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Dr. Karim
What Is a Price?
In Narrow Sense
P r i c i n g : A K e y S t r a t e g i c To o l
Unlike product features and channel commitments, prices can
be changed quickly. At the same time, pricing is the
number-one
problem
facing
many
marketing
Value-based
pricing
Good-value
pricing
Value-added
pricing
pricing
uses
buyers
perceptions
of
Fixed
costs
Variable
costs
Total
costs
such as:
Rent
Heat
Interest
Executive salaries
Benefits
Sellers are certain about costs
Prices are similar in industry and price competition is
minimized
Consumers feel it is fair
Disadvantages
Ignores demand and competitor prices
The table shows that as price increases, the break-even volume drops
(column 2). But as price increases, the demand for toasters also
decreases (column 3). At the $14 price, because the manufacturer
clears only $4 per toaster ($14 less $10 in variable costs), it must
sell a very high volume to break even. Even though the low price
attracts many buyers, demand still falls below the high break-even
point, and the manufacturer loses money. At the other extreme,
with a $22 price, the manufacturer clears $12 per toaster and
must sell only 25,000 units to break even. But at this high price,
consumers buy too few toasters, and profits are negative. The
table shows that a price of $18 yields the highest profits.
Note that none of the prices produce the manufacturers
pricing
involves
setting
prices
Captive
product
pricing
involves
pricing
products
Optional
pricing
product
involves
pricing additional or
accessory
products
V I -Ta r g e t C o s t i n g
Companies often position their products based on price and
then tailor other marketing mix decisions to the prices they
want to charge. Here, price is a crucial product-positioning
factor that defines the products market, competition, and
design. Many firms support such price-positioning strategies
with a technique called target costing.
Target costing reverses the usual process of first designing a
new product, determining its cost, and then asking, Can we
sell it for that? Instead, target costing starts with an
ideal selling price based on customer value
considerations and then targets costs that will ensure
that the price is met. For example, when Honda set out to
design the Fit, it began with a $13,950 starting price point
and an operating efficiency of 33 miles per gallon firmly in
mind. It then designed a stylish, peppy little car with costs
that allowed it to give target customers those values.
factors
affecting
pricing
include
the
the
relationship
between
Market Structure
2) Oligopoly
- Few sellers (e.g., cars producers), differentiated
products, must take prices of others into account when
determining its own price and strategies.
3) Monopolistic Competition