Chapter 10

Pricing Products:
Pricing Considerations and
Strategies
1
Road Map: Previewing the Concepts
Identify and explain the external and internal
factors affecting a firm's pricing decisions.
Contrast the three general approaches to setting
prices.
Describe the major strategies for pricing
imitative and new products.
Explain how companies find a set of prices that
maximizes the profits from the total product mix.
Discuss how companies adjust their prices to
take into account different types of customers
and situations.
Discuss the key issues related to initiating and
responding to price changes.
2
Factors Affecting Price Decisions
(Fig. 10-1)

3
Internal Factors Affecting Pricing
Decisions: Marketing Objectives
Survival
Low Prices Hoping to Increase
Demand.
Current Profit Maximization
Choose the Price that Produces
Marketing the Maximum Current Profit, Etc.

Objectives Market Share Leadership

Low as Possible Prices to Become
the Market Share Leader.

Product Quality Leadership

High Prices to Cover Higher
Performance Quality and R&D.
4
Four Seasons Hotel
Four Seasons uses
the product quality
leadership strategy.
It starts with very
high quality service,
then charges a price
to match.
http://www.fourseasons.com

5
Internal Factors Affecting Pricing
Decisions: Marketing Mix Strategy

Product Design

Nonprice
Price Distribution
Positions

Promotion
6
Types of Cost Factors that
Affect Pricing Decisions
Fixed Costs Variable Costs
(Overhead)
Costs that don’t Costs that do vary
vary with sales or directly with the
production levels level of production
Executive Salaries, Rent Raw materials

Total Costs
Sum of the Fixed and Variable Costs for Any Given
Level of Production
7
External Factors Affecting
Pricing Decisions
Market and
Demand

Competitors’ Costs,
Prices, and Offers

Other External Factors

Economic Conditions
Reseller Reactions
Government Actions
Social Concerns 8
Market and Demand Factors
Affecting Pricing Decisions
Pricing in Different Types of Markets

Pure Competition
Many Buyers and Sellers Pure Monopoly
Who Have Little Single Seller
Effect on the Price

Monopolistic Oligopolistic
Competition Competition
Many Buyers and Sellers Few Sellers Who Are
Who Trade Over a Sensitive to Each Other’s
Range of Prices Pricing/ Marketing
Strategies
9
Demand Curve (Fig. 10-2)

10
Price Elasticity of Demand
A. Inelastic Demand -
Demand Hardly Changes With
Price

a Small Change in Price.

P2
P1

Q2 Q1
Quantity Demanded per Period
B. Elastic Demand -
Demand Changes Greatly With
Price

P’ a Small Change in Price.

2

P’1

Q2 Q1
Quantity Demanded per 11
Major Considerations in Setting
Price (Fig. 10-3)

12
Cost-Based Pricing
Certainty
About Costs
Simples
Cost-Plus
Ethical a
to
F
c
rs t Pricing
Pricing is Pricing is an S n
itu
a o
l Method
Simplified Approach U
td
p
n
e
x
c
That Adds a
Standard
Price
Competition Is Markup to the
Attitudes Ignores
Minimized Costofof the Current
Others
Product Demand &
Fairer to Buyers Competitio
& Sellers n
13
Breakeven Analysis or Target Profit
Pricing (Fig. 10-4)
Tries to Determine the Price at Which a
Firm Will Break Even or Make a Certain Target
Profit.
Total
Cost in Dollars (millions)

12 Revenue
10 Target Profit
($2 million)
8
6 Total
Cost
4 Fixed Cost
2

200 400 600 800 1,000

Sales Volume in Units (thousands)
14
Cost-Based Versus Value-Based
Pricing (Fig. 10-5)

15
After examining Figure 10-5,
compare and contrast cost-based
pricing and value-based pricing.
What are situations that favor each
pricing method?

