Chapter 11 – Pricing Products and Services
11-1
PrPr
CHAPTER CONTENTS
PAGE
POWERPOINT RESOURCES TO USE WITH LECTURES …………………………………… 11-2
LEARNING OBJECTIVES (LO) ……………………………………………………………………………. 11-3
KEY TERMS ………………………………………………………………………………………………………….. 11-3
LECTURE NOTES
• Chapter Opener: Vizio, Inc. – Building a Smart TV Brand at a Great Value …………. 11-4
• Nature and Importance of Price (LO 11-1) ……………………………………………………….. 11-4
• Setting a Final Price (LO 11-5) ………………………………………………………………………. 11-27
APPLYING MARKETING KNOWLEDGE …………………………………………………………… 11-31
BUILDING YOUR MARKETING PLAN ………………………………………………………………. 11-33
VIDEO CASE (VC)
• VC-11: Carmex [B]: Setting the Price of the Number One Lip Balm …………………… 11-34
IN-CLASS ACTIVITY (ICA)
• ICA 11-1: Pricing an Apple iPad Air ……………………………………………………………….. 11-37
CONNECT EXERCISES …………………………………………………………….……11-43
• Final Price and Profit Equations Case Analysis
Pricing Products and Services
Chapter 11 – Pricing Products and Services
11-2
Chapter 11 – Pricing Products and Services
11-3
POWERPOINT RESOURCES TO USE WITH LECTURES
PowerPoint
Textbook Figures Slide
Figure 11-1 The “price” a buyer pays can take three different names depending on what
is purchased ………………………………………………………………………………………………….. 11-6
Figure 11-2 Four approaches for selecting an approximate price level ……………………………………. 11-10
Applying Marketing Metrics
Are Red Bull Prices Above, At, or Below the Market?: Price Premium Percent
[See UMD14PricePremium.xls] …………………………………………………………………………………………. 11-18
Marketing Matters, Making Responsible Decisions, and/or Marketing Insights
Marketing Matters—Does Spirit Airlines Engage in Value Pricing? ………………………………………… 11-8
Videos
11-1: Rolex Ad …………………………………………………………………………………………………………………. 11-11
11-3: Carmex [B] Video Case …………………………………………………………………………………………….. 11-37
In-Class Activity (ICA)
Chapter 11 – Pricing Products and Services
11-4
LEARNING OBJECTIVES (LO)
After reading this chapter students should be able to:
LO 11-1: Describe the nature and importance of pricing and the approaches used to select an
approximate price level.
LO 11-3: Explain the role of costs in pricing decisions and describe how combinations of price,
fixed cost, and unit variable cost affect a firm’s break-even point.
LO 11-5: Describe the steps taken in setting a final price.
KEY TERMS
barter
pricing objectives
break-even analysis
profit equation
demand curve
total cost (TC)
price (P)
total revenue (TR)
price elasticity of demand
value
pricing constraints
Chapter 11 – Pricing Products and Services
11-5
LECTURE NOTES
VIZIO, INC.—BUILDING A SMART TV BRAND AT A GREAT VALUE
• VIZIO is the largest U.S.-based TV maker.
• In 2002, William Wang:
a. Co-founded VIZIO after seeing an ad for a $10,000 flat-panel HDTV set.
• To make affordable “Where Vision Meets Value” HDTVs, VIZIO uses:
a. Uses contract manufacturers instead of investing in its own facilities.
b. Specialists in the U.S. to handle product development and marketing.
• “Consumers want to save money without sacrificing quality or technology.”
• VIZIO:
[Video 13-1: VIZIO]
I. NATURE AND IMPORTANCE OF PRICE [LO 11-1]
The price paid for products and services goes by many names: tuition, rent, interest,
premiums, fees, dues, fare, salary, commission, wage, and sometimes a price.
