Selecting the pricing objective Determining demand Estimating costs Analyzing competitors’ costs, prices, and offers Selecting a pricing method Selecting final price

©2000 Prentice Hall

1. Selecting the pricing objective

2. Determining demand

3. Estimating costs

4. Analyzing competitors’ costs, prices, and offers

5. Selecting a pricing method

6. Selecting final price

©2000 Prentice Hall Total Costs Sum of the Fixed and Variable Costs for a Given Level of Production Total Costs Sum of the Fixed and Variable Costs for a Given Level of Production Fixed Costs Overhead Costs that don’t vary with sales or production levels. Executive Salaries Rent Fixed Costs Overhead Costs that don’t vary with sales or production levels. Executive Salaries Rent Variable Costs Costs that do vary directly with the level of production. Raw materials Variable Costs Costs that do vary directly with the level of production. Raw materials ©2000 Prentice Hall for Price Setting for Price Setting Costs Competitors’ prices and prices of substitutes Customers’ assessment of unique product features Low Price No possible profit at this price High Price No possible demand at this price ©2000 Prentice Hall Pricing Methods Pricing Methods Pricing Methods Pricing Methods  Markup Pricing Markup Pricing  Target Return Pricing Target Return Pricing  Perceived Value Pricing Perceived Value Pricing  Value Pricing Value Pricing  Going-Rate Pricing Going-Rate Pricing  Sealed-Bid Pricing Sealed-Bid Pricing ©2000 Prentice Hall Some important pricing definitions Some important pricing definitions Some important pricing definitions Some important pricing definitions  Utility: The attribute Utility: The attribute that makes it capable that makes it capable of want satisfaction of want satisfaction  Value: The worth in Value: The worth in terms of other terms of other products products  Price: The monetary Price: The monetary medium of exchange. medium of exchange. Value Example Value Example : : Caterpillar Caterpillar Tractor is Tractor is 100,000 100,000 vs. vs. Market Market 90,000 90,000 90,000 if equal 90,000 if equal 7,000 extra durable 7,000 extra durable 6,000 reliability 6,000 reliability 5,000 service 5,000 service 2,000 2,000 warranty warranty 110,000 in benefits - 110,000 in benefits - 10,000 discount 10,000 discount ©2000 Prentice Hall Promotional Pricing Promotional Pricing Promotional Pricing Promotional Pricing  Loss-leader pricing Loss-leader pricing  Special-event pricing Special-event pricing  Cash rebates Cash rebates  Low-interest financing Low-interest financing  Longer payment terms Longer payment terms  Warranties service contracts Warranties service contracts  Psychological discounting Psychological discounting ©2000 Prentice Hall Psychological Pricing Psychological Pricing  Most Attractive? Most Attractive?  Better Value? Better Value?  Psychological Psychological reason to price this reason to price this way? way? A 32 oz. 2.19 B 26 oz. 1.99 Assume Equal Quality ©2000 Prentice Hall Discriminatory Pricing Discriminatory Pricing Discriminatory Pricing Discriminatory Pricing Time Product-form Customer Segment Location ©2000 Prentice Hall Meeting a Competitor’s Price Cut Meeting a Competitor’s Price Cut Has competitor cut his price? No No Hold our price at present level; continue to watch competitor’s price Is the price likely to significantly hurt our sales? Yes Yes Is it likely to be a permanent price cut? Yes Yes By more than 4 Drop price to competitor’s price By 2-4 Drop price by half of the competitor’s price cut How much has his price been cut? Yes Yes No No No No By less than 2 Include a cents-off coupon for the next purchase ©2000 Prentice Hall Review Review Review Review  Setting the Price Setting the Price  Adapting the Price Adapting the Price  Initiating Responding to Price Initiating Responding to Price Changes Changes