16
Competition-Based Pricing
Methods for
Setting Prices

Going-Rate
Company Sets Prices Based on
What
Competitors Are Charging
Sealed-Bid
?Company Sets Prices Based on
?What They Think Competitors
Will Charge
17
New-Product Pricing Strategies
Market-Skimming Use Under These
Conditions:
 Setting a High Price for a Product’s Quality and
New Product to “Skim” Image Must Support Its
Maximum Revenues Higher Price.
from the Target Market.
Costs Can’t be so High
 Results in Fewer, But that They Cancel the
More Profitable Sales. Advantage of Charging
 I.e. Intel More.
Competitors Shouldn’t
be Able to Enter Market
Easily and Undercut the
High Price.
18
New-Product Pricing Strategies
Use Under These Market Penetration
Conditions:
 Setting a Low Price for
Market Must be Highly
a New Product in Order
Price-Sensitive so a Low
to “Penetrate” the
Price Produces More
Market Quickly and
Market Growth.
Deeply.
Production/Distribution
Costs Must Fall as Sales  Attract a Large Number
Volume Increases. of Buyers and Win a
Must Keep Out Larger Market Share.
Competition & Maintain
Its Low Price Position or  I.e. Dell
Benefits May Only be
Temporary.
19
Form students into groups of three to five.
Which pricing strategy--market skimming or
market penetration--does each of the
following companies use?
McDonald’s,
Sony (television and other home electronics),
Bic Corporation (pens, lighters, shavers, and
related products), and
IBM (personal computers).

20
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,
and
Competitors’ prices.

21
Product Mix-Pricing Strategies
Optional-Product
Pricing optional or
accessory products sold
with the main product.
i.e camera bag.
Captive-Product
Pricing products that
must be used with the
main product. i.e. film.

22
Product Mix-Pricing Strategies

By-Product Product-Bundling
Pricing low-value by- Combining several
products to get rid
of them and make products and
the main product’s offering the bundle
price more at a reduced price.
competitive. I.e. theater season
I.e. sawdust, Zoo tickets.
Doo

23
Discount and Allowance Pricing
A d j u s t i n g B a s i c P r i c e t o
F o r C e r t a i n R e s p o n

C a s h D i s c o u S n et a s o n a l D i s

Q u a n t i t y D i s c T o r ua dn et - I n A l l o w

F u n c t i o n a l D P i sr oc om u o n t ti o n a l A

24
Segmented Pricing

S e l l i n g P r o d u c t s A
T h o u g h T h e r e i s N

C u s t o m e r L- oS c e a g t m i o e n n P

P r o d u c t - FT o i m r m e P r i c

25
Psychological Pricing
Considers the psychology
of prices and not simply
the economics.
Customers use price less
when they can judge
quality of a product.
Price becomes an
Ret important quality signal
ail $1
Cos 00. when customers can’t
t $ 00
3. 0 judge quality; price is used
0 to say something about a
product.
26
Promotional Pricing
Loss Leaders
Temporarily
Special-Event Pricing Pricing Products
Below List Price
Cash Rebates
Through:
Low-Interest Financing

Longer Warranties
Free Maintenance
Discounts
27
Other Price Adjustment
Strategies
•Pricing products for
customers
Geographical Pricing located in different parts of
the country or world.
• i.e. FOB-Origin, Uniform-
Delivered, Zone, Basing-
Point, & Freight-Absorption.

International Pricing • Adjusting prices for

customers
in different counties.
• Price Depends on Costs,
Consumers, Economic
Conditions, Competitive
28
Situations, & Other Factors.
Initiating Price Changes

Why? Why?
Excess Capacity Cost Inflation
Falling Market Overdemand:
Share Company Can’t
Dominate Market Supply All
Through Lower Customers’ Needs
Costs
29
Reactions to Price Changes
Price Cuts Are Seen by Buyers Competitors Mostly React
As: When:
Number
Being
Being Replaced
Replaced by
by Number ofof Firms
Firms is
is
Newer Small
Small
Newer Models
Models
Current
Current Models
Models Are
Are Product
Product is
is Uniform
Uniform
Not
Not Selling
Selling Well
Well
Company
Company isis in
in Buyers
Buyers are
are Well
Well
Financial
Financial Trouble
Trouble Informed
Informed
Quality
Quality Has
Has Been
Been
Reduced
Reduced
Price
Price May
May Come
Come
Down
Down Further
Further
30
Assessing/Responding to Competitor’s
Price Changes (Fig. 10-6)

31
Public Policy Issues in Pricing
(Fig. 10-7)

32
Rest Stop: Reviewing the Concepts
Identify and explain the external and internal factors
affecting a firm's pricing decisions.
Contrast the three general approaches to setting
prices.
Describe the major strategies for pricing imitative
and new products.
Explain how companies find a set of prices that
maximizes the profits from the total product mix.
Discuss how companies adjust their prices to take
into account different types of customers and
situations.
Discuss the key issues related to initiating and
responding to price changes.
33