Pricing Concepts

What Is Price?

Price Price is that which is given up

in an exchange to acquire a
good or service.
 Synonyms for Price

• Rent • Bribe
• Tuition • Dues
• Fee • Salary
• Fare • Commission
• Rate • Wage
• Toll • Tax
• Premium
• Honorarium
The Importance of Price

To the seller... To the consumer...

Price is revenue Price is the cost
of something

Price allocates resources

in a free-market economy
The Importance of Price to
Marketing Managers

The price charged to

Revenue customers multiplied by the
number of units sold.

Profit Revenue minus expenses.

 Consumer Psychology
and Pricing
• Reference prices
• Price-quality inferences
• Price ending
Trends Influencing Price
Flood of new products

Increased availability of bargain-priced private

and generic brands

Price cutting as a strategy to maintain or

regain market share

Internet used for comparison shopping

Sharing economy/ used products

Pricing Objectives

Profit-Oriented

Sales-Oriented

Status Quo
 Profit-Oriented Pricing Objectives

Profit-Oriented Pricing Objectives

Target
Profit Satisfactory
Return on
Maximization Profits
Investment
Profit Maximization

Profit Setting prices so that total

Maximization revenue is as large as
possible relative to total
costs.
Return on Investment

Return Net profit after taxes divided

on by total assets.
Investment

ROI = Net Profit after taxes

Total assets
Sales-Oriented Pricing Objectives

Sales-Oriented Pricing Objectives

Market Sales
Share Maximization
Market Share

Market Share A company’s product sales

as a percentage of total
sales for that industry.
Sales Maximization
• Short-term objective to maximize sales

• Ignores profits, competition, and the

marketing environment

• May be used to sell off excess inventory

Status Quo Pricing Objectives

Status Quo Pricing Objectives

Maintain Meet
existing competition’s
prices prices
Factors that Affect Elasticity of Demand
Availability of substitutes

Price relative to
purchasing power

Product durability

A product’s other uses

Rate of inflation
The Cost Determinant of Price

Types of Costs

Variable
Fixed Cost
Cost

Varies with changes Does not change

in level of output as level of output changes
Methods Used to Set Prices

Markup pricing

Keystoning
Methods
Used to
Set Prices Profit Maximization
Pricing

Break-Even
Pricing
Markup Pricing
The cost of buying the
product from the producer
Markup
plus amounts for profit and
Pricing for expenses not
otherwise accounted for.

The practice of marking up

Keystoning prices by 100%, or doubling
the cost.
Profit Maximization
A method of setting prices
Profit that occurs when marginal
Maximization revenue equals marginal cost.

The extra revenue associated

with selling an extra unit of
Marginal
output, or the change in total
Revenue revenue with a one-unit change
in output.
Break-Even Pricing
Break-Even Pricing

Break-Even Total fixed costs

=
Quantity Fixed cost contribution

Fixed cost
Contribution
= Price - Avg. Variable Cost
Other Determinants of Price
Stages of the
Product Life Cycle

Competition

Distribution Strategy

Promotion Strategy

Perceived Quality
Stages in the Product Life Cycle
Introductory Growth Maturity Decline
Stage Stage Stage Stage

$ $ $ $
High Stable Decrease Decrease

Stable

High
The Competition

• High prices may induce firms to enter the

market

• Competition can lead to price wars

• Global competition may force firms to

lower prices
Distribution Strategy
Manufacturers Wholesalers/Retailers

• Offer a larger profit margin or  Sell against the brand

trade allowance
 Buy grey-market goods
• Use exclusive distribution

• Franchising

• Avoid business with price-

cutting discounters

• Develop brand loyalty

The Relationship of Price to Quality

Prestige Pricing Charging a high price to help

promote a high-quality image.
Factors Affecting Price