Professional Documents
Culture Documents
Module 7
Learning objectives
Define the term price Distinguish profit-oriented, sales-oriented and status quo pricing objectives Explain the influence of supply and demand on prices Apply the concept of price elasticity and discuss the impact of price changes on total revenue Explain three methods of pricing based on cost and discuss the advantages and limitations of each method.
Learning objectives
Briefly discuss some factors, other than costs, that influence pricing Identify and explain the four steps in setting the price for a product and apply the four-step process to a real-word product or service Use examples to differentiate price skimming, penetration pricing and status quo pricing Identify and briefly discuss some of the legal and ethical issues impacting on pricing.
What is price?
What is given up in an exchange to acquire a good or service. Monetary and non-monetary costs
search costs social costs psychological costs
Importance of price
Revenue
Profit
Maximise the difference between total revenue and total costs So, why not set a very high price?
perceived value sets the ceiling dont want to attract new entrants need to be competitive avoid government intervention
Satisfactory profits
Acceptable level of profit Matches risk level higher risk leads to higher profit margins
Return on total assets ROI = net profit after tax/total assets Are we performing in line with industry ROI average?
Brand sales/total sales for product category Penetration pricing may be used to gain large market share Large market share means higher production volume which drives costs down However, firms with a smaller market share can still be very profitable
Short-term focus
temporary strategy to improve cash flow clear excess stock end of year sales
Pricing stability
dont rock the boat avoid price wars
Demand is the quantity of goods that will be sold at various prices for a specified period Demand curve
exhibit 11.1, p.395 shows the relationship between price and quantity demanded usually inverse relationship
How does quantity demanded respond to price changes? Price elasticity of demand = % change in quantity demanded/% change in price
i.e. if price increase of 2% creates a 10% fall in demand then price elasticity of demand = -10/2 = -5
Elasticity of demand
Elastic demand
Inelastic demand
Elastic demand
price changes influence demand total revenue decreases when price increases
Inelastic demand
price changes do not affect demand total revenue increases when price increases
if very cheap, price rise wont affect demand fix it rather than replace it if prices are high
Product durability
Costs set the floor for the price Need to cover total costs
fixed costs plus variable costs do not vary with production volume
Fixed costs
Variable costs
Mark-up pricing
Add a standard mark-up to the cost of the product First, calculate unit cost
variable cost = $10 fixed cost = $300 000 expected unit sales = 50 000 units
Second, calculate mark-up price = unit cost / (1- desired return on sales)
desired return = 20% unit cost = $16 then, mark up price = $16 / (1-0.2) = $20 so, profit to manufacturer is $4 per unit
the extra revenue associated with selling an extra unit of output or the total change in total revenue associated with one unit change in output change in total costs associated with a one unit change in output
Marginal cost
Break-even pricing
Break-even point
Break-even volume
= fixed costs /(unit selling price - unit variable cost) = 300,000/(20 - 10) = 30,000 units
Breakeven analysis
Dollar 1,200,000 10,00,000 800,000 600,000 400,000 200,000 10,000 total revenue
target profit total costs
fixed costs
20,000
30, 000
40,000
50,000
Promotion strategy
New products can be innovative or imitative Innovative products lead to price skimming Imitative products lead to penetration pricing Price reflects positioning Price changes over product life cycle
Maximises revenue
Quality and image must match high price Cost of producing smaller quantities must not be too high Lower price later to attract more price sensitive markets
production and distribution costs fall with volume achieve even greater economies of scale
Safe strategy May mean that costs are not covered by firms with smaller production runs May mean that profits are not captured by firms with a differentiated offering
Pricing tactics
cash discount - early payment functional discount - performing a function (ie returns or delivery) seasonal discount - purchasing out of season promotional allowance (trade allowance) rebate (cash refund)
Value-based pricing
what does the consumer consider to be value? what value is placed on particular attributes/features? what is the consumer prepared to pay?
Sets the ceiling for the price Non-price elements of the marketing mix are used to create value A more creative approach to pricing
Geographical pricing
Zone pricing
Flexible pricing
does $4.95 seem cheaper than $5.00? odd numbered pricing implies a bargain even numbered prices imply quality