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					Pricing the Product
           Chapter Objectives


• importance of pricing
• monetary & non-monetary
  forms of pricing
• pricing objectives
  for planning pricing strategies


                                     2
           Chapter Objectives


• using costs, demands, and
  revenue
  to make pricing decisions
• environmental factors
  affecting pricing strategies



                                  3
           Chapter Objectives


• key pricing strategies
• pricing tactics
  for single products
  multiple products,
  pricing on the Internet



                                4
            Chapter Objectives

• Internet pricing strategies

• Psychological aspects of pricing
• Legal aspects of pricing
• ethical aspects of pricing



                                     5
      “Yes, but what does it cost?”

• Price:
   the assignment of value,
   or the amount the consumer must exchange
     • to receive the offering

• Offerings:
  Money,    goods,          services,   favors,   votes,

  anything else that has value to the other party



                                                           6
 Figure 11.1:
   Steps in
Price Planning




                 7
Kotler   Solomon




               8
    Step 1: Develop Pricing Objectives


•   Sales or market share objectives
•   Profit objectives
•   Competitive effect objectives
•   Customer satisfaction objectives
•   Image enhancement objectives


      ROLLS-ROYCE




                                         9
10
    Step 2

Estimate demand
       Step 2: Estimate Demand

• Demand:
• customers’ desires for a
  product

• How much of a product are
  customers willing to buy
  as its price goes up or
  down?

                                 12
                Demand Curves

• Law of demand:
   as price goes up,
   quantity demanded goes down.


• For prestige products,
   a price increase may actually result in an increase in
    quantity demanded.




                                                             13
14
Figure 11.2: Demand Curves for
 Normal and Prestige Products




                                 15
           Shifts in Demand Curve

1. Changes in marketing strategy
  (improved product, new advertising)
  or
2. non-marketing activities
can cause upward or downward
  shifts in demand.

At a given price,
  demand is greater or less
  than before the shift.                16
Figure 11.3: Shift in Demand Curve




                                     17
            Estimating Demand

• Marketers predict total demand by
  estimating potential buyers for a product,
  then multiplying number of buyers times
    • average amount of each buyer’s purchase.


• Then they predict what the company’s
  share of the total market will be.

                                                 18
            Elastic Demand
• A change in price results
• in a substantial change in quantity
  demanded.

  If price is increased, revenues
    decrease, and vice-versa.

  Non-necessities (pizza)
   generate elastic demand.

  Availability of close substitute
   products facilitates elastic demand.   19
             Inelastic Demand

• A change in price
• has little or no effect on quantity
  demanded.
   If price is increased, revenues increase.


  The demand for necessities
     • (food and electricity)
     • is generally inelastic.

                                                20
    Cross-elasticity of Demand

• Changes in prices of other
  products affect a product’s
  demand.
  Products are substitutes:
    • increase in price of one will increase demand for
      other (bananas vs. strawberries).
  One product is essential for use of second:
    • increase in price of one decreases demand for
      other (increasing price of gas lowers demand for
      cars and tires).

                                                          21
    Step 3

Determine costs
         Step 3: Determine Costs

• Variable costs:
• costs of production (raw, processed
  material, parts, labor) that are tied to and
  vary depending on the number of units
  produced.
   Average variable costs may change
     • as the number of products produced
       changes.

                                                 23
          Step 3: Determine Costs

• Fixed costs:
• costs of production that don’t
  change with number of units
  produced
  Rent,
  cost of owning/maintaining factory,
  utilities,
  equipment,
  fixed salaries of firm’s executives


                                        24
         Step 3: Determine Costs

• Fixed costs:

  Average fixed cost:
   fixed cost per unit (total fixed costs divided by number of
   units produced)
   will decrease as number of units produced increases.




                                                            25
   Step 3: Determine Costs (cont’d)

• Total costs:
• total of fixed costs &
• variable costs
   for a set number of units produced.




