University of Technical Education

University of Sunderland

Chapter 10

HO CHI MINH CITY 2009

OUTLINE
1- Definition
2- Pricing policy
3- Pricing strategy
4- Approaches to pricing
2

1- Definition
Price can be defined as a measure of the
value exchanged by the buyer for the value
offered by the seller.
Maximising profits
Pricing decisions
Maintaining or increasing
market share
3

Costs and profits

DESIRED
PROFIT
plus:
COSTS
Raw materials
Machinery
wearing out
Production
Administration
Selling
Distribution

Equals

Cost-price model

SELLING
PRICE

Elements of cost
There are different ways of analysing and
classifying cost
Direct costs and indirect costs
Functional costs
Fixed costs and variable costs
Controllable and uncontrollable costs

Price elasticity
P1

Price

Traditional price elasticity

P2
Q1

Quantity

Q2
6

Price elasticity
% change in sales demand
% change in sales price
Elasticity >1
- If the price is lowered, total sales revenue will
rise.
- If the price is raised, total sales revenue will fall
Elasticity <1 (inelastic)
- If the price is lowered, total sales revenue will fall.
- If the price is raised, total sales revenue will go
up
7

Activity
What are the limitations of price
elasticity as a factor in determining
prices?

2- Pricing policy
Price policy is the outcome of
management decisions about price
which derive from internal operational
considerations
about
costs
and
external,
customer
focused
consideration about value.
9

Pricing issues
Maximum
price

Organisational
and
market
issues

Minimum
price

Nobody will buy above

this level
Making an appropriate profit
considering the opportunity
cost and investment
Considering the needs and
wants of the target market
and its perceptions
of the product
Considering the prices and
characteristics of
competitive offerings
Covering the cost of
developing a product
suitable for the market
The supplier will not sell
below this level 10

3- Pricing strategy
Price and promotion
Price strategy and the marketing
mix
Pricing and the competitive edge
(price war)

11

Virtuous circle of price: price-value cycle

Raise price

Higher customer
acceptance and
volume

Virtuous
circle

Lower volume, but

higher revenue from
better margins

Improve offer
mix and
promotion
12

4- Approaches to pricing
Competitive advantage

Broad
target

Competitive advantage
Lower cost

Differentiation

Cost
leadership

Differentiation

Cost focus

Differentiation
focus

Competitive
focus

Narrow
target

13

Cost leadership strategies

Premium price
for differentiated
product

Ordinary market price

for undifferentiated
product (1 and 2)

Discount
price for
differentiated
product
P

Market
C

price

P
C
C

14

Questions
1.
2.
3.
4.

State the elements of cost

What is price positioning?
What is the pricing policy?
What are the main pricing formulae used
by organisation?
5. According to porter, in his book
competitive advantage, what are the
principles on which firms should
compete?
15

16