12
Chapter
Pricing Strategies
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
12- 1
C HAPTER O BJECTIVES
1.
What are the roles of price and value in the
marketing mix? How do market structures,
costs, and demand affect prices?
2.
What are the most important market factors
influencing pricing decisions?
3.
How do marketers use pricing strategy and
pricing objectives to achieve their goals?
4.
What procedures and strategies do marketers
use when making pricing decisions?
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
12- 2
Objective 1
What are the roles of price and value in
the marketing mix? How do market
structures, costs, and demand affect
prices?
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
12- 3
D
E
F
I
N
E
D
A Price is the exchange value of a
product or service in the
marketplace.
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
12- 4
Value
E
X
P
L
A
I
N
E
D
Product
Benefits
Service
Benefits
Value
Value = Benefits - Costs
Price &
Other
Costs
Brand
Benefits
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
12- 5
E
X
P
L
A
I
N
E
D
More
Reliable
Design
Performance
Value
Creation
Reduce
Costs
Longer
Lasting
Safety
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
12- 6
Establishing Prices
A
P
P
L
I
E
D
Price
Place
Product
Promotion
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
12- 7
Market Structure
A
P
P
L
I
E
D
Oligopoly
Monopoly
Pure Competition
Monopolistic Competition
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
12- 8
Market Structure
A
P
P
L
I
E
D
Monopoly

Monopoly: A single firm has the power to set and control
price in a market.

Drug and software manufacturers, due to patent protections,
are examples.
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
12- 9
Market Structure
Oligopoly
A
P
P
L
I
E
D

Oligopoly: Few sellers, fairly large, requires sizable investment to
enter market

Where several firms share price power by being able to control
supply.


Airlines, Farm Implement Industries
Competition is more through product differentiation than price
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
12- 10
Market Structure
A
P
P
L
I
E
D
Monopolistic Competition

Monopolistic: Relatively large number of sellers, each seller
tries to differentiate their products from the competition


Clothing, Shoes
Product Differentiation: Developing and promoting
differences between one’s products and similar products.
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
12- 11
Monopolistic competition
A
P
P
L
I
E
D
$5.00
$30.00
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
12- 12
Market Structure
Pure Competition
A
P
P
L
I
E
D

Pure Competition: Numerous producers selling
undifferentiated products.

Agricultural Products: Corn, Wheat, Milk
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
12- 13
Types of Competition: Perfect
A
P
P
L
I
E
D

Perfect (or pure) competition

The market situation in which there are many buyers and
sellers of a product, and no single buyer or seller is powerful
enough to affect the price of that product

Supply: The quantity of a product that producers are willing to
sell at each of various prices

Demand: The quantity of a product that buyers are willing to
purchase at each of various prices

Market Price (Equilibrium): The price at which the quantity
demanded is exactly equal to the quantity supplied
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
12- 14
Supply Curve and Demand Curve
A
P
P
L
I
E
D
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
12- 15
Cost-Based Pricing
A
P
P
L
I
E
D
Profit
Revenue
Costs
Price x units sold
Fixed Costs + Variable Costs
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
12- 16
Margin
A
P
P
L
I
E
D

Add a fixed amount, called a margin, to the cost of each item
sufficient enough to earn a desired profit.
Price
Margin
Cost
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
12- 17
Contribution Margin
A
P
P
L
I
E
D

Contribution Margin = Price – Variable Costs
Price
$3
Contribution Margin
$10
Variable Costs
$7
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
12- 18
Profit Margin
A
P
P
L
I
E
D

Profit Margin = Price – Total Cost of the Product
Price
$2
Profit Margin
$1
$10
Variable Costs
$7
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
12- 19
Cost-Based Pricing
A
P
P
L
I
E
D

Recognize the need to establish a price that offsets costs and
results in a reasonable profit margin.
Price
$2
Profit Margin
$1
Fixed Costs
$10
$7
Variable Costs
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
12- 20
Cost-Plus Pricing: MARGIN
A
P
P
L
I
E
D

Margin is the percentage of the final selling price that is
profit.

