Slide 1What is a Price?Factors Affecting Price DecisionsSlide 4Internal Factor that Affects Price: CostsSlide 6External Factors Affecting Pricing DecisionsMarket and Demand Factors Affecting Pricing DecisionsRemember Econ? Demand Curves Really Do Matter!Slide 10What Marketers Want To Do:Cost-Based Versus Value-Based PricingNew-Product Pricing StrategiesNew-Product Pricing StrategiesProduct Mix-Pricing StrategiesDiscount and Allowance PricingPsychological PricingInitiating Price ChangesAssessing and Responding to Competitor Price ChangesPricing: Understanding and Capturing Customer ValueChapter 9BA 332What is a Price?Narrowly, price is the amount of money charged for a product or serviceBroadly, price is the sum of all the values that consumers exchange for the benefits of having or using the product or service.Factors Affecting Price DecisionsInternal Factors:•Marketing objectives•Marketing mix strategies • Costs•Organizational considerationsExternal Factors:•Nature of the market and demand• Competition•Other environmental factors (economy, government, resellers, social concerns)PricingDecisionsMarketingObjectivesSurvivalLow prices hoping to increasedemandCurrent Profit MaximizationChoose the price that produces the maximum current profitMarket Share Leadership Low as possible prices to become the market share leaderHigh Prices to Cover HigherPerformance Quality and R&D.Internal Factors Affecting Pricing Decisions: Marketing ObjectivesInternal Factor that Affects Price: CostsVariable CostsCosts that do varydirectly with the level of productionRaw materialsFixed Costs(Overhead)Costs that don’tvary with sales or production levels Executive salaries, rentTotal CostsSum of the Fixed and Variable Costs for Any Given Level of ProductionTotal CostsSum of the Fixed and Variable Costs for Any Given Level of ProductionSo Costs Determine the Floor But Customers Determine the CeilingMarkets andDemand Competitors’ costs,Prices and ofersOther External FactorsEconomic ConditionsGovernment ActionsSocial Concerns External Factors Affecting Pricing DecisionsPure CompetitionMany Buyers and Sellers Who Have Little Efect on the PricePure CompetitionMany Buyers and Sellers Who Have Little Efect on the PriceMonopolistic CompetitionMany buyers and sellersWho trade over aRange of pricesMonopolistic CompetitionMany buyers and sellersWho trade over aRange of pricesMarket and Demand Factors Affecting Pricing DecisionsOligopolistic CompetitionFew Sellers Who AreSensitive to Each Other’s Pricing/ Marketing StrategiesOligopolistic CompetitionFew Sellers Who AreSensitive to Each Other’s Pricing/ Marketing StrategiesPure MonopolySingle sellerPure MonopolySingle sellerRemember Econ? Demand Curves Really Do Matter!The Shape of the Demand Curve Affects the Price Elasticity of DemandPriceA. Inelastic Demand - Demand Hardly Changes Witha Small Change in Price.P1Q1P2Q2PriceP’1Q1P’2Q2B. Elastic Demand -Demand Changes Greatly Witha Small Change in Price.What Marketers Want To Do:REDUCE price elasticityBrands will not be perceived as easily substitutableCustomers’ won’t always seek the lowest pricePrice cuts won’t be the accepted way to increase demandBrands will be perceived as unique and will create a “monopoly” in the customers’ mindsEnhanced brand equity will allow a premium price to be charged.Cost-Based Versus Value-Based PricingMarketers prefer value based pricing because it begins with the customerNew-Product Pricing StrategiesMarket-Skimming Setting a High Price for a New Product to “Skim” Maximum Revenues from the Target Market.Results in Fewer, But More Profitable Sales.Use Under These Conditions:Product’s Quality and Image Must Support Its Higher Price.Costs cant be so high that they cancel the advantage of charging moreCompetitors Shouldn't be Able to Enter Market Easily and Undercut the High Price.New-Product Pricing StrategiesMarket Penetration Setting a Low Price for a New Product in Order to “Penetrate” the Market Quickly and Deeply.Attract a Large Number of Buyers and Win a Larger Market Share.Use Under These Conditions:Market Must be Highly Price-Sensitive so a Low Price Produces More Market Growth.Production/Distribution costs must fall as sales volume increasesMust Keep Out Competition & Maintain Its Low Price Position or Benefits May Only be Temporary.Product Mix-Pricing StrategiesOptional-ProductPricing optional or accessory products sold with the main product. For example: added memory on a computerCaptive-ProductPricing products that must be used with the main productDiscount and Allowance PricingC a s h D i s c o u n t S e a s o n a l D i s c o u n tQ u a n t i t y D i s c o u n t T r a d e - I n A l l o w a n c eP r o m o t i o n a l A l l o w a n c eA d j u s t i n g B a s i c P r i c e t o R e w a r d C u s t o m e r sF o r C e r t a i n R e s p o n s e sPsychological PricingConsiders the psychology of prices and not simply the economics.Customers use price less when they can judge quality of a product Price becomes an important quality signal when customers can’t judge quality; price is used to say something about a product. Retail $100.00Cost $3.00Price CutsWhy?Excess capacityFalling marketDominate Market Through Lower PricesInitiating Price ChangesPrice IncreasesWhy?Cost InflationOver-demand: Company Can’t Supply All Customers’ NeedsAssessing and Responding to Competitor Price