Chapter 11 Price the Product Price The assignment of value or the amount the consumer must exchange to receive the offering Step 1 Develop Pricing Objectives Profit Objectives Set prices to allow for an 8 profit margin on all goods sold Competitive Effect Alter pricing strategy during first quarter of the year to increase sales during competitor s introduction of a new product Sales or Market Share Objectives Develop bundle pricing offers in order to increase market share Customer Satisfaction Objectives Alter price levels to match customer expectations Image Enhancement Objectives After pricing policies to reflect the increased emphasis on the product quality image Prestige products consume Products that have a high price and that appeal to status conscious 1 Chapter 11 Price the Product Step 2 Estimate Demand Demand Curves There is an inverse relationship between price and demand for normal products For prestige products demand will increase to a point as price increases or will decrease as price decreases Shifts in Demand Changes in the environment or in company efforts can cause a shift in the demand curve A great advertising campaign for example can shift the demand curve upward Estimate Demand change in price Price Elasticity of Demand The percentage change in unit sales that results from a percentage change in price change in quantity demanded Elastic demand Demand in which changes in price have large effects on the amount demanded Inelastic demand Demand in which changes in price have little or no effect on the amount demanded Cross elasticity of demand When changes in the price of one product affect the demand for another item Step 3 Determine Costs Costs of production that do not change with the number of units produced The costs of production raw and processed materials parts and labor that are tied to and vary Variable costs depending on the number of units produced fixed costs average fixed cost The fixed cost per unit produced total costs The total of the fixed costs and the variable costs for a set number of units produced break even analysis A 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 The 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 Breakeven Point in units Total fixed costs Contribution Margin Per Unit Breakeven Point in dollars Total Fixed Costs 1 Variable Fixed Costs Price Contribution per unit marginal analysis A method that uses cost and demand to identify the price that will maximize profits marginal cost The increase in total cost that results from producing one additional unit of a product The difference between the price the firm charges for a product and the variable costs 2 Chapter 11 Price the Product marginal revenue The increase in total income or revenue that results from selling one additional unit of a product The markup amount added to the cost of a product to cover the fixed costs of the retailer or wholesaler and An amount added to the cost of a product to create the price at which a channel member will sell the product Markups and Margins Pricing through the Channel Markup gross margin leave an amount for a profit retailer margin The margin added to the cost of a product by a retailer wholesaler margin The amount added to the cost of a product by a wholesaler list price or manufacturer s suggested retail price MSRP The price the end customer is expected to pay as determined by the manufacturer also referred to as the suggested retail price The appropriate price for the end customer to pay as determined by the manufacturer Step 4 Examine the Pricing Environment The Economy Recessions consumers grow more price sensitive The Competition Pricing wars such as those in the fastfood industry can change consumers perceptions of what is a fair price leaving them unwilling to buy at previous price levels Government Regulation First a large number of regulations increase the costs of production Regulations for health care environmental protection occupational safety and highway safety just to mention a few cause the costs of producing many products to increase Other regulations of specific industries such as those imposed by the Food and Drug Administration FDA on the production of food and pharmaceuticals increase the costs of developing and producing those products Consumer Trends Culture and demographics determine how consumers think and behave and so these factors have a large impact on all marketing decisions Take for example the buying habits of the women who opted for a career in their twenties but who are hearing the ticking of their biological clocks as they enter their late thirties and forties Couples who have babies later in their lives are often better off financially than younger parents and on average they will have fewer children to spoil so they are more willing to spend whatever it costs to give their babies the best The International Environment o Sachets Single use packages of products such as shampoo often sold in developing countries Step 5 Choose a Pricing Strategy 3 Chapter 11 Price the Product Pricing Strategies Based on Cost cost plus pricing amount to arrive at the selling price A method of setting prices in which the seller totals all the costs for the product and then adds an A price setting method based on estimates of demand at different prices Pricing Strategies Based on Demand demand based pricing target costing A process in which 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 maximizing revenues A practice of charging different prices to different customers in order to manage capacity while Pricing Strategies Based on the Competition price leadership A pricing strategy in which one firm first sets its price and other firms in the industry follow with the same or very similar prices value pricing or everyday low pricing EDLP customers A pricing strategy in which a firm sets prices that provide ultimate value to New Product Pricing skimming price penetration pricing customers to purchase it trial pricing A very high premium price that a firm charges for its new highly desirable product A pricing strategy in which a firm