13.2 Pricing Considerations
Pricing Objectives have to be consistent with an organization’s overall marketing objectives
Examples of Pricing Objectives:
-Maximization of profits
-Enhancing product or brand image
-Providing customer value
-Obtaining an adequate return on investment or cash flow
-Maintaining price stability
-Demand sets the price ceiling
-Direct (variable) costs set the price floor
Campbell Soup’s Intelligent Quisine (IQ) line
*Consumers found the products too expensive
*Lower price could not cover variable costs
Factors narrowing pricing discretion
*Government regulations
*Price of competitive offerings
*Organizational objectives and policies
Other factors affecting the pricing decision
*Life-cycle stage of product or service
*Effect of pricing decisions on profit margins of marketing channel members
*Prices of other products and services provided by the organization
Price as an Indicator of Value
*Value can be defined as the ratio of perceived benefits to price:
Value = perceived benefits
price
*Price affects perception of quality.
*Price affects consumer perceptions of prestige. Example:
Swiss watchmaker TAG Heuer
Raised average price of its watches from $250 to $1000
Sales volume increased sevenfold!
*Consumer value assessments are often comparative – worth and desirability of a product relative to substitutes that satisfy the same need (e.g., Equal vs. sugar)
*Consumer’s comparison of costs and benefits of substitute items gives rise to a “reference value”
Price Elasticity of Demand
Price Elasticity of Demand is a concept used to characterize the nature of the price-quantity relationship
The coefficient of price elasticity, E, is a measure of the relative responsiveness of the quantity of a product demanded to a change in the price of that product
If the percentage change in quantity demanded is greater than the percentage change in price, i.e., E>1, then demand is said to be elastic.
If the percentage change in quantity demanded is less than the percentage change in price, i.e., E<1, then demand is said to be inelastic.
Factors affecting Elasticity of Demand
*The more substitutes the product or service has, the greater the elasticity
*The more uses a product or service has, the greater the elasticity
*The higher the ratio of the price of the product or service to the income of the buyer, the greater the elasticity
Product-Line Pricing
Cross-Elasticity of Demand relates the price elasticity simultaneously to more than one product or service
The Cross-Elasticity Coefficient is the ratio of the change in quantity demanded of product A to a price change in product B
A negative coefficient indicates the products are complementary (camera and film); a positive coefficient indicates they are substitutes (apple and pear)
Product-line pricing involves determining:
the lowest-priced product and price
plays the role of traffic builder
the highest-priced product and price
positioned as the premium item
price differentials for all other products in the line
reflect differences in their perceived value of the products offered
Estimating the Profit Impact from Price Changes
Impact of price changes on profit can be determined from:
Cost data
Price data
Volume data for individual products and services
Unit volume necessary to break even on a price change is:
13.3 Pricing Strategies
A business can use a variety of pricing strategies when selling a product or service. The price can be set to maximize profitability for each unit sold or from the market overall. It can be used to defend an existing market from new entrants, to increase market share within a market or to enter a new market. Businesses may benefit from lowering or raising prices, depending on the needs and behaviors of customers and clients in the particular market. Finding the right pricing strategy is an important element in running a successful business.
Markup Pricing
Selling price is determined by adding a fixed amount, usually a percentage, to the (total) cost of the product
Most commonly used pricing method (e.g., groceries and clothing)
Simple, flexible, controllable
Example: If a product costs $4.60 to produce and selling price is $6.35, the market on cost is 38% and markup on price is 28%.
Breakeven Pricing
Equals the per-unit fixed costs plus the per-unit variable costs
Useful tool for determining the minimum price at which a product must be sold to cover fixed and variable costs
Often used by non-profit organizations, or by profit-making organizations that may have a short-term breakeven objective
Rate-of-Return Pricing
Price is set so as to obtain a pre-specified rate of return on investment (capital) for the organization
Assumes a linear demand function and insensitivity of buyers to price
Most commonly used by large firms and public utilities whose return rates are closely watched or regulated by government agencies or commissions
Variable-Cost Pricing
Represents the minimum selling price at which the product or service can be marketed in the short run. It is often used to:
Stimulate demand (lower fares for seniors)
Can increase revenues, and hence, lead to economies of scale, lower unit costs, and higher profits
Shift demand (weeknight calling plans)
Away from peak load times to smooth it out over extended time periods New-Offering Pricing Strategies