                                          26
          Break-Even Analysis

• the number of units a firm must
  produce and sell
  at a given price to cover all its costs.
• Break-even point:
  point at which a firm doesn’t lose any money
   and doesn’t make any profit.

                           Song Airlines
                              Video

                                                  27
      Break-Even Analysis (cont’d)

• Break-even point (in units)
• = (total fixed costs)
• divided by (contribution per unit)

  Contribution per unit:
     • the difference between the price the firm
       charges for a product & the variable costs

                                                    28
      Break-Even Analysis (cont’d)

• Break-even point (in dollars)
• = (total fixed costs)
• divided by [1 - (variable cost per unit
  divided by price)]




                                            29
       Marginal Analysis

• A method that uses
• cost and demand
• to identify the price
• that will maximize profits.




                                30
            Marginal Analysis
• Marginal cost:
   increase in total costs from producing one additional
    unit of a product
• Marginal revenue:
   increase in total income or revenue from selling one
    additional unit of a product (decreases with each
    additional unit sold)
• Profit is maximized
   where marginal cost is exactly equal to marginal
    revenue.

                                                            31
            Step 4:

Evaluate the Pricing Environment
    Step 4: Evaluate the Pricing
            Environment

• The economy
 Broad economic
   trends
 Recessions (Price
   sensitive
   Consumers),
 Inflation
• The competition
• Consumer trends
                                   33
       Step 5:

Choose a Price Strategy
   Step 5: Choose a Price Strategy

• Pricing strategies
  based on cost
  Simple to calculate and
    relatively risk free

  Cost-plus pricing:
  total all product costs and
    add markup



                                     35
   Step 5: Choose a Price Strategy
              (cont’d)

• Pricing strategies based on
  demand
  Based on estimate of quantity
  a firm can sell at different prices



                            PRICELINE.COM

                                            36
   Step 5: Choose a Price Strategy
              (cont’d)

• Pricing strategies based on demand
  Target costing:
    • identify quality and functionality
       –customers need and
    • price they’re willing to pay
       –before designing product.

                             PRICELINE.COM

                                             37
   Step 5: Choose a Price Strategy
              (cont’d)

• Pricing strategies based on demand
  Yield management pricing:
   • charge different prices
   • to different customers
   • to manage capacity



                               PRICELINE.COM

                                               38
   Step 5: Choose a Price Strategy
              (cont’d)

• Pricing strategies based on the
  competition
   Pricing near, at, above, or below
    the competition
   Price leadership strategy:
    • industry giant announces price, and
    • competitors get in line
    • or drop out
    • (LCD TV and it’s competitor)
                                            39
   Step 5: Choose a Price Strategy
              (cont’d)

• Pricing strategies based on customers’
  needs
  Value pricing or
  everyday low pricing (EDLP):
    • pricing strategy in which a firm sets prices
    • that provide ultimate value to customers.



                                                     40
41
42
    Step 5: Choose a Price Strategy
               (cont’d)

• New-product pricing
  Skimming price:
    a very high premium price
  (TIVO, RIM, Mobile Phone,
    Kindle)


                 HP FINANCIAL CALCULATORS

                                            43
44
   Step 5: Choose a Price Strategy
              (cont’d)

• New-product pricing
  Penetration pricing:
   a very low price
   to encourage more customers
   to purchase


               HP FINANCIAL CALCULATORS

                                          45
    Step 5: Choose a Price Strategy
               (cont’d)

• New-product pricing
  Trial pricing:
   low price for a limited
    period of time




                 HP FINANCIAL CALCULATORS

                                            46
       Step 6:

Develop Pricing Tactics
    Step 6: Develop Pricing Tactics

• Pricing for individual products


  Two-part pricing:
  offering two separate
   types of payments to
    purchase the product (sms
    extra)
                                      48
    Step 6: Develop Pricing Tactics

• Pricing for individual products

  Payment pricing:
  breaking total price
  into smaller amounts
  payable over time



