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It includes direct and indirect costs as well as opportunity costs. Direct costs are cash outlays a customer makes in order to obtain something. An example would be admission to a national park. Direct costs are, in many cases, a relatively small part of the total cost. Indirect costs are costs associated with obtaining something. An example would be the cost of driving to a national park, food and entertainment along the way, etc. The total of the indirect costs is often more, sometimes much more, than the direct cost. The total cost is obtained by adding the direct and indirect costs. Opportunity costs are what we give up when we do something. They can have various types of value, sometimes monetary, sometimes not. Opportunity costs include other things you could be doing instead of going to a national park. Examples might include mowing the lawn or going to a baseball game (which would be non-monetary) and not working overtime on Saturday in order to go to a national park (which would be monetary), The price the park visitor pays to go to a national park is the total of all costs, including direct, indirect, and opportunity. The perceived benefits of going to a national park have to be at least as great as the total of the costs if a potential park visitor is going to make a decision to go to a park. Determining the price: How do you set monetary prices? There are basically two ways. I call these cost-based pricing and value-based pricing. Cost-based pricing is based on the total of all costs associated with delivering a product or service to a customer. An example of cost-based pricing would be when an organization identifies all of the costs associated with producing a product or service, adds them up, adds a margin for profit (in the business sector) and arrives at the "price" the customer is to be charged. This type of pricing is the "floor" for pricing decisions in that it is as low as the price can be and still cover all of the costs associated with delivering the product or service. I'm unaware of applications of this type of pricing in the park service world, unless it might be applied by concessionaires. Value-based pricing is based on an organization's perception of the value the potential customer (park visitor) might place on the product or service. An example of value-based pricing would be when an organization believes that people would pay Rs20 for a service and decides to price it at Rs20 even though the price might be set at Rs10 based on a cost-based model. This type of pricing is the "ceiling" for pricing decisions in that it is as high as the price can be and still find a willing customer. It has no relationship to the cost of production, rather it is influenced by perception of alternatives customers face. A subset of value-based pricing is supply/demand pricing. In this type of pricing, an organization has a limited supply of the product or service and decides to price it just barely low enough to sell all of the limited supply. There is no relationship to the cost of production. Sometimes applications supply/demand pricing are labeled as gouging because the organization is perceived as taking advantage of the situation. Political factors undoubtedly influence some pricing decisions, such as utilities and essential commodities. I would interpret this as politicians using a value-based price model in order to obtain Page 128 public favor. No concern is shown for the cost of production. Part of the logic of this type of decision is the reality that a park is a public resource and is, at least to some extent, a public good the value of which should be available to as many citizens as possible. In summary, pricing is quite complex. The most responsible means of pricing would probably give some consideration to all of these pricing concepts, attempting to balance the needs and desires of the public for access with the real costs associated with delivering the product or service. Responsible pricing would recognize market segmentation concepts as expressed in differing demand levels and
abilities to pay and attempt to maximize revenue through pricing accordingly. The most common mistakes in setting prices are. warranties & guaranties exchange rate fluctuation environmental factors Page 129 . focus gain market share. ± ± ± ± pricing that is too cost oriented prices that are not revised enough to reflect the market changes pricing that does not take rest of the marketing mix into account prices that are not varied enough for different products. Price is also the most flexible element of the marketing mix. marginal cost pricing organizational considerations transfer pricing cost vs profit center Factors external to an international firm ± ± ± ± ± ± ± ± ± ± ± ± ± nature of market (buyer or seller) level of market development/sophistication market demand and consumers¶ ability to buy competitive situation & consumer surplus product life-cycle-stage type of packaging. differentiation. variable cost. or the sum of the values that consumers exchange for the benefits of having or using the product or service Price is the only element in the marketing mix that produces revenue. market segments & purchase occasions Factors influencing international pricing: Factors internal to an international firm strategic objectives cost leader. environmental issues distribution & marketing costs transportation costs government policies. protect market share. tariffs. Importance of price in marketing mix: Price is the amount of money charged for a product or a service. to maintain status quo revenue. The result would be either maximizing gain or minimizing loss. profit or market share maximization marketing mix policies product. taxes & other restrictions country of origin image after-sales service. place & promotion costs short term vs long term cost focus full cost.
