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Pricing Concepts and Management
CMARKETING
From Foundations of Marketing 7th Edition by Pride & Ferrell
 Identify issues related to developing pricing objectives
 Discuss importance of identifying the target market’s evaluation of price
 Explain the importance of demand and the price elasticity of demand
 Describe relationships among demand, cost, and profits
 Explain how marketers analyze competitors price
Objectives
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 Price is an integral part of any marketing mix.
 Before a product’s price can be set, an organization must determine
the basis on which it will compete – whether on price alone or some
combination of factors.
 Price competition occurs when a seller emphasizes a product’s low
price and sets a price that equals or beats that of competitors.
 To use this approach most effectively, a seller must have the flexibility to
change prices rapidly and aggressively in response to competitor’s
actions.
 Non-price competition is based on factors other than price.
 It is used most effectively when a seller can distinguish its product
through distinctive product quality, customer service, promotion,
packaging, or other features.
Price
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1 • Developing of pricing objectives
2 • Assessment of target market’s evaluation of price
3 • Determination of demand
4 • Analysis of demand, cost, and profit relationships
5 • evaluation of competitor's prices
6 • Selection of a basis for pricing
7 • Selection of a pricing strategy
8 • Determination of a specific price
Stages of establishing Prices
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 The first step in setting prices is developing pricing objectives – goals that describe what a firm wants to achieve
through pricing.
 Survival
 Pricing is set low, sometimes below costs, in order to attract more sales
 Profit
 Businesses set prices to maximize profit for its owners
 Return on Investment
 Requires some trial and error, the goal is to attain a specified rate of return on investment
 Market Share
 Gain more total industry sales
 Cash Flow
 Set prices so as to recover cash as quickly as possible
 Status Quo
 Maintaining market share, meeting (but not beating) competitor’s prices, achieving price stability, and maintaining a
favorable public image
 Product Quality
 A high price may signal to customers that the product is of high quality
Development of Pricing Objectives
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 Despite the general assumption that price is a major issue for buyers, the importance of price
varies depending on the type of product and target market, and the purchase situation.
 The purchase situation also affects the buyer’s view of price.
 By assessing the target market’s evaluation of price, a marketer is in a better position to know
how much emphasis to put on price in the overall marketing strategy.
 Information about the target market’s price evaluation may also help a marketer determine how
far above the competition the firm can set its prices.
Assessment of the target market’s evaluation of price
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 Determining the demand for a product is the responsibility of marketing managers, who are aided
in this task by marketing researchers and forecasters.
 Marketing research and forecasting techniques yield data such as estimates of sales potential of
the quantity of a product that could be sold during a specific period. These estimates help
marketers establish the relationship between a product’s price and the quantity demanded.
Analysis of Demand
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 For most products, demand and price are
inversely related. This means that the quantity
demanded goes up as the price goes down and
vice versa.
 The normal demand curve (figure 1) is a
representation of the quantity of products
expected to be sold at different prices. As the
price falls, quantity demanded rises.
 The demand curve for prestige products tend to
sell better at higher prices than lower ones.
Prestige products are desirable partly because
their expense makes buyers feel elite (figure 2).
Demand Curves
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 Customer demand is influenced by many more
factors than just price.
 Changes in buyer’s needs, variations in the
effectiveness of other marketing mix variables, the
presence of substitutes, and dynamic
environmental factors can all influence demand.
Demand fluctuations
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 Price elasticity of demand is a measure of the
sensitivity of consumer demand for a product
or product category to changes in price.
 If a demand is elastic, a shift in price causes a
change in the quantity.
 For product with inelastic demand, even if the
price increases, this does not affect quantity.
Price Elasticity of Demand
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 In a marketing environment where consumers can comparison shop for items from retailers
across the globe, marketers must be more aware than ever of effects on demand, cost, and profit
potential.
 Customers have become less tolerant of price increases, putting manufacturers in the position of
having to find ways to maintain high quality and low costs.
 To stay in business, a company must set prices that not only cover costs but also meet customer’s
expectations for quality, features, and price.
Demand, Cost, and Profit Relationships
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 Marginal analysis examines what happens to a firm’s costs and revenues when production
changes by one unit.
 Both production costs and revenue must be evaluated.
 Types of costs:
 Fixed costs – costs that do not vary with changes in the number of units produced or sold
 Average fixed cost - the fixed cost per unit produced
 Variable costs – costs that vary directly with changes in the number of units produced or sold
 Average variable cost – the variable cost per unit produced
 Total cost – the sum of the average fixed and average variable cost times the quantity produced
 Average total cost – is the sum of the average fixed cost and the average variable cost
 Marginal cost – is the extra cost a firm incurs when it produces one additional unit of product.
