Price Determination

Chapter 12Chapter 12

Price DeterminationPrice Determination

Definition of PRICEDefinition of PRICE

►Price is the amount of money and/or Price is the amount of money and/or other items with utility needed to other items with utility needed to acquire a product.acquire a product.

Importance of PriceImportance of Price

►Price is significant in;Price is significant in;► In the EconomyIn the Economy► In the customer’s mindIn the customer’s mind► In the Individual firmIn the Individual firm

In the EconomyIn the Economy

►Price influences wages, rent, interest Price influences wages, rent, interest and profits.and profits.

► It influences the allocation of the It influences the allocation of the factors of production.factors of production.

► It influences demand and supply.It influences demand and supply.

In the Customer’s MindIn the Customer’s Mind

► It influences customer’s perception It influences customer’s perception towards quality of goods and services.towards quality of goods and services.

In the Individual FirmIn the Individual Firm

►Price affects a firm’s competitive Price affects a firm’s competitive position, position,

►revenues and net profits.revenues and net profits.

Pricing ObjectivesPricing Objectives

►Pricing objectives are following;Pricing objectives are following;►Profit-orientedProfit-oriented►Sales-orientedSales-oriented►Status quo-orientedStatus quo-oriented

Profit-Oriented ObjectivesProfit-Oriented Objectives

Two objectives are;Two objectives are;

1-Achieve a Target Return1-Achieve a Target Return

2-Maximize Profits2-Maximize Profits

1-Achieve a Target Return1-Achieve a Target Return

►The objective of the company is to The objective of the company is to achieve a specified percentage return achieve a specified percentage return on its sales or on its investment.on its sales or on its investment.

Maximize ProfitsMaximize Profits

►The objective of the company is to The objective of the company is to earn the revenue as much as possible.earn the revenue as much as possible.

Sales-Oriented GoalsSales-Oriented Goals

►Two objectives are;Two objectives are;►1-Increase sales volume1-Increase sales volume►2-Maintain or Increase Market Share2-Maintain or Increase Market Share

1-Increase Sales Volume1-Increase Sales Volume

►The objective of the company is to The objective of the company is to achieve rapid growth or to discourage achieve rapid growth or to discourage other firms entering a market.other firms entering a market.

2-Maintain or Increase Market 2-Maintain or Increase Market ShareShare

►The price setting objective can be to The price setting objective can be to retain the old customers or to attract retain the old customers or to attract the new customers.the new customers.

Status Quo GoalsStatus Quo Goals

►Two major objectives are;Two major objectives are;►Stabilizing prices andStabilizing prices and►Meeting competitionMeeting competition►They maintain firm’s current situation They maintain firm’s current situation

and and ►Avoid price competitionAvoid price competition

Factors Influencing Price Factors Influencing Price DeterminationDetermination

►Factors that influence price Factors that influence price determination are;determination are;

►Estimated DemandEstimated Demand►Competitive ReactionsCompetitive Reactions►Other Marketing-Mix ElementsOther Marketing-Mix Elements►Cost of ProductCost of Product

Estimated DemandEstimated Demand

►A company must estimate the total A company must estimate the total demand for the product.demand for the product.

►Steps in estimating demand are;Steps in estimating demand are;►Find whether there is a price the Find whether there is a price the

market expects and market expects and ►Estimate what the sales volume might Estimate what the sales volume might

be at different prices.be at different prices.

Competitive ReactionsCompetitive Reactions

►Competition greatly influences priceCompetition greatly influences price►When there is large competition orWhen there is large competition or►There is less or no competition,There is less or no competition,►Price strategy would be different in Price strategy would be different in

both cases.both cases.

Other Marketing-Mix Other Marketing-Mix ElementsElements

►Marketing-Mix elements are;Marketing-Mix elements are;►1-Product1-Product►2-Distribution Channels2-Distribution Channels►3-Promotion3-Promotion

1-Product1-Product

►A product’s price is affected by;A product’s price is affected by;►Either it is a new item orEither it is a new item or►An established productAn established product

2-Distribution Channels2-Distribution Channels

►Channels influence producer’s pricing.Channels influence producer’s pricing.►Price to wholesalers is lower because Price to wholesalers is lower because

they have to perform producer’s they have to perform producer’s services like;services like;

►StorageStorage►Granting creditGranting credit►Selling to retailers Selling to retailers

3-Promotion3-Promotion

►Promotional activities also influence Promotional activities also influence price setting.price setting.

