Chapter 14 Developing Pricing Strategies and Programs

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  • Fixed Cost or overhead cost are costs that do not vary with production level or sales revenue.Variable cost vary directly with level of production.
  • Total cost consist of the sum of the fixed and variable costs for any given level of production.
  • It refers to the gain a company experiences in producing a product over a period of time. Workers learn shortcuts, materials flow more smoothly, and procurement costs fall. The result is that average cost falls with accumulated production experience. This decline in the average cost with accumulated production experience is called the experience curve or learning curve. Average cost is the cost per unit at a level of production given total costhttp://design-marketing-dictionary.blogspot.com/2009/09/accumulated-production.html
  • Also used for season items, specialty items, slower-moving items, items with high storage and handling cost, demand-inelastic (drugs)
  • The firm determines the price that would yield its target rate of return on investment (ROI).Example 15 % to 20% ROI-does not consider other scenarios- if item will not sell at 50,000-manufacturers should consider different prices and their impact on sales volume-Find ways to decrease fixed costs and variable costs to lower break even volume
  • There is always a segment of buyers who care only about the priceDeliver more value than the competitor and demonstrate this to prospective buyers
  • Chapter 14 Developing Pricing Strategies and Programs

    1. 1. Chapter 14Developing PricingStrategies and Programs Donna Sia May 11, 2012 www. donnasia.blogspot.c om
    2. 2. OUTLINE:When setting effective pricing policy a company 1. Follows six pricing procedures 2. Selects a pricing structure that reflects various situations 3. Chooses what price adaptation strategy to use 4. Examine the effect of price changes 5. Responds to competitors price challenge www. donnasia.blogspot.c om
    3. 3. Price is the only element inthe marketing mix thatproduces revenue;the others produce cost. www. donnasia.blogspot.c om
    4. 4. Consumers use common pricereferences. Fair price Typical PriceLower-bound Last Price Paid www. donnasia.blogspot.c om
    5. 5. They may also refer to:Competitor’s Price Usual Discounted Price Expected Future Price www.donnasia.blogspot.c om
    6. 6. Companies follow 6 steps when setting prices.1 Select the price objective 2 Determine demand 3 Estimate costs 4 Analyze competitor price mix 5 Select pricing method 6 Select final price www. donnasia.blogspot.c om
    7. 7. In selecting price objectives, companies must look at Maximum Maximum Survival current profit market shareMaximum market skimming Product-quality leadership www.donnasia.blogspot.c om
    8. 8. Demand can be determined by examining: Price Estimating Price ElasticitySensitivity Demand of Demand Curves www. donnasia.blogspot.c om
    9. 9. Changes in price affect consumer demand:Source: Marketing Management, Kotler and Keller, 13th ed. www. donnasia.blogspot.c om
    10. 10. Customers are likely to be less sensitive to price changes when:product is more distinctive less aware of substitutes expenditure is a cannot easily compare the smaller part of quality of substitutes buyer’s total income www. donnasia.blogspot.c om
    11. 11. Customers are likely to be less sensitive to price changes when:small compared to the total cost Part of the cost is paidof the end product by another party used with previously purchased assets www. donnasia.blogspot.c om
    12. 12. Customers are likely to be less sensitive to price changes when:assumed to have high quality cannot store the productand prestige www. donnasia.blogspot.c om
    13. 13. Costs can either be fixed or variable processFixed Cost Variable Cost output www. donnasia.blogspot.c om
    14. 14. The sum of variable and fixedcost for any given level ofproduction is the total cost www. donnasia.blogspot.c om
    15. 15. As production accumulates average cost decreasesSource: Marketing Management, Kotler and Keller, 13th ed. www. donnasia.blogspot.c om
    16. 16. To arrive at target cost, firstdetermine target given product’s appealprice and desired and competitor’s pricefunction Then: Target Selling Price = $ 9.90 Less Profit Margin = $ 3.40 Target Cost = $ P 6.50 www. donnasia.blogspot.c om
    17. 17. Different pricing methods canbe used in varying situations Markup pricing Target-return pricing Perceived-value pricing Value pricing Going-rate pricing Auction-type pricing www. donnasia.blogspot.c om
    18. 18. Markup Pricing is just adding a standard mark-up to the product’s cost.Variable cost per unit $10.00Fixed Cost $ 300,000.00Expected Unit Sales 50,000 unitsUnit cost= variable cost + fixed cost unit sales = $10.00+ $ 300,000.00 50,000 = $16.00Desired Mark Up= 20%Selling Price= Unit Cost = $16.00 = $20 (1- desired return) (1-0.20) www. donnasia.blogspot.c om
    19. 19. Target-return pricing is used by companies who need to make a fair return on investmentDesired ROI = 20% or € 200,000Target-return on price= unit cost + desired return x investment capital unit sales= $16.00 + 0.20 x $1,000,000.00 = $20.00 50,000 www. donnasia.blogspot.c om
    20. 20. Break-even analysis is used to determine target return price and break-even volumeSource: Marketing Management, Kotler and Keller, 13th ed. www. donnasia.blogspot.c om
    21. 21. Perceived Value Pricing$ 90,000 tractor’s price = competitor’s price$ 7,000 superior durability$ 6,000 superior reliability$ 5,000 superior service$ 2,000 longer warranty$ 110,000 superior value- 10,000 discount$ 100,000 final price www. donnasia.blogspot.c om
    22. 22. The internet and Auction type pricing: English auctions Dutch auctions Sealed-bid auctionsSource: Marketing Management, Kotler and Keller, 13th ed. www. donnasia.blogspot.c om
    23. 23. Price Adaptation StrategyGeographical Pricing www. donnasia.blogspot.c om
    24. 24. Discounts and AllowancesPrompt payment discount Seasonal Discount Volume discount www. donnasia.blogspot.c om
    25. 25. Promotional Pricing Special-event pricingLoss-leader Pricing Low-interest financing www. donnasia.blogspot.c om
    26. 26. Profits Before and After a Price IncreaseSource: Marketing Management, Kotler and Keller, 13th ed. www. donnasia.blogspot.c om
    27. 27. Respond to Low-Cost rival by:1. Maintaining price2. Maintaining price and adding value3. Reducing price4. Increasing price and improving quality5. Launching a low-price fighter line www. donnasia.blogspot.c om
    28. 28. In summary:Price is the only element in the marketing Competitor’s can also offermix that produces revenue attractive prices Survival and ProfitPrice objectives Maximize market share Products Cost (Variable/Fixed) Deliver value to customers consumer psychology Sensitivity to price Durability, reliability, excellent service changes www. donnasia.blogspot.c om
    29. 29. Chapter 14Developing PricingStrategies and Programs Donna Sia May 11, 2012 www. donnasia.blogspot.c om

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