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
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
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
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