► If these activities are done by producer If these activities are done by producer he will charge more price from he will charge more price from retailers.retailers.

Cost of a ProductCost of a Product

►Cost also influences price Cost also influences price ►More cost more price More cost more price ►Low cost low price.Low cost low price.

Cost-Plus PricingCost-Plus Pricing

►Adding a standard markup (additional Adding a standard markup (additional amount) to the cost of the product.amount) to the cost of the product.

►Setting the price of one unit of a Setting the price of one unit of a product equal to the total cost of the product equal to the total cost of the unit plus the desired profit on the unit.unit plus the desired profit on the unit.

Prices Based on Marginal Prices Based on Marginal costs costs

►To set prices based on marginal costs To set prices based on marginal costs only, not total costs.only, not total costs.

► It is used when one product is It is used when one product is expected to attract business for expected to attract business for another.another.

Evaluation of Cost-Plus Evaluation of Cost-Plus PricingPricing

► It is straightforward, easy to explain It is straightforward, easy to explain and used by numerous firms.and used by numerous firms.

►Most common pricing method among Most common pricing method among ►e-commerce companies.e-commerce companies.

Break-Even AnalysisBreak-Even Analysis

► It is used to calculate break-even It is used to calculate break-even points.points.

►Quantity of output at which total Quantity of output at which total revenue equals total costs.revenue equals total costs.

►The more sales are above the break-The more sales are above the break-even point, the larger the total and even point, the larger the total and unit profits will be.unit profits will be.

Determining the Break-Even Determining the Break-Even PointPoint

►Break-Even Point in units=Total fixed Break-Even Point in units=Total fixed costs/unit contribution to overheadcosts/unit contribution to overhead

► OROR►Break-Even Point in units=Total Fixed Break-Even Point in units=Total Fixed

Costs/Selling Price-Average variable Costs/Selling Price-Average variable costcost

Evaluation of Break-Even Evaluation of Break-Even AnalysisAnalysis

► It cannot tell us whether or not we can It cannot tell us whether or not we can actually sell at the break-even actually sell at the break-even amount.amount.

► It is helpful because in the short run It is helpful because in the short run many firms experience reasonably many firms experience reasonably stable cost and demand structures.stable cost and demand structures.

Prices based on Marginal Prices based on Marginal AnalysisAnalysis

► It takes into account both demand and It takes into account both demand and costs to determine the best price for costs to determine the best price for profit maximization.profit maximization.

Determining the PriceDetermining the Price

►The price setter must understand the The price setter must understand the concepts of average and marginal concepts of average and marginal revenue as well as average and revenue as well as average and marginal costsmarginal costs

►Marginal revenue is the income Marginal revenue is the income derived from the sale of last unit.derived from the sale of last unit.

►Average revenue is the unit price at a Average revenue is the unit price at a given level of unit sales.given level of unit sales.

Evaluation of Marginal Analysis Evaluation of Marginal Analysis PricingPricing

► It has been used as a basis for price It has been used as a basis for price setting.setting.

► It can be helpful in studying past price It can be helpful in studying past price movements.movements.

► It cannot serve as a practical basis for It cannot serve as a practical basis for setting prices unless accurate, reliable setting prices unless accurate, reliable data can be obtained for plotting the data can be obtained for plotting the curves.curves.

Prices set in Relation toPrices set in Relation toMarket aloneMarket alone

►The seller’s price may be set right at The seller’s price may be set right at the market price to meet the the market price to meet the competition, or it may be set above or competition, or it may be set above or below the market price.below the market price.

Pricing to Meet CompetitionPricing to Meet Competition

► It is simple to carry out.It is simple to carry out.► In a situation with multiple suppliers, a In a situation with multiple suppliers, a

firm should ascertain what the firm should ascertain what the prevailing market price is and after prevailing market price is and after allowing for customary markups for allowing for customary markups for middlemen, should arrive at its own middlemen, should arrive at its own selling price.selling price.

Pricing Below CompetitionPricing Below Competition

► It is done by discount retailersIt is done by discount retailers►which stress low markup, high volume which stress low markup, high volume

and few customer services.and few customer services.►They price heavily advertised, well-They price heavily advertised, well-

known brands 10% to 30% below the known brands 10% to 30% below the suggested price.suggested price.

Pricing above CompetitionPricing above Competition

► It works only when the product is It works only when the product is distinctive or when the seller has distinctive or when the seller has acquired prestige in its field.acquired prestige in its field.