ingredients.± hidden costs Factors contributing the selection of final price: Psychological effects of price Influence of other marketing mix elements Company pricing policies Costs Impact of price on other parties distributors or dealers company sales force competitors Managing price escalation in foreign markets: Rearrange the distribution channel length of channel / exorbitant margins Eliminate costly features (or make them optional) no-frills versions .sell core products Downsize the product offer smaller version or a lesser count Assemble or manufacture the product in foreign markets closer proximity to customers .lower costs Adapt the product to escape tariffs and taxes by shifting it to different tax classification Pricing in inflationary environments: Modify components.to hedge against inflation Quote prices in a stable currency Pursue rapid inventory turnovers Draw lessons from other countries Exporters strategies under varying currency conditions: When domestic currency is WEAK« Stress price benefits Expand product line and add more costly features Shift sourcing manufacturing to domestic market Exploit export opportunities in all markets Use a full-costing approach. but employ marginal-cost pricing to penetrate new or competitive markets . parts and/or packaging materials Source materials from low-cost suppliers Shorten credit terms Include escalator clauses in long-term contracts .
the following is a general sequence of steps that might be followed for developing the pricing of a new product: 1. pricing affects other marketing mix elements such as product features.include fixed and variable costs associated with the product.perform marketing analysis. and define discounts.using information collected in the above steps. and positioning. revenue maximization. and promotion. channel decisions. Pricing is an important strategic issue because it is related to product positioning.) in domestic market Bill foreign customers in their own currency When domestic currency is STRONG« Engage in non-price competition by improving quality. 6. Determine pricing . 4. 2. delivery. etc. and after-sale service Improve productivity and engage in vigorous cost reduction Shift sourcing and manufacturing overseas Give priority to exports to countries with relatively strong currencies Trim profit margins and use marginal-cost pricing Keep the foreign-earned income in host country. understand legal constraints. While there is no single recipe to determine pricing. Make marketing mix decisions . . insurance. and promotional tactics. Calculate cost . targeting. etc. develop the pricing structure.evaluate likely competitor actions. 7. Furthermore. or price stabilization (status quo). profit maximization. Develop marketing strategy .define the product. slow down collections Maximize expenditures in local or host country currency Buy needed services abroad and pay for them in local currencies Bill foreign customers in the domestic currency Marketing > Pricing Strategy Pricing Strategy One of the four major elements of the marketing mix is price. 3. select a pricing method. 5.for example.understand how quantity demanded varies with price. transportation. Understand environmental factors . Set pricing objectives .Page 130 Speed repatriation of foreign-earned income and collections Minimize expenditures in local or host country currency Buy needed services (advertising. Estimate the demand curve . segmentation. distribution.
otherwise. a firm is not free to price its products at any level it chooses. and determines the profit margin at higher prices. there may be price controls that prohibit pricing a product too high. For example. it is important to understand the impact of pricing on sales by estimating the demand curve for the product. Marketing Strategy and the Marketing Mix Before the product is developed. the above list serves to present a starting framework. Offering a different price for different consumers may violate laws against price discrimination. Environmental Factors Pricing must take into account the competitive and legal environment in which the company operates. setting the price too low may risk a price war that may not be in the best interest of either side. distribution. Estimate the Demand Curve Because there is a relationship between price and quantity demanded. Setting the price too high may attract a large number of competitors who want to share in the profits. Pricing Objectives . Because of inherent tradeoffs between marketing mix elements. Inelastic demand indicates that price increases might be feasible. the marketing strategy is formulated. Finally. From a legal standpoint.These steps are interrelated and are not necessarily performed in the above order. There usually is a tradeoff between product quality and price. For example. The pricing policy should consider both types of costs. Calculate Costs If the firm has decided to launch the product. Pricing it too low may be considered predatory pricing or "dumping" in the case of international trade. so price is an important variable in positioning. The total unit cost of a producing a product is composed of the variable cost of producing each additional unit and fixed costs that are incurred regardless of the quantity produced. there might be no profit to be made. Nonetheless. pricing will depend on other product. experiments can be performed at prices above and below the current price in order to determine the price elasticity of demand. including target market selection and product positioning. For existing products. and promotion decisions. From a competitive standpoint. the firm must consider the implications of its pricing on the pricing decisions of competitors. collusion with competitors to fix prices at an agreed level is illegal in many countries. there likely is at least a basic understanding of the costs involved. The unit cost of the product sets the lower limit of what the firm might charge.
