Pricing

Group 4

PRICING

What is Price?•price is a component of an exchange or transaction that takes place between two parties and refers to what must be given up by one party (i.e., buyer) in order to obtain something offered by another party (i.e., seller).

What is Pricing•Pricing is the method a company uses to set the price its product. There are various factors that may come into play.• the idea is to set the price high enough to make a profit but low enough to attract consumer demand.• It is the only part of the marketing mix that generates revenue.

Internal Factors and External Factors

• Marketing Objectives• Marketing Strategy• Costs

• Elasticity of Demand• Customer Expectations• Competitive and other

products• Government regulation

Internal Factors External Factors

Internal Factors• Marketing Objectives• Return On Investment(ROI) -

A firm may set as a marketing objective the requirement that all products attain a certain percentage return on the organization’s spending on marketing the product.• Cash Flow - Firms may seek

to set prices at a level that will insure that sales revenue will at least cover product production and marketing costs.

Internal Factors• Marketing Objectives• Market Share - For new

products under this objective the price is set artificially low in order to capture a sizeable portion of the market and will be increased as the product becomes more accepted by the target market• Maximize Profits - Older

products that appeal to a market that is no longer growing may have a company objective requiring the price be set at a level that

optimizes profits.

Internal Factors• Marketing Strategy• concerns the decisions

marketers make to help the company satisfy its target market and attain its business and marketing objectives.

• Price, is one of the key marketing mix decisions and since all marketing mix decisions must work together, the final price will be impacted by how other marketing decisions are made

Internal Factors• Costs - starting point for setting a product’s price is to first determine how much it will cost to get the product to their customers.

- whatever price customers pay must exceed the cost of producing a good or delivering a service otherwise the company will lose money.

Internal Factors• Costs• Fixed Costs - Also referred to

as overhead costs, these represent costs the marketing organization incurs that are not affected by level of production or sales.

- fixed costs may also exist in the form of expenditure for fielding a sales force, carrying out an advertising campaign and paying a service to host the company’s website.

Internal Factors• Costs• Variable Costs - These costs

are directly associated with the production and sales of products and, consequently, may change as the level of production or sales changes.

- variable costs are evaluated on a per-unit basis since the cost is directly associated with individual items.

External Factors• Elasticity Demand - Marketers should never rest on their marketing decisions. They must continually use market research and their own judgment to determine whether marketing decisions need to be adjusted.• Elasticity is evaluated under the assumption that no other changes are being made (i.e., “all things being

equal”) and only price is adjusted.

External Factors• Elasticity Demand• Elastic Demand - Products are

considered to exist in a market that exhibits elastic demand when a certain percentage change in price results in a larger and opposite percentage change in demand• For example, if the price of a

product increases (decreases) by 10%, the demand for the product is likely to decline (rise) by greater than 10%.

External Factors• Elasticity Demand• Inelastic Demand - Products

are considered to exist in an inelastic market when a certain percentage change in price results in a smaller and opposite percentage change in demand.• For example, if the price of a

product increases (decreases) by 10%, the demand for the product is likely to decline (rise) by less than 10%.

• Unitary Demand - This demand occurs when a percentage change in price results in an equal and opposite percentage change in demand.• For example, if the price of a

product increases (decreases) by 10%, the demand for the product is likely to decline (rise) by 10%.

External Factors• Customer Expectations

- the most obvious external factors that influence price setting

- When deciding on a price marketers need to conduct customer research to determine what “price points” are acceptable. Pricing beyond these price points could discourage customers from purchasing.

External Factors• Competitive and other products - Marketers will undoubtedly look to market competitors for indications of how price should be set. For many marketers of consumer products researching competitive pricing is relatively easy, particularly when Internet search tools are used.

External Factors• Competitor and other products• Direct Competitor Pricing -

Almost all marketing decisions, including pricing, will include an evaluation of competitors’ offerings.• The impact of this information

on the actual setting of price will depend on the competitive nature of the market

External Factors• Competitor and other products• Related Product Pricing -

Products that offer new ways for solving customer needs may look to pricing of products that customers are currently using even though these other products may not appear to be direct competitors.

External Factors• Competitor and other products• Primary Product Pricing -

marketers may sell products viewed as complementary to a primary product.

External Factors• Government Regulation- Marketers must be aware of

regulations that impact how price is set in the markets in which their products are sold.

- These regulations are primarily government enacted meaning that there may be legal ramifications if the rules are not followed. Price regulations can come from any level of government and vary widely in their requirements.