Chapter 13Chapter 13

PricingPricing

StrategiesStrategies

Price CompetitionPrice Competition

►A company engages in price A company engages in price competition by regularly offering competition by regularly offering products priced as low as possible.products priced as low as possible.

►Value pricing aims to improve a Value pricing aims to improve a products value that is the ratio of its products value that is the ratio of its benefits to its price and related costs.benefits to its price and related costs.

►Value pricing emphasizes the price Value pricing emphasizes the price element of the marketing mix.element of the marketing mix.

Non-price CompetitionNon-price Competition

► In this competition, sellers maintain In this competition, sellers maintain stable prices and attempt to improve stable prices and attempt to improve their market positions by emphasizing their market positions by emphasizing other aspects of their marketing other aspects of their marketing programsprograms

►Main emphasis is on something other Main emphasis is on something other than the price.than the price.

Market Entry StrategiesMarket Entry Strategies

►1-Market-Skimming Pricing1-Market-Skimming Pricing►2-Market-Penetration Pricing2-Market-Penetration Pricing

Market-Skimming PricingMarket-Skimming Pricing

►Setting a relatively high initial price for Setting a relatively high initial price for a new product .a new product .

►Price is set at the highest possible Price is set at the highest possible level .level .

► It should provide healthy profit It should provide healthy profit margins.margins.

Market-Penetration PricingMarket-Penetration Pricing

►Low initial price is established for a Low initial price is established for a new product.new product.

►Primary aim is to penetrate the mass Primary aim is to penetrate the mass market immediately.market immediately.

►To generate substantial sales volume To generate substantial sales volume and a large market share.and a large market share.

►Discourage other firms from Discourage other firms from introducing competing products.introducing competing products.

Discounts and AllowancesDiscounts and Allowances

►Reduction in the list price is discount.Reduction in the list price is discount.

►Quantity discountQuantity discount►Trade discountTrade discount►Cash discountCash discount►Other discounts and allowancesOther discounts and allowances

Quantity DiscountsQuantity Discounts

►Reduction from a seller’s list price Reduction from a seller’s list price intended to encourage customers to intended to encourage customers to buy in large amounts.buy in large amounts.

Trade DiscountsTrade Discounts

►Also called functional discounts are Also called functional discounts are deductions from the list price offered deductions from the list price offered to buyers as payment for marketing to buyers as payment for marketing functions functions

►the buyer will perform.the buyer will perform.

Cash DiscountsCash Discounts

►Reductions granted to buyers for Reductions granted to buyers for paying their bills specified time.paying their bills specified time.

► It includes three elements;It includes three elements;

►1- The percentage discounts1- The percentage discounts►2-The period during which the discount 2-The period during which the discount

may be takenmay be taken► 3-The time when the bill becomes 3-The time when the bill becomes

overdueoverdue

Other Discounts and AllowancesOther Discounts and Allowances

►Rebate:Rebate:► It is a discount on a product that a It is a discount on a product that a

customer obtains by submitting a form customer obtains by submitting a form or certificate provided by the seller.or certificate provided by the seller.

Kinds of RebatesKinds of Rebates

►Coupon: Coupon: ►Mail-in RebateMail-in Rebate►Promotional allowancePromotional allowance

CouponCoupon

It is a small printed certificate that the It is a small printed certificate that the customer presents when purchasing customer presents when purchasing the product in order to obtain a the product in order to obtain a discount equal to the value shown on discount equal to the value shown on the certificate.the certificate.

Mail-in RebateMail-in Rebate

In it the customer fills out a short In it the customer fills out a short form, encloses proof of purchase and form, encloses proof of purchase and sends the paper work to a specified sends the paper work to a specified addressaddress

Promotional AllowancePromotional Allowance

► It is a price reduction granted by a It is a price reduction granted by a seller as payment for promotional seller as payment for promotional services performed by buyers. services performed by buyers.

Geographic Pricing StrategiesGeographic Pricing Strategies

►Point-of-Production PricingPoint-of-Production Pricing►Uniform Delivered PricingUniform Delivered Pricing►Zone Delivered PricingZone Delivered Pricing►Freight Absorption PricingFreight Absorption Pricing

Point-of-Production PricingPoint-of-Production Pricing

►The seller quotes the selling price at The seller quotes the selling price at the point of production, and the buyer the point of production, and the buyer selects the mode of transportation and selects the mode of transportation and pays all freight costs.pays all freight costs.