Marginal Analysis
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 Marginal revenue is the change in total
revenue that arises from the sale of an
additional unit of a product.
 Most firms must lower their prices to sell
additional units.
 This situation means that each additional unit
of product sold provides the firm with less
revenue than the previous unit sold.
Marginal revenue
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 The point at which the costs of producing a
product equal the revenue made from
selling the product is the break-even point.
Break-even analysis
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 In most cases, marketers are in a better position to establish prices when they know the prices
charged for competing brands.
 Learning competitor’s prices should be a regular part of marketing research.
 Uncovering competitors’ prices is not always an easy task. Knowing the prices of competing
brands is essential for a marketer.
Evaluation of Competitor’s Prices
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 Establishing prices involves selecting a basis for
pricing: cost, demand, and/or competition.
 Cost-based pricing
 Adding an amount or percentage to the cost of the
product.
 Cost-plus pricing is adding a specified amount or
percentage to the seller’s cost
 Mark-up pricing is adding to the cost of the product
a predetermined percentage of that cost
Selection of a basis for pricing
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 Demand-based pricing
 Is pricing based on the level of demand for the product
 Customers pay a higher price when demand is strong and a
lower the price when the demand is weak
Selection of a basis for pricing
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 Competition-based pricing
 Is pricing that is influenced primarily by competitor’s prices.
Selection of a basis for pricing
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 A pricing strategy is a course of action designed to
achieve pricing objectives, which are set to help
marketers solve the practical problems of setting
prices.
 New product pricing strategies:
 Price skimming is the strategy of charging the highest
possible price for a product during the introduction
stage of its life cycle. It helps the firm recover the cost
of Research & Development more quickly. It may also
hold down the demand for the product when the
firm’s production capacity is limited.
 Penetration pricing is the strategy of setting low
prices for a new product to build market share quickly
in order to encourage product trial by the target
market and discourage competitors from entering the
market.
Selection of a pricing strategy
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 Differential Pricing
 Means charging different prices to different buyers for the
same quality and quantity of the product
 Negotiated pricing occurs when the final price is established
through bargaining between the seller and the buyer.
 Secondary market pricing means setting one price for the
primary target market and a different price for another market
 Periodic discounting is the temporary reduction of prices on a
patterned or systematic basis
 Random discounting is a temporary reduction of prices on an
unsystematic basis
Selection of a pricing strategy
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 Psychological pricing
 Are pricing strategies that encourage purchases based on
customer’s emotional responses, rather than on economic
rational ones.
 Odd-number pricing is setting prices using odd numbers that
are slightly below whole dollar (peso) amounts
 Multiple unit pricing is setting a single price for two or more
units of product
 Reference pricing is pricing a product at a moderate level and
physically positioning it next to a more expensive model or
brand, in which the customer will use it as a reference point
 Bundle pricing is packaging together two or more products,
usually of complementary nature to be sold at a single price
 Everyday Low Prices (EDLPs) is setting a low price for
consistent products on a consistent basis
 Customary pricing is pricing based on tradition
Selection of a pricing strategy
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 Product-line pricing
 Is establishing and adjusting the prices of multiple products
within a product line
 Captive pricing is pricing the basic product low, but the items
required to operate or enhance it are higher
 Premium pricing is pricing the highest-quality or most versatile
products higher than other models in the product line
 Price lining is selling goods only at certain predetermined
prices that reflect definite price breaks
Selection of a pricing strategy
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 Promotional pricing
 Is pricing that is promotion-oriented
 Price leaders – products priced below the usual markup, near cost, or
below cost
 Special-event pricing involves advertised sales or price cutting linked to a
holiday, season or event
 Comparison pricing sets the price of a product at a specific level and
simultaneously compares it with a higher price. The higher price may be
the product’s previous price, price of the competing brand, the product’s
price at another retail outlet, or manufacturer’s suggested retail price.
Selection of a pricing strategy
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ADD A FOOTER23
 A pricing strategy will yield a certain price or range of prices, which is the final step in the pricing
process.
 Marketers may need to refine this price in order to make it consistent with the circumstances.
 Pricing strategies should help a firm in setting a final price.
 Marketers must establish pricing objectives, have considerable knowledge about target market
customers, and determine demand, price elasticity, costs, and competitive factors.
 The way marketers use pricing in the marketing mix will affect the final price.
