Pricing Considerations and Strategies

What is a Price?
Narrowly, price is the amount of money charged for a
product or service.
Broadly, price is the sum of all the values that
consumers exchange for the benefits of having or
using the product or service.
Dynamic Pricing: charging
different prices depending
on individual customers and
situations.

Factors Affecting Pricing

Decisions

Internal Factors Affecting Pricing

Decisions
Marketing Objectives:
Company must decide on its strategy for the
product.
General Objectives:
Survival, current profit maximization, market share
leadership, and product quality leadership.

Internal Factors Affecting Pricing

Decisions
Marketing Mix Strategy:
Price decisions must be coordinated with product
design, distribution, and promotion decisions to
form a consistent and effective marketing
program.
Target costing:
Pricing that starts with an ideal selling price, then
targets costs that will ensure that the price is met.

Internal Factors Affecting Pricing

Decisions
Costs:
Fixed Costs:
Costs that do not vary with production or sales level.
Variable Costs:
Costs that vary directly with the level of production.

Internal Factors Affecting Pricing

Decisions
Organizational Considerations:
Must decide who within the organization should
set prices.
This will vary depending on the size and type of
company.

External Factors Affecting Pricing

Decisions
The Market and Demand:
Costs set the lower limit of prices.
The market and demand set the upper limit.

Pricing in Different Types of Markets

Pure Competition:
Monopolistic Competition:
Many buyers and sellers
Many buyers and sellers
where each has little effect
who trade over a
on the going market price
range of prices

Oligopolistic Competition:
Few sellers who are
sensitive to each others
pricing/marketing strategies

Pure Monopoly:
Market consists of a
single seller

Major Considerations in Setting Price

Pricing Approaches
Cost-Plus Pricing
Adding a standard markup to the cost of the
product.
Popular because:

Sellers more certain about cost than demand

Simplifies pricing
When all sellers use, prices are similar and
competition is minimized
Some feel it is more fair to both buyers and sellers

Break-Even Pricing

Value-Based Pricing
Uses buyers perceptions of value, not
the sellers cost, as the key to pricing.

Competition-Based Pricing
Going-Rate Pricing:
Firm bases its price largely on competitors prices,
with less attention paid to its own costs or to demand.

Sealed-Bid Pricing:
Firm bases its price on how it thinks competitors will
price rather than on its own costs or on demand.

Dynamic Pricing Strategies

New product pricing strategies
Product mix pricing strategies
Price adjustment strategies
Strategies for initiating and responding to
price changes

New-Product Pricing Strategies

HIGHER

PRICE

PREMIUM STRATEGY

HIGHER

PREMIUM STRATEGY

LOWER

GOOD-VALUE
STRATEGY

QUALITY
LOWER

OVERCHARGING
STRATEGY

ECONOMY STRATEGY

New-Product Pricing Strategies

Market-Skimming

Set a high price for a new

product to skim
revenues layer by layer
from the market.

Company makes fewer,

but more profitable sales.

When to use:
Products quality and image
must support its higher price.
Costs of smaller volume cannot
be so high they cancel the
advantage of charging more.
Competitors should not be able
to enter market easily and
undercut the high price.

New-Product Pricing Strategies

Market Penetration

Set a low initial price in

order to penetrate the

market quickly and
deeply.

Can attract a large

number of buyers quickly

and win a large market
share.

When to use:
Market must be highly price
sensitive so a low price
produces more market
growth.
Production and distribution
costs must fall as sales
volume increases.
Must keep out competition and
maintain low price or effects
are only temporary.

Product mix pricing strategies

Product Line Pricing
Involves setting price steps between various

products in a product line based on:

Cost differences between products
Customer evaluations of different features
Competitors prices

Optional- and Captive-Product Pricing

Optional-Product
Pricing optional or accessory products sold with
the main product (e.g., ice maker with the
refrigerator).

Captive-Product
Pricing products that must be used with the main
product (e.g., replacement cartridges for Gillette
razors, software with computer).

Product mix Pricing Strategies

By-Product Pricing:
Setting a price for by-products in order to make
the main products price more competitive.

Product Bundle Pricing:

Combining several products and offering the bundle
at a reduced price (e.g., computer with software and
Internet access, hotel sell packages including room,
meals, entertainment, air-tickets etc.)

