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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
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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
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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
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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
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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
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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
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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
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Discriminatory Pricing Discriminatory Pricing
Discriminatory Pricing Discriminatory Pricing
Time Product-form
Customer Segment
Location
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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
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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