Pricing Considerations  and Approaches Topic 7
Objectives <ul><li>Understand the internal factors affecting a firm’s pricing decisions. </li></ul><ul><li>Understand the ...
What is Price? <ul><li>Rent </li></ul><ul><li>Fee </li></ul><ul><li>Rate </li></ul><ul><li>Commission </li></ul><ul><li>As...
Definition <ul><li>Price </li></ul><ul><ul><li>The amount of money charged for a product or service, or the sum of the val...
<ul><li>Price and the Marketing Mix: </li></ul><ul><ul><li>Only element to produce revenues </li></ul></ul><ul><ul><li>Mos...
11-  Figure 11-1:   Factors Affecting Price Decisions
Factors to Consider When Setting Price <ul><li>Market positioning influences strategy </li></ul><ul><li>Other pricing obje...
Factors to Consider When Setting Price <ul><li>Pricing must be carefully coordinated with the other marketing mix elements...
Factors to Consider When Setting Price <ul><li>Types of costs: </li></ul><ul><ul><li>Variable </li></ul></ul><ul><ul><li>F...
11-  Figure 11-2:   Cost Per Unit at Different Production Levels
11-  Figure 11-3:   Cost Per Unit As a Function  of Accumulated Production
Factors to Consider When Setting Price <ul><li>Who sets the price? </li></ul><ul><ul><li>Small companies:  CEO or top mana...
Factors to Consider When Setting Price <ul><li>Types of markets </li></ul><ul><ul><li>Pure competition </li></ul></ul><ul>...
11-  Figure 11-4:   Demand Curves
Factors to Consider When Setting Price <ul><li>Consider competitors’ costs, prices, and possible reactions when developing...
Factors to Consider When Setting Price <ul><li>Economic conditions </li></ul><ul><ul><li>Affect production costs  </li></u...
11-  Figure 11-5:   Major Considerations  in Setting Price
<ul><li>Cost-Based Pricing:  Cost-Plus Pricing </li></ul><ul><ul><li>Adding a standard markup to cost </li></ul></ul><ul><...
<ul><li>Cost-Based Pricing Example </li></ul><ul><ul><li>Variable costs:  $20  Fixed costs: $ 500,000 </li></ul></ul><ul><...
<ul><li>Cost-Based Pricing:  Break-Even Analysis and Target Profit Pricing </li></ul><ul><ul><li>Break-even charts show to...
11-  Figure 11-6:   Break-Even Chart for Determining Target Price
11-  Figure 11-7:   Cost-Based Versus  Value-Based Pricing
<ul><li>Value-Based Pricing: </li></ul><ul><ul><li>Uses buyers’ perceptions of value rather than seller’s costs to set pri...
<ul><li>Value-Based Pricing: </li></ul><ul><ul><li>Business-to-business firms seek to retain pricing power </li></ul></ul>...
<ul><li>Competition-Based Pricing: </li></ul><ul><ul><li>Also called going-rate pricing </li></ul></ul><ul><ul><li>May pri...
