Pricing

Price
• Price is the amount of money charged for a product or service, or the
sum of all the values that customers exchange for the benefits of
having or using the product or service
Factors affecting Price

• Company’s costs
• Competition
• Customers
• Market structure
• Marketing environment
Setting the Price

Pricing Procedure • Survival

• Maximize current profits
• Select pricing objective • Maximize market share
• Determine demand • Penetration strategy

• Estimate costs • Market skimming

• Skimming strategy
• Analyze competition
• Product quality leaders
• Select pricing method
• Partial cost recovery
• Select final price
Market penetration strategy:
• Companies believe a higher sales volume will lead to lower unit costs
& higher long run profit. They set the lowest price, assuming the
market is price sensitive. Once the market share is captured,
experience falling costs, & cut its price further as costs fell. This is
done
• when the market is highly price sensitive & low price stimulates market
growth.
• Production & distribution costs fall with accumulated production experience
• A low price discourages competition.
Market skimming:
• Companies unveiling a new technology favor setting high prices to
maximise market skimming, in which prices start high & slowly drop
over time.
• This makes sense :
• products quality & image must support its higher price.
• Enough buyers must want the product as that price
• the high initial price does not attract more competitors to the market
• The competitors should not undercut the high price
Setting the Price

Pricing Procedure • Understand factors that

affect price sensitivity
• Select pricing objective • Estimate demand curves
• Determine demand • Understand price
• Estimate costs elasticity of demand
• Analyze competition • Elasticity
• Select pricing method • Inelasticty
• Select final price
Inelastic and Elastic Demand
Price sensitivity
• Customers are less price sensitive
• To low cost items
• The product is more distinctive
• Items they buy infrequently
• There are a few or no substitutes or competitors
• Buyers cannot easily compare quality of substitutes
• Part of the cost is borne by another party
• They do not readily notice the higher price
• They are slow to change the buying habits
• They think the higher prices are justified
• The product is assumed to have more quality, prestige, or
exclusiveness
• The price is only a small part of the total cost of obtaining,
operating & servicing the product over its lifetime
Setting the Price

Pricing Procedure • Types of costs and levels of

production must be
considered
• Select pricing objective
• Accumulated production
• Determine demand leads to cost reduction via
• Estimate costs the experience curve
• Analyze competition • Mgmt wants to charge a
• Select pricing method price that will at least cover
the total production costs at
• Select final price a given level of production
Setting the Price

Pricing Procedure • Firms must analyze the

competition with respect to:
• Costs
• Select pricing objective • Prices
• Determine demand • Possible price reactions
• Estimate costs • Pricing decisions are also
• Analyze competition influenced by quality of
offering relative to
• Select pricing method competition
• Select final price
Setting the Price

Pricing Procedure • Select method:

• Select pricing objective
• Determine demand
• Estimate costs
• Analyze competition
• Select pricing method
• Select final price
• Markup pricing
• Target-return pricing
• Perceived-value pricing
• Value pricing
• Going-rate pricing
• Auction-type pricing
• Mark- up pricing: most elementary method is to
add a standard mark up to the products cost
• Manufacturer will charge dealers a standard mark up
for profit
• The cost-oriented approach works on the basis that
the most important element in pricing our offering is
the cost of producing that offering. If we can make a
set amount above what our product costs are, we can
earn a profit.
• Mark ups are generally higher on seasonal items to
cover the risk of not selling, specialty items, slower
moving items, items with high storage & handling
costs & demand- inelastic items
• Unit cost= VC + FC
unit sales

Mark up price = unit cost

1- desired return on sales
• Target – return pricing: the firm determines the price that yields its
target rate of ROI
• Target return price =
unit cost + desired return X invested capital
unit sales
• Perceived – value pricing: perceived value is made
up of a host of inputs, as buyers image of the
product performance, the channel deliverables,
the warranty quality, customer support & softer
attributes as suppliers reputation,
trustworthiness & esteem.
• Companies must deliver the value promised by
their value proposition & the customer must
perceive this value
• Firm’s use the other marketing program elements
such as advertising, sales force & the internet, to
communicate & enhance perceived value in
buyers minds
• Value pricing: companies win loyal customers by
charging a fairly low price for a high – quality
offering
• It is a matter of reengineering the co’s operation
to become a low cost producer without sacrificing
quality, to attract a large number of value
conscious customers
• Going –rate pricing: the firm bases its price
largely on competitors price. In industries that sell
steel, paper or fertilizer all firms charge the same
price, smaller firms “follow the leader” . This is
also called ‘me-too’ pricing.
• The advantage of this approach is that when your
prices are lower than your competitors, customers are
more likely to purchase from you, provided that they
know that your prices are lower, which is not always
the case.
• Some may charge a small premium or discount, but
they perceive the difference
• Is used when costs are difficult to measure or
competitive response is uncertain going rate is the
best option as it is the industry’s collective wisdom

• Auction – type pricing: is popular with electronic

market places selling everything to dispose off the
excess inventories or used goods.
Setting the Price
• Requires consideration of
Pricing Procedure additional factors:
• Influence of other marketing
mix variables
• Select pricing objective
• Company pricing policies
• Determine demand • Impact of price on other
• Estimate costs parties

• Analyze competition
• Select pricing method
• Select final price
Product Mix pricing strategies
• The cost differences between products in the line, customer
evaluations of the features, competitors price
1. Product line pricing- setting prices across the entire pdt line
2. Optional product pricing-pricing optional/ accessory pdt sold with
the main pdt
3. Captive product pricing- pricing pdts that must be used with the
main pdts
4. By product pricing- pricing low value by – pdts to get rid of /make
money
5. Product bundle pricing- pricing bundles of pdts sold together
Price Adjustment Strategies
Adapting the Price
• Discounts/ allowances- quantity discount, functional / trade discount,
• Differentiated pricing (segmented) –customer segmented, channel pricing,
Location based, Time based
• Promotional pricing- temporarily price below list price, cost
• Psychological pricing- reference price..
• Geographical price- FOB – origin, uniform delivered, zone pricing, basing
point, freight absorption pricing
• Dynamic pricing-
• International pricing- depends on economic condn, competitive situations,
laws & regulations
Initiating Price changes

• Initiate price cuts- excess capacity, falling demand,

• Initiate price increases- cost inflation, over demand
• Responding to price change
• Buyers reaction to price changes
• Competitors reaction to price change