This document discusses various considerations for pricing decisions and strategies. It covers topics such as pricing objectives, analyzing demand curves, cost-based pricing, competition-based pricing, differential pricing strategies, product line pricing, psychological pricing techniques, and adjusting prices. Key factors that influence pricing decisions are identified, such as costs, demand, competition, target markets, and product life cycles. Different pricing strategies like price skimming, penetration pricing, and bundling are also explained.

1. CHAPTER 4: PRICING CONSIDERATIONS DIPLOMA IN INTERNATIONAL BUSINESS (BUS2513)

2. Part 1 of 2 Pricing Decisions

3. Strategic Planning for Price Pricing objectives Target Market Price Promotion Place Product Geographic terms— who pays transportation and how Discounts and allowances— to whom and when Price levels over product life cycle Price flexibility

4. The Nature of Price The value exchanged for products in a marketing exchange Definition of Price Price is the amount of money charged for a product or service, or the sum of all the values that customers give in order to gain benefits of having or using a product or service. (Armstrong and Kotler, 2007)

5. Terms Used To Describe Price Tuition Premium Fine Fee Fare Toll Rent Commission Dues Deposit Tips Interest Taxes

6. The Importance of Price to Marketers Profit = Total Revenue – Total Costs Profits = (Price x Quantity Sold) – Total Costs

7. Price and Nonprice Competition Price Competition Emphasizes price as an issue and matches or beats competitors’ price To compete effectively- firm should be the low-cost seller Standardized products Frequent price changes Provides flexibility

8. Nonprice Competition Emphasizes distinctive product: Features Quality Promotion Packaging Other Distinction must be effective

9. Analysis Of Demand Demand Curve Demand Fluctuations Assessing Price Elasticity

10. Demand Curve A graph of the quantity expected to be sold at various prices if other factors remain constant

11. Demand Curve, Price-Quantity Relationship and Increase in Demand

12. Demand Curve, Relationship Between Price and Quantity for Prestige Products

13. Sample Demand Curve Slide 12-1 Figure 12.1 10 20 30 40 50 60 10,000 20,000 30,000 40,000 50,000 Price per Unit Quantity Demanded in Units

14. Demand Fluctuations Changes in buyers’ needs Variations in effectiveness of other marketing mix variables Presence of substitutes Environment factors

15. Elasticity Of Demand

16. Price/Demand Elasticity Elastic- change in price causes opposite change in total revenue Price  = Total Revenue  Price  = Total Revenue  Inelastic- change in price causes same change in total revenue Price  = Total Revenue  Price  = Total Revenue 

17. Price Elasticity Of Demand Price Elasticity of Demand = (% Change In Quantity Demanded) % Change in Price

18. Demand, Cost, and Profit Relationships Marginal Analysis Fixed costs Average fixed cost Variable costs Average variable cost Total cost Average total cost Marginal cost (MC) Marginal revenue (MR)

19. Costs And Their Relationships

20. Pricing Based on Cost Slide 12-6 Markup pricing a pricing approach that adds a percentage to the producer’s cost in order to arrive at a selling price. Rate of return pricing a pricing approach that involves total costs and then adding a desired rate of return to them to determine the selling price. Breakeven analysis a technique for determining the sales volume needed to cover all costs at a specific rate.

21. Typical Marginal Costs And Average Total Cost Relationship

22. Typical Marginal Revenue And Average Revenue Relationship

23. Combining Marginal Cost And Marginal Revenue Concepts For Optimal Profit

24. Marginal Analysis Relationships Dollars Profit Quantity Produced and Sold Dollars Quantity Produced and Sold Total Cost Total Revenue Marginal Cost Marginal Revenue

25. Demand, Cost, and Profit Relationships Break-Even Analysis Break-even point – point at which the costs of producing a product equal the revenue made from selling the product

26. Determining The Break-Even Point

27. Breakeven Analysis Slide 12-7 Figure 12.5 Dollars Quantity Produced and Sold Total Cost Breakeven Point Total Revenue Loss Profit

28. Breakeven Point Breakeven Point = Fixed Costs Per-Unit Contribution to Fixed Costs (Price – Variable Costs)

29. Factors That Affect Pricing Decisions

30. Pricing Objectives Dollar or Unit Sales Growth Growth in Market Share Target Return Maximize Profits Meeting Competition Nonprice Competition Pricing Objectives Sales Oriented Profit Oriented Status Quo Oriented

31. Organizational And Marketing Objectives Set prices consistent with organization’s goals and mission Pricing decisions should be compatible with firm’s marketing objectives

