TM 361 : Fundamentals of Marketing

Price System

Asma Ansary Asha

What Is a Price?
Price is the amount of money charged for a product or a
service. More broadly, price is the sum of all the values
that customers give up to gain the benefits of having or
using a product or service. Historically, price has been
the major factor affecting buyer choice. In recent
decades, nonprice factors have gained increasing
importance.
Price is the most important elements that determines a
firm’s market share and profitability. Price is the only
element in the marketing mix that produces revenue; all
other elements represent costs.
 Factors to Consider When Setting Prices

Internal
Internal Factors
Factors

Positioning Pricing
Pricing Target
Objectives
Decisions
Decisions
Market

External
External Factors
Factors
Internal Factors Affecting Pricing
Decisions

Marketing
Objectives
Marketing-Mix
Strategy

Costs

Organizational
Considerations
Types of Cost Factors that
Affect Pricing Decisions

Fixed
FixedCosts
Costs Variable
VariableCosts
Costs
(Overhead)
(Overhead)
Costs
Coststhat
thatdon’t
don’t Costs
Coststhat
thatdo
dovary
vary
vary
vary with salesor
with sales or directly with the
directly with the
production levels.
production levels. level
levelof
ofproduction.
production.
Executive
ExecutiveSalaries
Salaries Raw
Rawmaterials
materials
Rent
Rent

Total
TotalCosts
Costs
Sum
Sum of the Fixed and VariableCosts
of the Fixed and Variable Costsfor
foraaGiven
Given
Level
Levelof
ofProduction
Production
External
External Factors
Factors Affecting
Affecting Pricing
Pricing
Decisions
Decisions

Market and
Demand

Competitor’s Costs,
Prices, and Offers
Other External Factors
Economic Conditions
Retailer Needs
Government Actions
Social Concerns
 The Market and Demand Factors that
Affect Pricing Decisions
Pure
PureCompetition
Competition Monopolistic
MonopolisticCompetition
Competition
Many
ManyBuyers
BuyersandandSellers
SellersWho
Who Many
ManyBuyers
Buyersand
andSellers
SellersTrading
Trading
Have
HaveLittle
LittleAffect
Affecton
onthe
thePrice.
Price. Over
OveraaRange
Rangeof ofPrices.
Prices.

Different
Different Types
Types of
of Markets
Markets

Oligopolistic
OligopolisticCompetition
Competition Pure
PureMonopoly
Monopoly
Few
FewSellers
SellersEach
EachSensitive
Sensitiveto
toOther’s
Other’s Single
SingleSeller
Seller
Pricing/
Pricing/Marketing
MarketingStrategies
Strategies
Demand Curves
A demand curve is a curve that shows the number of units the market will
buy in a given time period, downward in either a straight or a curved line.
1]. In the normal case, demand and price are inversely
related. The demand curve slopes downward in either a straight or a
curved line.
2]. For prestige goods, however, the demand curve sometimes
slopes upward.
3]. Most companies try to measure their demand curves since the type of
market makes a difference. Economists show the impact of nonprice
factors on demand through shifts in the demand curve rather than
movements along it. In measuring the price-demand relationship, the
market researcher must not allow other factors affecting demand to
vary.
Price elasticity of demand will influence the price-demand
relationship. Price elasticity is a measure of the sensitivity of
demand to changes in price.
1]. Demand is inelastic if it hardly changes with a small change in price.
2]. Demand is elastic if it changes greatly.
3]. Influences include:
a]. Buyers are less price-sensitive when the product
they are buying is unique or high in quality, prestige, or
exclusiveness.
b]. Buyers are less price-sensitive when substitute
products are hard to find or cannot easily be compared.
c]. Buyers are less price sensitive when the total
expenditure for a product is low relative to their income or the cost
is shared by another party.
d]. If demand is elastic rather than inelastic, sellers will
consider lowering their price.
Demand Curves
A. Inelastic Demand -
Demand Hardly Changes With
a Small Change in Price.
Price

P2
P1

Q2 Q1
Quantity Demanded per Period
B. Elastic Demand -
Demand Changes Greatly With
a Small Change in Price.
Price

