Chapter 7 Slides

PowerPoint
to accompany
Pricing the Product
Copyright 2011 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781442525207/Solomon/Marketing/2
nd
edition
Making and Delivering Value
Making marketing value decisions
(Marketing Planning)
Understanding consumers needs
(Marketing Research, B2B and B2B Behaviour)
Communicating the value proposition
(Promotion)
Delivering the value proposition
(Place)

Creating the value proposition
(Product and Price)

This
chapter
nd
edition
Monetary and Non-Monetary
Prices
Monetary Prices
Where the
exchange involves
trading money for
the product
Non-monetary Prices
Where no money
changes hands, but there
is some exchange of
value.
Known as barter
Price is the value that customers give up or
exchange to obtain a desired product
May also need to consider the opportunity cost the
value given up to obtain something else
nd
edition
Example of Non-monetary Costs
nd
edition
Steps in price planning (Figure 7.1)
nd
edition
Step 1: Develop Pricing
Objectives
Profit
to get more investors

Customer
satisfaction
fully inclusive price

Sales (or market
share)
Woolworths v Coles

Competitive effect
Discourage or
pre-empt
Image
enhancement
Price = status
Pricing Objectives (Table 7.1)
nd
edition
Step 2: Estimate Demand
Demand refers to
customers desire
for a product
Marketers need to know
how much consumers will
purchase if price of the
product goes up or down
It is often best
explained by using
a demand curve
nd
edition
Normal Demand Curve
What would the demand curve for a prestige, high-end product look
like as price increases?
nd
edition
Shift in the Demand Curve
nd
edition
Estimating Demand
Estimated
demand
Likely
market
share
Number of
potential
buyers
Average
amount of
purchases by
each buyer
nd
edition
Estimating Demand for Pizza
nd
edition
Price Elasticity
Price Elasticity of Demand (E) =
Percentage change in quantity demanded
Divided by
Percentage change in price
Elastic demand
Demand in which changes in
price have a large effect on the
amount demanded
Inelastic demand
Demand in which changes in
price have little or no effect on
the amount demanded
nd
edition
Cross Elasticity of Demand
The price of other products
can affect the demand for an item
When goods are substitutes for each other:
an increase in the price of one will lead to an
increase in the demand for the other

When goods are complements:
an increase in the price of one, will lead to an
decrease in the demand for the other

nd
edition
Task 1
Give an example of a product for which
demand would be:
Elastic
Inelastic
Negatively cross elastic
Positively cross elastic
nd
edition
Task 2
When the domestic air travel business was
exposed to genuine competition from Virgin
Blue, the industry found that the market
responded very strongly to cheaper fares.
Does this mean that demand was elastic or
inelastic? Explain your answer.
nd
edition
Task 2 answer
The demand for domestic air travel is price elastic.

Price elastic means that consumers are sensitive to
changes in price and react strongly to those
changes.

Therefore, when a cheaper airfare is available,
more travellers switch to the lower priced fare.
nd
edition
Step 3: Determine Costs
Types of Costs
1. Variable
costs
The costs of production that are tied
to, and vary depending on the
number of units produced
2. Fixed
costs
Costs of production that do NOT
change with the number of units
produced
Includes raw and
processed materials,
parts and labour
(directly related to
production)
Includes rent, utilities, head
office salaries
(indirectly related to
production)
nd
edition
Average and Total Costs
1.
Average fixed cost:
the fixed cost per
unit produced
2.
Total costs

the total of the fixed costs
and variable costs for a set
number of units produced
Example
Fixed costs = $100,000
10,000 units produced
Average fixed cost = $10
nd
edition
Break-even analysis
Break-even point

Where total revenue
and total costs are
equal
A technique used to determine
the number of units that need to
be sold to cover all costs To break-even
nd
edition
Marginal analysis
Marginal analysis examines costs
and demand at the same time to
identify the output and the price that
will generate the maximum profit
(Marginal means extra or additional)
Maximum profit is where marginal
revenue equals marginal cost
(MR=MC)
nd
edition
Step 4: Evaluate the Pricing
Environment
Also need to consider other
external factors
1. The economy
(Economic growth, consumer
confidence, inflation)
2. The competition
Market structure:
oligopoly,
monopolistic competition,
pure competition
3. Consumer trends
(Lifestyles and
demographics)
nd
edition
Step 5: Develop a Pricing
Strategy

