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price
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The amount of money exchanged for a good or service
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Price Vs. the Other Elements of the Marketing Mix
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Product
Distribution
Promotion
create value(i.e., customer benefits, or "utility")
Price-harvests" that value
Distribution
Promotion
create value(i.e., customer benefits, or "utility")
Price-harvests" that value
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Three Major Bases for Pricing
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Customers •(demand-based pricing)
Competition (competition-based pricing)
Costs (cost-based pricing)
Competition (competition-based pricing)
Costs (cost-based pricing)
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Customers •(demand-based pricing)
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-Price based on customer demand or value to the customer
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Competition (competition-based pricing)
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Pricing influenced primarily by competitors' prices
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Costs (cost-based pricing)
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Pricing determined primarily by the cost of the product
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Four Steps in Estimating a Product's Value to the Customer (VTC)
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1.Identify the price of the competing product that the customer views as the best substitute. This is the reference value.
2.Identify all factors that differentiate your product from this competing product. These are the differentiating factors.
3.Determine the value to the customer of each of these differentiating factors. These are the positive and negative differentiation values.
4.Sum the reference value and the differentiation values to determine the total value to the customer (VTC) - the maximum that someone fully informed of the product's benefits would be willing to pay for the product.
2.Identify all factors that differentiate your product from this competing product. These are the differentiating factors.
3.Determine the value to the customer of each of these differentiating factors. These are the positive and negative differentiation values.
4.Sum the reference value and the differentiation values to determine the total value to the customer (VTC) - the maximum that someone fully informed of the product's benefits would be willing to pay for the product.
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reference value
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Accepted standard; the value you are making comparison with
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differentiating factors
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Identify all factors that differentiate your product from this competing product.
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positive and negative differentiation values.
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Determine the value to the customer of each of these differentiating factors
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value to the customer (VTC)
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the maximum that someone fully informed of the product's benefits would be willing to pay for the product.
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Using a Product's VTC
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•Using VTCs provides guidance for different prices to different market segments
- E.g., those who don't commute by train should get a lower price for Station Auto Service's tune-up
- E.g., music lovers highly value the best concert seats
•A product's costs do not go into the calculation of a product's VTC
•Consider your VTC during salary negotiations
- E.g., if the typical new hire gets $40K, but you work 25% faster, your VTC would be $50K
- E.g., those who don't commute by train should get a lower price for Station Auto Service's tune-up
- E.g., music lovers highly value the best concert seats
•A product's costs do not go into the calculation of a product's VTC
•Consider your VTC during salary negotiations
- E.g., if the typical new hire gets $40K, but you work 25% faster, your VTC would be $50K
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Ways to Avoid Price Warfare
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•Collect information on likely competitor response
- Will they be aware of a price cut?
- Have the ability to respond?
- Have the motivation to respond?
•Be able to win, and let competition know
- Low costs due to economies of scale or experience
- Low costs due to shared costs
- Financial strength
- Will they be aware of a price cut?
- Have the ability to respond?
- Have the motivation to respond?
•Be able to win, and let competition know
- Low costs due to economies of scale or experience
- Low costs due to shared costs
- Financial strength
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Markup Pricing
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Determining prices by using only costs and predetermined percent-ages, known as "markups"
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Two ways to state markups
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- As a percentage of cost
- As a percentage of selling price (closer to the "margins" of operating statements)
- As a percentage of selling price (closer to the "margins" of operating statements)
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markup price formula
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markup price= unit cost/ (1-desired return on sales)
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Markup as a Percentage of Cost
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markup/cost
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Markup as a Percentage of Price
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$Markup/$Price
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cost-based pricing advantages and disadvantages
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•Advantage: quick and easy
•Disadvantage: may not produce the best price
- Cost-based price could be too low
- Cost-based price could be too high
•Disadvantage: may not produce the best price
- Cost-based price could be too low
- Cost-based price could be too high
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price competition
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Emphasizes price as an issue and matching or beating competitors' prices
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non-price competition
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Emphasizes factors other than price to distinguish a product from competing brands
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Pricing Objectives
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Goals that describe what a firm wants to achieve through pricing
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Stages for Establishing Prices
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1. Development of pricing objectives
2. Assessment of target market's evaluation of price
3. Evaluation of competitors' prices
4. Selection of a basis for pricing
5. Selection of a pricing strategy
6. Determination of a specific price
2. Assessment of target market's evaluation of price
3. Evaluation of competitors' prices
4. Selection of a basis for pricing
5. Selection of a pricing strategy
6. Determination of a specific price
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Development of pricing objectives
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goals that describe what a firm wants to achieve through pricing
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Assessment of target market's evaluation of price
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Importance of price depends on:
-Type of product
-Type of target market
-Purchase situation
Value combines a product's price and quality attributes
-Customers use value to differentiate between competing brands
-Type of product
-Type of target market
-Purchase situation
Value combines a product's price and quality attributes
-Customers use value to differentiate between competing brands
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Evaluation of competitors' prices
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The Pricing Problem.
