2. OUTLINE:
When setting effective pricing policy a company
1. Follows six pricing procedures
2. Selects a pricing structure that
reflects various situations
3. Chooses what price adaptation
strategy to use
4. Examine the effect of price changes
5. Responds to competitors price
challenge
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3. Price is the only element in
the marketing mix that
produces revenue;
the others produce cost.
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4. Consumers use common price
references.
Fair price Typical Price
Lower-bound Last Price Paid
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5. They may also refer to:
Competitor’s Price Usual Discounted Price
Expected Future Price
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6. Companies follow 6 steps
when setting prices.
1 Select the price objective
2 Determine demand
3 Estimate costs
4 Analyze competitor price mix
5 Select pricing method
6 Select final price
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7. In selecting price objectives,
companies must look at
Maximum Maximum
Survival
current profit market share
Maximum market skimming Product-quality leadership
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8. Demand can be determined by
examining:
Price Estimating Price Elasticity
Sensitivity Demand of Demand
Curves
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9. Changes in price affect
consumer demand:
Source: Marketing Management, Kotler and Keller, 13th ed.
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10. Customers are likely to be less
sensitive to price changes when:
product is more distinctive less aware of substitutes
expenditure is a
cannot easily compare the smaller part of
quality of substitutes buyer’s total income
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11. Customers are likely to be less
sensitive to price changes when:
small compared to the total cost Part of the cost is paid
of the end product by another party
used with previously
purchased assets
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12. Customers are likely to be less
sensitive to price changes when:
assumed to have high quality cannot store the product
and prestige
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13. Costs can either be fixed or
variable
process
Fixed Cost Variable Cost
output
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14. The sum of variable and fixed
cost for any given level of
production is the total cost
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15. As production accumulates
average cost decreases
Source: Marketing Management, Kotler and Keller, 13th ed.
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16. To arrive at target cost, first
determine target given product’s appeal
price and desired and competitor’s price
function
Then: Target Selling Price = $ 9.90
Less Profit Margin = $ 3.40
Target Cost = $ P 6.50
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17. Different pricing methods can
be used in varying situations
Markup pricing
Target-return pricing
Perceived-value pricing
Value pricing
Going-rate pricing
Auction-type pricing
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18. Markup Pricing is just adding
a standard mark-up to the
product’s cost.
Variable cost per unit $10.00
Fixed Cost $ 300,000.00
Expected Unit Sales 50,000 units
Unit cost= variable cost + fixed cost
unit sales
= $10.00+ $ 300,000.00
50,000
= $16.00
Desired Mark Up= 20%
Selling Price= Unit Cost = $16.00 = $20
(1- desired return) (1-0.20)
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19. Target-return pricing is used
by companies who need to
make a fair return on
investment
Desired ROI = 20% or € 200,000
Target-return on price
= unit cost + desired return x investment capital
unit sales
= $16.00 + 0.20 x $1,000,000.00 = $20.00
50,000
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20. Break-even analysis is used to
determine target return price
and break-even volume
Source: Marketing Management, Kotler and Keller, 13th ed.
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21. Perceived Value Pricing
$ 90,000 tractor’s price = competitor’s price
$ 7,000 superior durability
$ 6,000 superior reliability
$ 5,000 superior service
$ 2,000 longer warranty
$ 110,000 superior value
- 10,000 discount
$ 100,000 final price
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22. The internet and Auction type
pricing:
English auctions
Dutch auctions
Sealed-bid auctions
Source: Marketing Management, Kotler and Keller, 13th ed.
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26. Profits Before and After a
Price Increase
Source: Marketing Management, Kotler and Keller, 13th ed.
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27. Respond to Low-Cost rival by:
1. Maintaining price
2. Maintaining price and adding value
3. Reducing price
4. Increasing price and improving
quality
5. Launching a low-price fighter line
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28. In summary:
Price is the only element in the marketing
Competitor’s can also offer
mix that produces revenue attractive prices
Survival and Profit
Price objectives
Maximize market share
Products Cost (Variable/Fixed)
Deliver value to customers consumer psychology
Sensitivity to price
Durability, reliability, excellent service changes
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Fixed Cost or overhead cost are costs that do not vary with production level or sales revenue.Variable cost vary directly with level of production.
Total cost consist of the sum of the fixed and variable costs for any given level of production.
It refers to the gain a company experiences in producing a product over a period of time. Workers learn shortcuts, materials flow more smoothly, and procurement costs fall. The result is that average cost falls with accumulated production experience. This decline in the average cost with accumulated production experience is called the experience curve or learning curve. Average cost is the cost per unit at a level of production given total costhttp://design-marketing-dictionary.blogspot.com/2009/09/accumulated-production.html
Also used for season items, specialty items, slower-moving items, items with high storage and handling cost, demand-inelastic (drugs)
The firm determines the price that would yield its target rate of return on investment (ROI).Example 15 % to 20% ROI-does not consider other scenarios- if item will not sell at 50,000-manufacturers should consider different prices and their impact on sales volume-Find ways to decrease fixed costs and variable costs to lower break even volume
There is always a segment of buyers who care only about the priceDeliver more value than the competitor and demonstrate this to prospective buyers