                                      49
Step 6: Develop Pricing Tactics (cont’d)

• Pricing for multiple products
  Price bundling:
  selling two or more goods or services
  as a single package
  for one price (Laptop, HP)




                                          50
Step 6: Develop Pricing Tactics (cont’d)

• Pricing for multiple products

  Captive pricing:
  pricing two products
  that work only when used together
    (Camera, razor)


                                       51
Step 6: Develop Pricing Tactics (cont’d)

• Distribution-based pricing
  F.O.B. (free on board) origin pricing
  F.O.B delivered pricing
  Basing-point pricing
  Uniform delivered pricing
  Freight absorption pricing


                                          52
  Step 6: Develop Pricing Tactics (cont’d)

• Discounting for channel members
  List price (suggested retail price):
    • price that manufacturer sets
    • as appropriate
    • for end consumer to pay




                                          53
Step 6: Develop Pricing Tactics (cont’d)

• Discounting for channel members
  Trade or functional discounts:
  set percentage discounts
    • off list price
  for each channel level




                                       54
Step 6: Develop Pricing Tactics (cont’d)

• Discounting for channel members
  Quantity discounts:
  reduced prices
  for purchases of larger quantities




                                        55
Step 6: Develop Pricing Tactics (cont’d)

• Discounting for channel members
  Cash discounts:
    enticements to customers
    to pay bills quickly
          (2% 10 days, net 30 days)
          (2/10 net 30)


                                       56
Step 6: Develop Pricing Tactics (cont’d)

• Discounting for channel members
  Seasonal discounts:
  price reductions
  offered during certain times of year




                                         57
Other pricing issues
  Pricing and Electronic Commerce

• Dynamic pricing strategies:
• seller easily adjusts price
• to meet changes in marketplace.




                        CHEAPTICKETS.COM

                                           59
  Pricing and Electronic Commerce

• Dynamic pricing strategies:.
  Cost of changing prices on Internet
    is practically zero.
  Firms can respond quickly and frequently
    to changes in costs, supply, and/or demand.



                          CHEAPTICKETS.COM

                                                  60
  Pricing and Electronic Commerce


• Online auctions (eBay.com)
 E-commerce allows shoppers
 to purchase products
 through online bidding.




                                    61
   Pricing and Electronic Commerce
                (cont’d)

• Pricing advantages for online shoppers
  Consumers gain control.
  Search engines and “shopbots”
    • make customers more price-sensitive.
  Consumers have more negotiating
   power.


                                             62
  Psychological Issues in Pricing

• Buyer’s pricing expectation
  Internal reference price:
  consumers use a price/price range
  to evaluate product’s cost.
    • Assimilation effect
    • Contrast effect



                                       63
   Psychological Issues in Pricing

• Buyer’s pricing expectation
  Price/quality inferences:
     • consumers assume higher-priced
       product
     • has higher quality.



                                        64
  Psychological Pricing Strategies

• Odd-even pricing:
   prices ending in 99 rather
    than 00 lead to increased
    sales.
• Price lining:
   items in a product line sell at
    different price points.




                                      65
66
 Legal and Ethical Considerations


• Deceptive pricing practices
  Going-out-of-business sale
  Bait-and-switch




                                    67
 Legal and Ethical Considerations



• Unfair sales acts
  Loss-leader pricing
  Unfair sales acts

• Illegal business-to-business (B2B) price
  discrimination

                                             68
 Legal and Ethical Considerations in
          Pricing (cont’d)

• Price fixing:
  two or more companies conspire
  to keep prices at a certain level


  Horizontal price fixing

  Vertical price fixing


                                       69
  Legal and Ethical Considerations in
           Pricing (cont’d)

• Predatory pricing:
• company sets a very low
  price
• for purpose of driving
  competitors out of business




                                        70
71
The end




          72

				
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posted:9/7/2012
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