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PDF Created With Pdffactory Pro Trial Version: Internal Factors External Factors
PDF Created With Pdffactory Pro Trial Version: Internal Factors External Factors
PDF Created With Pdffactory Pro Trial Version: Internal Factors External Factors
MKT 322
Ch 7: PRICING STRATEGY
1. OBJECTIVES
Ø To understand the internal and external factors affecting a firm’s pricing
decisions.
Ø To understand the three approaches in setting prices.
Ø To understand the different types of pricing strategies.
2. DEFINITION
Ø Price is the amount of money charge for a product or service of the sum of the
values that consumers exchange for the benefits of having or using the product or
service.
Ø Price goes by many names such as rent, tuition fees, fare, rate, interest, toll,
premium, etc.
Ø Price is the only element in the marketing mix that produces revenue, all other
elements represent costs. Price is also one of the most flexible elements in
marketing mix.
(c) Cost
Ø Costs are another internal factor that set the floor for the price that the
company can charge.
Ø Companies want to charge a price that covers all its costs for producing,
distributing, and selling the product, and provides a fair rate return for its
effort and risk.
Ø Although break-even analysis and target profit pricing can help the company
to determine minimum prices needed to cover expected costs and profits
they do not take the price-demand relationship into account.
Ø When using this method, the company must also consider the impact of
price on the sales volume needed to realize target profits and the likelihood
that the needed volume will be achieved at each possible price.
Ø Company using this approach must find out what value the buyer assigns to
different competitive offers.
Ø Value pricing strategies mean offering just the right combination of quality and
good service at a fair price. In many instances this has resulted in the company
either overcharge or undercharge the product.
5. PRICING STRATEGIES
Ø Penetration pricing – is setting a low price for a new product in order to attract a
large number of buyers and to gain large market share under the conditions that:
v Market is highly price-sensitive.
v Low rice must help keep out competition
v Production and distribution costs must fall as sales volume increases.
Ø Captive product pricing – is setting a price for products that must be used along
with a main product, such as blades for a razor and film for a camera.
v Producers of the main product offer them at low prices and set high
markup on the supplies
v Examples; HP makes very low profit on its printers but very high margins
on printer cartridges and other supplies.
v In service, it is called two part pricing – where the price of the service is
broken into a fixed fee and a variable usage rate. Example; telephone
service.
Ø By product pricing – this involves setting a price for by-product in order to make
the main product’s price more competitive.
v Examples; a lumber mill selling wood chips, palm oil milling selling palm
kernel residues; zoos and their waste product.
v Manufacturer will seek a market for these by product and should accept
any price that covers more than the cost of storing and delivering them.
v This practice allows the seller to reduce the main product’s price to make
it more competitive.
b) Segmented pricing
Ø Selling a product or service at two or more prices, where the difference in
prices is not based on differences in costs. Possible forms include;
v Customer segment pricing - different customer pay different prices for
the same product or service.
v Product form pricing – different versions of the product are priced
differently but not according to differences in their costs
v Location pricing – company charges different prices for different
locations, even though the cost of offering each location is the same.
v Time pricing – prices vary by season, the month, the day, or even the
hour.
c) Psychological pricing
Ø Psychological pricing encourages purchases based on emotional rather than
rational responses. It is used most often at the retail level but of limited use
for industrial product.
Ø Odd-Even pricing – is a practice by ending the price with certain numbers in
order to influence buyers’ perceptions of the price or the product.
Ø A product priced at odd ending (e.g.$99.99) will foster certain psychological
perception that the product is less than $100 and is a bargain.
Ø A product price with even ending (e.g. $200.00) will influence a customer to
view the product as being a high quality, premium brand.
d) Promotional pricing
Ø This is temporarily pricing products below the list price, and sometimes even
below cost, to increase short term sales.
Ø Loss leader pricing – is to set price below the usual markup, near cost or
below cost. It is used by supermarket or departmental stores to attract
customer to the store in the hope that they will buy other items.
Ø Special event pricing – involves advertise sales or price cutting linked to a
holiday, season, or event.
Ø Cash rebates – seller offer cash rebate to consumers who buy the product
from them within a specific time period.
Ø Low interest financing/longer warranties/free maintenance – this is
offered by manufacturers to reduce the customer’s price
Ø Discount – seller may simply offer discounts from normal prices to increase
sales and reduce inventories.
e) Geographical pricing
Ø Price adapted to different part of the country, such as;
Ø FOB origin pricing – is a geographical pricing strategy in which goods are
placed free on board a carrier and the customer pays the freight from the
factory to the destination.
Ø Uniform delivery pricing – company charges the same price plus freight to
all customers regardless of their location.
Ø Zone pricing – the company set up two or more zones, all customers within a
zone pay the same total price, and this is higher in the more distant zones.
Ø Freight absorption pricing – company absorbs all or part of the actual
freight charges in order to get the business.
Ø FOB destination – a price indicating that the producer is absorbing shipping
costs. It is used to attract distance customers.
v Price increase.
§ Strong demand
§ Product quality is exceptionally good
§ Suppliers are profiteering
v Maintain price and add value – the leader could improve its product,
services, and communications. Firm may find it more profitable to
improve quality than to cut price and operate at a lower margin.
v Increase price and improve quality – raise price to cover rising costs,
while improving quality to justify higher prices.
v Launch a low price fighter line – add lower price items to the line or
create a separate lower price brand.