Price

Amount of money charged for a product or

service
Sum of all the values that consumer
exchanges benefit of having or using the
product
Pricing environment
Fixed price policies
Dynamic pricing
Developing Pricing Strategies
Price:
is only element in marketing mix produces
revenues, all other elements represent cost
determines the amount of income generated
from sales of product
differentiate product from competitors
If too much generate fewer sales
If too little sacrifice profits
Factors to Consider When Setting Prices
Internal Factors
Pricing
Decisions
External Factors
Target
Market
Positioning
Objectives
Internal Factors Affecting Pricing
Decisions
Marketing
Objectives
Marketing-Mix
Strategy
Costs
Organizational
Considerations
Marketing Objectives that Affect
Pricing Decisions
Marketing
Objectives

Survival

Low Prices to Cover Variable Costs and
Some Fixed Costs to Stay in Business.

Current Profit Maximization
Choose the Price that Produces the
Maximum Current Profit, Cash Flow or ROI.
Market Share Leadership

Low as Possible Prices to Become
the Market Share Leader.
Product Quality Leadership

High Prices to Cover Higher
Performance Quality
Marketing Mix Variables that Affect
Pricing Decisions
Marketing-Mix
Strategy
Product Design
and Quality
Distribution
Promotion
Non-Price
Factors
Types of Cost Factors that
Affect Pricing Decisions

Total Costs
Sum of the Fixed and Variable Costs for a Given
Level of Production


Variable Costs

Costs that do vary
directly with the
level of production.

Raw materials

Fixed Costs
(Overhead)
Costs that dont
vary with sales or
production levels.

Executive Salaries
Rent

Costs Considerations
C
o
s
t

p
e
r

u
n
i
t

1
2
3
4
SRAC
LRAC
Quantity Produced per Day
1
,
0
0
0

2
,
0
0
0

3
,
0
0
0

4
,
0
0
0

Cost Per Unit at Different Levels of Production Per Period
External Factors Affecting Pricing
Decisions

Market and
Demand

Competitors Costs,
Prices, and Offers
Other External Factors
Economic Conditions
Reseller Needs
Government Actions
Social Concerns
The Market and Demand Factors that
Affect Pricing Decisions

Pure Competition
Many Buyers and Sellers Who
Have Little Affect on the Price.

Monopolistic Competition
Many Buyers and Sellers Trading
Over a Range of Prices.
Oligopolistic Competition
Few Sellers Each Sensitive to Others
Pricing/ Marketing Strategies
Pure Monopoly
Single Seller
Different Types of Markets
Demand Curves
P
r
i
c
e

Quantity Demanded per Period
A. Inelastic Demand -
Demand Hardly Changes With
a Small Change in Price.
P
2
P
1
Q
1
Q
2
P
r
i
c
e

Quantity Demanded per Period
P
2
P
1
Q
1
Q
2
B. Elastic Demand -
Demand Changes Greatly With
a Small Change in Price.
Pricing approaches
Cost based pricing
Break even pricing
Value based pricing
Competition based pricing
Minimizes
Price
Competition

What is Cost-Plus Pricing and Why
is it Popular?
Perceived
Fairness to
Both Buyers
and Sellers


Sellers Are More
Certain About
Costs Than
Demand


Adding a Standard Markup to the Cost of the Product
Breakeven Analysis or Target Profit Pricing
200
400
600
800
1,000
1,200

10

20

30

40

50
Total Revenue
Total Cost
Fixed Cost
Target Profit
($200,000)
Sales Volume in Units (thousands)
C
o
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t

i
n


D
o
l
l
a
r
s

(
t
h
o
u
s
a
n
d
s
)

Tries to Determine the Price at Which a Firm Will
Break Even or Make a Target Profit
Break-even Analysis
Break-even analysis: method of
calculating the minimum volume
of sales needed at a given price
to cover all costs
Variable costs: business costs
that increase with the number of
units produced
Fixed Costs: business costs that
remain constant regardless of the
number of units
Break-even point: sales volume
at a given price that will cover all
of a company costs
Doesnt dictate price to
charge
Provides some insight into
number of units to sell at a
given price to make profit
Useful when calculating
the effect of special pricing
promotion
Allows to try different
prices & see results by
using spreadsheet
software
Break-even point=
fixed costs

selling price per unit variable costs per unit
Value-Based Pricing
Product
Cost
Price
Value
Customers
Customer
Value
Price
Cost
Product
Cost-Based Pricing Value-Based Pricing
Competition-Based Pricing
Setting Prices
Sealed-Bid
Company Sets Prices Based on
What They Think Competitors
Will Charge.
Going-Rate
Company Sets Prices Based on What
Competitors Are Charging.
?
?
Pricing Strategy
It is a strategic tool that organizations use to
differentiate their products from competitors
and thereby gain the competitive edge to
capture the market.
Price - Quality Strategies
Premium
Strategy
Overcharging
Strategy
Good-Value
Strategy
Economy
Strategy
Price
Higher Lower
Higher

