Objective ØChapter 10 Pricing Products Understanding and Capturing

Objective ØChapter 10: Pricing Products: Understanding and Capturing Customer Value Presenter: Sayed Moammer Mazhary BBA (Marketing & Finance) MBA (HRM)

Outline Ø Ø Ø Marketing Defined What is Price? Factors to consider when setting Prices Ø Value based pricing Ø Company and product cost Ø Other internal and external considerations affecting price decision

Marketing Defined Ø According to William Stanton, “Marketing is a total system of business activities designed to plan, price, promote & distribute want satisfying products to target markets in order to achieve organizational objectives. ” Ø According to Philip Kotler, “marketing is a human activity directed at satisfying needs and wants through exchange process. ” we generally think of price in monetary terms may be more useful to think of what it costs us to acquire something of value the costs may be monetary or non-monetary we need to think in terms of time and effort, as well as the monetary costs 3

Cost Vs Price l Remember there is a big difference between costs and price. Costs are the expenses of a firm. Price is the amount customers are charged for items.

Price Defined • • • The amount of money charged for a product or service The sum of all the values that consumers exchange for the benefits of having or using the product or service Examples of “price? ” Rent, Fee, Rate, Commission, Assessment, Tuition, Fare, Toll, Premium, Retainer, Bribe, Salary, Wage, Interest, Tax

Factors to Consider When Setting Prices Customer Perception of Value l Company and Product Costs l The Market and Demand l

Customer Perception of Value Effective customer-oriented pricing involves understanding how much value consumers place on the benefits they receive from the product and setting a price that captures that value l Harley Davidson- American Motor Bike manufacturer. l

Customer Perception of Value Con’t l • • Value-based pricing uses the buyers’ perceptions of value, not the seller’s cost, as the key to pricing. Price is considered before the marketing program is set. Value-based pricing is customer driven Cost-based pricing is product driven

Company and Product Costs Cost-based pricing involves setting prices based on the costs for producing, distributing, and selling the product plus a fair rate of return for its effort and ris l Types of costs l I. Fixed costs II. Variable costs III. Total costs

Company and Product Costs Con’t I. III. Fixed costs are the costs that do not vary with production or sales level, Rent, Heat, Interest, Executive salaries Variable costs are the costs that vary with the level of production, Packaging, Raw materials Total costs are the sum of the fixed and variable costs for any given level of production

Exercise: Cost-Based Pricing Example - Variable costs: $20 - Expected sales: 100, 000 units - Fixed costs: $ 500, 000 - Desired Sales Markup: 20%

Excersice: Cost-Based Pricing Example - Variable costs: $20 - Expected sales: 100, 000 units - Fixed costs: $ 500, 000 - Desired Sales Markup: 20% Variable Cost + Fixed Costs/Unit Sales = Unit Cost $20 + $500, 000/100, 000 = $25 per unit Unit Cost/(1 + Desired Return on Sales) = Markup Price $25 / (1 +. 20) = $30

Company and Product Costs Con’t Average cost is the cost associated with a given level of output l Experience or learning curve is when the average cost falls as production increases because fixed costs are spread over more units l

Company and Product Costs Con’t § § § Break-even pricing is the price at which total costs are equal to total revenue and there is no profit Target profit pricing is the price at which the firm will break even or make the profit it’s seeking Cost-based pricing adds a standard markup to the cost of the product

Other Internal and External Considerations Affecting Price Decisions Internal factors • Marketing strategies • Objectives • Marketing mix External factors • Market demand • Competitor’s strategies and prices

The Market and Demand Before setting prices, the marketer must understand the relationship between price and demand for its products and the market they targeted or operate in. l Types of markets l I. III. IV. Pure competition Monopolistic competition Oligopolistic competition Pure monopoly

Types of markets Pure competition is a market with few many buyers and sellers trading uniform commodities where no single buyer or seller has much effect on market price Ex: Flour Market, sugar, Gasoline etc… Monopolistic competition is a market with many buyers and sellers who trade over a range of prices rather than a single market price with differentiated offers.

Types of markets Con’t Oligopolistic competition is a market with few sellers because it is difficult for sellers to enter who are highly sensitive to each other’s pricing and marketing strategies Ex: Telecom (Etisalaat, MTN, Roshan, AWCC, Afghan Telecom) Pure monopoly is a market with only one seller. In a regulated monopoly, the government permits a price that will yield a fair return. In a nonregulated monopoly, companies are free to set a market price. Ex: AUWSSC, DABS, WAPDA Afghanistan Urban Water Supply and Sewerage Corporation, Da Afghanistan Brishna Sherkat, Water and Power Development Authority.

Types of markets Con’t q The demand curve shows the number of units the market will buy in a given period at different prices q q Normally, demand price are inversely related (Higher price = lower demand) For prestige (luxury) goods, higher price can equal higher demand when consumers perceive higher prices as higher quality

Types of markets Con’t l l l Price elasticity of demand illustrates the response of demand to a change in price Inelastic demand occurs when demand hardly changes when there is a small change in price Elastic demand occurs when demand changes greatly for a small change in price elasticity of demand= % change in quantity demand / % change in price

Types of markets Con’t Factors affecting price elasticity of demand • Unique product • Quality • Prestige • Substitute products • Cost relative to income

Other external factors • • Economic conditions Resellers’ response to price Government Social concerns

Pricing Objectives l a firm may have several pricing objectives – to achieve a certain return on sales – to maximize short-term or long-term profits – to increase sales to a certain level – to achieve a target share of the market – to maintain price stability in the market – to meet competitors’ prices

The End of Chapter One