Identify Your Competition.
Identify Your Competitive Assortment.
Determine the Frequency.
Gather the URLs.
Analyze the Data.
Identify Your Competition.
Identify Your Competitive Assortment.
Determine the Frequency.
Gather the URLs.
Analyze the Data.
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Selection of a basis for pricing
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The three major dimensions on which prices can be based are:
Cost
Demand
Competition
Cost
Demand
Competition
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Selection of a pricing strategy
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an approach or course of action designed to achieve pricing and marketing objectives
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Determination of a specific price
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-Pricing Strategy--yields a certain price that may need refining:
-helps in setting final price
-marketers may need to refine this price in order to make it consistent with circumstances
-In order to set prices, marketers must:
-Establish pricing objectives
-Have considerable knowledge about target market customers
-Determine demand, price elasticity, costs, and competitive factors
-helps in setting final price
-marketers may need to refine this price in order to make it consistent with circumstances
-In order to set prices, marketers must:
-Establish pricing objectives
-Have considerable knowledge about target market customers
-Determine demand, price elasticity, costs, and competitive factors
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Survival
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the state or fact of continuing to live or exist, typically in spite of an accident, ordeal, or difficult circumstances.
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profit
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The financial gain made in a transaction
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return on investment
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the percentage of the total cost of purchasing an investment and the profit made from selling that investment
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market share
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a company's product sales as a percentage of total sales for that industry
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cash flow
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the difference between cash coming in and cash going out of a business
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status quo
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the existing state of affairs
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product quality
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the characteristics of a product or service that bear on its ability to satisfy stated or implied customer needs
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demand curve
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a graph of the relationship between the price of a good and the quantity demanded
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Demand Fluctuations
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Factors that can influence demand
-Changes in buyers' needs
-Variations in the effectiveness of other marketing mix variables
-The presence of substitutes
-Dynamic environment
-Changes in buyers' needs
-Variations in the effectiveness of other marketing mix variables
-The presence of substitutes
-Dynamic environment
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price elasticity of demand
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a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price
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fixed costs
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Costs that do not vary with changes in the number of units produced orsold
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Average Fixed Cost (AFC)
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The fixed cost per unit produced
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variable costs
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Costs that vary directly with changes in the number of units produced or sold
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Average Variable Cost (AVC)
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The variable cost per unit produced
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total cost
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The sum of average fixed and average variable costs, times the quantity produced
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average total cost
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The sum of the average fixed cost and the average variable cost
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marginal cost (MC)
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The extra·cost incurred by producing one more unit of a product
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Marginal Revenue (MR)
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The change in total revenue resulting from the saleof an additional unit of a product
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break-even point
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The point at which the costs of producing a product equal the revenue made from selling the product
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break even formula in units
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=Fixed cost/Contribution margin per unit
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Break even point formula
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fixed cost/(price-variable cost)
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cost-based pricing
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Adding a dollar amount or percentage to the cost of the product
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demand-based pricing
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a price-setting method based on estimates of demand at different prices
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competition-based pricing
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setting prices based on competitors' strategies, prices, costs, and market offerings
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