Determination of Specific Price
2/17/2020
ADD A FOOTER24
The End
25
2/17/2020
ADD A FOOTER

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Cmarketing 13

  • 1. Pricing Concepts and Management CMARKETING From Foundations of Marketing 7th Edition by Pride & Ferrell
  • 2.  Identify issues related to developing pricing objectives  Discuss importance of identifying the target market’s evaluation of price  Explain the importance of demand and the price elasticity of demand  Describe relationships among demand, cost, and profits  Explain how marketers analyze competitors price Objectives 2/17/2020 ADD A FOOTER2
  • 3.  Price is an integral part of any marketing mix.  Before a product’s price can be set, an organization must determine the basis on which it will compete – whether on price alone or some combination of factors.  Price competition occurs when a seller emphasizes a product’s low price and sets a price that equals or beats that of competitors.  To use this approach most effectively, a seller must have the flexibility to change prices rapidly and aggressively in response to competitor’s actions.  Non-price competition is based on factors other than price.  It is used most effectively when a seller can distinguish its product through distinctive product quality, customer service, promotion, packaging, or other features. Price 2/17/2020 ADD A FOOTER3
  • 4. 1 • Developing of pricing objectives 2 • Assessment of target market’s evaluation of price 3 • Determination of demand 4 • Analysis of demand, cost, and profit relationships 5 • evaluation of competitor's prices 6 • Selection of a basis for pricing 7 • Selection of a pricing strategy 8 • Determination of a specific price Stages of establishing Prices 2/17/2020 ADD A FOOTER4
  • 5.  The first step in setting prices is developing pricing objectives – goals that describe what a firm wants to achieve through pricing.  Survival  Pricing is set low, sometimes below costs, in order to attract more sales  Profit  Businesses set prices to maximize profit for its owners  Return on Investment  Requires some trial and error, the goal is to attain a specified rate of return on investment  Market Share  Gain more total industry sales  Cash Flow  Set prices so as to recover cash as quickly as possible  Status Quo  Maintaining market share, meeting (but not beating) competitor’s prices, achieving price stability, and maintaining a favorable public image  Product Quality  A high price may signal to customers that the product is of high quality Development of Pricing Objectives 2/17/2020 ADD A FOOTER5
  • 6.  Despite the general assumption that price is a major issue for buyers, the importance of price varies depending on the type of product and target market, and the purchase situation.  The purchase situation also affects the buyer’s view of price.  By assessing the target market’s evaluation of price, a marketer is in a better position to know how much emphasis to put on price in the overall marketing strategy.  Information about the target market’s price evaluation may also help a marketer determine how far above the competition the firm can set its prices. Assessment of the target market’s evaluation of price 2/17/2020 ADD A FOOTER6
  • 7.  Determining the demand for a product is the responsibility of marketing managers, who are aided in this task by marketing researchers and forecasters.  Marketing research and forecasting techniques yield data such as estimates of sales potential of the quantity of a product that could be sold during a specific period. These estimates help marketers establish the relationship between a product’s price and the quantity demanded. Analysis of Demand 2/17/2020 ADD A FOOTER7
  • 8.  For most products, demand and price are inversely related. This means that the quantity demanded goes up as the price goes down and vice versa.  The normal demand curve (figure 1) is a representation of the quantity of products expected to be sold at different prices. As the price falls, quantity demanded rises.  The demand curve for prestige products tend to sell better at higher prices than lower ones. Prestige products are desirable partly because their expense makes buyers feel elite (figure 2). Demand Curves 2/17/2020 ADD A FOOTER8
  • 9.  Customer demand is influenced by many more factors than just price.  Changes in buyer’s needs, variations in the effectiveness of other marketing mix variables, the presence of substitutes, and dynamic environmental factors can all influence demand. Demand fluctuations 2/17/2020 ADD A FOOTER9
  • 10.  Price elasticity of demand is a measure of the sensitivity of consumer demand for a product or product category to changes in price.  If a demand is elastic, a shift in price causes a change in the quantity.  For product with inelastic demand, even if the price increases, this does not affect quantity. Price Elasticity of Demand 2/17/2020 ADD A FOOTER10
  • 11.  In a marketing environment where consumers can comparison shop for items from retailers across the globe, marketers must be more aware than ever of effects on demand, cost, and profit potential.  Customers have become less tolerant of price increases, putting manufacturers in the position of having to find ways to maintain high quality and low costs.  To stay in business, a company must set prices that not only cover costs but also meet customer’s expectations for quality, features, and price. Demand, Cost, and Profit Relationships 2/17/2020 ADD A FOOTER11
  • 12.  Marginal analysis examines what happens to a firm’s costs and revenues when production changes by one unit.  Both production costs and revenue must be evaluated.  Types of costs:  Fixed costs – costs that do not vary with changes in the number of units produced or sold  Average fixed cost - the fixed cost per unit produced  Variable costs – costs that vary directly with changes in the number of units produced or sold  Average variable cost – the variable cost per unit produced  Total cost – the sum of the average fixed and average variable cost times the quantity produced  Average total cost – is the sum of the average fixed cost and the average variable cost  Marginal cost – is the extra cost a firm incurs when it produces one additional unit of product. Marginal Analysis 2/17/2020 ADD A FOOTER12