• Pricing decisions involve carefully assessing consumer demand, revenues, fixed
Chapter 11 – Pricing Products and Services
11-6
b. An offering’s price must:
• Generate enough sales dollars to develop, produce, and market it while…
A. What Is a Price?
• Price (P) is the money or other considerations (including other products and
services) exchanged for the ownership or use of a product or service.
• Barter:
1. The Price Equation.
a. The amount paid for a product or service:
b. Accounts for billions of dollars annually in domestic and international trade
(also known as countertrade—see Chapter 6).
c. Firms now use “special fees” and “surcharges” rather than a higher list price.
d. Buyers are more willing to pay extra fees than a higher list price so…
e. Sellers use add-on charges to have consumers pay more without raising the
list price.
f. [Figure 11-1] All of the different factors that increase or decrease the price
are put together in a “price equation”:
g. These are key factors if you want to buy a 2019 Bugatti Chiron Sport, the
world’s fastest and most expensive “open top” production car.
[ICA 11-1: Pricing an Apple iPad]
Chapter 11 – Pricing Products and Services
11-7
2. Calculating a Final Price.
a. Applying the price equation shown in Figure 11-1 to your Bugatti Chiron
purchase, your final price is:
Final price = [List price] – [Allowances] + [Extra Fees]
B. Price as an Indicator of Value
• Price is often used to indicate value when it is compared with the perceived
benefits of a product or service.
• Value is the ratio of perceived benefits to price:
Value = Perceived Benefits ÷ Price
1. Using Value Pricing.
a. Creative marketers engage in value pricing:
• The practice of simultaneously increasing product and service benefits
while maintaining or decreasing price.
d. Value:
Chapter 11 – Pricing Products and Services
11-8
MARKETING MATTERS
Does Spirit Airlines Engage in Value Pricing? For Some Yes, For Others No.
• U.S. Department of Transportation reports that Spirit Airline fares are, on average,
40% lower than other airlines.
• Passengers get a seat that will not recline.
C. Price in the Marketing Mix
• Pricing has a direct effect on a firm’s profits, whose profit equation is:
• Quantity sold affects costs since the quantity sold impacts a firm’s costs due to
efficiency of production.
II. COMMON PRICING APPROACHES
• [Figure 11-2] A key to a marketer’s setting a final price for a product is to find an
approximate price level to use as a reasonable starting point. There are four common
approaches to find this approximate price level.
A. Demand-Oriented Pricing Approaches
• Demand-oriented approaches weigh factors underlying expected customer tastes
and preferences more heavily than…
1. Skimming Pricing.
Chapter 11 – Pricing Products and Services
11-9
• These customers are not very price sensitive.
• Customers weigh the new product’s price, and quality against the same
b. Skimming pricing is an effective strategy when:
• Enough prospective customers are willing to buy the product at the high
initial price to make these sales profitable.
2. Penetration Pricing.
a. Penetration pricing involves setting a low initial price on a new product to
appeal immediately to the mass market—the opposite of skimming pricing.
b. The conditions favoring penetration pricing are that:
• Many segments of the market are price sensitive.
c. A firm using penetration pricing may:
• Maintain the initial price for a time to gain profit lost from its low
d. Penetration pricing may follow skimming pricing.
• A firm might initially price a product high to:
Chapter 11 – Pricing Products and Services
11–10
3. Prestige Pricing.
a. Consumers may use price as a measure of the quality or prestige of an item so
that as price is lowered beyond some point, demand for the item actually falls.
b. Prestige pricing involves setting a high price so that quality- or status-
conscious consumers will be attracted to the product and buy it.
c. In Figure 11-3:
• The demand curve:
[Video 11-1: Rolex Ad]
d. Products with an element of prestige pricing in them:
• May sell worse at lower prices than at higher ones because…
• Buyers tend to associate a lower price with lower quality.
