CHAPTER 8

Pricing
1. Definition of price
2. Major factors Affecting Price Decisions/Setting Price
3. Major Pricing Strategies / General Pricing Approaches:
 Value-Based
 Cost-Based
 Competition-Based
4. Pricing Strategies:
 New Product Pricing strategies
 Product Mix Pricing strategies
 Price Adjustment strategies

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 01

 Price
pg 314
the sum of all the values that consumers give up in
order to gain the benefits of having or using a
product or service.

Note: Price is the only

element in the marketing mix
that produces revenue; all
other elements represent
costs.

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 02

 External: Internal:
CUSTOMER MARKETING
PERCEPTIONS OF STRATEGY,
VALUE Major factors OBJECTIVES & MIX

External: Affecting Price Internal:

MARKET & PRODUCT
DEMAND Decisions/ COSTS
Setting Price
External: pg 324 Internal:
ENVIRONMENTAL ORGANIZATIONAL
FACTORS CONSIDERATIONS

03
Major factors Affecting Price
Decisions/Setting Price:
1. Overall Marketing Strategy, Objectives &
Mix
General pricing objectives might include survival, current profit
maximization, market share leadership, or customer retention and
relationship building.

Price decisions must be coordinated with product design,

distribution, and promotion decisions to form a consistent and
effective integrated marketing program.

Companies often position their products on price and then tailor

other marketing mix decisions to the prices they want to charge.
Many firms support price-positioning strategies with the target
costing technique. 04
TARGET COSTING
starts with an ideal selling price
based on customer-value
considerations, and then targets
costs that will ensure that the price
is met.

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 05

2. PRODUCT COSTS
Generally price must exceed costs to generate profit.

(note: refer pricing strategies for price that equals costs or

price below costs situations)

06
3. ORGANIZATIONAL CONSIDERATIONS
Small companies, prices are often set by top management
rather than by the marketing or sales departments.

Large companies, pricing is typically handled by divisional or

product line managers.

Industrial markets, salespeople may be allowed to negotiate

with customers within certain price ranges.
- In industries in which pricing is a key factor,
companies often have pricing departments to set the
best prices or to help others in setting them.
07
4. CUSTOMER PERCEPTION OF VALUE

Customer may perceive higher price to higher value (eg.

luxury goods)

08
5. DEMAND
Normally, demand and price are inversely related:
Higher price = lower demand, v.v.

For prestige (luxury) goods, higher price can equal higher

demand when consumers perceive higher prices as higher
quality.

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 10
TYPES OF MARKETS
Pure competition: The market consists of many buyers and sellers trading in a uniform
commodity. No single buyer or seller has much effect on the going market price.
In a purely competitive market, sellers do not spend much time on marketing strategy.

Monopolistic competition: The market consists of many buyers and sellers who trade
over a range of prices rather than a single market price. A range of prices occurs because
sellers can differentiate their offers to buyers.

Oligopolistic competition: The market consists of a few sellers who are highly sensitive
to each other’s pricing and marketing strategies.
There are few sellers because it is difficult for new sellers to enter the market.

Pure monopoly: The market consists of one seller. The seller may be a government
monopoly, a private regulated monopoly, or a private non-regulated monopoly.
09
 Elasticity of demand

Elasticity of demand the percentage change in unit sales

that results from a percentage change in price
- when changes in price have large effects on the amount
demanded, demand is elastic, v.v.

Note: Marketers need to know how sensitive customers are

to changes in price and how this change impacts
demand.
11
 Elasticity of demand

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 12

Elastic Demand

Some customers are very sensitive to changes in price, and

a change in price results in a substantial change in the
quantity demanded. In such instances, we have a case of
elastic demand.
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 13
Inelastic Demand

When changes in price have little or no effect on the amount

demanded, demand is inelastic.