b) Based on
demand
d) Based on
customers
needs
a) Based on
costs
c) Based on the
competition
e) New-product
pricing
nd
edition
a) Pricing Based on Costs
Simple to calculate
Low risk approach
Price will at least cover all
costs
Doesnt consider
competitor prices
Not related to market
demand
May not be consistent
with brand image
Not related to PLC stage
nd
edition
Two Methods of Cost-Based
Calculation
Cost-plus
pricing
A method of setting prices in which
the seller totals all the costs for the
product and then adds an amount
to arrive at the selling price
Example = 20 + 50% = $30 price
Mark-up
the selling
price
Mainly used by
wholesalers/retailers
Their mark-up is known as the
sellers gross margin
Example = 20/(1-50%) = $40 price
nd
edition
b) Pricing Based on Demand
Price is based upon estimates of
demand at different prices
Two demand-based pricing strategies
Target costing
Tries to match price with demand
Starts with market price
Then determines whether the firm
can produce at a cost low enough
to generate a profit
Yield management
Charges different prices
to different customers
Goal to maximise
revenue
Often used by airlines and hotels,
Eg, 25% full fare, 75% discount fare
nd
edition
c) Pricing Based on the
Competition
Competitors
price
Price above
Price equal
Price below
Common in
oligopolies
Eg, airlines
Strong brand or
better quantity
Eg, premium pricing for
prestige brands

Low quality
product or new
entrant
nd
edition
d) Pricing Based on Customer
Needs
Usually has the goal of long-term
customer retention
Eg Bunnings - offers 10% below any others price
The firm promises ultimate value to
customers. Referred to as
value-pricing
Also known as EDLP
(Every Day Low Pricing)
nd
edition
e) New-product Pricing
Usually used when the product
is new or there is no
established industry price
Skimming price
Charging a very high,
premium price
Used for a product in
high demand, or where
extensive R+D costs
need to be recouped
Penetration pricing
Using a very low price,
with the intention of
building market share
Trial price
A low price, for a limited time,
to quickly attract some sales
Eg Two week introductory price

nd
edition
Step 6: Develop Pricing Tactics
(methods of implementing pricing strategies)
a) Pricing for Individual Products
Example:
Monthly fee for a
mobile phone
plan
Plus a per-
minute rate for
extra calls
1. Two-part pricing
Example:
Leasing a car
and making
monthly
repayments
2. Payment
pricing
nd
edition
E.g. A low-priced printer
and profitable printer ink
cartridges
E.g. A value meal at
McDonalds
Selling two or more
goods as a single
package
b) Pricing for Multiple Products
1. Price bundling 2. Captive pricing
Gets the customer to
buy more and protects
from switching
Used for two products
that must be used
together
The first is priced low to
gain future customer
purchases of the other
product
nd
edition
Example of Captive Pricing
nd
edition
c) Distribution-based Pricing (freight)
Is a pricing tactic that establishes how companies
handle the cost of delivering products to
customers
F.O.B origin pricing
(F.O.B = free on board)
Where the cost of products transport is
the customers responsibility
F.O.B delivered pricing Where the cost of product transport is
paid by the manufacturer and included in
the selling price
Basing-point pricing Where the customer pays shipping
charges based on location
Uniform delivered
pricing
Where the company adds a standard
shipping charge for all customers,
regardless of location
Freight absorption
pricing
Where the seller absorbs the total cost of
transportation
nd
edition
d) Discounting for Channel Members
1.Trade or functional
discounts
Discounts to channel members for
performing functions (e.g. selling, storage,
transport, and so on)
2. Quantity discounts
Where prices are reduced for purchases of
large quantities
2a. Cumulative
quantity discounts
Quantity discounts based on total
purchases within a specified time period
2b.Non-cumulative
quantity discounts
Quantity discounts based on purchases
from one individual order
3. Cash discounts
Discounts designed to encourage
fast/early payment of invoices
4. Seasonal discounts
Price reductions offered at specific times
of the year
nd
edition
Pricing with E-Commerce
(benefits)
Allows for
dynamic pricing
Many auction
sites available
Eg, eBay
Easier for
consumers to
compare prices
Some products sell
much cheaper
online (e.g. music)
nd
edition
Psychological Pricing
Strategies
Odd-even pricing
Research suggests that $1.99 is
more effective than $2.00
However, luxury goods and
professional fees usually use
even prices
Price lining
The practice of setting a limited number of
different specific prices, called price points, for
items in a product line
Eg a line of air conditioners from basic model
$999 to top model $1999
nd
edition
Legal/Ethical Considerations
Price
discrimination
Predatory
pricing
Price fixing

The collaboration of two or more
companies in setting prices, usually to
keep prices high
Where one (large) company sets a
very low price for the purpose of
driving competition out of the market
Offering similar products to different
consumers at different prices

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