P’2
P’1

Q2 Q1
Quantity Demanded per Period
2). Competitors’ costs, prices, and
offers. Other external factors are based on
pricing from the competitors. The company
needs to learn the price and quality of each
competitor’s offer and possible competitor’s
reaction to the firm’ pricing moves.
Other external factors include:
a). Economic conditions (such as boom or
recession, inflation, or interest rates).
b). Reseller’s policies must be considered
especially if they do not match the supplier’s.
c). The government (because of its regulatory
power) must be considered.
d). Social concerns may affect the firm’s short-
term sales, market share, and profit goals.
 What is Cost-Plus Pricing and Why
is it Popular?
Adding a Standard Markup to the Cost of the Product

Sellers
SellersAre
Are More
More Minimizes
Minimizes
Certain
CertainAbout
About Price
Price
Costs
Costs Than
Than Competition
Competition
Demand
Demand
Perceived
Perceived
Fairness
Fairness to
to
Both
Both Buyers
Buyers
and
and Sellers
Sellers
To illustrate markup pricing, suppose a toaster manufacturer had the following costs
and expected sales:
Variable cost $10
Fixed costs $300,000
Expected unit sales 50,000
Then the manufacturer’s cost per toaster is given by the following:

Now suppose the manufacturer wants to earn a 20 percent markup on sales. The
manufacturer’s markup price is given by the following:

The manufacturer would charge dealers $20 per toaster and make a profit of $4 per
unit. The dealers, in turn, will mark up the toaster. If dealers want to earn 50
percent on the sales price, they will mark up the toaster to $40 ($20 50% of $40).
This number is equivalent to a markup on cost of 100 percent ($20/$20).
 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 Total Revenue

1,000 Target Profit

800 ($200,000)
Total Cost
600
400 Fixed Cost
200

10 20 30 40 50
Sales Volume in Units (thousands)
 Major Pricing Strategies
The price the company charges will fall somewhere
between one that is too high to produce any demand
and one that is too low to produce a profit. Customer
perceptions of the product’s value set the ceiling for
prices. If customers perceive that the product’s price is
greater than its value, they will not buy the product.
Product costs set the floor for prices. If the company
prices the product below its costs, the company’s
profits will suffer.
 Cost-Based Pricing Value-Based Pricing

Design
Designaa Assess
Assesscustomer
customerneeds
needs
good
goodproduct
product and
andvalue
valueperceptions
perceptions

Determine
Determine Set
Settarget
targetprice
priceto
tomatch
match
product
productcosts
costs Customer
Customerperceived
perceivedvalue
value

Set
Setprice
pricebased
based Determine
Determinecosts
coststhat
that
on
oncost
cost can
canbe
be incurred
incurred

Convince
Convincebuyers
buyers Design
Designproduct
producttotodeliver
deliver
of
ofproduct’s
product’svalue
value desired
desired value at targetprice
value at target price
Competition-Based Pricing

Setting
Setting Prices
Prices

Going-Rate
Going-Rate
Company
CompanySets
SetsPrices
PricesBased
BasedononWhat
What
Competitors
CompetitorsAre
AreCharging.
Charging.

?
Company
Sealed-Bid
Sealed-Bid
CompanySets
SetsPrices
PricesBased
Basedonon
?What
WhatThey
TheyThink
ThinkCompetitors
Will
Competitors
WillCharge.
Charge.
 Promotional Activities
Promotion mix, Integrated
marketing communications strategy,
Advertising , sales promotion,
personal selling and sales
management,
Direct and online marketing, New
marketing model.
The
The Marketing
Marketing Communications
Communications
Mix
Mix
Any
AnyPaid
PaidForm
Formof ofNonpersonal
Nonpersonal
Advertising
Advertising Presentation
Presentation and promotionof
and promotion of
ideas, goods, or services by an
ideas, goods, or services by an
Identified
IdentifiedSponsor.
Sponsor.

Personal
PersonalSelling
Selling Personal Presentations by
a Firm’s Sales Force.

Sales Promotion Short-term Incentives to

Encourage Sales.

Building Good Relations with

Public Relations Various Publics by Obtaining
Favorable Unpaid Publicity.