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14

6. ENVIRONMENTAL FACTORS:
EG. COMPETITORS
Sometimes a firm’s pricing strategy involves pricing its
products near, at, above or below the competition.
In assessing competitors’ pricing strategies, the company
should ask several questions:
- How does the company’s market offering compare with
competitors’ offerings in terms of customer value?
- How strong are current competitors and what are their current
pricing strategies?
- How does the competitive landscape influence customer price
sensitivity?

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 15

6. ENVIRONMENTAL FACTORS:
EG. ECONOMIC
Economic conditions such as economic boom or economic
downturn can have a strong impact on the firm’s pricing
strategies
eg. economic boom – prices goes up
economic downturn – prices are cut

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 16
6. ENVIRONMENTAL FACTORS:
EG. RESELLER
GOVERNMENT
SOCIETY

Marketer have to consider other environmental factors in

pricing decisions including reseller reactions to the firm’s
pricing, government policy on pricing structure or
society influence/pressure on ethical pricing.

17
  General Pricing Approach
Pg 315-323
Value-Based Cost-Based Competition-Based
- It is customer driven - It is product driven - Set above, at par or
- It sets the price ceiling - It sets the price floor below competitors price

Assess needs and Design a product Compare firm’s offer

value perceptions with competitor’s
offer in terms of
customer value
Set target price Determine costs
Set price based on:
Set price based on Higher price for
Determine costs
cost higher Customer
value, v.v.
Design a product Convince buyers of the
value
18
 Value-based pricing
uses buyers’ perceptions of
value, not sellers’ cost, as the
key to pricing.

Value-based pricing means that

the marketer cannot design a
product and marketing program
and then set the price. Price is
considered along with the other
marketing mix variables before
the marketing program is set.

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

19
Value-based pricing
GOOD VALUE VALUE ADDED

Good-value pricing is offering just the right combination of quality

and good service at a fair price. In many cases good-value pricing
includes less expensive items. Eg. McDonald’s value meals

Value-added pricing is the strategy of attaching value-added

features and services to differentiate their offers and thus support
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall
higher prices. Eg. extended warranty at discounted price
20
Good Value perceptions:
1. EDLP (everyday low pricing)
involves charging a constant,
everyday low price with few or no
temporary price discounts
eg. Tesco Extra

2.HIGH-LOW PRICING
involves charging higher prices on
an everyday basis but running
frequent promotions to lower
prices temporarily on selected
items
eg. Parkson

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

21
Cost-based pricing
involves setting prices based on
the costs for producing,
distributing, and selling the
product plus a fair rate of return
for its effort and risk.
- Cost-based pricing adds
a standard markup to
the cost of the
product.

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

22
Types of costs:
FIXED COSTS
+
VARIABLE COSTS
=
TOTAL COSTS

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

23
 Costs as a Function of Production

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

24
Cost + Pricing
MARKUP

PRICE
PRODUCT COST

The simplest pricing method is cost plus pricing—adding a

standard markup to the cost of the product.

Markup pricing remains popular because sellers are more

certain about costs than about demand
- Markup method keeps price competition down.
- Markup method ignores demand and competitors’
prices. 25
Break-even pricing
Break-even pricing is the price at which total costs are
equal to total revenue and there is no profit.

Target profit pricing is the price at which the firm will

break even or make the profit it’s seeking.

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

26
Break-even pricing

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

27
Competition-based pricing
Compare firm’s offer with competitor’s offer in terms of
customer value

Firm set pricing based on:

1. Higher price for higher customer value
2. Lower price for lower customer value
3. Similar price for similar customer value

28
 Pricing Strategies:
 New Product Pricing strategies
pg 338

SKIM PENETRATE

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

29
Skim
Many companies that invent new
products set high initial prices to
“skim” revenues layer-by-layer from
the market. Market skimming
makes sense when the product’s
quality and image support its higher
price, and enough buyers must
want the product at that price.

