IB2 Ch 27 Price

							4.4 Price
 Chapter 27
Price

 Price is the amount
  paid by consumers for
  a product.
What else does PRICE say?
   Determines the degree of value added to “bought-in”
    components.
         Bought-In   Pieces purchased from other
                      manufacturers to create a whole
                      product.
   Influences the revenue and profit of a business due
    to impacting demand for a product.
   Reflects the marketing objectives of the business.
   Establishes the psychological image and identify of
    a product.
Factors in determining price
1.   Costs of production
2.   Competitive conditions
     in the market
3.   Competitors’ prices
4.   Marketing objectives
5.   Price elasticity of demand                        What?
     (Measures the responsiveness of demand following a change in price.)

6.   Whether it is a new or existing product
Pricing Strategies
   Cost-Based Pricing
        Firms determine the costs of producing and supplying
         a product and then ADD money on top of this
         calculated costs to determine the selling price.

        Cost-Plus Pricing Adding a fixed mark-up for profit
                              to the cost of the item.
        This method is popular with retailers. They take the
         cost of the item and add a mark up percentage to
         determine selling price.
                Cost of bought-in materials: $40
                50% markup on cost = $20 Selling price= $60
Pricing Strategies
(Cost-Based Continued…)
    Full-Cost Pricing (or absorption-cost pricing)
      This pricing strategy is similar to cost-plus pricing.
      Used in manufacturing companies.
      The fixed and variable costs are allocated to manufactured
       products to determine cost, then a markup is added to
       determine selling price.

        5000 Training videos are produced
                                       $10,000 fixed costs
                                            $5 variable costs per video

         $10,000 + (5000 X $5) = $35,000 total cost of videos
         Average unit cost = $35,000 / 5000 = $7 cost per video

        A markup is added to the average video cost to determine
         selling price.
 Pricing Strategies
 (Cost-Based Continued…)
        Marginal-Cost Pricing
          Basing the price on the extra cost of making one additional
           unit.
          This pricing scheme could gain market share and increase
           sales.



            Assume that the total cost of producing 10,000 units is
             $50,000. If you produce a total of 10,001 units the total
             cost is $50,002. That would mean the marginal cost—
             the cost of producing the next unit—was $2.


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 Pricing Strategies
 (Cost-Based Continued…)
        Contribution-Cost Pricing
          Basing the price on the variable cost of the product plus extra
           to contribute towards covering fixed costs and profit.
          If enough units are sold, fixed costs are covered and a profit
           will be made.



            Assume that the variable costs per unit is $2. The sales
             price is set at $3. $1 can be contributed to cover fixed
             costs. If fixed costs are $1000, 1000 units will need to
             be sold before a profit is made.


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Pricing Strategies
   Competition-based pricing
        The company will base its price upon the price set by its
         competitors.
        Price Leadership One dominant firm in a market
                             sets a price and the other firms
                             simply charge a price based upon
                             the price set by the market leader.
        This occurs in markets dominated by a few firms.
        Examples: Airlines, Gas stations, cell phone service
Pricing Strategies
(Competition-Based Continued)
      Going-Rate Pricing The price charged is based upon
                           a study of the conditions that
                           prevail in a market and the prices
                           charged by major competitors.
      This occurs in markets where pricing information is
       easily determined by customers and can be easily
       compared.
      Examples: Internet
 Pricing Strategies
 (Competition-Based Continued)
        Predatory pricing
        Deliberately charging less than competitors in order
         to force them out of the market.
        This practice is illegal in the European Union. It is
         difficult to prove.




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Pricing Strategies
   Market-Based Pricing
        Pricing set based upon the marketing objectives of the
         company.
        Penetration Pricing          Setting a low price
                                      supported by strong
                                      promotion in order to
                                      achieve high volume
                                      in sales.
        This occurs when firms are trying to obtain market
         share. If successful, the price can increase later.
        Examples: Snack foods
Pricing Strategies
(Market-Based Continued)
     Market Skimming A high price is charged for a new
                           product that has little or no
                           competition.
     This strategy is used to maximize short-term profits until
      competitors enter the market and to project an exclusive
      image.
     Examples: Pharmaceuticals,
                  Technology products
 Pricing Strategies
 (Market-Based Continued)
      Price      Discrimination
        Charging different groups of consumers different prices
         for the same goods or services.
        Examples:
         Airline tickets, bus fare, train tickets,
         movie theatre tickets, restaurant
         meals, grocery discounts.

         Senior citizen discounts,
         children’s prices vs adult prices


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 Pricing Strategies
 (Market-Based Continued)
      Loss      Leader
        Product sold at a very low price to encourage
         consumers to buy other products.
        Commonly done in the grocery industry.
        Example:
         Milk, bread, soda, or chips are sold at a very low price –
         perhaps at a loss – to entice buyers into the store.

         Selling computer printers below cost or
         giving them away for free so expensive
         ink cartridges can be sold.

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 Pricing Strategies
 (Market-Based Continued)
         Psychological Pricing
         Setting prices to advantage of a customer’s perception
          of value of the product.
     1.   Common for prices to be set below the key price to
          make the product appear cheaper than it is: $999
          instead of $1001; $1.99 instead of $2.01
     2.   Prices are set to coincide with market perception of the
          product even if the product has a low production cost.
          Setting the price too low would create a perception of a
          cheap product. Setting the price too high could
          alienate buyers.

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 Pricing Strategies
 (Market-Based Continued)
        Promotional Pricing
        Special low prices used to gain market share or sell off
         excess stock – includes “buy one get one free” offers.

        Widely used pricing strategy to stimulate sales for
         limited periods of time usually during low product
         demand periods or to promote the opening of a new
         store.




HL
 Elasticity
    The quantity demanded for products as the price for
     them rises or falls.

    Goods that are “needs” (milk, bread, gas) are
     considered “inelastic”. The demand is steady
     regardless of price.
    Goods that are “wants” (steak, expensive cars,
     jewelry) are considered “elastic”. The demand for
     them decreases as their price increases.


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 Price Elasticity of Demand
 (PED)
    The quantity demanded for most products
     increases as the price of the product falls.
                                     Lower demand as
          High demand for            price increases
          inexpensive
          products




        Demand          Price    Demand         Price

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 Income Elasticity of Demand
 (YED)
    The quantity demanded for products as income
     rises or falls.
                                  Low demand for
         High demand for          expensive products
         inexpensive              when income is low
         products when
         income is low




        Demand         Price   Demand         Price

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Income Elasticity of Demand
(YED) - Reverse when income is
HIGH
    The quantity demanded for products as income
     rises or falls.
                                     High demand for
         Low demand for              expensive products
         inexpensive                 when income is high
         products when
         income is high




        Demand            Price   Demand         Price

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Cross Elasticity of Demand
(XED)
    The quantity demanded for a product following
     the price of change of ANOTHER product.

    Your competitor lowers the price of his product is
     likely to cause a reduction in price in your product
     – positive elasticity




HL
Advertising Elasticity (AED)
    The quantity demanded for a product following advertising
     spending.

    Typically elasticity is high when advertising consumer
     goods….the more advertising $$ spent, the more products
     sold…..the fewer advertising $$ spent, the fewer products
     sold.
    Not true when:
        Competitors are spending more advert $$ than you.
        The campaign is expensive but poorly received by customers.
        Other elements of the marketing mix are in conflict.
        Industrial products are less responsive to advert $$.

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