Sellers can-

University of Science and Technology Chittagong (USTC)

Faculty of Business Administration Course Instructor: Afiya Sultana
Course: Marketing Management (Lecturer, FBA, USTC)
PRICING PRODUCTS: DEVELOPING PRICING STRATEGIES Understanding
Pricing
In general terms price is a component of an exchange or transaction that takes place between two parties and
refers to what must be given up by one party (i.e., buyer) in order to obtain something offered by another party
(i.e., seller). More simply to say, it is the amount charged by the marketer in return of the value offered by the
product.
One of the four major elements of the marketing mix is price. Pricing is an important strategic issue because it is
related to product positioning. Furthermore, prici ng affects other marketing mix elements such as product
features, channel decisions, and promotion. Price comes in many forms and performs many functions. Rent,
tuition, fares, fees, rates, tolls, retainers, wages and commissions all may in some way be the price you pay for
some goods or services. Its also made up of many components such as rebates and dealer incentives. Price is the
direct revenue generating element amongst the four Ps, the rest being cost centers.
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.
Pricing is the process of determining what a company will receive in exchange for its products. There are various
factors that may play roles in pricing decision like competitors price, market segment, location of the market,
seasonal adjustments and other outside factors like economic stability and so on.
A changing pricing environment
Pricing practices have changed significantly in recent years. Many firms are bucking the low price trend and
have been successful in trading consumers up to more expensive products and services by combining unique
product formulations with engaging marketi ng campaigns. Even products in fiercely competitive supermarket
categories have been able to enjoy price hikes for the right new offerings. Today the internet is also partially
reversing the fixed pricing trend. Dynamic Pricing on the Web or Internet allows
Buyers can-

Monitor customer behavior and tailor
offers to individuals
Give certain customers access to special
prices
Seller and both buyer to:
Both buyers and seller can-
Aid consumers with price comparisons from
thousands of vendors
Name their price and have it met
Save their time and cost

Change prices on the fly to adjust for changes in demand or costs.
Negotiate prices in online auctions and exchanges.
Setting the Pricing Policy
Setting the price is one of the most important decisions to position a market offering. The firms must consider
many factors in setting its pricing policy. A six-step procedure is usually suggested to make an effective pricing
decision for most of the firms:
1. Develop marketing strategy - perform marketing analysis, segmentation, targeting, and positioning.
2. Set pricing objectives- for example, profit maximization, revenue maximization, or price stabili zation
(status quo).
3. Determining the demand - understand how quantity demanded varies with price.
4. Calculate cost - include fixed and variable costs associated with the product.
5. Understand competitors and environmental factors - evaluate likely competitor actions, cost and offers;
also understand legal constraints, etc.
6. Determine pricing - using information collected in the above steps, select a pricing method, develop the
pricing structure, and define discounts.
7. Selecting the final price-company consider the additional factors including the influence of other
marketing elements on price.
These steps are interrelated and are not necessarily performed in the above order. Nonetheless, the above list serves
to present a starting framework.
1. Marketing Strategy and the Marketing Mix
Before the product is developed, the marketing strategy is formulated, including target market selection and
product positioning. There usually is a tradeoff between product quality and price, so price is an important variable
in positioning. Because of inherent tradeoffs between marketing mixes elements, pricing will depend on other
product, distribution, and promotion decisions.
Price and the Marketing Mix:
* Only element to produce revenues
Most flexible element
Can be changed quickl y
Common Pricing Mistakes:
* Reducing prices too quickly to get sales
Pricing based on costs, not customer value
2. Step 1: Selecting the pricing objective
Pricing should be compatible with the company objectives. The clearer a companys objectives, the easier it is to
set price. A company can pursue any of five major objectives through pricing; survival, maximum current profit,
maximum market share, maximum market skimming or product quality leadership.
a) Survival: Companies pursue survival as their major objecti ve if in situations such as market decline,
overcapacity, intense competition or changing consumer wants the goal may be to select a price that will cover
costs and permit the firm to remain in the market. As long as prices cover variable costs and some fi xed costs, the
company stays in business. Survival is a short -run objective; in the long run, the firm must learn how to add value
or face extinction.
b) Current profit maximization - seeks to maximize current profit, many companies try to set a price that will
maximize current profits. They estimate the demand and costs associated with alternative prices and choose the
price that produces maximum current profit, cash flow or rate of return on investment. In emphasizing current
performance, the company may sacrifice long-run performance by ignoring the effects of other marketing-mix
variables, competitors reactions and legal restraints on price.
c) Maximize market share: Some companies want to maximize market share. They believe that a higher sales volume
will lead to lower unit costs and higher long-run profit. They set the lowest price, assuming the market is price-
sensitive. It is the market penetration pricing.
d) Market skimming pricing: Companies introducing a new technology favor setting high prices to skim the market.
It makes sense under the following conditions:
A sufficient number of buyers have a high current demand.
The high initial price does not attract more competitors to the market.
The high price communicates the image of a superior product.
e) Product quality leadership: A company might aim to use the price to signal high quality in an attempt to position
the product as the quality leader in the market. The company may build high quality product which priced higher
than competitors products. The objective is to get consumers to buy such product with attractive features and
benefits attached.
f) Maximize profit margin: A attempts to maximize the unit profit margin, recognizing that quantities will be low.
g) Partial cost recovery: An organization that has other revenue sources may seek only partial cost recovery.
h) Other objectives: Besides, nonprofit and public organizations may adopt other pricing objectives such as partial
cost recovery, full cost recovery. Whatever the specific objective, businesses t hat use price as a strategic tool will
profit more than those who simply let costs or the market determine their pricing.
Step 2: Determining Demand
Because there is a relationship between price and quantity demanded, it is important to understand the impa ct of
pricing on sales by estimating the demand for the product. Demand changes for any product as price changes. In
normal case, the two are inversely related. When the price is higher the demand is lower. In the case of prestige
goods, the demand curve sometimes slopes upward. It means the demand rises as price increases. Companies prefer
customers who are less price sensitive. However if the price is too high, the level of demand may fall. In
determining the demand three things should be considered-
Price sensitivity- Price sensitivity is the effect a change in price will have on customers. The first step in estimating
demand is to understand what affects price sensitivity. Generally speaking, customers are less price sensitive to
low-cost items or items they buy infrequently. They are also less price sensitive when- 1) there are few or no
substitutes or competitors; 2) they do not readily notice the higher price; 3) they are slow to change their buying
behavior; 4) they think the higher prices are justifi ed; and 5) price is only a small part of the total cost of obtaining
operating and servicing the product over its lifetime.
Estimating demand curves- There are different method to measure the demand curves-
Surveys
Price experiments
Statistical analysis
Price elasticity of Demand-
Knowledge of price elasticity of demand is useful in helping make pricing decisions. Price elasticity of demand is the
responsiveness of demand to changes in price. In simple terms, if the price rises or falls, we know that dema nd will
change but crucially we will want to know how much it changes. It is very useful because you can know what to
expect in terms of the demand of your product, if you make a variation in the price. A product is "elastic" if when
the price goes up, the sales go down. Or of course if the price goes down, the sales go up. For the elastic products
seller will consider lowering the price. A lower price will produce more total revenue. On the contrary price is
"inelastic", if when the price goes up, the sales are the same or few change.
There are also "snob" products which elasticity is directly proportional, meaning that the higher price the higher
sales. Examples are some jewelry, some exclusive restaurants and clubs etc.
3. Calculate Costs
If the firm has decided to launch the product, there likely is at least a basic understanding of the costs involved:
otherwise, there might be no profit to be made. The company wants to charge a price that covers its cost of
producing, distributing, and selling the product including a fair return for its effort and risk. The total unit cost of a
producing a product is composed of the variable cost of producing each additional unit and fixed costs that are
incurred regardless of the quantity produced. The pr icing policy should consider both types of costs. The unit cost
of the product sets the lower limit of what the firm might charge, and determines the profit margin at higher prices.
Functions of Accumulated production curve or Experiences curve: When company gain experience to producing
product, use the technology efficiently and gain economics of scale through the workers learn shortcuts, materials
flow more smoothly, procurement costs fall. The result is that average cost falls with the accumulated produc tion
experience. This decline in the average cost with accumulated production experience is called the experience curve
or learning curve.
4. Analyzing competitors and Environmental Factors
Pricing must take into account the competitive and legal environment in which the company operates. From a
competitive standpoint, the firm must consider the implications of its pricing on the pricing decisions of
competitors. For example, setting the price too low may risk a price war that may not be in the best interest o f
either side. Setting the price too high may attract a large numberof competitors who
want to share in the profits. On the other side, if the firms offercontains features not offered by the
nearest competitor, their worth to the customer should be evaluated and added to the competitors price. If the
competitors offer contains some features not offered by the firm, their worth to the customer should be evaluated
and subtracted from firm's price. Now the firm can decide whether it can charge more, th e same, or less than the
competitor, remembering that competitors can charge their prices at any lime.
Consider competitors costs, prices, and possible reactions
Pricing strategy influences the nature of competition
o Low-price low-margin strategies inhibit competition o
High-price high-margin strategies attract competition
Benchmarking costs against the competition is recommended
From a legal standpoint, a firm is not free to price its products at any level it chooses. For example, there may be
price controls that prohibit pricing a product too high. Pricing it too low may be considered predatory pricing or
"dumping" in the case of international trade. Offering a different price for different consumers may violate laws
against price discrimination. Finally, collusion with competitors to fix prices at an agreed level is illegal in many
countries. Other environmental element includes:
Economic conditions
o Affect production costs o Affect buyer
perceptions of price and value
Reseller reactions to prices must be considered
Government may restrict or limit pricing options
Social considerations may be taken into account
Step 5: Determining Price and Selecting a Pricing Method
In selecting a price, a company must consider the three Cs such as the customer' s deman d schedule, the cost
function and competitors prices. Costs set a floor to the price. Competitors prices, the price of the substitute
products and the customers assessment are important in selecting a pricing method. Pricing methods can be
categorized into two broad categories:
Cost based Pricing and Value based Pricing.
Cost based pricing is product driven where the company designs what it considers to be a good product, totals the
cost of making the product, sets a price that covers costs plus a target profit. Marketing must the convince buyers
that the price is justified for the value of the product.
On the other hand Value based pricing reverses the process where the company sets its target price based on
customer perceptions of the product value. The targeted value and price then drive decisions about product designs
and the costs incurred. A company using value based pricing should also identify what value buyers assign to
competing products.

Between these two extremes, the company must consider competitors prices and some other external and
internal factors. Some pricing approaches are discussed below which may involve one or more of these factors.
Different pricing methods:
1. Markup pricing: It is the most elementary method which adds a standard markup of profit to the
products cost. Markups are generally higher on seasonal items, specialty items, slower moving items, items with
high storage and handling costs and demand- inelastic items.
Cost-plus pricing - set the price at the production cost plus a certain profit margin.
o Adding a standard markup to cost o
Ignores demand and competition
Cost-plus Pricing Example
- Variable costs: $20 - Fixed costs: $ 500,000

- Expected sales: 100,000 units - Desired Sales Markup: 20%
Variable Cost + Fixed Costs/Unit Sales = Unit Cost
goo, ooi^ ^
$20 + $500,000/100,000 = $25 per unit ^ 0 , 0 00 ^
Unit Cost/(l - Desired Return on Sales) = Markup Price
~ 31 S
$25 /(1-.20) = $3 1.25
Companies introducing a new product often price it high hoping to recover their costs as rapidly as possible. But
a high-markup strategy could be fatal if a competitor is pricing low. Still Cost based pricing is a popular pricing
technique because:
First, sellers can determine costs much more easily than they can estimate demand. By tying the price to cost,
sellers simplify their pricing task. Second where all firms in the industry use this pricing method, their prices
tend to be similar. Price competition is therefore minimized. Third, many people feel that cost -plus pricing is
fairer to both buyers and sellers. Sellers do not take advantage of buyers when the latter's demand becomes
acute, and the sellers earn a fair return on their investment.
2. Target return pricing: According to this pricing method, the firm determines the price that would yield its
target rate of return on investment (ROI) .The basic equation of this method is as follows:
Target return price ---= unit cost + (desired return X invested capital) / unit sales.
Break-Even Analysis and Target Profit Pricing
o Break-even charts show total cost and total revenues at different levels of unit volume, o The
intersection of the total revenue and total cost curves is the break-even point, o Companies
wishing to make a profit must exceed the break-even unit volume.
This method depends on the price elasticity of such product and competitor's prices. As the ex pected sales are
uncertain, the company needs to analysis the break even sales volume.
3. Perceived value pricing: under this approach, the companies base their price on the customers perceived value.
Perceived value is made up of several elements such as buyers image about product performance, the channel
deliverables, the warranty quality, customer support, suppliers reputation, trustworthiness and esteem. Each
potential customer places different weights on these different elements. Some customer will be price buyers, some
value buyers and other will be loyal buyers. Companies need different strategies for these three groups.
o Uses buyers' perceptions of value rather than seller's costs to set price, o
Measuring perceived value can be difficult.
o Consumer attitudes toward price and quality have shifted during the last decade, c Value
pricing at the retail level o Everyday low pricing (EDLP) vs. high-low pricing
4. Value pricing: In value pricing method, the companies try to win loyal customers by charginga fairly
low price for a high-quality offering. Value pricing is not a matter of simply setting lower prices; it is a matter of
reengineering the companys operations to become a low-cost producer without sacrificing quality and lowering
prices significantly to attract a large number of value conscious customers. An important type of value pricing is
everyday low pricing (EDLP). Retailers adopt EDLP for a number of reasons, the most important of which is that
constant sales and promotions are costl y and have eroded consumer confidence in the credibility of everyday shelf
prices. Consumers also have lesstime and
patience for such time-honored traditions as watching for supermarket specials.

c Uses buyers' perceptions of value rather than sellers costs to set price, c
Measuring perceived value can be difficult.
o Consumer attitudes toward price and quality have shifted during the last decade, o Value
pricing at the retail level c Everyday low pricing (EDLP) vs. high-low pricing
5. Going-Rate Pricing: In going-rate pricing, the firm pays less attention to its own costs or demand and bases its
price largely on competitors prices. The firm might charge the same, more or less than its major competitor(s). in
oligopolistic industries, firms normally charge the same price. The smaller firms "follow the leader changing their
prices when the market leaders prices change rather than when their own demand or costs change. Some firms may
charge a slight premium or slight discount but they preserve the amount of difference. Going-rate pricing is quite
popular where costs are difficult to measure or competitive response is uncertain, firms feel that the going price
represents a good solution. The going price is thought to reflect the industry collective wisdom as to the price that
would yield a fair return and not jeopardize industrial harmony.
May price at the same level, above, or below tlje competition
* Bidding for jobs is another variation of competition-based pricing
Sealed bid pricing
-For new products, the pricing objective often is either to maximize profit margin or to maximize quantity (market
share). To meet these objectives, skim pricing and penetration pricing strategies often are employed. Joel Dean
discussed these pricing policies in his classic HBR article entitled, Pricing Policies for New Products.
Skimming price: Skim pricing refers attempts to "skim the cream" off the top of the market by setting a high price
and selling to those customers who are less price sensitive. Skimming is a strategy used to pursue the objective of
profit margin maximization.
Skimming is most appropriate when:
Demand is expected to be relatively inelastic; that is, the customers are not highly price sensitive.
Large cost savings are not expected at high volumes, or it is difficult to predict the cost savings
that would be achieved at high volume. '
The company does not have the resources to finance the large capital expenditures necessary for high
volume production with initially low profit margins.
Penetration pricing: Penetration pricing pursues the objective of quantity maximization by means of a low price. It
is most appropriate when:
Demand is expected to be highly elastic; that is, customers are price sensitive and the quantity demanded
will increase significantly as price declines.
Large decreases in cost are expected as cumulative volume increases.
The product is of the nature of something that can gain mass appeal fairly quickly.
There is a threat of impending competition.
As the product lifecycle progresses, there likely will be changes in the demand curve and costs. As such, the
pricing policy should be reevaluated over time.
The pricing objective depends on many factors including production cost, existence of economies of scale, barriers
to entry, product differentiation, rate of product diffusion, the firm' s resources, and the product's anticipated price
elasticity of demand.
Step 6: Selecting the Final Price
Pricing methods narrow the price range from which the company must select its final price. In selecting the final
price, the company must consider additional factors, including the influence of other marketing - elements on price,
company pricing policies and the impact of price on other parties.
The Influence of other Marketing-mix elements on price: The final price must take into account the brand's quality and
advertising relative to competition. Farris and Reibstein examined the relationship among relative price, relative
quality and relative advertising and found the following:
1. Brands with average relative quality but high relative advertising budgets were able to charge premium
prices. Consumers apparently were willing to pay higher prices for known products rather than for
unknown products.
2. Brands with high relative quality and high relative advertising obtained the highest prices.
Conversely, brands with low quality and low advertising charged the lowest prices.
The positive relationship between high prices and high
advertising held most strongly in the later
stages of the product life cycle for market leaders, and for low-cost products.
Price Adjustment strategies:
Companies usually adjust their basic prices to account for various customer differences changing situations. Some
of the strategies are discussed below:
Price Discounts and Allowances
Most companies will modify their basic price to reward customers for such acts as early payment, volume
purchases, and off-season buying. Descriptions of these price adjustments-called discounts and allowances:
Cash Discounts. A cash discount is a price reduction to buyers who promptly pay their bills. Such di scounts are
customary in many industries and servejthe purpose of improving the sellers' liquidity and reducing credil -
collection costs and bad debts. ~
Quantity Discounts. A quantity discount is a price r eduction to buyers who buy large volumes. Under the law,
quantity discounts must be offered equally to all customers and must not exceed the cost savings to the seller
associated with large quantities. These savings include reduced expenses of selling, inv entory, and transportation.
