Chapter 11 Price the Product How Marketers Price What They Sell o Price Assignment of value or the amount he consumer must exchange to receive the offering o Opportunity cost Value of something we give up to obtain something else o STEP 1 Develop Pricing Objectives Sales Market Share Objectives Maximization of competitive advantage Profit Objectives Certain level of profit Critical when the product is a fad Competitive Effect Objectives Pricing intended to have a certain effect on competitors marketing efforts Customer Satisfaction Objectives No negotiated prices just honest promises Image Enhancement Objectives Prestige products Products that have a high price and that appeal to status conscious consumers o STEP 2 Estimate Demand Customers desires for a product Demand Curves Illustration of the effect of price on the quantity Normal demand curve straight vs Prestige demand curve demanded of a product curved Shifts in Demand before the shift occurs Estimate Demand Upward shift At any given price demand is greater than Identify number of buyers or potential buyers for product and multiply that estimate times the avg amount each member or the target market is likely to purchase Predict market share Price Elasticity of Demand Percentage change in unit sales that results from a percentage change in price change in qty demanded change in price Elastic demand Price has a large effect on the amount demanded 1 Inelastic demand Price has little or no effect on the amount demanded 1 Factors that affect price elasticity and sales o Availability of substitute goods services Cross elasticity of demand Changes in the price of one product affect the demand for another item o Complements o STEP 3 Determine Costs Variable and Fixed Costs Variable costs Costs of production raw and processed materials parts and labor that are tied to and vary depending on the number of units produced Fixed costs Costs of production that do not change with the number of units produced Average fixed cost Fixed cost per unit produced Total costs Total of the fixed costs and the variable costs for a set number of units produced Break even analysis Method for determining the number of units that a firm must produce and sell at a given price to cover all its costs Break even point Point at which the total revenue and total costs are equal and beyond which the company makes a profit below that point the firm will suffer a loss Total Fixed Costs Contribution per unit to fixed costs in units Contribution per unit Difference between the price the firm charges for a product and the variable costs Marginal Analysis Method that uses cost and demand to identify the price that will maximize profits Marginal cost Increase in total cost that results from producing one additional unit of a product Marginal revenue Increase in total income or revenue that results from selling one additional unit of a product Marginal cost Cost of producing each additional unit o STEP 4 Evaluate the Pricing Environment The Economy Business cycle inflation economic growth and consumer confidence The Competition Consumer Trends Culture and demographics Strategic shopping finding the bargains even if you don t need the savings o STEP 5 Choose a Pricing Strategy Pricing Strategies Based on Cost Simple to calculate and relatively risk free Do not consider factors like the nature of the market demand competition product life cycle and image Most common and simple Cost plus pricing 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 Price Strategies Based on Demand Demand based pricing Price setting method based on estimates of demand at different prices Use of field experiments or surveys Target costing Firms identify the quality and functionality needed to satisfy customers and what price they are willing to pay before the product is designed the product is manufactured only if the firm can control costs to meet the required price Yield management pricing Practice of charging different prices to different customers in order to manage capacity while maximizing revenues seats on airlines Price Strategies Based on the Competition Price leadership One firm first sets its price and other firms in the industry follow with the same or very similar prices Collusion Coordinating rates with other firms illegal Pricing Strategies Based on Customers Needs Value pricing everyday low pricing EDLP Pricing strategy in which a firm sets prices that provide ultimate value to customers Begins with customers and then considers competition New Product Pricing Skimming price Very high premium price that a firm charges for its new highly desirable product o Successful when it makes customers feel they must have it no matter the cost when there is little chance that competitors can get into the market quickly and when the market consists of several customer segments with different levels of price sensitivity Penetration pricing Firm introduces a new product at a very low price to encourage more customers to purchase it o Barrier to entry for competitors Trial pricing Pricing a new product low for a limited period of time in order to lower the risk for a customer Two part pricing Two separate payments to purchase the product Payment pricing Breaks total price into smaller amounts payable over time Pricing for Multiple Products Price bundling Selling two or more goods or services as a single package for one price Captive pricing Pricing tactic for two items that must be used together one item is priced very low and the firm makes its profits on another high margin item essential to the operation of the first item Distribution Based Pricing Established how firms handle the costs of shipping products to customers near far and wide o STEP 6 Develop Pricing Tactics Pricing for Individual Products F O B origin pricing Cost of transporting the product from the factory to the customer s location is the responsibility of the customer F O B delivered pricing Cost of loading and transporting the product to the customer is included in the selling price and is paid by the manufacturer CIF cost insurance freight Ocean shipments all inclusive CFR cost and freight Ocean shipments no insurance involved CIP carriage and insurance paid to and CPT carriage paid to Non water shipment modes Basing point pricing Customers pay shipping charges from set basing point locations whether the goods are actually shipped from