that is. Partial cost recovery .seeks to maximize current profit. Skimming is most appropriate when: y y y Demand is expected to be relatively inelastic. Status quo .use price to signal high quality in an attempt to position the product as the quality leader. the customers are not highly price sensitive. The product is of the nature of something that can gain mass appeal fairly quickly. There is a threat of impending competition.attempts to maximize the unit profit margin. Survival . the pricing objective often is either to maximize profit margin or to maximize quantity (market share). or it is difficult to predict the cost savings that would be achieved at high volume. skim pricing and penetration pricing strategies often are employed. the goal may be to select a price that will cover costs and permit the firm to remain in the market. Maximize quantity . customers are price sensitive and the quantity demanded will increase significantly as price declines. Skimming is a strategy used to pursue the objective of profit margin maximization. Pricing Policies for New Products. Current profit maximization may not be the best objective if it results in lower long-term profits.seeks to maximize the number of units sold or the number of customers served in order to decrease long-term costs as predicted by the experience curve. survival may take a priority over profits. The company does not have the resources to finance the large capital expenditures necessary for high volume production with initially low profit margins. Quality leadership .seeks to maximize current revenue with no regard to profit margins. Joel Dean discussed these pricing policies in his classic HBR article entitled. Large decreases in cost are expected as cumulative volume increases. To meet these objectives. that is. Current revenue maximization .the firm may seek price stabilization in order to avoid price wars and maintain a moderate but stable level of profit. The underlying objective often is to maximize long-term profits by increasing market share and lowering costs. Penetration pricing pursues the objective of quantity maximization by means of a low price. . taking into account revenue and costs.in situations such as market decline and overcapacity. Maximize profit margin .an organization that has other revenue sources may seek only partial cost recovery. It is most appropriate when: y y y y Demand is expected to be highly elastic. y y y y y y y For new products. recognizing that quantities will be low. so this objective is considered temporary. Common objectives include the following: y Current profit maximization . Large cost savings are not expected at high volumes. Skim pricing attempts to "skim the cream" off the top of the market by setting a high price and selling to those customers who are less price sensitive.The firm's pricing objectives must be identified in order to determine the optimal pricing. In this case.
Trade discount . there likely will be changes in the demand curve and costs. software traditionally was purchased as a product in which customers made a one-time payment and then owned a perpetual license to the software. y y Quantity discount . y y y y .set the price to achieve a target return-on-investment. popular price points. Many software suppliers have changed their pricing to a subscription model in which the customer subscribes for a set period of time. they also can be based on day of the week or time of the day.based on the time that the purchase is made and designed to reduce seasonal variation in sales.a short-term discounted price offered to stimulate sales. the firm's resources. such as pricing offered by long distance and wireless service providers. Seasonal discount . managers have the opportunity to design innovative pricing models that better meet the needs of both the firm and its customers. Pricing Methods To set the specific price level that achieves their pricing objectives.base the price on factors such as signals of product quality. the travel industry offers much lower off-season rates. For example. Value-based pricing . In addition to setting the price level. rate of product diffusion. This model offers stability to both the supplier and the customer since it reduces the large swings in software investment cycles. Target return pricing . The pricing objective depends on many factors including production cost. For example.set the price at the production cost plus a certain profit margin. and the product's anticipated price elasticity of demand. Such discounts do not have to be based on time of the year. Cumulative quantity discount . Promotional discount . Cash discount .extended to customers who pay their bill before a specified date. For example.As the product lifecycle progresses. managers may make use of several pricing methods. barriers to entry. Price Discounts The normally quoted price to end users is known as the list price.a discount that increases as the cumulative quantity increases. the subscription must be renewed or the software no longer will function. These methods include: y y y y Cost-plus pricing . Psychological pricing .a functional discount offered to channel members for performing their roles. as outlined below. Afterwards. existence of economies of scale.offered to customers who purchase in large quantities. product differentiation. the pricing policy should be reevaluated over time. As such. There are several types of discounts. This price usually is discounted for distribution channel members and some end users.base the price on the effective value to the customer relative to alternative products. a trade discount may be offered to a small retailer who may not purchase in quantity but nonetheless performs the important retail function. and what the consumer perceives to be fair. such as one year. Cumulative discounts may be offered to resellers who purchase large quantities over time but who do not wish to place large individual orders.
