Chapter 9 Pricing Understanding and Capturing Customer Value Learning Goals Pricing general pricing strategies internal factors affecting pricing decisions external factors affecting pricing decisions Pricing Strategies new product pricing strategies product mix pricing strategies price adjustment strategies price changes What price to set whatever the market will allow What is price the amount of money charged for a product or service or the sum of the values that consumers exchange for the benefits of having or using the product or service Price by any other name tuition is the price we pay for education rent is the price we pay for an apartment premium is the price we pay for life insurance dues is the price we pay for memberships fare is the price we pay for transportation wage is the price we pay for labor interest is the price we pay for borrowed money Sales P x Q sales f MM MM marketing mix MM Ps Promotional Budget Pro Forma Income Statements A pro forma income statement is similar to a historical income statement except it projects the future rather than tracks the past Promotion to Sales Ratio a marketing control measure used to determine whether the amount spent on promotion was excessive total expenditure on promotion in a given period is expressed as a percentage of total sales revenue for the same period Promotional Gross Sales Major Pricing Strategies Customer Perceptions of Value Other internal and external considerations Product Costs Customer perceptions of value price ceiling no demand above this price Other internal and external considerations marketing strategy objectives and mix nature of the market and demand competitors strategies and prices Product costs price floor no profits below this price Cost Based Pricing setting price based on the costs for producing distributing and selling the product plus a fair rate of return for effort and risk Cost Plus Pricing markup pricing adding a standard markup to the cost of the product Break even Pricing target return pricing setting price to break even on the costs of making and marketing a product or setting price to make a target return Types of Costs Fixed Costs Variable Costs Total Costs Price is a Signal prices can be both too high and too low prices set too low may signal poor quality price set too high might signal low value The Role of Price in the Marketing Mix price is usually ranked as one of the most important factors in purchase decisions price is the only marketing mix element that generates revenue General Pricing Approaches Cost Based Pricing Example Variable costs 20 Fixed costs 500 000 Expected sales 100 000 units Desired sales markup 20 Variable Cost Fixed Costs Unit Sales Unit Cost 20 500 000 100 000 25 per unit Unit Cost 1 Desired Return on Sales Markup Price 25 1 20 31 25 used this formula in a car purchase Cost Based Pricing Cost Plus Pricing advantages it simplifies the pricing process competition may be minimized it is perceived as more fair to both buyers and sellers disadvantages ignores demand and competition expected sales level 100 units suppose cost unit 10 markup 20 price 12 Suppose you sell only 80 units new cost 11 markup 20 price 13 2 how many units will be sold Another pricing method you are considering is break even pricing With this method you compute how many units you will need to sell at a given price to break even Your VP of Finance who is focused on profits is against using this method to set the price Which of the following best explains who the VP of Finance is against break even pricing break even pricing computes a price that simply offsets costs without actually generating a profit Customer Value Based Pricing Buyer s Perceptions of Value uses buyers perceptions of value not the seller s cost as the key to pricing Value based pricing means that the marketer cannot design a product and marketing program and then set the price Price is considered along with the other marketing mix variables before the marketing program is set Good Value Pricing strategies involves offering just the right combination of quality and good service at a fair price Value Added Pricing involves attaching value added features and services of differentiate a company s offers and charging higher prices Value Based VS Cost Based Pricing Cost Based Pricing design a good product determine product costs set price based on cost convince buyers of product s value Value Based Pricing assess customer needs and value perceptions set target price to match customer perceived value determine costs that can be incurred design product to deliver desired value at target price General Pricing Approaches Value Based Pricing customer value the difference between the benefits a customer sees from a market offering and the costs of obtaining these benefits e g the ratio of perceived benefits to price uses buyers perceptions of value rather than seller s costs to set price start with what price you expect buyers are willing to pay demand look at the competitive environment value pricing work backwards and create the right cost structure Value pricing at the retail level Everyday low pricing EDLP vs high low pricing General Pricing Approaches Competition Based Pricing also called going rate pricing may price at the same level above or below the competition ex pharmaceutical industry As Vice President of Marketing for Holden Evan a highly successful consumer products company you have been asked by your superiors to price a new product for the company an electric razor Your first chore is to determine the basis on which you will determine price Before you have a chance to analyze the situation an advisor from sales tells you that this razor will never break into a tough market unless it has an absolute rock bottom price Which of the following identifies the best reason for why you should ignore advice to employ a competitive price approach in which you undercut all competitors by setting the price before you know the costs you could lose money on every razor you sell You are considering a cost plus pricing method for the razor Which of the following identifies the greatest danger in using this pricing method the price that is set will dramatically decrease demand Pricing in Different Types of Markets The seller s pricing freedom varies with different types of markets Under pure competition the market consists of many buyers and sellers trading in a uniform commodity such as wheat copper or financial securities No single