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Pricing Products: Pricing Considerations and Approaches

Factors to Consider When Setting Prices


Internal Factors

Positioning Objectives

Pricing Decisions

Target

Market

External Factors

Internal Factors Affecting Pricing Decisions


Marketing Objectives Marketing-Mix Strategy Costs Organizational Considerations

Marketing Objectives that Affect Pricing Decisions


Survival
Low Prices to Cover Variable Costs and Some Fixed Costs to Stay in Business.

Current Profit Maximization

Marketing
Objectives

Choose the Price that Produces the Maximum Current Profit, Cash Flow or ROI.

Market Share Leadership


Low as Possible Prices to Become the Market Share Leader.

Product Quality Leadership


High Prices to Cover Higher Performance Quality

Marketing Mix Variables that Affect Pricing Decisions


Product Design and Quality

Non-Price Factors

Marketing-Mix Strategy

Distribution

Promotion

Types of Cost Factors that Affect Pricing Decisions


Total Costs
Sum of the Fixed and Variable Costs for a Given Level of Production

Costs that dont vary with sales or production levels. Executive Salaries Rent

Fixed Costs (Overhead)

Variable Costs
Costs that do vary directly with the level of production. Raw materials

Costs Considerations
Cost Per Unit at Different Levels of Production Per Period

Cost per unit

SRAC

LRAC

1,000

2,000

3,000

Quantity Produced per Day

4,000

External Factors Affecting Pricing Decisions


Market and Demand Competitors Costs, Prices, and Offers Other External Factors
Economic Conditions Reseller Needs Government Actions Social Concerns

The Market and Demand Factors that Affect Pricing Decisions


Pure Competition
Many Buyers and Sellers Who Have Little Affect on the Price.

Monopolistic Competition
Many Buyers and Sellers Trading Over a Range of Prices.

Different Types of Markets

Oligopolistic Competition
Few Sellers Each Sensitive to Others Pricing/ Marketing Strategies

Pure Monopoly
Single Seller

Demand Curves
A. Inelastic Demand Demand Hardly Changes With a Small Change in Price. Price P2 P1

Q 2 Q1 Quantity Demanded per Period B. Elastic Demand Demand Changes Greatly With a Small Change in Price. P2 P1

Price

Q2 Q1 Quantity Demanded per Period

What is Cost-Plus Pricing and Why is it Popular?


Adding a Standard Markup to the Cost of the Product

Sellers Are More Certain About Costs Than Demand

Minimizes Price Competition

Perceived Fairness to Both Buyers and Sellers

Breakeven Analysis or Target Profit Pricing


Tries to Determine the Price at Which a Firm Will Break Even or Make a Target Profit
Cost in Dollars (thousands)

1,200 1,000 800 600 400 200


Target Profit ($200,000)

Total Revenue

Total Cost Fixed Cost

10

20

30

40

50

Sales Volume in Units (thousands)

Value-Based Pricing
Cost-Based Pricing Value-Based Pricing

Product Cost

Customer Value

Price
Value Customers

Price
Cost Product

Competition-Based Pricing
Setting Prices

Going-Rate
Company Sets Prices Based on What Competitors Are Charging.

? Company Sets Prices Based on Think Competitors ? What They Will Charge.

Sealed-Bid