Chapter 8

The pricing approaches

Things to conceder in setting the price:
1. Product cost (fixed cost + variable cost).
2. Competitors offers & other internal and external factors.
3. Consumers perception of value.

New product pricing strategies:
If a company is setting a new product there two options:
1. To set a high price if the company is setting a high price for their products it should
be backed up with a strong promotional effort it is called
Market skimming pricing
Advantage {the company initially sets high prices to skim revenues layer by layer from the
market}
Disadvantage {it may lead to lower demand}


Product cost
Competitors
offers & other
internal and
external factors
High Price (no
demand)
2. To set a low price
If the company is setting for a low price but it should also be backed up by strong promotional
support called market penetration pricing
The advantage {the company can penetrate the market quickly and deeply to attract a large
number of buyers and capture a large market share in the process}
Disadvantage{ revenues may be filled by more substantial demand }
To know which is better it depends on the button line ( profit) although it may be the same in
both options.
(Table 3)
the different between the two options are:
1. In skimming pricing is to make a swift return on investment by offering product at a high price
2. In penetration pricing the objective is to capture a large market share by attracting buyers
through low prices.
The low pricing is more beneficial to a firm over a long period of time.
the companies that are adopting the skimming pricing strategy need to be caution of their
marketing program and ensure that they justify the high price they charge for their products to
win customers confidence, support and eventually loyalty.

An alternative the two pricing strategies is establishing a relationship between the price and the
quality of the product to come up with 4 possible strategies:
1. Selling a High- quality product at a high price (premium pricing strategy)
2. Selling High- quality product at low price ( good value pricing strategy)
3. Selling Low- quality product at high price( overcharging pricing strategy)
4. Selling a low- quality product at a low price (economy pricing strategy)
Figure 3
Cost based pricing:
The cost is primary considered under the cost based pricing
Cost based pricing has 3 pricing approaches:
1. Cost -plus pricing. It requires a standard mark-up in the cost of the product ( called the mark-
up pricing) total cost of product per unit + (total cost of product per unit * Mark-up)= selling
price
2. Break -even pricing the company neither earns profit nor incurs loss ( net income equals to 0)
Q= T F C/ SP/u-VC/u where Q= break- even quantity, TFC= total fixed cost, SP/u= selling price
per unit and VC/u= variable cost per unit
The dominator (SP/u-VC/u) is also known as the contribution margin which is the amount os
sales contribution to pay for the companys fixed costs.
If a company sells more than the break- even it is sure to earn profit but if below it will incur
loss

Sales
Less: variable cost
Contribution margin
Less fixed cost
Net income

3. Target profit pricing a strategy in variation of the break-even the company will set a target
profit to be earned and use the break even analysis to meet the said target.
TPP= TP/Q+ CSP where TPP= breakeven price, TP= target profit, Q= estimated quantity to be
sold and CSP= current selling price.
Value- based pricing strategy: it considers the buyers perception value as the main ingredient in pricing.
The starting point is the customers perception value not the cost
Figure 4
Competition- based pricing strategy:
There 2 kind of Competition- based pricing strategy:
1. Going rate pricing
2. Sealed- bid pricing