  • 13.  Marginal revenue is the change in total revenue that arises from the sale of an additional unit of a product.  Most firms must lower their prices to sell additional units.  This situation means that each additional unit of product sold provides the firm with less revenue than the previous unit sold. Marginal revenue 2/17/2020 ADD A FOOTER13
  • 14.  The point at which the costs of producing a product equal the revenue made from selling the product is the break-even point. Break-even analysis 2/17/2020 ADD A FOOTER14
  • 15.  In most cases, marketers are in a better position to establish prices when they know the prices charged for competing brands.  Learning competitor’s prices should be a regular part of marketing research.  Uncovering competitors’ prices is not always an easy task. Knowing the prices of competing brands is essential for a marketer. Evaluation of Competitor’s Prices 2/17/2020 ADD A FOOTER15
  • 16.  Establishing prices involves selecting a basis for pricing: cost, demand, and/or competition.  Cost-based pricing  Adding an amount or percentage to the cost of the product.  Cost-plus pricing is adding a specified amount or percentage to the seller’s cost  Mark-up pricing is adding to the cost of the product a predetermined percentage of that cost Selection of a basis for pricing 2/17/2020 ADD A FOOTER16
  • 17.  Demand-based pricing  Is pricing based on the level of demand for the product  Customers pay a higher price when demand is strong and a lower the price when the demand is weak Selection of a basis for pricing 2/17/2020 ADD A FOOTER17
  • 18.  Competition-based pricing  Is pricing that is influenced primarily by competitor’s prices. Selection of a basis for pricing 2/17/2020 ADD A FOOTER18
  • 19.  A pricing strategy is a course of action designed to achieve pricing objectives, which are set to help marketers solve the practical problems of setting prices.  New product pricing strategies:  Price skimming is the strategy of charging the highest possible price for a product during the introduction stage of its life cycle. It helps the firm recover the cost of Research & Development more quickly. It may also hold down the demand for the product when the firm’s production capacity is limited.  Penetration pricing is the strategy of setting low prices for a new product to build market share quickly in order to encourage product trial by the target market and discourage competitors from entering the market. Selection of a pricing strategy 2/17/2020 ADD A FOOTER19
  • 20.  Differential Pricing  Means charging different prices to different buyers for the same quality and quantity of the product  Negotiated pricing occurs when the final price is established through bargaining between the seller and the buyer.  Secondary market pricing means setting one price for the primary target market and a different price for another market  Periodic discounting is the temporary reduction of prices on a patterned or systematic basis  Random discounting is a temporary reduction of prices on an unsystematic basis Selection of a pricing strategy 2/17/2020 ADD A FOOTER20
  • 21.  Psychological pricing  Are pricing strategies that encourage purchases based on customer’s emotional responses, rather than on economic rational ones.  Odd-number pricing is setting prices using odd numbers that are slightly below whole dollar (peso) amounts  Multiple unit pricing is setting a single price for two or more units of product  Reference pricing is pricing a product at a moderate level and physically positioning it next to a more expensive model or brand, in which the customer will use it as a reference point  Bundle pricing is packaging together two or more products, usually of complementary nature to be sold at a single price  Everyday Low Prices (EDLPs) is setting a low price for consistent products on a consistent basis  Customary pricing is pricing based on tradition Selection of a pricing strategy 2/17/2020 ADD A FOOTER21
  • 22.  Product-line pricing  Is establishing and adjusting the prices of multiple products within a product line  Captive pricing is pricing the basic product low, but the items required to operate or enhance it are higher  Premium pricing is pricing the highest-quality or most versatile products higher than other models in the product line  Price lining is selling goods only at certain predetermined prices that reflect definite price breaks Selection of a pricing strategy 2/17/2020 ADD A FOOTER22
  • 23.  Promotional pricing  Is pricing that is promotion-oriented  Price leaders – products priced below the usual markup, near cost, or below cost  Special-event pricing involves advertised sales or price cutting linked to a holiday, season or event  Comparison pricing sets the price of a product at a specific level and simultaneously compares it with a higher price. The higher price may be the product’s previous price, price of the competing brand, the product’s price at another retail outlet, or manufacturer’s suggested retail price. Selection of a pricing strategy 2/17/2020 ADD A FOOTER23
  • 24.  A pricing strategy will yield a certain price or range of prices, which is the final step in the pricing process.  Marketers may need to refine this price in order to make it consistent with the circumstances.  Pricing strategies should help a firm in setting a final price.  Marketers must establish pricing objectives, have considerable knowledge about target market customers, and determine demand, price elasticity, costs, and competitive factors.  The way marketers use pricing in the marketing mix will affect the final price. Determination of Specific Price 2/17/2020 ADD A FOOTER24