Pricing Considerations and Approaches

1. Pricing Considerations and Approaches Chapter 11

2. 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.

3. “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 c Priceline.com

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

5. Definition • 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.

6. 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.

7. MySimon is one of several independent web sites that provides product price comparisons. MySimon

8. 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.

9. 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

10. Figure 11-1: Factors Affecting Price Decisions

11. Market positioning influences 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

12. Product quality leadership: Four Seasons starts with very high quality service, then charges a price to match.

13. 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

14. Swatch used target costing to manage costs carefully and create a watch offering the right blend of fashion and functions at a price consumers would pay.

15. 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

16. Figure 11-2: Cost Per Unit at Different Production Levels

17. Figure 11-3: Cost Per Unit As a Function of Accumulated Production

18. 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 Internal Factors • Marketing objectives • Marketing mix strategies • Costs • Organizational considerations

19. External factors must also be considered when planning pricing strategy.

20. 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

21. Discussion Question • How would you characterize the type of market – in terms of level of competition – for the following: • Electricity and gas utilities • Cable TV, Internet services • Local, long-distance, wireless telephone service

22. Figure 11-4: Demand Curves

23. Demand curves sometimes slope upward— Gibson learned that its high-quality guitars didn’t sell as well at lower prices

24. 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

25. PC marketing has become extremely price competitive. Knowledge of competitive prices, offers, and costs is key to pricing strategy.

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

27. Figure 11-5: Major Considerations in Setting Price

28. 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 • Price competition may be minimized • It is perceived as fairer to both buyers and sellers

29. 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

30. 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.

31. Figure 11-6: Break-Even Chart for Determining Target Price

32. Discussion Question • Assume the following costs: • Fixed costs (FC): $ 500,000 • Variable cost/unit (VC): $ 10.00 • Recalling that BE = FC/(P-VC), calculate the break-even unit volume at selling prices of $15.00 and $20.00 per unit. • How many units would need to be sold if a profit of $250,000 was desired?

33. Figure 11-7: Cost-Based Versus Value-Based Pricing

34. 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. • Introduction of less expensive versions of established brands has become common.

35. Perceived value reflects more than just the functional benefits of a product. The pen at left costs $185.00

36. General Pricing Approaches • Value-Based Pricing: • Business-to-business firms seek to retain pricing power • Value-added strategies can help • Value pricing at the retail level • Everyday low pricing (EDLP) vs. high-low pricing

37. General Pricing Approaches • Competition-Based Pricing: • Also called going-rate pricing • May price at the same level, above, or below the competition • Bidding for jobs is another variation of competition-based pricing • Sealed bid pricing

38. BusinessNow Metreo Video Clip Pricing in business-to-business sales is often negotiable. Metreo’s software helps companies make pricing decisions. Click the picture above to play video