle.

1 bottle: $2.70

Bundled 2 bottles: $4.90

6 PRICE ADJUSTMENT STRATEGIES

 Price adjustment strategies:

Price adjustment strategies

Segmented pricing Discount and allowance pricing

Promotional pricing Psychological pricing

International pricing Dynamic pricing

Geographical pricing

PRICE ADJUSTMENT STRATEGIES

 Discount

 A straight reduction in price on purchases during

a stated period of time or of larger quantities.

 Forms of discounts:

Cash discount

A price reduction to

buyers who pay

their bills promptly

Quantity discount

A price reduction to buyers who buy large volumes

Seasonal discount

A price reduction tobuyers who buy merchandise or services out of season

Functional/ trade

discount

A price reduction to trade-channel members who perform certain functions, such as selling, storing, and record

keeping

PRICE ADJUSTMENT STRATEGIES

 Allowances

 Promotional money paid by

manufacturers to retailers in return for

an agreement to feature the manufacturer’s products in some way.

 Types of allowances:

• Trade-in allowance: Price reductions given

for turning in an old item when buying a new one (automobile; other durable goods)

• Promotional allowance: Payments or price

reductions that reward dealers for participating in advertising and sales-support programs

PRICE ADJUSTMENT STRATEGIES

 Segmented pricing

 Selling a product or service at two or more prices, where the difference in prices is not based on differences in costs.

 Conditions:

• The market must be segmentable

• Segments must show different degrees of demand

• The costs of segmenting and reaching the market cannot exceed the extra revenue obtained from the price difference

• The segmented pricing must also be legal

 Segmented prices should reflect real differences in customers’ perceived value

PRICE ADJUSTMENT STRATEGIES

pay different prices

for the same product

or service

Product-form pricing

Different versions of the product are priced differentlybut not according to differences in their

costs

Time-based pricing

A firm variesits price by the season, the month, the day, and even the

hour

Location-based

pricing

A company charges different prices for different locations,even though the cost

of offering each location is the same

PRICE ADJUSTMENT STRATEGIES

 Psychological pricing

 Pricing that considers the psychology of

prices and not simply the economics; the

price is used to say something about the

product.

 Reference price

• Prices that buyers carry in their minds and refer

to when looking at a given product

PRICE ADJUSTMENT STRATEGIES

 Promotional pricing

 Temporarily pricing products below the list price, and sometimes even

below cost, to increase short-run sales.

 Forms:

Discount Special-event

pricing

Low-interest financing

Free maintenance

PRICE ADJUSTMENT STRATEGIES

absorption pricing

Freight-PRICE ADJUSTMENT STRATEGIES

 Geographical pricing

 Strategies:

• FOB-origin pricing: Pricing in which goods are placed free on board a carrier; the

customer pays the freight from the factory to the destination

• Uniform-delivered pricing: Pricing in which the company charges the same price plus

freight to all customers, regardless of their location

• Zone pricing: Pricing in which the company sets up two or more zones All customers

within a zone pay the same total price; the more distant the zone, the higher the price

• Basing-point pricing: Pricing in which the seller designates some city as a basing

point and charges all customers the freight cost from that city to the customer

• Freight-absorption pricing: Pricing in which the seller absorbs all or part of the

freight charges in order to get the desired business

PRICE ADJUSTMENT STRATEGIES

 Dynamic pricing

 Adjusting prices continually to meet the

characteristics and needs of individual

customers and situations.

PRICE ADJUSTMENT STRATEGIES

 International pricing

 For companies that market their products internationally

 Prices to charge in different countries:

• Set a uniform worldwide price

• Adjust their prices to reflect local market conditions and cost considerations

 Price determinants:

• economic conditions

• competitive situations

• laws and regulations

• nature of the wholesaling and retailing system

• consumer perceptions and preferences

• marketing objectives in various world markets

• costs

7 PRICE CHANGES

PRICE CHANGES

Responding to price changes

Responding to a price change by a

competitor.

Initiating price changes

Initiating price increases

Initiating price cuts

INITIATING PRICE CHANGES

 Initiating price cuts

 Situations:

• Excess capacity

• Falling demand in the face of strong price competition or a weakened economy

 Aims:

• Boost sales and market share

• Dominate the market through lower costs

 Initiating price increases

INITIATING PRICE CHANGES

 Buyer reactions

 Customers do not always

interpret price changes in a

straightforward way.

 A brand’s price and image are

often closely linked

• when the product is uniform

• when the buyers are well informedabout products and prices

 Competitors can interpret a company price cut in many ways.

 The company must assess each competitor’s likely reaction.

RESPONDING TO PRICE CHANGES

 Responding to price changes

 How a firm should respond to a price change by a competitor?

 Issues to consider:

• Why did the competitor change the price?

• Is the price change temporary or permanent?

• What will happen to the company’s market share and profits if it does not respond?

• Are other competitors going to respond?

• Company’s situation and strategy

• Possible customer reactions to price changes

RESPONDING TO PRICE CHANGES

Has competitorcut price?

Will lower pricenegatively affect ourmarket share and profits?

Can/should effectiveaction be taken?

Hold current price;continue to monitorcompetitor’s price

Reduce price Raise perceived value

Improve qualityand increase priceLaunch low-price