Chapter 20 Pricing Concepts Price the value paid for a product in a marketing exchange Barter the trading of products Financial price is the measurement of value commonly used in exchanges 20 1 The Nature of Price 20 2A Price Competition Price Competition when a marketer emphasizes price as an issue and matches or beats competitors prices o To be effective the firm with the lowest price is the most profitable o Firms that stress low price as a key marketing mix element tend to market standardized products o Price competition gives marketers flexibility o Prices can be altered to account for changes in their costs or respond to changes in demand for the product 20 2B Nonprice Competition Nonprice Competition occurs when a seller decides not to focus on price and instead emphasizes distinctive product features service product quality promotion packaging or other factors to distinguish its product from competing brands o Nonprice competition allows a company to increase its brand s unit sales though means other than changing the brand s price o Even nonprice competing organizations should be prepared to price their brands near or slightly above that of a price competing brand 20 3A The Demand Curve and distribution For most products the quantity demanded goes up as the price goes down and vice versa Demand depends on other factors in the marketing mix including product quality promotion Prestige products such as perfumes and jewelry tend to sell better at high prices that lower ones o The higher price makes buyers feel elite o If price is raised too high demand will fall o If price is too low demand will also fall because the product would lose its pricy appeal 20 3B Demand Fluctuations Demand can be influenced by factors such as changes in buyer s needs variations in the effectiveness of the marketing mix variables the presence of substitutes and dynamic environmental factors o Toy manufacturers fireworks suppliers and AC Heating contractors face seasonal demand fluctuations o Restaurants and utility companies face daily fluctuations 20 3C Assessing Price Elasticity of Demand Price Elasticity of Demand provides a measure of the sensitivity of demand to changes in price o The percentage change in quantity demanded caused by a percentage change in price is much greater for elastic demand than for inelastic demand By analyzing total revenues as prices change marketers can determine whether a product is price elastic o Total Revenue Price Quantity o Price Elasticity of Demand Change Quantity Demanded Change Price o The less elastic the demand the more beneficial it is for the seller to raise the price 20 4A Marginal Analysis Fixed Costs do not vary with changes in the number of units sold ie cost of renting a factory Average Fixed Cost the fixed cost per unit produced and is calculated by dividing fixed costs by the number of units produced Variable Costs vary directly with changes in the number of units produced or sold Average Variable Cost the variable cost per unit produced is calculated by dividing the variable costs by the number of units produced Total Cost the sum of average fixed costs and average variable costs times the quantity produced Average Total Cost the sum of the average fixed cost and the average variable cost Marginal Cost the extra cost a firm incurs when it produces one more unit of a product Marginal Revenue the change in total revenue that occurs when a firm sells an additional unit of a product Since marginal revenue MR is a unit s additional revenue and marginal cost MC is a unit s additional cost then MR minus MC tells us whether the unit is profitable Profit is highest where MC MR or MR MC 0 Any unit for which MR exceeds MC adds to a firm s profits Any unit for which MC exceeds MR subtracts from a firm s profits 20 4B Break Even Analysis Break Even Point the point at which the costs of producing a product equal the revenue made from selling the product To use break even analysis effectively a marketer should determine the break even point for each of several alternative prices 20 5F Factors that Affect Pricing Decisions Most factors that affect pricing decisions can be grouped into one of eight categories 1 Organizational and Marketing Objectives 20 5A a Marketers should set prices that are consistent with the organization s goals b and mission If the goal is to increase unit sales and buyers are price sensitive then increasing the price or setting a price above the average market price would not be in line with this objective 2 Types of Pricing Objectives 20 5B a An organization that uses pricing to increase its market share would likely set the brand s price below those of competing brands of similar quality b Temporary price reductions are good for gaining market share 3 Costs 20 5C a Labor saving technologies a focus on quality and efficient manufacturing processes have brought productivity gains that translate into reduced costs and lower prices for customers b Marketers should take into account the costs the product shares with others in the product line 4 Other Marketing Mix Variables 20 5D a For many products buyers associate better product quality with a high price and poorer product quality with a low price b When setting a price the profit margins of marketing channel members such as wholesalers and retailers must also be considered 5 Channel Member Expectations 20 5E a A producer must consider what members of the distribution channel expect b The amount of profit expected depends on what the intermediary could make if it were handling a competing product instead c Channel members often expect producers to give discounts for large orders and prompt payment 6 Customers Interpretation and Response 20 5F a Does the price mean high quality or low quality or great deal fair price or rip off b Customers interpretation and response to a price are to some degree determined by their assessment of value or what they receive compared with what they give up to make the purchase Internal Reference Price a price developed in the byer s mind through experience with the product c i Less confident consumers tend to have higher internal reference prices than consumers with greater confidence d External Reference Price a comparison price provided by others such as retailers or manufacturers e Customers perceptions of prices are also influenced by their expectations about f Value Conscious consumers that are concerned about both price and quality of future price
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