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Pricing Concepts in Marketing

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					Pricing Concepts

1

The Importance of Price
Revenue = Unit Price X number of units sold  Revenue pays for every activity.  What’s left over is Profit.

Marketers must select a price that is not too high or not too low, a price that equals the perceived value to target consumers

The Importance of Price
High rate of new product introduction Increased availability of bargain-priced dealer and generic brands Price cutting as a strategy to maintain or regain market share

Trends in the Market

More efficient and better informed buyers

Pricing is Affected By:
• • • • • • • Company strategy / mission Pricing objectives Other marketing mix elements Stage in Product Life Cycle Portfolio management Competitive environment Cost and Demand

Pricing Objectives
• Profit Oriented
– Target return – Profit maximization

• Sales Oriented
– $ sales – # of units (volume)

– Market share in $
– Quality

– Market share in units
– Competitive barrier

More Pricing Objectives
• Status Quo
– non-price marketing – stable pricing

• Survival Pricing

– competitive pricing

• Social Responsibility Pricing

The PLC and Price
Introduction Growth Maturity Decline

Price
$
0

Competition
Time
.

Price Determinants The absolute limits on a product’s price are...
Demand

Upper

$
Cost

Lower

Cost Determinants of Price
• Direct costs
– fixed – variable

• Indirect costs • Break-even point

Break-Even Analysis
Total Revenue

4,000

Total Costs Break-even point

Price
2,000

Fixed costs

0

1,000

2,000

3,000

4,000

5,000

6,000

Quantity

Normal Demand Curve
P

p1 p2

D

q1

q2

Q

Elasticity of Demand
Elastic Demand
 Consumers buy more or less of a product when the price changes

Inelastic Demand

 An increase or decrease in price will not significantly affect demand

Unitary Elasticity

 An increase in sales exactly offsets a decrease in prices, and revenue is unchanged

Elasticity of Demand
E<1 Inelastic
P
p1 p2 D q1q2

E=1 Unitary
P
p1 p2 D

E>1 Elastic
P
p1 p2

D

Q

q1 q2

Q

q1

q2 Q

Effects of Price / Total Revenue
Lower Price Elastic E>1 Total Revenue Increases ? Raise Price Total Revenue Decreases ?

Inelastic E<1

Total Revenue Decreases ?

Total Revenue Increases ?

Unitary E=1 ?

Total Revenue Remains the same ?

Factors That Affect Elasticity
Availability of Substitutes

Price relative to Purchasing Power
Product Durability

Factors That Affect Elasticity of Demand

Product’s Other Uses

Prestige Pricing
P
p1 p2 p3

D
q1 ,3 q2

The Competitive Environment
• Monopoly
– price gouging

• Oligopoly
– price leadership – collusion

• Monopolistic Competition
– nonprice marketing

• Pure Competition

Legal Issues of Pricing
• Price fixing
• Sherman Act (1890), FTC Act (1936)

• Price discrimination
• Clayton Act (1914), Robinson-Patman Act (1936)

• Predatory pricing
• Federal Trade Commission Act (1936)

• Deceptive pricing
• Wheeler-Lea Amendment, Consumer Credit Protection Act (1968)

• Resale price maintenance
• Consumer Goods Pricing Act (1968)

• Tying contracts (FTC and Robinson Patman)

Pricing Strategies
• Cost-Based
– Contribution pricing – Total cost pricing – Average cost pricing

• Profit-Based
– Target markup / cost-plus (keystoning) – Target rate of return – Break-even volume or target profit

Pricing Strategies
• Volume Pricing
– Economies of scale – Experience curve

• Custom Pricing
– Flexible pricing – Timed pricing – Bid/Sealed Bid pricing

Pricing Strategies
• Marginal Analysis
1 2 3 4 100 220 350 400

120 130 50

+ + -

– Keep adding units (dollars) until your increase begins to decrease

Pricing in the Product Portfolio
• Full line
Depth of Kraft Product Lines Width of Kraft Product Mix (selected lines) Breakfast Cereals
Alpha-Bits Fruit & Fiber Grape-Nuts Honeycomb Pebbles Post 40% Bran Flakes Post Raisin Bran Post Toasties Smurf-Berry Crunch Orowheat Sugar-Free Kool-Aid Tang Hostess Snacks Crystal Light

Baked Goods
Entenmann’s

Beverages
Country Time Lemonade

• Complementary product

Krema Candy
Kool-Aid

• By -product

Demand-Based Pricing
Price Skimming
P
p1
Profit

Penetration Pricing
P

D

C
q1

p1

D
Profit

C

Q

q1 Q

Demand-Based Pricing (cont.)
• Value-in-use
• Leader pricing
– Loss-leader pricing

• Bait pricing
– Bait and switch

Market Pricing Strategies
• Perceived value pricing
• Going-rate pricing • Price band • Competitive dominance strategy • One-price strategy

Psychological Pricing
• • • • • • • Price-quality relationship Customary pricing Demand-backwards Bundle Optional product pricing Captive product pricing / Two-part pricing Odd/Even pricing

Price Perception
• Which sale is more of a bargain?
– $ 0.89 --> $ 0.75 – $ 0.93 --> $ 0.79

Pair 1 .89 - .75 = .14 Pair 2 .93 - .79 = .14

Price Perception
• What is the best price for a car that is around $20,000?
– – – – $ 21,167 $ 20,000 $ 19,879 $ 19,102

Odd/Even Pricing
The Effect of Advertised Odd-price Endings on Sales of Margarine
Price/lb. ($) Parkay brand Regular price Discount price Odd discount price Imperial Brand Regular price Discount price Odd discount price .83 .63 .59 Unit sales 2,817 8,283 (+ 194%) 14,567 (+ 406%)

.89 .71 .69

5,521 9,120 (+ 65%) 17,817 (+ 222%)

Price Reductions
Cash Discount Quantity Discount Functional Discount EDLP

Price Reductions

Seasonal Discounts Promotional Allowances

Trade Loading

Rebates

Geographic Pricing
FOB Origin Uniform Delivered Zone Pricing Freight-Absorption

Pricing Tactics Based on Geography

Basing-Point


				
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Description: pricing concepts from the 4P's of marketing