32. Costs Why price below cost? Match competition Generate cash flow Increase market share Focus on cost reduction Costs shared with others in product line

33. Pricing Decisions Influence Other Mix Variables Demand Distribution Intensive Selective Exclusive Promotion Premium = little advertising, personal selling Complex = potential buyer confusion

34. Channel Member Expectations Profit Competing product Time/resources required Discounts Support activities- associated costs

35. Reference Prices Internal- developed in buyer’s mind through experience with product External- comparison price provided by others

36. Context Of Price- Buyers Characterized Value-conscious - concerned about price and quality Price-conscious - want to pay low prices Prestige-sensitive - purchase products that signify prominence and status

37. Competition Monopoly Whatever market will bear Government regulation Oligopoly Barriers to entry Little advantage in price cuts Monopolistic Competition Distinguishable product Usually nonprice competition Perfect competition All products the same No flexibility in pricing

38. Pricing Based on Competition Slide 12-8 Pricing Below Competition pricing to gain market share and attract cost-conscious buyers. Especially useful to companies with low cost positions. Matching Competition pricing at competitor’s levels with the intent of distinguishing the product in other ways. Common in oligopolies. Pricing Above Competition pricing for products that offer greater value, quality, convenience or prestige. Sealed-Bid Pricing pricing in which the buyer asks potential sellers to submit sealed bids containing the seller’s pricing and availabilities.

39. Discount Pricing Trade Quantity Seasonal Discount Pricing Sale Cash

40. Business-To-Business Price Discounting

41. Trade (Functional) Discount A reduction off the list price by a producer to an intermediary for performing certain functions

42. Quantity Discount Deduction from list price that reflect(s) the economies of purchasing in large quantities

43. Cumulative Discount A quantity discount aggregated over a stated time period

44. Noncumulative Discounts A one-time price reduction based on the number of units purchased, the dollar value of the order, or the product mix purchased

45. Cash Discount A price reduction given to buyer for prompt payment or cash payment

46. Seasonal Discount A price reduction to buyers that purchase goods or services out of season

47. Allowance A concession in price to achieve a desired goal

48. Allowances Common Kinds of Allowances Advertising Allowance Push Money Allowance Trade-In Allowance Stocking Allowance

49. Price Flexibility Policies One-price policy The same price to all customers who purchase products under essentially the same conditions and quantities Exchange rate changes may make this difficult in international markets Flexible pricing (e.g., in channels, business markets, expensive consumer shopping products) Issues: Use is increasing because of impact of information technology, customer databases, scanners, etc. Selling costs may be higher if prices are negotiated “ Signals” to competitors Customer dissatisfaction may be a problem “ Gray channels” and cross-shipping 17-4

50. Geographic Pricing Policies Common Geographic Pricing Policies F.O.B. Uniform Delivered Freight Absorption Zone

51. Geographic Pricing F.O.B. Factory Destination Uniform geographic (Postage-Stamp) Zone Base-point Freight Absorption

52. Geographic Pricing Slide 13-7 Geographic Pricing Pricing a good or service according to where it is delivered. FOB Origin Pricing Seller’s price is for the goods at point of shipment, where title passes from buyer to seller. Uniform Delivered Pricing Seller’s price includes shipping; title passes where buyer receives the goods. Single-zone Pricing Pricing in which all buyers pay the same price, including delivery. Multiple-zone pricing Pricing in which buyers in different zones pay different delivery prices. FOB with freight allowed Pricing in which the seller allows the buyer to deduct shipping costs from the quoted price of the product. Basing point pricing Pricing in which the seller charges the quoted price plus the cost of delivering from a basing point where the product is made.

53. • What is the location of potential buyers? • Are they organizational buyers or consumers? • What is the consumption rate of potential buyers? • What is the financial condition of potential buyers? • How many potential buyers are in the market? Demographic Pricing Factors Slide 12-2

54. • Will potential buyers be favorably attracted by odd pricing such as 99 cents instead of $1, or $177 instead of $180? • Will potential buyers perceive the price to be too high relative to what the product offers? • Are potential buyers concerned enough with prestige to pay more for the product? • How much will potential buyers be willing to pay for the product? • Will potential buyers use price as an indicator of the product’s quality? Psychological Pricing Factors Slide 12-3

55. Psychological Pricing Slide 13-6 Table 13.3 Table 13.3 missing TYPE DESCRIPTION EXAMPLE Product Pricing Technique Prestige Pricing Definition Example Setting a high price to convey an image of high quality or exclusivity Odd-even pricing Bundle pricing Setting prices a few dollars or cents below a round number Offering several products as a package at a single price The Porsche 911 turbo coupe has a base price of $105,000. Office Depot advertises a GE cellular phone for $39.99. A hotel quotes a rate for an over-night stay that includes breakfast the next morning.

