Chapter 20 Pricing Decisions

The purpose of marketing is to
facilitate satisfying exchange relationships between buyer and seller
Definition of Price
The value paid for a product in a marketing exchange
Price
is a key element in the marketing mix because it relates directly to the generation of total revenue
Profit = Total Revenue – Total Costs
Profit = (Price x Quantity Sold) – Total Costs
Pricing high-
emphasizes quality
Pricing low –
emphasizes a bargain
Factors affecting Pricing Decisions
1) Organizational &Marketing Objectives
2) Pricing Objectives
3) Costs
4) Other Marketing Mix Variables
5)Channel Member Expectations
6)Customer Interpretation and Response
7)Competition
8) Legal and Regulatory Issues
Price competition –
Emphasizing price as an issue and matching or beating competitors’ prices
To compete effectively on a price basis, a firm should
1)be the low-cost
2)Must be willing and able to change prices frequently to meet competitors’ pricing
3)May lead to price wars
Demand curve – quantity of products expected to be sold increases at various prices [other factors remain constant] – demand curve shift from D1 to D2.
quantity of products expected to be sold increases at various prices [other factors remain constant] – demand curve shift from D1 to D2.
Demand depends on other factors in the marketing mix
quality, promotion and distribution
An improvement in any of these factors may cause a shift to demand curve D2
An improvement in any of these factors may cause a shift to demand curve D2
quality, promotion and distribution
Prestige products tend to sell better at high prices, partly because
the expense makes the buyers feel elite
For a certain price range, P1 to P2, demand goes up
After a certain point, raising the price backfires, P2 to P3 demand goes down
For a certain price range, P1 to P2, demand goes up
After a certain point, raising the price backfires, P2 to P3 demand goes down
Factors that can influence demand
1)Changes in buyers’ needs
2)Variations in the effectiveness of other marketing mix variables
3)The presence of substitutes
4)Dynamic environment
Price elasticity of demand –
A measure of the sensitivity of demand to changes in price
Demand for electricity is inelastic, when price increases from P1 to P2, demand decreases a small amount
Demand for electricity is inelastic, when price increases from P1 to P2, demand decreases a small amount
Demand for recreational vehicles is elastic, when price goes up from P1 to P2, quantity demanded decreases a great amount
If demand is elastic,
a change in price causes and opposite change in total revenue
If demand is inelastic,
total revenue change in the same direction
Price elasticity of demand = % change in quantity demanded
%change in price
Two approaches to understanding demand, cost and profit relationships are
Marginal analysis

Break-even analysis

Break-even analysis
Break-even analysis
Break Even Analysis
Break Even Analysis
Break Even Point
Break Even Point
There are several issues unique to pricing business products
– Discounts
-Geographic Pricing
-Transfer Pricing
Trade (functional) discounts –
– a reduction off the list price a producer gives to an intermediary for performing certain functions
Quantity discounts –
Deductions from the list price for purchasing in large quantities
Cumulative discounts
which are quantity discounts aggregated over a stated time period
Noncumulative discounts
which are one-time price reductions based on the number of units purchased, the dollar value of the order, or the product mix purchased
Cash discounts –
price reduction given to buyers for prompt payment or cash payment
Seasonal discounts –
price reduction given to buyers for purchasing goods or services out of season
Allowances –
concession in price to achieve a desired goal
Geographic pricing –
reductions for transportation and other costs related to the physical distance between buyer and seller
F.O.B. factory –
is the price of merchandise at the factory before shipment
F.O.B. destination –
is a price indicating the producer is absorbing shipping costs
Uniform geographic pricing –
is charging all customers the same price, regardless of geographic location
Zone pricing –
based on is pricing transportation costs within major geographic zones
Base-point pricing –
is geographic pricing that combines factory price and freight charges from the base point nearest the buyer
Freight absorption pricing –
is absorption of all or part of actual freight costs by the seller
Geographic pricing strategy is used to
improve market penetration and retain a hold in an increasingly competitive market