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- The valure that customers give up or exchange to obtain a desired product
- May be in form of money, goods, services, favors, votes or anything else that has value to other party
Role of Price
- Thereer is always a catch.
- Can't give it away from becaues they would go bancrupt
- Firm Revenue = Price * Units sold
- Profit = Total Rev - Total cost
Steps in Planning
- 1) Develop pricing objective
- 2) Estimate Demand
- 3) Determine costs
- 4) Evaluate Pricing Enviornment
- 5) Choose a pricing strategy
- 6) Develop Pricing tactis
Develop Pricing objectives
- What do we want to accomplish
- Sales or markep share objectives: often objective is to maximaize sales or increace market dshare
- Profic Ojectives: focus on target level of profit growth or desired net profit margin
Step 2: Estimate Demand
- Demand: How much of a prduct are customers willing to buy as it's price goes up or down
- Law of demand: if pricees decrese, customers will buy more
- As price goes down, quantity demanded also goes down becase people of prestige don't want to buy if because not good for status
- Demand curve is curved out like a backwards C
Shifts in Demand
- Improvent in prodcut
- New ad campaign
- Paparrazzi and celeberty use
- Upward shift: at any given price, demand is greatere
- Recalls in food
- Ranines, no golf resutes in Downward shit
- Important to predict
- Total demand by: identify # consumers, average consumptions, predict market share of your company
Price Elasticity of Demand
- Ther percent change in unit sales that results froma percentage change in price
- Need to know how sensitive customers aer to changes in price.
- When changes in price have large effects on the amount demanded, demand is elastic
- When changes in price have little or no effect on the amount demanded, demand is inelastic
Factors that effect Elasticity
- Availability of substitute goods and services
- Purchasing power of consumer
- Cross-elasticity: When changres in the price of one product affect the demand for another item
- Complements: increase price one decrase demand for other
- Products durability and other uses
Step 3: Determine Costs
- Variable Costs: per-unit costs of production that will fluctuate depending on how many units made
- Fised costs: Do no vary with the number of units produced. Stay the same.
- Average Fixed cost: Fixed cost per unit, the toal fixeed costs divided by number of units (more units, lower average fixed costs)
- Total costs = variable + fixed
- Technique marketrs use to examine the rlationship between dost and price.
- Break-even point: point at which the company doesn't lose any money and doesnt' make any profit.
- Total fixed costs/contribution per unit
Contribution per unit
Differnce between the price the firm charges for a product (revenue per unit) and the varible costs.
- Provides a way for marketers to look at cost and demand at the same time and to identify the output and thei price that will generate the maximum profit.
- Marginal cost: the increas in total cost from producing one addition unit
- Marginal revenue: the increase in rev from selling one additonal unit
- Profit maximized whn marginal rev = marginal cost
Step 4: Enviornment
- Depends on..
- Economy: busines cycle, infaltion, ecomoic growth, and consumer confidence
- In resessions consumers are more price sensitive
- Competition: Price wars not good. Try not to compete too much becaue alows all business to reamain profitable
- Consumer Trends: the way people think: demograhihcs
Step 5: Choose a pricing strategy
- Based on-
- Consumer needs
- New product
Pricing strategy based on Cost
- Risk free, promise price will at least coer the costs
- The drawback of cost based strategies is that they do not consider demand, competition, or the nature of the target market
- Cosst plus pricing: markets totlas all the costs for the product and then adds an amount to arraive at the selling price
Pricing strategies baes on Demand
- The firm bases the selling price on an estimate of volume or quantity that i can sell in different markets at different prices.
- Target costing: firm fist determines prcie at chwich customer will be wiling and then work backwrd to desing the prudt so it can prodie and sell the pruduct at a profit
- Yield managment pricing: charge different prices to different customers in order to manage capcity whild maximzing revenues. Goal here is to accurately predict the proportion of custmers who fall into each category and allocate the percentages of the capacity so no product goes unsold
Pricing Strategies based on Competion
- Pricing near at or above or beleow the competiion
- Price leadersip stragegy: Big firms announce and then small get in line or drop out. common in oligopolisic industries.
Pricing strageies basedon customer needs
- Less concerend with shorterm reslus than with keeping customers for the long term.
- Value pricing (EDLP): promises ultimate valie to consumers
- In consumers eyes, price is jstified by what they recieve
New Product Pricing
- New products are vital to growth adn profits of firm
- Skimming, Penetration and trial
- Firm charges a high premimium price for its new product with the intentio ofrducin it in th future in response to market pressure.
- Doens't lower until competition comes in
- Opposite of skimming, Prices a new product very low to sell more in short time and gaim market share easly.
- May act as a barrier to entry for competion if price so low
- New product carries a low price for a limited tiem to generate a high leve of customer interstr.
- Unlike penetration pricing, it will increase the trail price after the introuctory period.
- Idea is to win customer acceptance first then profit later
Step 6: Develop Pricing Tactics
- Once develop strategies, need to put in motion
- Individual producs
- Mulitple products
- Distribution based
Pricing for individual products
- Two part pricing: require two seperate types of payment to puchare the product. item plus ship and handeling or cell phones
- Payment pricing: makes the consumer think the price is doable by breaking up into smaller amount apyable over time
Pricing for multiple products
- Price bundling: sellijng two or more goods or serves a sa single pakacge for one price where price total often less then all individual
- Captive pricing: it has two product that work only when used together. Sell one item at low price but other is very high
Distributoin Based Pricing
Establishes how firms handle the cost of shipping produt to customers near far and wide
FOB factory origin pricing
The cost of tarnporing the prouct formt he factory to the customer location is resopnibliyt of the custmer
FOB delierve pricing
the seller pays bothe the cost of lading the cost of transproijng to the customer
Basing point pricing
Customer pay shipping charges from set basing point location wheat the good ar actually shippec from these point or not
Uniform delerved pricing
firm adds a standdard shipping charge to the price for all customers regarless of location
- Seller absorbs the total cost of tranportation
- More likely to use this in highly competitive markets
Discounting for Channel members
- Builds most pricing strucctures arround list prices
- List price: the pricee the end customer is expected to pay as determend by the manufacture; also referd to as the suggested retail price
Trade or functional discounts
Discounts off list price of pruduct ot members of the channel of distribution who perfomr various marketin functions
A pricing tactic of charign reduced prices for puchas of larger quantis of a product