Session 7

Pricing for value

What is price?

In the narrowest sense, price is the amount

of money charged for a product or a
service. More broadly, price is the sum of
all the values that customers give up to
gain the benefits of having or using a
product or service

Internal factors affecting pricing decisions

Marketing objectives

Costs

Costs set the floor for the price that

the
company can charge for its product

Major pricing strategies

There are several strategic options

open to marketers when setting prices

Copyright 2013 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781442549425/Kotler, Burton, Deans, Brown, Armstrong /Marketing/9e

Cost,
Price and
Profit
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ip

Method : Price=Cost+
Profit

The challenge here is working out the total cost of the product
which may be combination of fixed and variable costs.

! For most smaller businesses the fixed costs are rarely accounted for
in the unit cost of the product unless you are operating a
manufacturing business.

However fixed costs are very important as the business needs to work
out the amount of total output or sales required to break-even.
You may be asking
what is the difference
is between fixed
and variable costs?

Method 3: Price=Cost+
Profit

So here is a definition:
Variable costs are those that fluctuate with
production volume, while fixed costs remain
constant.

Cost,
Price and
Profit
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ip

Fixed Costs

Cost,
Price and
Profit
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Note that in most cases, increasing

production will still make each
additional unit more profitable. This is
because fixed costs are now being
spread thinner across a larger
production volume.

What are Variable Costs?

Cost,
Price and
Profit
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ip

Variable costs vary with production

volume.

wages

shipping

After classifying all your variable costs,

total them for a given time period.

Gross Margin Profit

Profit

Margin on sales represents a key factor behind many

of the most fundamental business considerations,
including budgets and forecasts.
How do we
business:

calculate gross margin

for a product or

Gross Margin (%) = (Revenue Cost of goods sold) / Revenue

or
as the ratio of gross profit to cost of goods sold, usually in the
form of a percentage:

External factors affecting pricing decisions

The market and demand

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Competitors prices and offers

Another external factor affecting the
companys pricing decisions is
competitors prices and their possible
reactions to the companys own
pricing moves

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Cost,
Price and
Profit
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ip

Example: Cost Plus Pricing

If your product costs $100 (fixed and variable
costs) and the required gross margin is 40%,
then:
Selling price = $100 / (1 40%) = $100 /
0.60 = $166.67

Break-Even Analysis

Break-Even
Analysis

To construct your breakeven analysis, take your fixed

costs, divided by your price, minus your variable costs.
As an equation, this is defined as:
Breakeven Point = Fixed Costs / (Unit Selling Price
- Variable Costs)

Value-based pricing
Setting price based on buyers
perceptions of value, rather than on
the sellers cost

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Competition-based pricing

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Performance-based pricing

This pricing approach is an

arrangement in which the seller is paid
on the basis of actual performance of
its offer

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Relationship pricing

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New-product pricing strategies

Although new products are important for

a companys future, their development is
a strain on resources. Pricing new
products needs to take account of these
research and development costs

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Value pricing

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Steps to effective pricing

Start by determining what value the target market places
on the product or service
2. Assess the differences in value placed on the offer by
different market segments
3. Determine price sensitivity in different market
segments
4. Identify the best pricing structure
5. Take account of likely competitors reactions
6. Measure and monitor the net prices obtained in the
market
7. Assess customers emotional responses to prices
8. Determine whether the market segment or key
customer provides sufficient returns in relation to costs to
serve
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