MARKETING MATTERS
Customer Value: Energizer’s Lesson in Price Perception—
Value Lies in the Eye of the Beholder
The commercialization of new alkaline battery technology at a price that creates value
for consumers is not always obvious or easy. Just ask the marketing executives at Energizer
about their experience with pricing Energizer Advanced Formula and Energizer e2AA
alkaline batteries.
Chapter 11 – Pricing Products and Services
11–11
4. Odd-even pricing.
a. Involves setting prices a few dollars or cents under an even number ($499.99
5. Target pricing.
a. Consists of estimating the price that ultimate consumers would be willing to
6. Bundle Pricing.
a. Is the marketing of two or more products in a single package price.
b. Is based on the idea that consumers value the package more than the
individual items.
c. Bundle pricing:
8. Yield Management Pricing.
a. Is the charging of different prices to maximize revenue for a set amount of
Chapter 11 – Pricing Products and Services
11–12
• Vary prices based on time, day, week, or season in order to match demand
with supply.
B. Cost-Oriented Pricing Approaches
• With cost-oriented approaches, price is set by looking at the production and
marketing costs (the supply side of the pricing problem) and…
• Then adding enough to cover direct expenses, overhead, and profit.
1. Standard markup pricing.
a. Standard markup pricing involves adding a fixed percentage to the cost of all
items in a specific product class.
e. These markups must:
• Cover all expenses of the store.
2. Cost-plus pricing.
a. Cost-plus pricing involves summing the total unit cost of providing a product
or service and adding a specific amount to the cost to arrive at a price.
b. Cost-plus pricing assumes two forms:
• Cost-plus percentage-of-cost pricing.
Chapter 11 – Pricing Products and Services
c. Cost-plus pricing:
• Is the most commonly used method to set prices for business products.
C. Profit-Oriented Pricing Approaches
A marketer may choose to balance both revenues and costs to set price by either:
1. Target Profit Pricing.
a. Target profit pricing involves setting an annual target of a specific dollar
volume of profit.
b. To calculate a target profit price for a picture frame store:
Profit = Total Revenue – Total Cost
c. NOTE: A critical assumption is that this higher average price of a framed
picture will not cause the demand to fall.
d. Target profit pricing:
• Is simple.
[See CH11TargetProfit.xls]
11–14
2. Target Return-on-Sales Pricing.
a. Target return-on-sales pricing involves setting a price to achieve a profit
that is a specified percentage of the sales volume.
b. This method is used due to the difficulty in establishing a benchmark of sales
or investment to show how much of a firm’s effort is needed to achieve the
target.
Target return on sales = Total profit ÷ Total revenue
3. Target Return-on-Investment Pricing.
a. Target return-on-investment pricing involves setting a price to achieve an
annual target return-on-investment (ROI).
b. Some large, publicly owned firms and public utilities use this method.
D. Competition-Oriented Pricing Approaches
Rather than emphasize demand, cost, or profit factors, a price setter can stress what
competitors or “the market” is doing.
1. Customary pricing.
a. Involves setting a price that is dictated by tradition, a standardized channel of
distribution, or other competitive factors.
Chapter 11 – Pricing Products and Services
11–15
2. Above-, at-, or below-market pricing.
a. Involves setting a market price for a product or product class based on a
subjective feel for the competitors’ price or market price as the benchmark.
c. Above-market pricing sets a premium price for a product.
d. At-market pricing:
• Establishes the going market price in the minds of their competitors.
e. Below-market pricing.
• Sets a market price below the prices of nationally branded competitive
products to promote a value image among buyers.
f. Companies use a “price premium” to assess whether its products and brands
are above, at, or below the market.
3. Loss-leader pricing.
a. Involves deliberately selling a product below its customary price, not to
Chapter 11 – Pricing Products and Services
11–16
LEARNING REVIEW
11-1. Value is _______.
11-2. What circumstances in pricing a new product might support skimming or
penetrating pricing?