Price adjustment strategies

Discounts and Allowances
Discounts
Cash
Quantity
Functional
Seasonal

Allowances
Trade-In
Promotional

Allowances
Promotional money paid by manufacturers to
retailers in return for an agreement to feature
the manufacturers products in some way

Allowances
Trade-in: Price reduction for turning in an old
item when buying a new one.
Promotional: Price reductions to reward
dealers for participating in advertising & sales
support program

Segmented Pricing
Selling a product or service at two or more prices,

where the difference in prices is not based on

differences in costs.
Types:
1. Customer-segment ex. museums
2. Product-form ex. Airlines (executive, business,
economy)
3. Location pricing ex. theaters
4. Time pricing ex. hotels giving seasonal discount

Psychological Pricing
Considers the psychology
of prices and not simply the
economics.
Consumers usually
perceive higher-priced
products as having higher
quality.
Consumers use price less
when they can judge
quality of a product.

Promotional Pricing
Temporarily pricing products below list price and sometimes
even below cost to create buying excitement and urgency.

Approaches:
Loss
Loss Leaders
Leaders

Low-Interest
Low-Interest Financing
Financing

Special-Event
Special-Event Pricing
Pricing

Longer
Longer Warranties
Warranties

Cash
Cash Rebates
Rebates

Free
Free Maintenance
Maintenance
Discounts
Discounts

Promotional Pricing

Companies offer promotional prices to create buying excitement and

urgency.

Initiating Price Changes

Price Cuts

Price Increases

Excess Capacity

Cost Inflation

Falling Market
Share

Overdemand:
Cannot Supply
All Customers
Needs

Dominate Market
Through Lower
Costs

Assessing and Responding to

Competitor Price Changes

Steps in Setting Price

1.
2.
3.
4.
5.
6.

Select the price objective

Determine demand
Estimate costs
Analyze competitor price mix
Select pricing method
Select final price

Step 1: Selecting the Pricing Objective

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

Step 2: Determining Demand

Price sensitivity
Estimate demand curves
Price elasticity of demand

Inelastic and Elastic Demand

Step 3: Estimating Costs

Types of costs
Accumulated production
Activity-based cost accounting
Target costing

Cost Per Unit at Different Levels of Production

Cost Terms and Production

Fixed costs
Variable costs
Total costs
Average cost
Cost at different levels of production

Cost per Unit as a Function of

Accumulated Production

Target Costing
Market research establishes a new products desired
functions and the price at which it will sell, given its
appeal and competitors prices. This price less
desired profit margin leaves the target cost the
marketer must achieve.

Step 4: Analyzing Competitors Costs

Competitors costs
Competitors prices
Possible price reactions

The Three Cs Model for Price-Setting

Step 5: Selecting a Pricing Method

Markup pricing
Target-return pricing
Perceived-value pricing
Value pricing
Going-rate pricing
Auction-type pricing

Target-Return Pricing

Break-Even Chart for Determining TargetReturn Price and Break-Even Volume

Perceived-Value Pricing
Customers perceived-value

Performance
Warranty
Customer support
Reputation

Auction-Type Pricing
English
Dutch
Sealed-Bid

Step 6: Selecting the Final Price

Impact of other marketing activities
Company pricing policies
Gain-and-risk sharing pricing
Impact of price on other parties

Geographical Pricing
Countertrade forms:
Barter
Compensation deal
Buyback arrangement
Offset

Price Discounts and Allowances

Discount
Quantity discount
Functional discount
Seasonal discount
Allowance

Promotional Pricing Tactics

Loss-leader pricing
Special-event pricing
Special customer pricing
Cash rebates
Low-interest financing
Longer payment terms
Warranties and service contracts
Psychological discounting

Differentiated Pricing
Customer-segment pricing
Product-form pricing
Image pricing
Channel pricing
Location pricing
Time pricing
Yield pricing

Traps in Price Cutting Strategies

Low-quality trap
Fragile-market-share trap
Shallow-pockets trap
Price-war trap

Should We Raise Prices?

Methods for Increasing Prices

Delayed quotation pricing
Escalator clauses
Unbundling
Reduction of discounts

Brand Leader Responses to Competitive Price

Cuts
Maintain price
Maintain price and add value
Reduce price
Increase price and improve quality
Launch a low-price fighter line