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Chapter 11: Pricing Considerations and Approaches

Objectives

•Understand the internal factors affecting a firm’s pricing decisions.

•Understand the external factors affecting pricing decisions, including the impact of consumer perceptions of price and value.

•Be able to contrast the three general approaches to setting prices.

Please Open The Following Figures In Different Windows and Leave Them Open:

Animated Figure 11-1 , Animated Figure 11-2, Animated Figure 11-3 , Animated Figure 11-4 .

Case Study
Priceline.com
•“Buyer-driven commerce” concept offers lower prices to consumers and the ability to sell excess inventory to sellers •13.5 million user customer base •Tremendous growth	•Most deals relate to travel or time sensitive / perishable services Not all ventures have been profitable •Some customers find it difficult to commit to purchase prior to learning details

What is Price?
Price Has Many Names
•Rent •Fee •Rate •Commission •Assessment	•Tuition •Fare •Toll •Premium •Retainer	•Bribe • Salary • Wage • Interest • Tax

Definitions

•Price

§The amount of money charged for a product or service, or the sum of the values that consumers exchange for the benefits of having or using the product or service.

What is Price?

•Dynamic Pricing on the Web allows SELLERS to:

§Charge lower prices, reap higher margins.
§Monitor customer behavior and tailor offers.
§Change prices on the fly to adjust for changes in demand or costs.
§Negotiate prices in online auctions and exchanges.

What is Price?

•Dynamic Pricing on the Web allows BUYERS to:

§Get instant price comparisons from thousands of vendors.
§Find and negotiate lower prices.
§Negotiate prices in online auctions and exchanges.

What is Price?

•Price and the Marketing Mix:

§Only element to produce revenues
§Most flexible element
§Can be changed quickly

•Price Competition

•Common Pricing Mistakes

Factors to Consider When Setting Price
Internal Factors •Marketing objectives •Marketing mix strategies •Costs •Organizational considerations	•Market positioning influences pricing strategy •Other pricing objectives: §Survival §Current profit maximization §Market share leadership §Product quality leadership •Not-for-profit objectives: §Partial or full cost recovery §Social pricing

Factors to Consider When Setting Price
Internal Factors •Marketing objectives •Marketing mix strategies •Costs •Organizational considerations	•Pricing must be carefully coordinated with the other marketing mix elements •Target costing is often used to support product positioning strategies based on price •Nonprice positioning can also be used

Factors to Consider When Setting Price
Internal Factors •Marketing objectives •Marketing mix strategies •Costs •Organizational considerations	•Types of costs: §Variable §Fixed §Total costs •How costs vary at different production levels will influence price setting •Experience (learning) curve effects on price

Factors to Consider When Setting Price
Internal Factors •Marketing objectives •Marketing mix strategies •Costs •Organizational considerations	•Who sets the price? §Small companies: CEO or top management §Large companies: Divisional or product line managers •Price negotiation is common in industrial settings •Some industries have pricing departments

Factors to Consider When Setting Price
External Factors •Nature of market and demand •Competitors’ costs, prices, and offers •Other environmental elements	•Types of markets §Pure competition §Monopolistic competition §Oligopolistic competition §Pure monopoly •Consumer perceptions of price and value •Price-demand relationship §Demand curve §Price elasticity of demand

Factors to Consider When Setting Price
External Factors •Nature of market and demand •Competitors’ costs, prices, and offers •Other environmental elements	•Consider competitors’ costs, prices, and possible reactions when developing a pricing strategy •Pricing strategy influences the nature of competition §Low-price low-margin strategies inhibit competition §High-price high-margin strategies attract competition •Benchmarking costs against the competition is recommended

Factors to Consider When Setting Price
External Factors •Nature of market and demand •Competitors’ costs, prices, and offers •Other environmental elements	•Economic conditions §Affect production costs §Affect buyer perceptions of price and value •Reseller reactions to prices must be considered •Government may restrict or limit pricing options •Social considerations may be taken into account

General Pricing Approaches

•Cost-Based Pricing: Cost-Plus Pricing

§Adding a standard markup to cost
§Ignores demand and competition
§Popular pricing technique because:
It simplifies the pricing process
v Price competition may be minimized
It is perceived as more fair to both buyers and sellers

General Pricing Approaches

Cost-Based Pricing Example

Variable costs: $20 Fixed costs: $ 500,000

Expected sales: 100,000 units Desired Sales Markup: 20%

Variable Cost + Fixed Costs/Unit Sales = Unit Cost

$20 + $500,000/100,000 = $25 per unit

Unit Cost/(1 – Desired Return on Sales) = Markup Price

$25 / (1 - .20) = $31.25

General Pricing Approaches

•Cost-Based Pricing: Break-Even Analysis and Target Profit Pricing

§Break-even charts show total cost and total revenues at different levels of unit volume.
§The intersection of the total revenue and total cost curves is the break-even point.
§Companies wishing to make a profit must exceed the break-even unit volume.

General Pricing Approaches

Break-Even Analysis and Target Profit Pricing

General Pricing Approaches

•Value-Based Pricing:

§Uses buyers’ perceptions of value rather than seller’s costs to set price.
§Measuring perceived value can be difficult.
§Consumer attitudes toward price and quality have shifted during the last decade.