56. Price Level Policies “ Skim the cream” pricing involves selling at a high price to those who are willing to pay before aiming at more price-sensitive consumers. Price Quantity Initial skimming price Second price Final price Skimming Pricing Sell at high price before reducing to next price level and repeat

57. Price Level Policies a Price Quantity Penetration Pricing Whole market price Penetration pricing involves selling the whole market at one low price.

58. Penetration Pricing vs. Price Skimming Time $ New Product Pricing Strategies Price Skimming Penetration Pricing

59. Pricing Based on Customer Value Slide 12-9 Dominant Backward Pricing a pricing approach that involves setting a price by starting with the estimated price customers will pay and working backwards with retail and wholesale margins. Value Pricing a pricing approach that involves setting prices so that the exchange value is higher than the value of competing exchanges.

60. Value Pricing Fits with Strategy Planning Target Market and Competition Focus on Customer Requirements ???? ???? ???? ???? ???? $

61. Basic Value Positions Slide 13-1 Table 13.1 Price Level High relative to product class Value Position High value because of quality and prestige. Examples Nike athletic shoes (such as Air Jordans); dental work by a widely respected specialist. Keds tennis shoes; dental work by the neighborhood family dentist. High value because of good quality at a reasonable price. High value because of acceptable quality at a low price. Around average for product class Low relative to product class Generic or private-label shoes at a drugstore or discount store; dental work by students being trained at a university clinic.

62. Part 2 of 2 Setting Prices

63. Development of Pricing Objectives Pricing objectives – goals that describe what a firm wants to achieve through pricing

64. Slide 13-2 Figure 13.2 Evaluate Customer Response and other Pricing Constraints Set Pricing Objectives Analyze Profit Potential Set Initial Price Make Price Adjustments as Needed The Pricing Process

65. Stages For Establishing Prices

66. Pricing Objectives And Typical Actions To Achieve Them

67. Pricing Objectives Survival Profit Return on Investment (ROI) Market Share Cash Flow Status Quo Product Quality

68. High-quality products are usually priced to reflect the quality level  © 2005 BMW of North America, LLC, used with permission. The BMW name and logo are registered trademarks.

69. Assessment of the Target Market’s Evaluation of Price Price depends on: Type of product Type of target market Purchase situation (e.g: price of concessions at movies)

70. Evaluation of Competitors’ Prices Regular function of marketing research Importance of customer view of pricing and marketing mix variables Pricing above competition – creates an exclusive image Pricing below competition – gains market share

71. Some prices are set higher than the competition to create an exclusive image  FIJI ® and all other trademarks, copyrights and intellectual property used herein are the property of FIJI Water Company LLC or its affiliates." Used by permission

72. Selection of a Basis of Pricing Cost Demand Competition 

73. Cost Based Pricing Cost-based pricing – a dollar amount to the cost of the product Cost-plus pricing – adding a specified dollar amount to the seller’s costs Markup – Adding to the cost of the product a predetermined percentage of that cost

74. Markup as % of Cost = Markup Cost = 15 45 = 33.3 % Markup as % of Selling Price = Markup Selling Price = 15 60 = 25.0 %

75. Demand-Based Pricing Customers pay a higher price when demand for the product is strong and a lower price when demand is weak

76. Non-Price Factors Affecting Demand Product Quality Range Nature- essential/luxury Substitutes Support Service at point of sale & after Advertising/promotion Distribution Methods Market Degree of competition Competitor action/reaction General economic conditions  “ Demand based pricing”, N. Coulthurst, 4/3/02 , http://www.accaglobal.com/publications/studentaccountant/404831

77. Point-of-sale service affects demand  Reprinted with permission of Lowe's Companies

78. Competition-Based Pricing Pricing influenced primarily by competitors’ prices method increases when: competing products are homogeneous organization is serving markets in which price is a key consideration www.zillow.com 

79. Selection of a Pricing Strategy Differential Pricing – different prices to different buyers for the same product New-Product Pricing Product-Line Pricing – establishing prices of multiple products within a product line Psychological Pricing – influence customer perception to make a product’s price attractive Professional Pricing – fees set by experienced people in particular field Promotional Pricing

80. Common Pricing Strategies

81. Differential Pricing Techniques Negotiated – final price established through buyer/seller bargaining Secondary-market – one price for primary target market and different price for another Periodic discounting – systematic temporary price reduction Random discounting – unsystematic temporary price reduction 