Direct Communications
Direct Marketing With Individuals to Obtain
an Immediate Response.
The Communication Process
Communication involves nine elements
1). Sender: the party sending the message to another party.
2). Encoding: the process of putting thought into symbolic form.
3). Message: the set of symbols that the sender transmits.
4). Media: the communication channels through which the message
moves from sender to receiver.
5). Decoding: the process by which the receiver assigns meaning to the
symbols encoded by the sender.
6). Receiver: the party receiving the message sent by another party.
7). Response: the reactions of the receiver after being exposed to the
message.
8). Feedback: the part of the receiver’s response communicated back
to the sender.
9). Noise: the unplanned static or distortion during the communication
process, which results in the receiver’s getting a different message than
the one the sender sent.
The
The Communication
Communication Process
Process
Sender
Sender

Feedback
Feedback Encoding
Encoding

Message
Message

Media
Media

Response
Response Decoding
Decoding

Receiver
Receiver
Steps
Steps in
in Developing
Developing Effective
Effective
Communication
Communication

Step
Step 1.
1. Identifying
Identifying the
the Target
Target Audience
Audience

Step
Step 2.
2. Determining
Determining the
the Communication
Communication Objectives
Objectives
Buyer
BuyerReadiness
ReadinessStages
Stages

Awareness
Knowledge

Liking

Preference

Conviction

Purchase
Purchase
Steps
Steps in
in Developing
Developing Effective
Effective
Communication
Communication

Step
Step 3.
3. Designing
Designing aa Message
Message

Message Content
Rational Appeals
Emotional Appeals Message Structure
Moral Appeals Draw Conclusions
Argument Type Message Format
Argument Order Headline, Copy, Color,
Words, & Sounds,
Body Language

Attention
Attention Interest
Interest Desire
Desire Action
Action
 Steps in Developing Effective
Communication

Step
Step 4.
4. Choosing
Choosing Media
Media

Personal Communication
Channels

Nonpersonal Communication
Channels

Step
Step 5.
5. Selecting
Selecting the
the Message
Message Source
Source

Step
Step 6.
6. Collecting
Collecting Feedback
Feedback
Setting
Setting the
the Total
Total Promotion
Promotion Budget
Budget

Affordable Percentage-
Method of-Sales
Method

Competitive- Objective-
Parity and-Task
Method Method
 Affordable method: Setting the promotion budget at the
level management thinks the company can afford.
 Percentage-of-sales method: Setting the promotion
budget at a certain percentage of current or forecasted
sales or as a percentage of the unit sales price.
 Competitive-parity method: Setting the promotion
budget to match competitors’ outlays.
 Objective-and-task method: Developing the promotion
budget by
(1) defining specific promotion objectives,
(2) determining the tasks needed to achieve these objectives, and
(3) estimating the costs of performing these tasks. The sum of
these costs is the proposed promotion budget.
Setting the Promotion Mix
Nature of Each Promotion Tool
Advertising
Advertising
Reaches
ReachesMany
ManyBuyers,
Buyers,Expressive
Expressive
Impersonal
Impersonal
Personal
Personal Selling
Selling
Personal
PersonalInteraction,
Interaction,Builds
BuildsRelationships
Relationships
Costly
Costly
Sales
Sales Promotion
Promotion
Provides
ProvidesStrong
StrongIncentives
Incentivesto
toBuy
Buy
Short-Lived
Short-Lived
Public
Public Relations
Relations
Believable,
Believable, Effective,
Effective,Economical
Economical
Underused
Underusedby byMany
ManyCompanies
Companies
Direct
Direct Marketing
Marketing
Nonpublic,
Nonpublic,Immediate,
Immediate,Customized,
Customized,
Interactive
Interactive
 Promotion mix strategies. Marketers choose from two
basic strategies:
a). A push strategy is a promotion strategy
that calls for using the salesforce and trade promotion
to push the product through the channels; the produce
promotes the product to wholesalers, the wholesalers
promote to the retailers, and the retailers promote to
consumers.
b). A pull strategy is a promotion strategy that
calls for spending a lot on advertising and consumer
promotion to build up consumer demand; if successful,
consumers will ask their retailers for the product, the
retailers will ask the wholesalers, and the wholesalers
will ask the producers.
 Integrated Marketing Communications
Carefully integrating and coordinating the company’s
many communications channels to deliver a clear,
consistent, and compelling message about the
organization and its products.

Packaging
Packaging Advertising
Advertising

Event
Event Personal
Marketing Personal
Marketing Selling
Message Selling

Direct
Direct Sales
Sales
Marketing
Marketing Promotion
Promotion
Public
Public
Relations
Relations
Thanks For your attention