Answer: Skimming pricing is an effective strategy when: (1) enough prospective
customers are willing to buy the product immediately at the high initial price to make
Chapter 11 – Pricing Products and Services
11–17
USING MARKETING DASHBOARDS
Are Red Bull Prices Above, At, or Below the Market?
How would you determine whether a firm’s retail prices are above, at, or below the
market? Combine two consumer market share measures to create a “price premium” display
on a marketing dashboard.
Your Challenge.
Red Bull is the leading energy-drink brand in the United States in terms of dollar
market share and unit market share. Company executives want to know whether the brand’s
Your Findings.
Using 2010 energy-drink brand market share data for U.S. convenience stores, the
Red Bull price premium is 1.152, or 15.2% [(38% ÷ 33%) – 1] = 0.151. Red Bull’s price
premium based on 2009 brand market share data was 1.121, or 12.1 percent. Red Bull’s price
premium has increased relative to its competitors.
[See UMD11PricePremium.xls]
Your Actions.
Red Bull has increased its price premium while retaining its unit volume share,
which is not only favorable news for the brand but also evidence of price discounting by
III. ESTIMATING DEMAND AND REVENUE [LO 11-2]
Marketing executives must translate an estimate of customer demand into estimates of
revenues the firm expects to receive.
A. Estimating Demand
Chapter 11 – Pricing Products and Services
• How much are consumers willing to pay for a product? That depends in part on
these factors that affect the decision:
a. Preference for a particular product compared to other others.
• To estimate demand for a product, a marketer must:
1. The Demand Curve.
a. A demand curve is a graph that relates the quantity sold and price, showing
the maximum number of units that will be sold at a given price.
b. [Figure 11-4].
• Demand curve D1 shows the demand for Red Baron frozen cheese pizza
c. There are three other factors to consider when estimating demand.
• Consumer tastes.
• Price and availability of similar products.
– The laws of demand apply to a firm’s competitors as well.
• Consumer income. As real consumer income increases, allowing for
inflation, demand for a product (Red Baron) also increases.
d. Along with price, demand factors determine consumers’ willingness and
ability to pay for products and services.
e. It is difficult to estimate demand for new products because consumer likes and
dislikes are difficult to assess.
11–19
2. Movement Along versus Shift of a Demand Curve.
a. [Figure 11-4A] Movement along a demand curve.
• Occurs when the price is lowered and quantity demanded increases.
• Demand curve D1 shows that:
– As the price of Red Baron frozen cheese pizza is lowered from $8
(point 1) to $6 (point 2)…
b. [Figure 11-4B] Shift in the demand curve.
• Occurs when some of the factors that affect a demand curve do change:
– An increase of advertising.
• This means that:
– More of a product class is wanted for a given price—the demand curve
shifts to the right from D1 (the blue line) to D2 (the red line).
– The demand for all frozen cheese pizzas, including Red Baron frozen
cheese pizza, increases.
• Now, the initial demand curve, D1 (the blue line), no longer represents
frozen cheese pizza demand.
B. Price Elasticity of Demand [LO 11-4]
• With a downward-sloping demand curve, marketing managers are interested in:
Chapter 11 – Pricing Products and Services
11–20
• Price elasticity of demand measures the percentage change in quantity
demanded relative to a percentage change in price.
Price Elasticity of Demand (E) = Percentage Change in Quantity Demanded (%ΔQ)
Percentage Change in Price (%ΔP)
1. Elastic Demand and Inelastic Demand.
a. Elastic demand.
• Exists when a 1 percent decrease in price produces more than a
1 percent increase in quantity demanded, increasing total revenue.
• Results in a price elasticity that is greater than 1.
b. Inelastic demand.
• Exists when a 1 percent decrease in price produces less than a 1 percent
increase in quantity demanded, which decreases total revenue.
d. It is important that marketing managers recognize that price elasticity of
demand is not the same over all possible prices of a product.
C. Fundamentals of Estimating Revenue
• Instead of demand curves, marketers: