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CHAPTER TEN

Pricing Products: Pricing Considerations and Strategies



PRICE the amount of money charged for a product or service or the sum of the values that
consumers exchange for the benefits of having or using the product or service.
Fixed Priced Policies setting one price for all buyers a modern idea that arise with
the development of large scale retailing industries.
Dynamic Pricing the practice of charging different prices depending on individual
customers and situations.

Price is the only element in the marketing mix that produces revenue, all the others are
costs.
It is the most flexible of all the elements and can be changed quickly.
But pricing and price competition is the number one problem facing many marketing
executives.
The most common mistakes of pricing that it is too cost oriented rather than customer
value oriented, prices that are not revised with market changes, pricing that does not
take the marketing mix unto account and even pricing is not varied enough for different
products.

FACTORS TO CONSIDER WHEN SETTING PRICES

1. Internal Factors Affecting Pricing Decisions

Marketing Objectives
o Pricing Strategy it depends on the market department
o Market Position depends on what position they have on the market
like high priced or low priced.
o Survival this happened when the company is troubled with too much
capacity, heavy competition or changing consumer wants like keeping the
plant going but this is not plausible for long term.
o Current Profit Maximization estimate what the demand and the costs
will be at difference prices and choose the price that will produce
maximum current profit, cash flow or ROI.
o Market Share Leadership they set the prices as low as possible.
o Product Quality Leadership charging high price to cover higher
performance quality and the high cost of R&D.
Marketing Mix Strategy
o Target Costing pricing that starts with an ideal selling price, then target
costs that will ensure that the price is met.
o Often the best strategy is not to charge the lowest price but rather to
differentiate the marketing offer to make it worth the price.
Cost sets the floor for the price that the company can charge for its product.
o Fixed costs
o Variable costs
o Total costs
Organizational Considerations
o Usually top management set the prices (small companies)
o But in medium or large companies, the line managers are in-charge of the
pricing.
o Salespeople can negotiate with customers.

2. External Factors Affecting Pricing Decisions
The Market and Demand costs set the lower limit of prices but the market and
demand set the upper limit.
4 Pricing in Different Types of Markets
Pure Competition market consists of many buyers and sellers trading in
a uniform commodity. A seller cannot charge more than the going price
or less than the market price. (Pretty much charge the same price)
Monopolistic Competition the market consists of many buyers and
sellers who trade over a range of prices rather than a single market price.
(Less affected by each others strategies, variable prices and has different
offers).
Oligopolistic Competition few sellers but are sensitive to each others
pricing and marketing strategies but it is difficult to enter the market.
Pure Monopoly consists of only one seller.
Consumer Perceptions of Price and Value
Analyzing the Price Demand Relationship
Demand Curve a curve that shows the number of units the market will
buy in a given time period at different prices that might be changed.
Price Elasticity a measure of the sensitivity of demand to changes in price.
Competitors Costs, Prices and Offers
Other External Factors
Economic Conditions
Resellers
Government
Social Concerns

GENERAL PRICING APPROACHES

1. Cost Based Pricing
Cost-Plus Pricing adding a standard mark-up to the cost of the product.
Break-even Pricing setting price to break even on the costs of making and
marketing a product, or setting price to make a target profit.



2. Value Based Pricing setting price based on buyers perceptions of value rather than on
the sellers costs.
Value Pricing offering just the right combination of quality and good service at
a fair price.

3. Competition Based Pricing setting prices based on the prices that competitors
charged for similar products.
Sealed bid pricing pricing a firm bases its price on how it thinks competitors
will price rather than on its own costs or on the demand.

NEW PRODUCT PRICING STRATEGIES

1. Market Skimming Pricing setting a high price for a new product to skim maximum
revenues layer by layer from the segments willing to pay the high price; the company
makes fewer but more profitable sales.
2. Market Penetration Pricing - setting a low price for a new product in order to attract a
large number of buyers and a large market share.

PRODUCT MIX PRICING STRATEGIES

1. Product Line Pricing setting the price steps between various products in a product line
based on cost differences between the products, customer evaluations of different
features and competitors prices.
2. Optional Product Pricing the pricing of optional or accessory products along with a
main product.
3. Captive Product Pricing setting a price for products that must be used along with a
main product, such as blades for a razor and film for a camera.
4. By-Product Pricing setting a price for by products in order to make the main products
price more competitive.
5. Product Bundle Pricing combining several products and offering the bundle at a
reduced price.

PRICE ADJUSTMENT STRATEGIES

1. Discount and Allowance Pricing
Discounts a straight reduction in price on purchases during a stated period of time.
Cash Discounts a price reduction to buyers who pay their bills promptly.
Quantity Discounts reduction to buyers who buy large volumes.
Functional/Trade Discounts offered by the seller to trade channel members
who perform certain functions.
Seasonal Discount price reduction to buyers who buy merchandise or services
out of season.
Allowances promotional money paid by manufacturers to retailers in return for an
agreement to feature the manufacturers products in some way.
2. Segmented Pricing selling a product or service at two or more prices, where the
difference in prices is not based on differences in costs.
Customer Segment Pricing different prices offered to customers pay for the
same product or service.
Product Form Pricing
Location Pricing
Time Pricing
3. Psychological Pricing a pricing approach that considers the psychology of prices and
not simply the economics, the price is used to say something about the product.
Reference Prices prices that buyers carry in their mind and refer to when they
look at a given product.
4. Promotional Pricing temporarily pricing products below the list price and sometimes
even below costs, to increase short run sales.
5. Geographical Pricing
Free on board
Uniform Delivered Pricing
Zone Pricing
Basing Point Pricing
6. International Pricing










PRICE CHANGES
After developing their pricing structure and strategies, companies often face situations on
initiating price changes or respond to price changes by competitors.

1. Initiating Price Cuts
Excess Capacity
Falling Market Share
Dominate Market through lower prices
2. Initiating Price Increase
Cost inflation
Overdemand
Companys limited capacity
3. Buyers and Competitors Reaction to Prices Changes
Being replaced by newer products
Current models are not selling well
Company is in financial trouble
Quality has been reduced
Price may go down further
Product us uniform

PUBLIC POLICY & PRICING

Price Fixing sellers must set prices without talking to competitors
Predatory Pricing selling below the cost with an intention of punishing a competitor in
order to gain higher long run profits by putting competitors out of business.
Price Discrimination ensuring that sellers offer the sale price terms to customers at a
given level of trade.
Retail Price Maintenance a manufacturer mandating the retailers to sell a fixed
amount.
Deceptive Pricing occurs when a seller states a price or price savings that mislead
consumers or are not actually available to consumers.
Price confusion results when firms employ pricing methods that make it difficult for
consumers to understand just what price they are paying.