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Pricing objectives
Survival Maximum current profit Maximum market share Maximum market skimming Product-quality leadership


Setting Pricing Policy

1. Selecting the pricing objective

2. Determining demand

3. Estimating costs 4. Analyzing competitors costs, prices, and offers

5. Selecting a pricing method

6. Selecting final price


The Three Cs Model for Price Setting

Low Price No possible profit at this price


Competitors prices and prices of substitutes

Customers assessment of unique product features

High Price No possible demand at this price


Price Elasticity of Demand

% Change in quantity demanded

Price Elasticity of Demand =

% Change in price

Elastic Demand Inelastic Demand



Costs, Volume, and Profits

Fixed Costs (FC) Variable Costs (VC) Total Costs (TC)
TC = (VC X Q) + FC

Marginal Cost (MC) Marginal Revenue (MR) Total Revenue (TR)

Total Revenue = Price X Quantity

Profits = TR - TC

Price Determination Methods

Markup Pricing
Price = Unit Cost + Markup or Price = Unit Cost/(1-k)*
*k = desired % markup


Price Determination Methods

Break-Even Analysis
Total Revenue Profit

Total Cost


Fixed Cost

BEP Quantity (units)


Price Determination Methods

Target-Return Pricing

(Desired return X Invested capital)

Price = Unit Cost + Expected Unit Sales


Price Determination Methods

Target-Cost Pricing
1. Define market segments for new product. 2. Product is designed based on competitive advantages and disadvantages. 3. Position product in context of overall company strategy. 4. Fine-tune product based on customers preferences, perceived value and willingness to pay. 5. Estimate various price-responsiveness with simulations. 6. Estimate target costs between optimal price and


Price Determination Methods

Income-Based Pricing Real Estate Marketable Securities Businesses


Prices and Customer Value


Pricing Strategies
Differential Pricing Second-market discounting Periodic discounting Product Line Pricing Bundling Premium pricing Partitional pricing Psychological Pricing Odd-even pricing Customary pricing One-sided claims

Competitive Pricing Penetration pricing Price signaling Going-rate pricing


B2B Pricing Strategies

New Product Pricing
Price Skimming Penetration Pricing Experience Curve Pricing

Price Line Pricing

Complementary Product Pricing Price Bundling Customer Value Pricing

Competitive Pricing
Leader Pricing Parity Pricing Low-Price Supplier

Cost-based Pricing
Cost-plus Pricing


Adapting Prices: Decreases and Increases

Price Reduction Traps:
1. Low-quality trap 2. Fragile market share trap 3. Shallow pockets trap

Acceptable Price Range:

Prices the buyer is willing to pay.


Adapting Prices: Reacting to Competitive Price Changes

Temporary retail price reductions substantially increase store traffic and sales. Large-market-share brands are hurt less by price changes from smaller competitors. Frequent price dealing lowers consumers reference prices, which may hurt brand equity.

Price changes for high-quality brands affect weaker brands and private-label brands disproportionately.

Adapting Prices: Price Discounts and Allowances

Cash Discounts
Trade Sales Promotion Allowances Quantity Discounts


Adapting Prices: Geographical Pricing

FOB Origin Pricing
Uniform Delivered Price

Zone Pricing Freight Absorption Pricing


Competitive Bidding and Negotiated Pricing

Sealed-bid Pricing Reverse Auctions


Pricing Services
Price is influenced by the nature of the service involved. The larger the market share, the higher the price that can be charged. Managing off-peak demand makes pricing services difficult. Bundling services into a single package and price is a common strategy.

FTC Pricing Guidelines

Comparisons with former prices. Comparisons with other retailer prices.

Comparisons with prices suggested by manufacturers or other non-retail distributors.


Deceptive Pricing Practices

Bait and Switch Predatory Pricing Unit Pricing