Marketing Objectives that Affect Pricing Decisions Marketing Objectives Survival Low Prices to Cover Variable Costs and Some Fixed Costs to Stay in Business. Current Profit Maximization Choose the Price that Produces the Maximum Current Profit, Cash Flow or ROI. Market Share Leadership Low as Possible Prices to Become the Market Share Leader. Product Quality Leadership High Prices to Cover Higher Performance Quality
Marketing Mix Variables that Affect Pricing Decisions Marketing-Mix Strategy Product Design and Quality Distribution Promotion Non-Price Factors
Types of Cost Factors that Affect Pricing Decisions Total Costs Sum of the Fixed and Variable Costs for a Given Level of Production Variable Costs Costs that do vary directly with the level of production. Raw materials Fixed Costs (Overhead) Costs that don’t vary with sales or production levels. Executive Salaries Rent
Costs Considerations Cost per unit 1 2 3 4 SRAC LRAC Quantity Produced per Day 1,000 2,000 3,000 4,000 Cost Per Unit at Different Levels of Production Per Period
External Factors Affecting Pricing Decisions Market and Demand Competitors’ Costs, Prices, and Offers Other External Factors Economic Conditions Reseller Needs Government Actions Social Concerns
The Market and Demand Factors that Affect Pricing Decisions Pure Competition Many Buyers and Sellers Who Have Little Affect on the Price. Monopolistic Competition Many Buyers and Sellers Trading Over a Range of Prices. Oligopolistic Competition Few Sellers Each Sensitive to Other’s Pricing/ Marketing Strategies Pure Monopoly Single Seller Different Types of Markets
Demand Curves Price Quantity Demanded per Period A. Inelastic Demand - Demand Hardly Changes With a Small Change in Price. P 2 P 1 Q 1 Q 2 Price Quantity Demanded per Period P’ 2 P’ 1 Q 1 Q 2 B. Elastic Demand - Demand Changes Greatly With a Small Change in Price.
What is Cost-Plus Pricing and Why is it Popular? Minimizes Price Competition Perceived Fairness to Both Buyers and Sellers Sellers Are More Certain About Costs Than Demand Adding a Standard Markup to the Cost of the Product
Breakeven Analysis or Target Profit Pricing Total Revenue Total Cost Fixed Cost Target Profit ($200,000) Sales Volume in Units (thousands) Cost in Dollars (thousands) Tries to Determine the Price at Which a Firm Will Break Even or Make a Target Profit 200 400 600 800 1,000 1,200 10 20 30 40 50
Value-Based Pricing Cost-Based Pricing Value-Based Pricing Product Cost Price Value Customers Customer Value Price Cost Product
Competition-Based Pricing Setting Prices Sealed-Bid Company Sets Prices Based on What They Think Competitors Will Charge. Going-Rate Company Sets Prices Based on What Competitors Are Charging. ? ?