They can be offered on a noncumulative basis or a cumulative basis. Discounts provide an incentive to the customer
to order more from a given seller rather than buy from multiple sources.
Functional Discounts. Functional discounts are offered by the manufacturer to trade-channel members if they will
perform certain functions such as selling, storing and record-keeping.
Seasonal Discounts. A seasonal discount is a price reduction to buyers who buy merchandise or services ou t of
season. Seasonal discounts allow the seller to maintain steadier production during the year.
Allowances. Allowances are other types of reductions from the list price. For example, trade -in allowances are price
reductions granted for turning in an old item when buying a new one. Promotional allowances are payments or price
reductions to reward dealers for participating in advertising and sales support programs.
Promotional Pricing: Companies use several pricing techniques to stimulate early purchase.
Loss-leader pricing: Flere supermarkets and department stores drop the price on well -known brands to
stimulate additional store traffic. But manufacturers typically disapprove of their brands being used as loss
leaders because this practice can dilute the br and image as well as cause complaints from other retailers
who Charge the list price.
Special-evcnt pricing: Sellers will establish special prices in certain seasons to draw in more customers.
Cash rebates: Consumers are offered cash rebates to encourage t heir purchase of the manufacturer's product
within a specified time period. The rebates can help the manufacturer clear inventories without cutting the
list price. Rebates also appear in consumer -packaged goods marketing. The} stimulate sales without
costing the company as much as it would cost to cut the price. The reason is that many buyers buy the
product but fail to mail in the rebate coupon.
Low-interest financing: Instead of decreasing its products price, the company can offer customers low-
interest financing.
Longer payment terms: Sellers, especially mortgage banks and auto companies, stretch their loans over longer
periods and thus lower monthly payments. Consumers often think less of the cost of a loan and more about
whether they can afford the monthly payment.
Warranties and service contracts: The company can promote sales by adding a free warranty offer or service
contract. Instead of charging for the warranty or service contract, it offers these free or at a reduced price.
Psychological discounting: This strategy involves putting an artificially high price on a product and then
offering it at substantial savings, t 'H^U
Promotional pricing strategies are often a zero-sum game. If they work, competitors will copy them rapidly, and
they will lose their effectiveness for the individual company. If they do not work, they waste company money that
would have been put into longer-impact marketing tools, such as building up product quality and service and/or
improving the product image through advertising.
Differentiated Pricing: Differentiated pricing occurs when a company sells a product or service at two or more prices
that do not reflect a proportional difference in costs. It takes several forms:
Customer segment pricing: Different customer groups are charged different prices for the same product or
service.
Product-form pricing: Different versions of the product are priced differently but not proportionate!} to their
respective costs.
Image pricing: Some companies price the same product at two different levels based on image differences.
Location pricing: The same product is priced differently at different locations even though the cost of
offering at each location is the same.
Time pricing: Prices are varied by season, day or hour. A special form of t ime pricing is yield pricing which
is often used by hotels and airlines to ensure high occupancy.
For price discrimination to work, certain conditions must exist. First, the market must be segmentable, and the
segments must show different intensities of demand. Second, members of the lower-price segment must not be able
to resell the product to the higher-price segment. Third, competitors must not be able to undersell the firm in the
higher-price segment. Fourth, the cost of segmenting and policing the market must not exceed the extra revenue
derived from price discrimination. Fifth, the practice must not breed customer resentment and ill will. Sixth, the
particular form of price discrimination must not be illegal.
Company Pricing Policies
The contemplated price must be consistent with company pricing policies. Many companies set up a pricing
department to develop pricing policies and establish or approve pricing decisions. Their aim is to ensure that the
salespeople quote prices that are reasonable to customers and profitable to the company.
Impact of price on other parties
Management must also consider the reactions of other parties to the contemplated price. How will the distributors
and dealers feel about it? Will the company sales force be willing to sel l at that price or complain that the price is
too high? How will competitors react to this price? Will suppliers raise their prices when they see our price? Will
the government intervene and prevent this price from being charged? In the last case, marketer s need to know the
laws affecting price and make sure that their pricing policies are defensible (i.e. price fixing is illegal) Some forms
of price discrimination are also illegal. However predatory pricing selling below cost with the intention of destroyi ng
competition- is against the law.