Pricing Products and Services I Nature and Importance of Price A What is a Price Price is the money or other considerations including other goods and services exchanged for the ownership or use of a good or service Barter the practice of exchanging goods and services for other goods and services rather than for money accounts for billions of dollars annually in domestic and international trade B Price as an indicator of value Price is often used to indicate quality or value when it is compared With the perceived benefits of a product or service Creative marketers engage in value pricing the practice of simultaneously increasing product and service benefits while maintaining or decreasing price Example supersizing C Price in the Marketing Mix Pricing has a direct effect on a firm s profits This is apparent from a firms profit equation Profit total revenue total cost Profit unit price x quantity sold total cost II General Pricing Approaches A key to a marketing manager s setting a final price for a product is to find an approximate price level to use as a reasonable starting point A Demand Oriented Approaches Demand oriented approaches emphasize factors underlying expected customer tastes and preferences more than such factors as cost profit and competition when selecting a price level 1 Skimming Pricing a A firm introducing a new or innovative product can use skimming pricing setting the highest initial price that customers really desiring the product are willing to pay b These customers are not very price sensitive They weigh the new product s price and quality against the same characteristics of substitutes c As consumer demand is satisfied the firm lowers the price to attract another more price sensitive segment d Skimming pricing gets its name from skimming successive layers of cream or customer segments as prices are lowered in a series of steps 2 Penetration Pricing a Setting a low initial price on a new product to appeal immediately to the mass market Penetration Pricing is the exact opposite of skimming pricing b Penetration pricing may follow skimming pricing A company might initially price a product high to attract price insensitive consumers and recoup initial R D costs and introductory promotional expenses Then use penetration pricing to appeal to a broader segment of the population and increase market share 3 Prestige Pricing a Prestige Pricing setting a high price so that quality or status conscious consumers will be attracted to the product and buy it b Although consumers tend to buy more of a product when the price is lower sometimes the reverse is true 4 Odd Even Pricing a Odd even pricing setting prices a few dollars or cents under an even number 499 99 vs 500 00 The overuse of odd even pricing tends to reduce its effect on demand 5 Target Pricing a Manufacturers will sometimes estimate the price that the ultimate consumer is willing to pay for a product They then work backward through markups taken by retailers and wholesales to determine what price they can charge to wholesalers for the product b In target pricing the manufacturer deliberately adjusts the composition and features of a product to achieve the target price to consumers 6 Bundle Pricing a Bundle Pricing is the marketing of two or more products in a single package price and is based on the idea that consumers value the package more than the individual items b Bundle Pricing provides buyers with a lower total cost not having to make separate purchases 7 Yield Management Pricing a Yield management pricing is the charging of different prices to maximize revenue for a set amount of capacity at any given time b This is often used by airlines hotels car rental firms engaged in capacity management by varying prices based on time day week or season to match demand and supply B Cost Oriented Approaches With cost oriented approaches a price setter stresses the cost side of the pricing problem not the demand side Price is set by looking at the production and marketing costs and then adding enough to cover direct expenses overhead and profit 1 Standard Markup Pricing adding a fixed percentage to the cost of all items in a specific product class a This percentage markup varies depending on the type of retail store and product involved b High volume products usually have smaller markups than lowvolume products c These markups must cover all expenses of the store pay for overhead costs and contribute something to profits For supermarkets this may be only 1 percent 2 Cost plus Pricing a Many manufacturers professional services and construction firms use this variation of standard markup pricing b cost plus pricing involves summing the total unit cost of providing a product or service and adding a specific amount to the cost to arrive at a price c Cost plus pricing is the most commonly used method to set prices for business products or business to business marketers in the service sector C Profit Oriented Approaches A price setter may balance both revenues and cost to set price by either setting a target of a specific dollar volume of profit or expressing this target profit as a percentage of sales or investment 1 Target Profit Pricing a Target Profit pricing setting an annual target of a specific dollar volume of profit b To calculate a target profit price for a picture frame store Profit total revenue total cost Price x Quantity sold fixed Cost Unit Variable Cost x Quantity sold c This method depends on an accurate estimate of demand Because demand is difficult to estimate this method has the potential for disaster if the estimate is too high 2 Target Return on sales Pricing a Target return on sales pricing involves setting a rice to achieve a profit that is a specified percentage of the sales volume b Supermarkets often use this method due to the difficulty in establishing a benchmark of sales or investment to show how much of a firm s effort is needed to achieve the target 3 Target Return on Investment Pricing Involves setting a price to achieve an annual target return on Investment ROI that is mandated by a board of directors or regulators D Competition oriented Approaches Rather than emphasize demand cost or profit factors a price setter can stress what competitors or the market is doing 1 Customary Pricing a Customary pricing setting a price dictated by tradition a standardized channel of distribution or other competitive factors b A significant departure from this price may result in the loss of sales for