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Pricing Concepts &

Setting the Right Price
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The Importance of Price
to Marketing Managers
Revenue
Profit
The price charged to customers
multiplied by the
number of units sold.

Revenue minus expenses

Price Cost = Profit
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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
Revenue = Unit Price X Number of Units Sold

Revenue pays for every activity.
Whats left over is Profit.
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Trends Influencing Price Setting
Flood of new
product introductions
Increased availability of
bargain-priced private and
generic brands
Price cutting as a strategy to
maintain or regain
market share
A general decline in consumer
confidence after terrorist attacks
Trends
in the
Market
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Pricing Objectives
Profit-Oriented Pricing Objectives

Sales-Oriented Pricing Objectives

Status Quo Pricing Objectives
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Profit-Oriented Pricing Objectives
Profit-Oriented Pricing Objectives
Profit
Maximization
Satisfactory
Profits
Target
Return on
Investment
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Sales-Oriented Pricing Objectives
Market
Share
Sales
Maximization

Sales-Oriented Pricing Objectives

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Status Quo Pricing Objectives
Maintain
existing
prices
Meet
competitions
prices
Status Quo Pricing Objectives
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The Cost Determinant of Price
Change with changes
in level of output
Types of Costs
Variable
Costs
Fixed Costs
Do not change
as level of output changes
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The Cost Determinant of Price
Methods
Used to Set
Prices
Markup pricing
Key Stoning
Profit Maximization Pricing
Break-Even Pricing
Introductory Price Point
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Markup Pricing
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.

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Profit Maximization
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.

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Break-Even Pricing
Quantity
$

2,000
0 1,000 2,000 3,000 4,000 5,000 6,000
4,000
Fixed costs
Total Revenue
Total Costs
Break-even point Variable Costs
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Fixed and Variable Costs
Fixed costs do not change as
production or sales quantity
changes.
Variable costs change as
production changes
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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
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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




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Other Determinants of Price
Perceived Quality
Promotion Strategy
Distribution Strategy
Competition
Stages of the
Product Life Cycle
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Stages in the
Product Life Cycle
Introductory
Stage
Growth
Stage
Decline
Stage






Maturity
Stage




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Steps in Setting the Right Price
Results lead to the right price
Fine tune with pricing tactics
Choose a price strategy
Estimate demand, costs, and profits
Establish pricing goals
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Choosing a Price Strategy
Basic Strategies
for
Setting Prices
Status Quo Pricing
Price Skimming
Penetration Pricing
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Price Skimming
Situations
when
Price
Skimming
Is
Successful
Unique Advantages/Superior
Legal Protection of Product
Blocked Entry to Competitors
Technological Breakthrough
Inelastic Demand
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Penetration Pricing
Advantages

Discourages or blocks
competition from
market entry
Boosts sales and
provides large profit
increases.
Disadvantages

Requires gear up for
mass production
Selling large volumes
at low prices
Strategy to gain
market share may fail
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Status Quo Pricing
Advantages

Simplicity

Safest route to long-
term survival for small
firms
Disadvantages

Strategy may ignore
demand and/or cost
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The Legality and Ethics of
Price Strategy

Issues
That Limit
Pricing
Decisions


Unfair Trade Practices
Price Fixing
Price Discrimination
Predatory Pricing
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Price Fixing
An agreement between
two or more firms on the
price they will charge
for a product.
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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
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Robinson-Patman Act Defenses
Seller Defenses
Cost
Market
Conditions
Competition
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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.
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Tactics for Fine-Tuning
the Base Price
Special Pricing Tactics
Discounts
Geographic Pricing
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Tactics for Fine-Tuning
the Base Price
Quantity Discounts
Cash Discounts
Functional Discounts
Seasonal Discounts
Promotional Allowances
Rebates
Value-Based Pricing
Zero Percent Financing
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Geographic Pricing
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.

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Geographic Pricing
Zone Pricing
Freight
Absorption
Pricing
Basing-Point
Pricing
The U.S. is divided into zones and
a flat freight rate is charged to
customers in a given zone.

The seller pays for all or part of
the freight charges and does not
pass them on to the buyer.

The seller designates a location as
a basing point and charges all
buyers the freight costs from that
point.

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