but other products that are not discounted.Pricing used by people who have great skill or experience in a particular field or activity. and has been criticized as promoting wasteful expenditures. Cost-plus pricing is often used on government contracts. then include an additional amount to represent profit. Customary pricing:.The Best example here would be China Dumping the Electronic Goods in the Indian Market.Pricing of a product during its Launch.It is related to the short term promotion of a particular product. The difference between the two prices is thebid/ask spread. Dumping Pricing:. Candy bars of a certain weight all cost a predictable amount -.is where the product "traditionally" sells for a certain price. For Eg Big Bazzar.It is a pricing method commonly used by firms.Pricing Methods with Examples - Bid Pricing :-The stock exchanges use a system of bid and ask pricing to match buyers and sellers. For example. For Ex :. It is used primarily because it is easy to calculate and requires little information.unless you purchase them in an airport shop. For Eg Corporate Professionals Promotional pricing :. Prestige pricing:. There are several varieties. but the common thread in all of them is that you first calculate the cost of the product. Nordstrom's clientele believes it to be of higher quality. Professional pricing:. Pricing Issues in International Marketing Price can best be defined in ratio terms.Cheap products are not taken seriously by some buyers unless they are priced at a particular level. you can sometimes find clothing of the same quality brand at Nordstrom as you do at the Men's Warehouse. giving the equation resources given up ³³³³³³³³³³³³³³³ goods received price = This implies that there are several ways that the price can be changed: . For Ex ± Spykar Jeans. Loss Leader Pricing :-The intent of this pricing strategy is to not only have the customer buy the (loss leader) sale item. But because it is priced higher. Cost-plus pricing: . Experience curve pricing: -A pricing policy in which a company expands its market share by fixing a low price that high cost competitors cannot match.
"WAS $10. another matter). is to be more expensive on products where price expectations are muddier. Most drivers with long commutes develop a good feeling of what gasoline should cost. Note that. Sears was reported to sell some 55% of its merchandise on sale. of course.. This is often pure fiction. Another way candy manufacturers have effectively increased prices is through a reduction in quality. although the consumer may contrast the offering price against the MSRP. The trick. It is frequently tempting for foreign licensees of a major brand name to use inferior ingredients.. in the 1970s. In the early 1990s. Consumers often develop internal reference prices.00. Reference Prices. Change quantity. Marketers often try to influence people's price perceptions through the use ofexternal reference prices³indicators given to the consumer as to how much something should cost. this latter figure is quite misleading.g. forking out the money for a large tube of toothpaste is no big deal for most American families. Reference prices are more likely to be more precise for frequently purchased and highly visible products." For this strategy to be used legally in most countries. However.00.99. certain products are put on sale so frequently that the "regular" price is meaningless. Often. or expectations about what something should cost. you either have to call a 900 number or have a credit card handy to get help from many software makers. Nowadays.99. Regular Price $5. for cash flow reasons. consumers respond unfavorably to an increased sticker price. most software manufacturers provided free support for their programs³it used to be possible to call the WordPerfect Corporation on an 800 number to get free help." . and can tell a bargain or a ripoff. based mostly on their experience. and candy manufacturers responded by making smaller candy bars. the "gooey" stuff is much cheaper than chocolate. our price: $99. but for a different (usually larger) amount of money.00.y y y y "Sticker" price changes³the most obvious way to change the price is the price tag³ you get the same thing. Change terms. since consumers tend to have a good idea of prices and these products are quite visible.g. Another way to change terms is to do away with favorable financing terms.99. In a candy bar. the claim must be true (consistency of enforcement in some countries is." "Sold elsewhere for $150." Thus. consumers in less affluent countries may need to buy smaller packages at any one time (e. and changes in quantity are sometimes noticed less³e. retailers very often promote soft drinks. Therefore. The suggested retail prices in certain categories are deliberately set so high that even full service retailers can sell at a "discount. "SALE! Now $2. now $6. the wholesale cost of chocolate increased dramatically. then. but it introduces a greater strain on the budget of a family closer to the subsistence level). Change quality. Examples include: y y y y Manufacturer's Suggested Retail Price (MSRP). In the old days.
