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Pricing Ch 11.docx


Department
Management and Organizational Studies
Course Code
MOS 2320A/B
Professor
Angela White

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Pricing 2/29/2012 10:40:00 AM
Chapter 11
What is a Price?
Price the amount of money charged for a product or service, the
sum of values customers exchange for the benefits of having or
using the product or service
Major factor affecting the buyers choice
Only element in the marketing mix that produces revenue
Plays a key role in creating customer value and building customer
relationships
Factors to Consider When Setting Prices
Customer perceptions of value
o When customers buy a product they exchange something of
value to get something of value in return
o Effective, customer-oriented pricing involves understanding
how much value consumers places on the benefits they
receive from the product and setting a price that captures this
value
o Price ceiling there is no demand above this price
o Price floor there are no profits below this point
Value-based pricing setting prices based on buyers
perceptions of value rather than on the seller’s cost,
price is considered along with other marketing mix
variables before the program is set
Good-value pricing offering just the right combination
of quality and good service at a fair price
Everyday low pricing (EDLP) involves charging a
constant everyday low price with few or no temporary
price discounts
High-low pricing involves charging higher prices on an
everyday basis but running frequent promotions to
lower prices temporarily on selected items
Value-added pricing attaching value-added features
and services to differentiate a company’s offers and
charging higher prices

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Pricing power the ability to escape price competition
and to justify higher prices and margins without losing
market share
Company product costs
o Cost based pricing setting prices base don the costs of
producing, distributing and selling the product plus a fair rate
of return for their effort and risk
The key to manage the spread between costs and prices
is how much company makes for the customer value it
delivers
Types of costs:
fixed costs (overhead)
variable costs
total costs fixed plus variable
Experience curve (learning curve) the drop in average
per-unit production cost that comes with accumulated
production experience
o Cost-plus pricing adding a standard markup to the cost of
the product
Benefits
Sellers are certain about costs
Prices are similar in industry and price
competition is minimized
Consumer’s feel it is fair
Drawbacks
Ignores demand and competitor prices
Markup pricing remains popular for many reasons:
Sellers are more certain about costs than about
demand, they don’t need to make frequent
adjustments as demand changes
When all firms in the industry use this pricing
method, prices tend to be similar and price
competition is minimized
Many people feel that this pricing method is more
fair to both buyers and sellers
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o Breakeven pricing setting the price to breakeven on the
costs of making and marketing a product, or setting the price
to make a target profit
o Target profit pricing the price at which the firm will break
even or make the profit it’s seeking
Other internal and external considerations
o Customer perceptions of value set the upper limit for prices
and costs set the lower limit
o Companies must consider external factors when setting prices
o Overall marketing strategy, objectives and mix
Target costing pricing that starts with an ideal selling
price then targets costs that will ensure that the price is
met
o Organizational considerations
Management must decide who within the organization
should set prices (small companies vs. large companies
vs. industrial markets)
o The market and demand
Pricing in different types of markets
Pure competition the market consists of many
buyers and sellers trading in a unique commodity
such as wheat or copper, no single buyer or seller
has much effect on the market price
Monopolistic competition the market consists of
many buyers and sellers who trade over a range
of prices rather than a single market, a range of
prices occurs because sellers can differentiate
their offers
Oligopolistic competition the market consists of
a few sellers who are highly sensitive to each
other’s pricing and marketing strategies, e.g. –
steel, cares, computers, etc.
Demand curve shows the number of units the
market will buy in a given period at different
prices
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