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Chapter # 10

Pricing Products:Pricing Considerations

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P rice is the amount of money charged for aproduct or service or the some of the values thatconsumer exchange for the benefits of having orusing the product or service.

F ixing pricing setting one price for all buyersD ynamic pricing charging different pricingdepending on individual consumers andsituations.

What is a price ?

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Importance of pricing

Price is the only one element of marketing mixthat can generate revenue

Most flexible element of the marketing mix

Many companies do not handle pricing well -

One problem Companies are too quick toreduce price to get sale rather convincing buyerthat their product are worth a higher price ;

Other mistake pricing is too cost orientedrather customer value oriented.

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Factors affecting price decision

Internal FactorsMarketing objectives

Marketing mix strategyCost

Organizational consideration

Pricing Decisions

External FactorsNature of market and demand

CompetitionOther environmental factors ( economy, Gvt.)

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Marketing-MixStrategy

Product Designand Quality

DistributionPromotion

Marketing Mix Variables that

Affect Pricing Decisions

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C o s

t p e r u n

i t

12

3 4SRAC

LRAC

Quantity Produced per Day

1 , 0

0 0

2 , 0

0 0

3 , 0

0 0

4 , 0

0 0

Cost Per Unit at Different Levels of Production Per Period

Costs Considerations

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Organizational consideration

In small companies, price are set by top

management rather by the marketing or salesdepartments.

In large companies, pricing is typically handled

by divisional or product line managers.In industrial markets, sales people may beallowed to negotiate with customer within certainprice ranges.

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The Market and Demand

Competitors Costs, Prices, and Offers

Other External FactorsEconomic Conditions, Reseller NeedsGovernment Actions, Social Concerns

External Factors Affecting Pricing

Decisions

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Pure CompetitionMany Buyers and Sellers Who

Have Little Affect on the Price.

Monopolistic CompetitionMany Buyers and Sellers Trading

Over a Range of Prices.

Oligopolistic CompetitionFew Sellers Each Sensitive to Others

Pricing/ Marketing Strategies

Pure MonopolySingle Seller

Different Types of Markets

The Market and Demand Factors

that Affect Pricing Decisions

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Analyzing the Price- demand Relationship

A. Inelastic Demand -Demand Hardly Changes Witha Small Change in Price.

Quantity Demanded per Period

B. Elastic Demand -Demand Changes Greatly Witha Small Change in Price.

P r i c e

P 2

P 1

Q 1Q 2

P r i c e

Quantity Demanded per Period

P 2

P 1

Q 1Q 2

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Competitors costs, prices and offers

Another external factor affecting the companys decision is competitors costs and prices and

possible competitors reactions to the companys own pricing movesIn addition, the companys pricing strategy may

affects the the nature of competitors it faces.if the company follows a high price, high -margin strategy, it may attract competitors, but alow- price, low margin strategy may stopcompetitors, or drive them out of the market.

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Other external factors

Economic Conditions Economic factors such

as boom or recession, Inflation and interest ratesaffect the pricing decision.

Reseller Needs the company should setprice that ensure the resellers fair profit and helpthem to sell their product effectively.

Government Actions

Social Concerns -

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General pricing Approaches

1. Cost-based approach Cost- plus pricing Break- even

Target-profit pricing2. Buyer-based approach3. Competition-based approach

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Simplest pricing method - adding a standard markup to thecost of the productTo illustrate mark- up cost, suppose a manufacturer had thefollowing cost and expected salesVariable cost $ 10Fixed cost $ 300000Expected unit sales 50000

Unit cost = Variable cost + Fixed cost / unit sales= 10+ $ 300000/50000 = $ 16Now say, the manufacturer wants to earn 20% mark up onsale, thus

Mark-up Price = unit cost / 1- desired return on sale= $ 16 / 1- .2 = $ 20

Cost-Plus Pricing

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Why Cost-Plus Pricing Popular?

Minimizesprice competition

Perceivedfairness to

both buyersand sellers

Sellers are morecertain about

costs thandemand

Drawback : C ost based pricing works only if thatprice actually brings the expected level of sales.

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The firm tries to determine the price at which a firm willbreak even or make a target profit

According to the information of cost- based pricingBreak even volume = fixed cost / price variable cost

= $ 300,000 / $ 20 - $ 10 = $ 30,000

If the target profit is $ 200,000, the sales would be 50,000unites.

With the increases or decreases of unit price the break-evenvolume will changes, expected demand, total revenue, totalcoat and finally profit will be changed. (Table 11.1, pageno 359)

Break- even analysis and target

Profit pricing

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200

400

600

800

1,000

1,200

10 20 30 40 50

Total Revenue

Total Cost

Fixed Cost

Target Profit($200,000)

Sales Volume in Units (thousands)

C o s

t i n

D o

l l a

r s ( t h o u s a n

d s )

Break- even analysis and target

Profit pricing

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Value-Based Pricing

Setting price based on buyers perceptions ofvalue rather than on the seller cost.

Value pricing offering just the rightcombination of quality and good service at afair price

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Product

Cost

Price

Value

Customers

Customer

Value

Price

Cost

Product

Cost-Based Pricing Value-Based Pricing

Comparison of value-based

Pricing and cost based pricing

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Setting Prices based on the prices that competitorscharges for similar products

Sealed-BidCompany Sets Prices Based on What They

Think Competitors Will Charge.

Going-RateCompany Sets Prices Based on What

Competitors Are Charging.

??

Competition-Based Pricing