which is useful in a new market where the penetration of a product is low. since the profit maximizing price in Japan was higher and thus bags would be bought in France and shipped to Japan for resale. and it may thus be more difficult for the manufacturer to influence retail level pricing. Where the local government imposes price controls. "Gray" markets occur when products are diverted from one market in which they are cheaper to another one where prices are higher³e. this may have serious repercussions as consumers may develop a low reference price and may thus resist paying higher prices in the future. In some cultures. The manufacturer therefore imposed quantity limits on buyers. price escalation. Firms will often try to charge high prices to subsidiaries in countries with high taxes so that the income earned there will be minimized. .. Selected International Pricing Issues. a firm may find the market profitable to enter nevertheless since revenues from the new market only have to cover marginal costs. products may then be attractive to divert to countries without such controls. However.g. Two phenomena may occur when products are sold in disparate markets. Transfer pricing involves what one subsidiary will charge another for products or components supplied for use in another country. is likely to take place. Since these quantity limits were circumvented by enterprising exchange students who were recruited to buy their quota on a daily basis. bargaining may be more common. particularly where retail stores are smaller and the buyer has the opportunity to interact with the owner.Reference prices have significant international implications. whereby the product dramatically increases in price in the export market. This usually occurs because a longer distribution chain is necessary and because smaller quantities sold through this route will usually not allow for economies of scale. prices eventually had to be lowered in Japan to make the practice of diversion unattractive. When a product is exported. Luis Vuitton bags were significantly more expensive in Japan than in France. While marketers may choose to introduce a product at a low price in order to induce trial.
as opposed to biweekly or monthly.Antitrust laws are relevant in pricing decisions. In general. Psychological issues: Most pricing research has been done on North Americans. which may make a penetration pricing entry strategy infeasible. In barter. Buyers in some countries do not have ready access to convertible currency. Americans are used to sales. and this raises serious problems of generalizability. while in developing countries. the seller takes payment in some product produced in the buying country³ e. Japan has actively lobbied the World Trade Organization (WTO) to relax its regulations. there is less trust in the market. while consumers in countries where goods are more scarce may attribute a sale to low quality rather than a desire to gain market share. for example. some firms have been forced into non-cash deals. which generally require firms to price no lower than their average fully absorbed cost (which incorporates both variable and fixed costs). Cultural differences may influence the extent of effort put into evaluating deals (potentially impacting the effectiveness of odd-even pricing and promotion signaling). or cause others to buy. and anti-dumping regulations are especially noteworthy. it is illegal to sell a product below your cost of production.g. Thus. . Lockheed (back when it was an independent firm) took Spanish wine in return for aircraft. Alternatives to "hard" currency deals. may influence the effectiveness of framing attempts³"a dollar a day" is a much bigger chunk from a weekly than a monthly paycheck. products for a certain value within a specified period of time.. The fact that consumers in some economies are usually paid weekly. discount stores have had difficulty there). An offset contract is somewhat more flexible in that the buyer can get paid but instead has to buy. and sellers to Eastern Europe have taken their payment in ham. and governments will often try limit firms· ability to spend money abroad. There is some evidence that perceived price quality relationships are quite high in Britain and Japan (thus.