Take the variable cost of a product and adding a fixed
percentage to arrive at a selling price.

To calculate the selling price of a $12 product, and a desired
margin of 10% the formula would be:

$12 /(1-.10) or $12 / .9 = $13.33.

Profit = $1.33 or 10% of the selling price.
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
12- 21
Group Activity
A
P
P
L
I
E
D

To calculate the selling price of a $12 product, and a desired
margin of 10% the formula would be:


$13.33.
Calculate the selling price of a product that costs $14 to
produce and has a margin of 15%


$12 /(1-.10) or $12 / .9 =
$14 /(1-.15) or $14 / .85 = $16.47.
Calculate the selling price of a product that costs $25 to
produce and has a margin of 18%

$25 /(1-.82) or $25 / .82 = $30.49
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
12- 22
Cost-Plus Pricing
A
P
P
L
I
E
D

Markup is the percentage difference between the actual cost
and the selling price

The margin is determined by dividing the contribution per
unit by the unit cost.

Cost = $12

Contribution per unit = $1.33

Selling price = 13.33

The margin is: $1.33 / $12 = 11%

There difference between the cost and the selling price is 11%.
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
12- 23
Cost-Plus Pricing
A
P
P
L
I
E
D

The markup is determined by dividing the contribution per
unit by the unit cost.

Find the margin for the following:


Cost = $14

Contribution per unit = $2.47

Selling price = $16.47

the margin is: $2.47/ $16.47 = 15%
Problem 2

Cost = $25

Contribution per unit = $5.49

Selling price = $30.49

the margin is: $5.49 / $30.49 = 18%
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
12- 24
Cost-Plus Pricing
A
P
P
L
I
E
D
Determine the Margin and Selling Price
for a product costing $12.00.
Markup %
Margin
Selling Price
10%
11.0%
$13.33
15%
17.6%
$14.12
20%
25.0%
$15.00
25%
33%
$16.00
30%
42.8%
$17.14
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
12- 25
Break-even Point
A
P
P
L
I
E
D
Break-Even =
In Units
Fixed Costs
Price - Variable Costs
Fixed cost = $40k; Variable Cost = $5; Selling Price = $10
Calculate the break even point in number of units
Break-Even =
$40,000
$10 - $5
Break-Even =
8,000 units
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
12- 26
Break-even Point
A
P
P
L
I
E
D
Fixed cost = $40k; Variable Cost = $5; Selling Price = $10
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
12- 27
Determination of Demand

Elastic vs. Inelastic
Price
A
P
P
L
I
E
D
$0.50
$0.25
$0.10
100K 200K 300K
Quantity
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
12- 28
Objective 3 & 4
How do marketers use pricing strategy and
pricing objectives to achieve their goals?
What procedures and strategies do
marketers use when making pricing
decisions?
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
12- 29
D
E
F
I
N
E
D
A Pricing Strategy
identifies what a business will
charge for its products or
services.
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
12- 30
Pricing Objectives
E
X
P
L
A
I
N
E
D
$
Profitability
$
Volume
$
Meeting Competition
$
Prestige
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
12- 31
New Product Pricing
A
P
P
L
I
E
D
Product outperforms others
Early adopters value product
Skimming
Demand is inelastic
Expected demand can’t be met
High quality is desired position
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
12- 32
New Product Pricing
A
P
P
L
I
E
D
Higher volume reduces costs
Low price deters competitors
Penetration
Demand is elastic
Buyers price sensitive
Competitor imitation possible
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
12- 33
Pricing Strategies
A
P
P
L
I
E
D
Verizon Wireless
Storefront
Pricing
Tiered
Pricing
Online
Pricing
Dynamic
Pricing
Carnival Cruise
Priceline
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
12- 34
Portfolio Pricing
Price
ceiling $$$
Product 3
Product 2
Price range for
brand/product line
A
P
P
L
I
E
D
Product 1
Price
floor $
Customer’s willingness to pay
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
12- 35
Price Adjustment Strategies
A
P
P
L
I
E
D
Cash Discount
Quantity Discount
Trade-in
Rebate
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
12- 36
Visual Summary
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
12- 37