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marketing mgmt Topic 7

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marketing mgmt Topic 7

  1. 1. Pricing Considerations and Approaches Topic 7
  2. 2. Objectives <ul><li>Understand the internal factors affecting a firm’s pricing decisions. </li></ul><ul><li>Understand the external factors affecting pricing decisions, including the impact of consumer perceptions of price and value. </li></ul><ul><li>Be able to contrast the three general approaches to setting prices. </li></ul>11-
  3. 3. What is Price? <ul><li>Rent </li></ul><ul><li>Fee </li></ul><ul><li>Rate </li></ul><ul><li>Commission </li></ul><ul><li>Assessment </li></ul>11- Price Has Many Names <ul><li>Tuition </li></ul><ul><li>Fare </li></ul><ul><li>Toll </li></ul><ul><li>Premium </li></ul><ul><li>Retainer </li></ul><ul><li>Bribe </li></ul><ul><li>Salary </li></ul><ul><li>Wage </li></ul><ul><li>Interest </li></ul><ul><li>Tax </li></ul>
  4. 4. Definition <ul><li>Price </li></ul><ul><ul><li>The amount of money charged for a product or service, or the sum of the values that consumers exchange for the benefits of having or using the product or service. </li></ul></ul>11-
  5. 5. <ul><li>Price and the Marketing Mix: </li></ul><ul><ul><li>Only element to produce revenues </li></ul></ul><ul><ul><li>Most flexible element </li></ul></ul><ul><ul><li>Can be changed quickly </li></ul></ul><ul><li>Price Competition </li></ul><ul><li>Common Pricing Mistakes </li></ul>What is Price? 11-
  6. 6. 11- Figure 11-1: Factors Affecting Price Decisions
  7. 7. Factors to Consider When Setting Price <ul><li>Market positioning influences strategy </li></ul><ul><li>Other pricing objectives: </li></ul><ul><ul><li>Survival </li></ul></ul><ul><ul><li>Current profit maximization </li></ul></ul><ul><ul><li>Market share leadership </li></ul></ul><ul><ul><li>Product quality leadership </li></ul></ul><ul><li>Not-for-profit objectives: </li></ul><ul><ul><li>Partial or full cost recovery </li></ul></ul><ul><ul><li>Social pricing </li></ul></ul>11- <ul><li>Marketing objectives </li></ul><ul><li>Marketing mix strategies </li></ul><ul><li>Costs </li></ul><ul><li>Organizational considerations </li></ul>Internal Factors
  8. 8. Factors to Consider When Setting Price <ul><li>Pricing must be carefully coordinated with the other marketing mix elements </li></ul><ul><li>Target costing is often used to support product positioning strategies based on price </li></ul><ul><li>Nonprice positioning can also be used </li></ul>11- <ul><li>Marketing objectives </li></ul><ul><li>Marketing mix strategies </li></ul><ul><li>Costs </li></ul><ul><li>Organizational considerations </li></ul>Internal Factors
  9. 9. Factors to Consider When Setting Price <ul><li>Types of costs: </li></ul><ul><ul><li>Variable </li></ul></ul><ul><ul><li>Fixed </li></ul></ul><ul><ul><li>Total costs </li></ul></ul><ul><li>How costs vary at different production levels will influence price-setting </li></ul><ul><li>Experience (learning) curve effects on price </li></ul>11- <ul><li>Marketing objectives </li></ul><ul><li>Marketing mix strategies </li></ul><ul><li>Costs </li></ul><ul><li>Organizational considerations </li></ul>Internal Factors
  10. 10. 11- Figure 11-2: Cost Per Unit at Different Production Levels
  11. 11. 11- Figure 11-3: Cost Per Unit As a Function of Accumulated Production
  12. 12. Factors to Consider When Setting Price <ul><li>Who sets the price? </li></ul><ul><ul><li>Small companies: CEO or top management </li></ul></ul><ul><ul><li>Large companies: Divisional or product line managers </li></ul></ul><ul><li>Price negotiation is common in industrial settings </li></ul><ul><li>Some industries have pricing departments </li></ul>11- <ul><li>Marketing objectives </li></ul><ul><li>Marketing mix strategies </li></ul><ul><li>Costs </li></ul><ul><li>Organizational considerations </li></ul>Internal Factors
  13. 13. Factors to Consider When Setting Price <ul><li>Types of markets </li></ul><ul><ul><li>Pure competition </li></ul></ul><ul><ul><li>Monopolistic competition </li></ul></ul><ul><ul><li>Oligopolistic competition </li></ul></ul><ul><ul><li>Pure monopoly </li></ul></ul><ul><li>Consumer perceptions of price and value </li></ul><ul><li>Price-demand relationship </li></ul><ul><ul><li>Demand curve </li></ul></ul><ul><ul><li>Price elasticity of demand </li></ul></ul>11- <ul><li>Nature of market and demand </li></ul><ul><li>Competitors’ costs, prices, and offers </li></ul><ul><li>Other environmental elements </li></ul>External Factors