Conditions for successful

implementation:
1. competitors should not be
able to enter the market
easily and undercut the
high price.
30
 Penetrate
Rather than setting a high price to skim off small
but profitable market segments, some companies
use market-penetration pricing. They set a low
initial price in order to penetrate the market quickly
and deeply—to attract a large number of buyers
quickly and win a large market share.

Conditions for successful implementation:

1. market must be highly price sensitive so
that a low price produces more market
growth.
2. Production and distribution costs must fall
as sales volume increases.
3. The low price must help keep out the
competition, and the penetration pricer
must maintain its low-price position—
Copyright © 2011 Pearson Education, Inc.
otherwise, the price advantage may be
31
Publishing as Prentice Hall

only temporary.
 Product Mix Pricing Strategies
pg 339

Product line Optional Captive

pricing product pricing product pricing

By-product Product bundle

pricing pricing

32
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall
 Product line
pricing

Companies usually develop product lines rather than single products.

In product line pricing, management must decide on the price steps
to set between the various products in a line eg. Loreal shampoos

The price steps should take into account:

- cost differences between the products in the line
- customer evaluations of their different features
- competitors’ prices

In many industries, sellers use well-established price points for the

products in their line. The seller’s task is to establish perceived quality
differences that support the price differences. 33
 Optional
product pricing

Optional-product pricing offers to sell optional or

accessory products along with their main product.

Pricing these options is a sticky problem. The company has

to decide which items to include in the base price and which
to offer as options
eg. sofeware options with purchase of basic computer
package

34
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall
 Captive
product pricing

Companies that make products that must be used along with

a main product are using captive-product pricing.
Producers of the main products often price them low and set
high markups on the supplies.

In the case of services, this strategy is called two-part

pricing. The price of the service is broken into a fixed fee
plus a variable usage rate
eg. banking overdraft facilities.

35
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall
 By-product
pricing

By-product pricing manufacturer will seek a market for by-

products and should accept any price that covers more than
the cost of storing and delivering them.

By-products can even turn out to be profitable

eg. cow dung from farm concentrating on milk production

36
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall
Product bundle
pricing

Product bundle pricing sellers often combine several of

their products and offer the bundle at a reduced price.
eg. TGV Combo popcorn & drinks

Price bundling can promote the sales of products

consumers might not otherwise buy, but the combined
price must be low enough to get them to buy the bundle
eg. TGV Combo popcorn, drinks & chocolate

37
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall
  Price Adjustment Strategies
pg 343

Discount and Segmented

allowance pricing
pricing

Psychological Promotional
pricing pricing

Geographic Dynamic International

pricing pricing pricing

Note: Companies usually adjust their basic prices to account for various
customer differences and changing situations 38
Discount and
allowance
pricing

Most companies adjust their basic price to reward customers for certain
responses:
1. cash discount
price reduction to buyers who pay their bills promptly.
2. quantity discount
price reduction to buyers who buy large volumes
3. functional discount
offered by the seller to trade-channel members who perform certain
functions eg. selling, storing, and record keeping.
4. seasonal discount
price reduction to buyers who buy out of season.

39
 Segmented
pricing
Companies will often adjust their basic prices to allow for differences in
customers, products, and locations.
In segmented pricing, the company sells a product or service at two or
more prices, even though the difference in prices is not based on
differences in costs:
1. customer-segment pricing
different customers pay different prices for the same product or
service.
2. product form pricing
different versions of the product are priced differently but not
according to differences in their costs.
3. location pricing
company charges different prices for different locations, even
though the cost of offering each location is the same.
4. time pricing
40
firm varies its prices by season, month, day & even the hour.
 Segmented
pricing

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

41
 Psychological
pricing

Many consumers use price to judge quality.

In using psychological pricing, sellers consider the
psychology of prices and not simply the economics.