Lower
Q
u
a
l
i
t
y

New Product Pricing Strategies







Market Skimming












Market Penetration
>Setting a High
Price for a New
Product to
Maximize
Revenues from the
Target Market.
>Results in Fewer,
More Profitable
Sales.
> Setting a Low Price
for a New Product
in Order to Attract
a Large Number of
Buyers.
>Results in a Larger
Market Share.
Price Skimming
Skimming: charging a high price for a new product during the
introductory stage & lowering the price later
Price vary depending on stage in product life cycle
During introductory phase objective to recover development
costs ASAP, so price is high & the drop later when product no
longer novelty & competition heats up
Makes sense under 2 conditions:
Product quality & image support higher price
Competitors cannot enter market with competing products &
undercut price
Penetration Pricing
Penetration Pricing: introducing a new product at a low price
in hopes of building sales volume quickly
Advantages:
discouraging competition because the low price
Limits profit for everyone
Helps expanding entire product category by attracting customers who
dont buy at higher, skim-pricing levels
If you compete pioneers in category, this strategy helps in taking
customers away from pioneer
Makes sense when market highly price sensitive, so low price
generates additional sales & company maintain low-price
position long to keep out competition

Product Line Pricing
Setting Price Steps Between Product Line Items
Rs.25. Rs 35
Optional-Product Pricing
Pricing Optional or Accessory Products
Sold With The Main Product
i.e. Car Options
Captive-Product Pricing
Pricing Products That Must Be Used
With The Main Product
i.e. Razor Blades, Film, Software
By-Product Pricing
Pricing Low-Value By-Products To Get Rid
of Them
i.e. Lumber Mills
Product-Bundle Pricing
Pricing Bundles Of Products Sold Together
i.e. Season Tickets, Computer Makers
Product Mix Pricing Strategies
Product
Mix
Pricing
Strategies
Price-Adjustment Strategies
Price Adjustment Strategies
Discount & Allowance
Reducing Prices to Reward
Customer Responses such as
Paying Early or Promoting
the Product.
Segmented
Adjusting Prices to Allow
for Differences in Customers,
Products, or Locations.
Cash Discount
Quantity Discount
Functional Discount
Seasonal Discount
Customer
Product Form
Location
Time
Trade-In Allowance
Price-Adjustment Strategies
Adjusting Prices for Psychological
Effect.
Price Used as a Quality Indicator.

Temporarily Reducing Prices to
Increase Short-Run Sales.
i.e. Loss Leaders, Special-Events
Adjusting Prices to Account for the
Geographic Location of Customers.
i.e. FOB-Origin, Uniform-Delivered,
Zone Pricing, Basing-Point, &
Freight-Absorption.

Adjusting Prices for International
Markets.
Price Depends on Costs, Consumers,
Economic Conditions & Other Factors.

Psychological Pricing
Promotional Pricing
Geographical Pricing
International Pricing
Initiating and Responding to Price
Changes
Initiating
Price
Increases
Competitor
Reactions
to
Price
Changes
Initiating
Price Cuts
Buyer
Reactions
to
Price
Changes
Price
Changes
Price-Adjustment Strategies
Hold Current Price;
Continue to Monitor
Competitors Price.
Reduce Price
Raise Perceived
Quality
Improve Quality
& Increase Price
Launch Low-Price
Fighting Brand
Has Competitor Cut
Price?
Will Lower Price
Negatively Affect Our
Market Share & Profits?
Can/ Should Effective
Action be Taken?
Yes
No
No
No
Price Adjustment Strategies
Price discounts
Bundling
Dynamic Pricing
Price Discounts
Discount Pricing: offering a reduction in price
Depend on type of customer targeted & type of item
offered
Discount boost sales but can touch off price wars
between competitors
Price war encourage customers to focus only on
pricing not on value or benefits
Price war can hurt entire industry for years
To offset loss of revenue stock shelves with more
profitable items otherwise if you couldn't compete
you close up business
Examples
Wholesaler or retailer Discount: to encourage orders
Customer cash discount: to reward customers who
pay cash or pay promptly
Quantity discount: to Large volumes buyer
Seasonal discount: to who buy out of season
Value pricing: charging affordable price for high
quality offering (for certain times or certain customer
segment)
Bundling
Definition: Combining several products &
offering the bundle at a reduced price
Promote sales of products consumers might
not otherwise buy
Make products harder for consumers to make
price comparison
Dynamic Pricing
Definition: Charging different prices depending on individual
customers & situations
By using internet technology
Enables to move slow-selling merchandise instantly
Allows to experiment with different pricing levels
Tactics:
Auction pricing (buyers bid against each other & the highest bid buy)
Group buying (buyers obtain volume discount by joining buying
groups)
Name-your-price (buyers specify how much to pay & sellers choose
whether to sell)
Impact of Ethics on Pricing
How should you price if your product is a life-
saving drug?

What are the ethical considerations?
Customers have no choice
Need to pay for the research
When cheaper options doesnt work
Competition decides

Will you be the low price leader? Or the service leader?

Will you deliberately price low in order to penetrate the
market quickly (first-mover advantage)? Or will you price
high to skim off the early adopters at a premium profit?

Will you bundle several products in order to make a greater
profit?

Will you round off to the nearest dollar or use an odd price
approach?