  14. 14. 11- Figure 11-4: Demand Curves
  15. 15. Factors to Consider When Setting Price <ul><li>Consider competitors’ costs, prices, and possible reactions when developing a pricing strategy </li></ul><ul><li>Pricing strategy influences the nature of competition </li></ul><ul><ul><li>Low-price low-margin strategies inhibit competition </li></ul></ul><ul><ul><li>High-price high-margin strategies attract competition </li></ul></ul><ul><li>Benchmarking costs against the competition is recommended </li></ul>11- <ul><li>Nature of market and demand </li></ul><ul><li>Competitors’ costs, prices, and offers </li></ul><ul><li>Other environmental elements </li></ul>External Factors
  16. 16. Factors to Consider When Setting Price <ul><li>Economic conditions </li></ul><ul><ul><li>Affect production costs </li></ul></ul><ul><ul><li>Affect buyer perceptions of price and value </li></ul></ul><ul><li>Reseller reactions to prices must be considered </li></ul><ul><li>Government may limit or restrict pricing options </li></ul><ul><li>Social considerations may be taken into account </li></ul>11- <ul><li>Nature of market and demand </li></ul><ul><li>Competitors’ costs, prices, and offers </li></ul><ul><li>Other environmental elements </li></ul>External Factors
  17. 17. 11- Figure 11-5: Major Considerations in Setting Price
  18. 18. <ul><li>Cost-Based Pricing: Cost-Plus Pricing </li></ul><ul><ul><li>Adding a standard markup to cost </li></ul></ul><ul><ul><li>Ignores demand and competition </li></ul></ul><ul><ul><li>Popular pricing technique because: </li></ul></ul><ul><ul><ul><li>It simplifies the pricing process </li></ul></ul></ul><ul><ul><ul><li>Price competition may be minimized </li></ul></ul></ul><ul><ul><ul><li>It is perceived as fairer to both buyers and sellers </li></ul></ul></ul>General Pricing Approaches 11-
  19. 19. <ul><li>Cost-Based Pricing Example </li></ul><ul><ul><li>Variable costs: $20 Fixed costs: $ 500,000 </li></ul></ul><ul><ul><li>Expected sales: 100,000 units Desired Sales Markup: 20% </li></ul></ul><ul><ul><li>Variable Cost + Fixed Costs/Unit Sales = Unit Cost </li></ul></ul><ul><ul><li>$20 + $500,000/100,000 = $25 per unit </li></ul></ul><ul><ul><li>Unit Cost/(1 – Desired Return on Sales) = Markup Price </li></ul></ul><ul><ul><li>$25 / (1 - .20) = $31.25 </li></ul></ul>General Pricing Approaches 11-
  20. 20. <ul><li>Cost-Based Pricing: Break-Even Analysis and Target Profit Pricing </li></ul><ul><ul><li>Break-even charts show total cost and total revenues at different levels of unit volume. </li></ul></ul><ul><ul><li>The intersection of the total revenue and total cost curves is the break-even point. </li></ul></ul><ul><ul><li>Companies wishing to make a profit must exceed the break-even unit volume. </li></ul></ul>General Pricing Approaches 11-
  21. 21. 11- Figure 11-6: Break-Even Chart for Determining Target Price
  22. 22. 11- Figure 11-7: Cost-Based Versus Value-Based Pricing
  23. 23. <ul><li>Value-Based Pricing: </li></ul><ul><ul><li>Uses buyers’ perceptions of value rather than seller’s costs to set price. </li></ul></ul><ul><ul><li>Measuring perceived value can be difficult. </li></ul></ul><ul><ul><li>Consumer attitudes toward price and quality have shifted during the last decade. </li></ul></ul><ul><ul><ul><li>Introduction of less expensive versions of established brands has become common. </li></ul></ul></ul>General Pricing Approaches 11-
  24. 24. <ul><li>Value-Based Pricing: </li></ul><ul><ul><li>Business-to-business firms seek to retain pricing power </li></ul></ul><ul><ul><ul><li>Value-added strategies can help </li></ul></ul></ul><ul><ul><li>Value pricing at the retail level </li></ul></ul><ul><ul><ul><li>Everyday low pricing (EDLP) vs. high-low pricing </li></ul></ul></ul>General Pricing Approaches 11-
  25. 25. <ul><li>Competition-Based Pricing: </li></ul><ul><ul><li>Also called going-rate pricing </li></ul></ul><ul><ul><li>May price at the same level, above, or below the competition </li></ul></ul><ul><ul><li>Bidding for jobs is another variation of competition-based pricing </li></ul></ul><ul><ul><ul><li>Sealed bid pricing </li></ul></ul></ul>General Pricing Approaches 11-
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