Marketing

1. PRICING
• Price:
• The amount of money charged for a product or service, or the sum of the values
that customers exchange for the benefits of having or using the product or service.
• Price is the only element in the marketing mix that produces revenue; all other
elements represent costs. Price is also one of the most flexible marketing mix
elements. Unlike product features and channel commitments, prices can be changed
quickly. At the same time, pricing is the number-one problem facing many
marketing executives, and many companies do not handle pricing well.

2. Goals of Pricing
Gaining market share: When a business is trying to take business away from its competition, it is trying to increase its market share.
• Market share is a percentage of the total sales volume generated by all competitors in a given market.
• Return on investment: Is a calculation that is used to determine the relative profitability of a product. A company may price its
products to achieve a certain return on investment. Formula is: Profit divided by Investment
• Assume your company sells trash cans for $8 each. Your cost to make and market the trash cans is $6.50 per unit. Profit is
money earned by a business minus costs and expenses.
• $8 - $6.50 = $1.50 / $6.50 = .23 This means that your rate of return on investment is 23 percent.
• Meeting the competition: Some companies price their products to meet the prices of their competition.
(Automobiles and soft drinks are examples). Competing products in both of these categories tend to be very
similar and therefore priced closely to one another.

3. Pricing Strategies
Cost-based pricing
Set prices based on costs
 $6.50 cost of trash cans.
 If desire 10% profit then mark-up 10%
from cost
 If desire 23% profit then mark-up 23%
from cost
Demand-based pricing
Marketers attempt to
determine what consumers are
willing to pay for given goods
and services.
Importance of a consumer’s
“perceived value of an item”
Effective when there are few
substitutes and consumer is willing
to pay higher prices because they
believe an item is different from
that offered by competition.
Companies try to achieve this status
by developing brand loyalty.
Competition-based pricing
Set prices based on what the
competitors charge.
Elect to take one of three
actions using this pricing
method:
 Price above the
competition
 Price below the
competition
 Price in-line with the
competition

4. Pricing Strategies continued….
• You could also use a combination of these strategies
• Many marketers use all three pricing strategies to determine prices.
• Cost-based pricing helps marketers determine the price floor for a product – the lowest price for which it can be offered to still make
a profit.
• Demand-based pricing determines a price range that is defined by the price floor and price ceiling (the highest amount consumers
would pay).
• Competition-based pricing may be used to assure the final price is in line with the competition.
• Combining pricing considerations offers a good range within which a company can establish its
selling price. And if a company decides to go with the competition-based strategy, they still know
how much they can lower their prices if necessary based on the cost-based pricing figures.

5. Pricing Policies
• One-price policy – all customers are charged the same price for the same type or
amount of merchandise.
• Flexible-price policy – customers pay different prices for the same type or amount
of merchandise.
Four stages to the Product Life Cycle:
• Introduction > Growth > Maturity > Decline
• Pricing plays an important role in this sequence of events.

6. Psychological Pricing
• Odd/even pricing: use odd pricing (i.e. $19.99 to suggest bargains). The psychological principle is based
on odd numbers conveying a bargain image, while even numbers ($10, $50, $100) conveying a quality
image.
• Prestige pricing: set higher than average prices to suggest exclusiveness, status, and prestige. Many
consumers assume that higher prices mean higher quality and are willing to pay more for certain goods
and services.
• Multi-unit pricing: Suggest a bargain and helps to increase sales. Some businesses have found that
pricing items in multiples, such as 3 for $.99 is better than selling the same items at $.33 each.

7. Psychology Pricing continued…
• Bundle pricing: Including several products in a package that is sold at a single price.
• All inclusive travel vacations (airfare, hotel, meals)
• Software that is included when you purchase a new computer
• Promotional pricing: Used in conjunction with sales promotions when prices are lower than average. Examples: Back to school sales, Presidents’
Day sales, clearance sales, etc.
• Other promotional techniques may involve rebates, coupons, and special discounts.
• Discount pricing: involves the seller’s offering reductions from the usual price based on the buyer’s performance of certain functions.
• Paying cash (Encourage consumers to pay their bills quickly or to not encourage use of credit cards)
• Buying in large quantities.
• Sellers benefit from large orders through the lower selling costs involved in one transaction as opposed to
several small transactions.
• Quantity discounts also offer buyers an incentive to purchase more merchandise than they originally
intended to purchase.
• Seasonal discounts (willing to buy at a time outside the customary buying season)

8. • Break-Even Analysis and Target Profit Pricing:
• The break-even price is the price that will produce enough revenue to cover all costs at a given level of
production. At the break-even point, there is neither profit nor loss.
• Marketers need to understand break-even analysis because it helps them choose the best pricing strategy and
make smart decisions about the short- and long-term profitability of the product.
• For the sake of this exercise, let's assume that Helen works a set number of hours every week—20 hours—
and that you pay her $20 per hour including all taxes and benefits. You rent the kitchen for $100 per week,
and that price includes all the equipment and utilities. Those are costs that are not going to change no matter
how many cookies you sell. If you baked nothing, you would still need to pay $100 per week in rent and $400
per week in wages. Those are your fixed costs. Fixed costs do not change as the level of production goes up or
down. Your fixed costs are $500 per week.
Now you need to buy ingredients for the cookies. Once you add up the food costs of making a single large
batch of cookies, you find that it's a total of $7.20 for a batch of 12 dozen (144) cookies. If you divide that
out, you can tell that each cookie costs $.05 in food costs ($7.20 / 144 cookies = $.05). In other words, every
cookie you sell is going to have a variable cost of $.05. Variable costs do change as production is increased or
decreased.
Adding these different types of costs makes the break-even equation more complicated, as shown below:

9. pn = Vn + FC
p = price
n = number of units sold
V = variable cost per unit
FC = fixed costs
With this equation we can calculate either the break-even price or
the break-even quantity.
Calculating Break-Even Price
Chances are good that you can only bake a certain number
of cookies each week—let's say it's 2,500 cookies—so,
based on that information, you can calculate the break-
even price. The formula to do that is the following:
p = (Vn + FC) / n
n = 2,500
V = $.05
FC = $500
Therefore, p = (($.05 x 2,500) + $500) / 2,500
p = ($125 + $500) / 2,500
p = $.25
Your break-even price for your cookies is 25 cents. That
doesn't mean it's the right market price for the cookies;
nor does it mean that you can definitely sell 2,500 cookies
at whatever price you choose. It simply gives you good
information about the price and quantity at which you
will cover all your costs.

10. Factors affecting pricing decision
• Beyond customer value perceptions, costs, and competitor strategies, the company
must consider several additional internal and external factors that affect company’s
pricing decision.
• Internal Factors:
• Internal factors affecting pricing include the company’s overall marketing strategy,
objectives, and marketing mix as well as other organizational considerations.
• External Factors:
• External factors include the nature of the market and demand and other
environmental factors.

11. Factors affecting price
 Supply and demand
o Brand loyalty, price of products relative to income, availability of substitutes, luxury vs.
necessity, urgency of purchase
 Your costs and expenses
o The series of businesses involved in selling or distributing your product
 Competition
o Price wars in certain sectors – airlines, gasoline, computers, etc.