Chapter 14 Arriving at the Final Price I The Six Steps in Setting Price Identify Pricing Objectives and Constraints 1 2 Estimate Demand and Revenue 3 Determine cost volume and profit relationships 4 Select a approximate price level 5 Set the list or quoted price 6 Make special adjustments to the list quoted price II STEP 4 How to Select an Approximate Price Level a What is the possible range of prices Covered in previous material Value to consumer Absolute Maximum b Demand oriented Pricing Approaches i Price Skimming 1 involves setting the highest initial price that customers really desiring the product are willing to pay 2 used when introducing a new or innovative product so it is seen in the early stage of the PLC 3 Variable cost absolute minimum Price Cost 4 Used to rapidly recover investments in developing a new product Time experience 141 5 Works because a consumers want the product b there are no competition yet c We have a protection on the product copyright patents unique process 6 And SO we have an INELASTIC demand curve 7 Advantages of Price Skimming a Allows us to recover development costs quickly b IF the price is perceived as too high by the market we can easily lower it RAISING a price is much harder to do i Example Apple quickly dropped the price of it s ipads iphones 599 to 499 in 2 months 8 Disadvantage of Price Skimming a The major disadvantage is that the large profit margins will ATTRACT competition ii Penetration Pricing 1 Involves setting a low initial price on a new product 2 It is used to appeal immediately to the mass market price sensitive 3 And so to capture a large share of the market quickly 4 This is used when there are few barriers to competition entering the market 5 When we expect the PLC to be long 6 When we expect demand to be ELASTIC so there is a market response to our lower price 142 Price Cost Price Cost Curve Time Experience 7 Advantages of Penetration Pricing a The small margin is likely to discourage competition b Because we get a large share of the market quickly i Our volume is larger and our production costs per unit drop more quickly ii And with high volume we still generate good profit 8 Disadvantages of Penetration Pricing a A risky strategy i We must be able to do a good job of forecasting the demand because we will need to gear up FAST for mass production and distribution marketing ii IF demand does not develop our production costs stay high and we do not make a profit iii Slide down the demand 1 Involves starting with a Price Skimming approach and then REDUCING price as our costs decline a This is done to appeal to a wider market once the premium price buyers are satisfied or b To react to an influx of competitors 2 Price Cost Price Cost Curve Time Experience 143 3 Advantages of slide down the demand curve a Allows us to recover developmental costs early in the PLC b Helps to discourage competition as we drop price note that OUR costs should be lower than those of the late entrant competitors c assumes a reasonably long PLC 4 Disadvantages of slide down the demand curve a It is very hard to know just when to begin dropping prices i Drop too soon and we give up profits ii Drop too late and we let competition in iv Prestige Pricing 1 involves setting a high price 2 to attract quality or status conscious consumers 3 This should appeal to high end consumers and limit it appeal to others which ENHANCES the product s image 4 Price Cost Price Cost curve Time Experience 5 Advantages and Disadvantages of Prestige Pricing a Because of the high price we are unlikely to sell in large volume however b This is not a problem as significant profit can be made with the large markup on each item sold b Demand oriented Pricing Approaches 144 i Price Lining 1 involves setting the price of a line of products at a number of different specific pricing points 2 even if customers don t know much about a set of products they may perceive difference based on price alone 3 If the differences in models are not readily apparent or not easily viewed then price lining helps the customer recognize that differences do exist as long as the prices are noticeably different 4 Examples Mitsubishi LCD projectors 5 Advantage of Price Lining a May increase profits if the costs of adding the additional features is not significant i Consumers buy up to a higher priced more feature rich model which is ALSO more profitable for the marketer 6 Disadvantages of Price Lining a A disadvantage to price lining is that by focusing too much on price we may overlook issues of quality or consumer buying trends b If it is used as a regular practice it may limit our ability of the business to meet competitors prices ii Target Pricing consists of 1 estimating the price that ultimate consumers would be willing to pay for a product 2 working backward through markups taken by retailers and wholesalers to determine what price to charge wholesalers and then 3 deliberately adjusting the composition and features of the product to achieve the target price to consumers 4 SO Target Price Markups Profit Target COSTS iii Odd even Pricing 1 involves setting prices a few dollars or cents under an even number 2 Use prices that end in 5 7 and most often 9 for psychological reasons 145 a Consumers tend to round down a price of 39 95 to 39 rather than rounding it up to 40 b However this is not considered to be as effective today as it was in the past as consumers have become smarter about price iv Bundle pricing 1 involves setting prices for two or more products as a single price a For buyers the overall cost of the purchase shows a savings compared to purchasing each product individually b For marketers this technique avoids making price adjustments on a EACH product if they fear doing so could affect the product s perceived quality level c Example Buy our digital camera and you get the how to photography DVD for 50 less With this approach we present a price adjustment without v Yield Management Pricing 1 Involves charging a different price for the same good service in 2 to maximize revenue for a set amount of capacity at any given time different markets a Examples i Passanger Airline Seats ii Train Seats iii Hotel Rooms iv Rental Cars v Concert seats 3 Requires a That there is a fixed amount of resources available for sale b That the resources sold are perishable This means that there is a time limit to selling the resources after which they cease to be of value c That different customers are willing