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Pricing Concepts & Setting the Right Price

Pricing Concepts & Setting the Right Price. Revenue. The price charged to customers multiplied by the number of units sold. Profit. Revenue minus expenses. The Importance of Price to Marketing Managers. Price – Cost = Profit. Revenue = Unit Price X Number of Units Sold

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Pricing Concepts & Setting the Right Price

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  1. Pricing Concepts & Setting the Right Price

  2. Revenue The price charged to customers multiplied by the number of units sold. Profit Revenue minus expenses The Importance of Priceto Marketing Managers Price – Cost = Profit

  3. Revenue = Unit Price X Number of Units Sold • Revenue pays for every activity. • What’s left over is Profit. The Importance of Price To earn a profit, marketers must select a price that is not too high or too low, a price that equals the perceived value to target consumers

  4. Flood of new product introductions Trends in the Market Increased availability of bargain-priced private and generic brands Price cutting as a strategy tomaintain or regain market share A general decline in consumer confidence after terrorist attacks Trends Influencing Price Setting

  5. Profit-Oriented Pricing Objectives Sales-Oriented Pricing Objectives Status Quo Pricing Objectives Pricing Objectives

  6. Profit-Oriented Pricing Objectives Profit-Oriented Pricing Objectives Profit Maximization SatisfactoryProfits Target Return on Investment

  7. Sales-Oriented Pricing Objectives Market Share Sales Maximization Sales-Oriented Pricing Objectives

  8. Status Quo Pricing Objectives Maintain existing prices Meet competition’s prices Status Quo Pricing Objectives

  9. Types of Costs Variable Costs Fixed Costs Change with changes in level of output Do not change as level of output changes The Cost Determinant of Price

  10. The Cost Determinant of Price • Markup pricing • Key Stoning • Profit Maximization Pricing • Break-Even Pricing • Introductory Price Point Methods Used to Set Prices

  11. Markup Pricing The cost of buying the product from the producer plus amounts for profit and for expenses not otherwise accounted for. Keystoning The practice of marking up prices by 100%, or doubling the cost. Markup Pricing

  12. Profit Maximization A method of setting prices that occurs when marginal revenue equals marginal cost. Marginal Revenue The extra revenue associated with selling an extra unit of output, or the change in total revenue with a one-unit change in output. Profit Maximization

  13. Total Revenue Profit Total Costs 4,000 Break-even point $ Loss 2,000 Fixed costs 3,000 4,000 5,000 6,000 0 1,000 2,000 Quantity Break-Even Pricing Variable Costs

  14. Fixed and Variable Costs • Fixed costs do not change as production or sales quantity changes. • Variable costs change as production changes

  15. Average Variable Cost (AVC) • Assuming $2.00 AVC per unit (raw materials, labor, packaging, distribution, etc.) • 50,000 units produced = $100,000 variable costs • 250,000 units produced = $500,000 variable costs

  16. Steps to Find Break Even Price 1. Total Fixed Costs + (AVC x # of Units Sold) = Total Costs 2. Total Costs / # of Units Sold = Break Even Price

  17. Stages of the Product Life Cycle Competition Distribution Strategy Promotion Strategy Perceived Quality Other Determinants of Price

  18. Introductory Stage Growth Stage Maturity Stage Decline Stage Stages in the Product Life Cycle

  19. Establish pricing goals Estimate demand, costs, and profits Choose a price strategy Fine tune with pricing tactics Results lead to the right price Steps in Setting the Right Price

  20. Price Skimming Basic Strategies for Setting Prices Penetration Pricing Status Quo Pricing Choosing a Price Strategy

  21. Inelastic Demand Situations when Price Skimming Is Successful Unique Advantages/Superior Legal Protection of Product Technological Breakthrough Blocked Entry to Competitors Price Skimming

  22. Disadvantages • Requires gear up for mass production • Selling large volumes at low prices • Strategy to gain market share may fail Penetration Pricing Advantages • Discourages or blocks competition from market entry • Boosts sales and provides large profit increases.

  23. Advantages Disadvantages • Strategy may ignore demand and/or cost • Simplicity • Safest route to long-term survival for small firms Status Quo Pricing

  24. Unfair Trade Practices Issues That Limit Pricing Decisions Price Fixing Price Discrimination Predatory Pricing The Legality and Ethics ofPrice Strategy

  25. Price Fixing An agreement between two or more firms on the price they will charge for a product.

  26. Price Discrimination The Robinson-Patman Act of 1936: Prohibits any firm from selling to two or more different buyers at different prices if the result would lessen competition

  27. Seller Defenses Cost Market Conditions Competition Robinson-Patman Act Defenses

  28. Predatory Pricing The practice of charging a very low price for a product with the intent of driving competitors out of business or out of a market.

  29. Discounts Geographic Pricing Special Pricing Tactics Tactics for Fine-Tuning the Base Price

  30. Quantity Discounts Promotional Allowances Cash Discounts Rebates Functional Discounts Value-Based Pricing Seasonal Discounts Zero Percent Financing Tactics for Fine-Tuning the Base Price

  31. FOB Origin Pricing The buyer absorbs the freight costs from the shipping point (“free on board”). Uniform Delivered Pricing The seller pays the freight charges and bills the purchaser an identical, flat freight charge. Geographic Pricing

  32. Zone Pricing The U.S. is divided into zones and a flat freight rate is charged to customers in a given zone. Freight Absorption Pricing The seller pays for all or part of the freight charges and does not pass them on to the buyer. Basing-Point Pricing The seller designates a location as a basing point and charges all buyers the freight costs from that point. Geographic Pricing

  33. Single-Price Tactic All goods offered at the same price Flexible Pricing Different customers pay different price Professional Services Pricing Used by professionals with experience, training or certification Price Lining Several line items at specific price points Leader Pricing Sell product at near or below cost Bait Pricing Lure customers through false or misleading price advertising Odd-Even Pricing Odd-number prices imply bargain Even-number prices imply quality Price Bundling Combining two or more products in a single package Two-Part Pricing Two separate charges to consume a single good Special Pricing Tactics

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