42
 Promotional
pricing
Companies will temporarily price their products below list price or below
cost to create buying excitement & urgency.
Promotional pricing takes several forms:
1. The seller may simply offer discounts from normal prices to
increase sales and reduce inventories.
2. Supermarkets and department stores will price a few products
as loss leaders to attract customers to the store in the hope that
they will buy other items at normal markups.
3. Use special-event pricing in certain seasons to get more
customers.
4. Manufacturers offer cash rebates to consumers who buy the
product from dealers within a specified time; the manufacturer
sends the rebate directly to the customer.
5. Manufacturers offer low-interest financing, longer warranties or
free maintenance to reduce the consumer’s “price.” 43
Adverse Effects of Promotional pricing:
1. If used too frequently & copied by competitors,
price promotions can create “deal-prone”
customers who wait until brands go on sale before
buying them.
2. Constantly reduced prices can erode a brand’s
value in the eyes of customers.
3. ‘quick-fix’ strategy that lasts short term
4. Lead to industry price wars

44
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall
 Geographic
pricing

Company also must decide how to price its products for

customers located in different parts of the country or world.
eg. courier charges

45
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall
 Geographic pricing:
1. FOB-origin pricing goods are placed free on board (hence, FOB) a carrier. At
that point the title and responsibility pass to the customer, who pays the freight
from the factory to the destination.
2. Uniform-delivered pricing company charges the same price plus freight to all
customers, regardless of their location. The freight charge is set at the average
freight cost (the opposite of FOB pricing)
3. Zone pricing falls between FOB-origin pricing and uniform-delivered pricing.
The company sets up two or more zones. All customers within a given zone pay
a single total price; the more distant the zone, the higher the price.
4. Basing-point pricing seller selects a given city as a “basing point” and charges
all customers the freight cost from that city to the customer location, regardless
of the city from which the goods are actually shipped. Some companies set up
multiple basing points to create more flexibility in quoting freight charges from the
basing-point city nearest to the customer.
5. freight-absorption pricing seller who is anxious to do business with a certain
customer or geographical area absorbs all or part of the actual freight charges in
order to get the desired business.
46
 Dynamic
Pricing

Dynamic pricing (known as “real time pricing” in view

of the internet flexibility) offers many advantages for
marketers.

Internet sellers can mine their databases to gauge a

specific shopper’s desires, measure his or her means, and
instantaneously tailor products to fit that shopper’s
behavior, and price products accordingly. (eg. hotel
booking). Many B2B marketers monitor inventories, costs,
and demand at any given moment and adjust prices
instantly. Buyers also benefit from the Web and dynamic
pricing.
47
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall
Example of Dynamic pricing
Alaska airlines Web banner promotes “fly
Alaska Airlines to Honolulu for $200 round
trip.”
Alaska Airlines is introducing a system that
creates unique prices and advertisements
for people as they surf the Web. The system
identifies consumers by their computers,
using a small piece of code known as a
cookie. It then combines detailed data from
several sources to paint a picture of who’s
sitting on the other side of the screen.
When the person clicks on an ad, the
system quickly analyzes the data to assess
how price-sensitive customers seem to be.

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

48
 International
Pricing

Companies that market their products internationally must decide

what prices to charge in the different countries in which they operate.
Company can set a uniform worldwide price or adjust their prices to
reflect local market conditions and cost considerations.

The price that a company should charge in a specific country depends

on many factors, including economic conditions, competitive
situations, laws and regulations, and development of the wholesaling
and retailing system.Consumer perceptions and preferences also may
vary from country to country, calling for different prices. Or the
company may have different marketing objectives in various world
markets that require changes in pricing strategy.

49
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall
International pricing
Costs play an important role in setting
international prices. Travelers abroad
are often surprised to find that goods
that are relatively inexpensive at home
may carry outrageously higher price
tags in other countries.
In some cases, such price escalation
may result from differences in selling
strategies or market conditions.
In most instances, however, it is simply
a result of the higher costs of selling in
another country—the additional costs
of product modifications, shipping and
insurance, import tariffs and taxes,
exchange rate fluctuations, and
physical distribution.
50