82. Steps In Developing New Product Pricing Develop Marketing Strategy Make Marketing Mix Decisions Estimate Demand Curve Calculate Cost Understand Environmental Factors Set Pricing Objectives Determine Pricing  NetMBA, “Pricing Strategy”, 2005, http://www.netmba.com/marketing/pricing/

83. New-Product Pricing Price skimming – charging the highest possible price that buyers who most desire the product will pay Penetration pricing – prices set below competing brands to penetrate market and gain market share quickly

84. Product-Line Pricing Strategies Captive – basic product in a product line low while related items higher Premium – pricing highest-quality product higher than other models Bait – low pricing on one item in line with intention of selling higher-priced item in the line Price Lining – limited number of prices for selected lines of merchandise

85. For Premium Pricing, Engage The Emotions Taking Care of Me - overstressed people want to pamper selves Connect with Friends & Family - serious money to nurture family, romantic getaways, cosmetic surgery, etc. Questing - consumers appreciate adventure Individual Style - personal taste, differentiate self from others  iBizResources, “For Premium Pricing, engage the Emotions”, 2006, http://www.familybusinessstrategies.com/articles4/041404f.html

86. Psychological Pricing Techniques Reference pricing – moderate pricing positioned next to a more expensive brand Bundles pricing – packaging multiple products to be sold at a single price Multiple-unit pricing – packaging together two or more identical products to be sold at a single price Everyday low prices (EDLP) – pricing products low on a consistent basis

87. More Psychological Pricing Techniques Odd-even pricing – ending the price with a certain number to influences buyers’ perceptions Customary pricing – on the basis of tradition Prestige pricing – setting prices at a high level to convey prestige

88. Consumers associate higher prices with higher quality  Reprinted with permission of Mannington Mills, Inc.

89. Concept of Professional Pricing Professional pricing carries the idea that professional have an ethical responsibility not to overcharge customers 

90. Types Of Promotional Pricing Price Leader- firm prices a few products below the usual markup, near cost, or below cost Special-Event- advertised sales or price-cutting linked to a holiday, a season, or an event Comparison Discounting- price is set at a specific level and simultaneously compares it with a high price

91. Special events are often seasonal and employ special-event pricing  Reprinted with permission of Montage, Inc.

92. Determination of Price: Pricing Strategy Yields a certain price- may need refining Helps in setting final price In absence of government price controls, remains flexible and convenient to adjust the marketing mix

93. Adjusting Prices Slide 13-5a Table 13.2 Discount Quantity discount Definition Example Reduction in the price per unit for purchasing a larger quantity Price reduction offered during times of slow demand Percentage reduction from list price offered to resellers A catalog for Gardener’s Supply Company offers 1 cedar planter for $32.95 and 2 or more for $30.00 each. A ski resort offers lower prices during the summer. Seasonal discount Trade discount Cash discount A publisher sells books to a chain of stores for a fraction of the retail price. Incentive for buyers to pay quickly or a lower price for payment of cash An organization receives an invoice that reads, “2/10 net 30.”

94. Adjusting Prices Slide 13-5b Table 13.2 Discount Trade-in allowance Definition Example Discount for providing a product along with monetary payment Price reduction in exchange for the reseller performing certain promotional activities A car dealer offers $1,000 off the list price in exchange for a buyer trading in her used car. A frozen-pizza maker gives a price break to a supermarket that promises to feature the product in its advertising. Promotional allowance

95. Adjusting Prices Slide 13-5c Table 13.2 Product Discount Promotional discount Definition Example Short-term discount to stimulate sales or convince buyers to try a product Setting prices near or below cost in order to attract customers to a store A Jiffy Lube franchise passes out flyers offering $5 off on an oil change; the discount is good for 30 days. A supermarket features bananas at 20 cents a pound and Pampers diapers at 50 percent off; the price is below cost, but the store expects buyers to purchase additional items selling at a profit. Loss leader pricing

96. Laws Limiting Pricing Practices Slide 12-10 Table 12.3 Law Price Fixing Resale Price Maintenance Deceptive Pricing Practices Price discrimination that lessens or damages competition; discrimination in the use of promotional pricing Dumping Pricing Practices Laws of most countries Sherman Antitrust Act Consumer Goods Pricing Act Federal Trade Commission Act Robinson-Patman Act

97. Pricing Product Lines Slide 13-4 Price Lining Uniform Pricing all books $40.00 all CD’s $15.95 all Cassettes $9.95 $1.00 $1.00 $1.00