Uniform Delivered PricingUniform Delivered Pricing

►Under uniform delivered pricing, the Under uniform delivered pricing, the same delivered price is quoted to all same delivered price is quoted to all buyers regardless of their locations.buyers regardless of their locations.

Zone Delivered PricingZone Delivered Pricing

► It divides a seller’s market into a It divides a seller’s market into a limited number of broad geographic limited number of broad geographic zones and then sets a uniform zones and then sets a uniform delivered price for each zone.delivered price for each zone.

Freight Absorption PricingFreight Absorption Pricing

►A manufacturer quotes to the A manufacturer quotes to the customer a delivered price equal to its customer a delivered price equal to its factory price plus the shipping costs factory price plus the shipping costs

Special Pricing StrategiesSpecial Pricing Strategies&&

SituationsSituations►One-Price & Flexible-Price StrategiesOne-Price & Flexible-Price Strategies►Price LiningPrice Lining►Odd PricingOdd Pricing►Leader-Pricing & Unfair Practices ActsLeader-Pricing & Unfair Practices Acts►High-Low Pricing & Everyday Low High-Low Pricing & Everyday Low

PricingPricing

One-Price strategyOne-Price strategy

►Under a one-price strategy, a seller Under a one-price strategy, a seller charges the same price to all similar charges the same price to all similar customers who buy identical quantities customers who buy identical quantities of a productof a product

Flexible-Price StrategyFlexible-Price Strategy

►Under this strategy, similar customers Under this strategy, similar customers may pay different prices when buying may pay different prices when buying identical quantities of a product.identical quantities of a product.

►Also called as variable price strategy.Also called as variable price strategy.

Flat-Rate PricingFlat-Rate Pricing

►A variation of the one-price strategy A variation of the one-price strategy received some attention lately.received some attention lately.

►Under such an arrangement a Under such an arrangement a purchaser pays a stipulated single purchaser pays a stipulated single price and then can consume as little or price and then can consume as little or as much of the product as desired.as much of the product as desired.

Single-Price StrategySingle-Price Strategy

►Extreme variation of one price Extreme variation of one price strategy.strategy.

►All customers charged the same price All customers charged the same price and all items sold by the firm carry a and all items sold by the firm carry a single price.single price.

Price LiningPrice Lining

► It involves selecting a limited number It involves selecting a limited number of prices at which a business will sell of prices at which a business will sell related products.related products.

►For consumers the main benefit of For consumers the main benefit of price lining is that it simplifies buying price lining is that it simplifies buying decisions.decisions.

►For retailers price lining helps in For retailers price lining helps in planning purchases.planning purchases.

Odd PricingOdd Pricing

►This psychological strategy is This psychological strategy is commonly used in retailing.commonly used in retailing.

►Odd pricing sets at uneven or odd Odd pricing sets at uneven or odd amounts such as 51 cents or Rs.77amounts such as 51 cents or Rs.77

►The rationale for odd pricing is that it The rationale for odd pricing is that it suggests lower prices and as a result suggests lower prices and as a result yields greater sales than even pricing.yields greater sales than even pricing.

Leader PricingLeader Pricing

►Retailers temporarily cut prices on a Retailers temporarily cut prices on a few items to attract customers.few items to attract customers.

►The items on which prices are cut are The items on which prices are cut are termed leaders.termed leaders.

Unfair-Practices ActsUnfair-Practices Acts

►Also called unfair sales actsAlso called unfair sales acts► It is used to regulate leader pricingIt is used to regulate leader pricing►These laws prohibit a retailer or These laws prohibit a retailer or

wholesaler from selling an item below wholesaler from selling an item below invoice cost plus some stipulated invoice cost plus some stipulated amount.amount.

High-Low PricingHigh-Low Pricing

►this strategy entails alternating this strategy entails alternating between regular and sale prices on the between regular and sale prices on the most visible products offered by a most visible products offered by a retail firm.retail firm.

Everyday Low PricingEveryday Low Pricing

► It involves consistently low prices and It involves consistently low prices and fewfew

►temporary price reductions.temporary price reductions.► It is featured by large discounters.It is featured by large discounters.

Resale Price MaintenanceResale Price Maintenance

►To control the prices at which To control the prices at which middlemen resell their products is middlemen resell their products is termed resale price maintenance.termed resale price maintenance.

►Manufacturers seek to do this to Manufacturers seek to do this to protect the brand’s image.protect the brand’s image.