4
Factors Affecting Pricing Decision
PRICE
In general terms price is a component of an
exchange or transaction that takes
place between two parties and refers to what must
be given up by one party (i.e., buyer) in order to
obtain something offered by another party (i.e.,
seller).
 Buyers’ View – For those making a purchase, such as
final customers, price
refers to what must be given up to obtain benefits. In most
cases what is given
up is financial consideration (e.g., money) in exchange for
acquiring access to a
good or service. But financial consideration is not always
what the buyer gives
up. Sometimes in a barter situation a buyer may acquire a
product by giving up
their own product.
 Sellers’ View - To sellers in a transaction, price reflects
the revenue generated
for each product sold and, thus, is an important factor in
determining profit. For
marketing organizations price also serves as a marketing
tool and is a key element in marketing promotions.
Value refers to the
perception of benefits received for what someone must
give up. Since price often reflects an important part of
what someone gives up, a customer’s perceived value of
a product will be affected by a marketer’s pricing decision.
Any easy way to see this is to view value as a calculation:
Importance of Pricing
 Most Flexible Marketing Mix Variable –For marketers
price is the most adjustable of all marketing decisions.
 Setting the Right Price – Pricing decisions made
hastily without sufficient
research, analysis, and strategic evaluation can lead to
the marketing
organization losing revenue.
 Trigger of First Impressions - Often times customers’
perception of a product
is formed as soon as they learn the price, such as when a
product is first seen
when walking down the aisle of a store.
 Important Part of Sales Promotion – Many times price
adjustments are part of
sales promotions that lower price for a short term to
stimulate interest in the
product.
 Internal Factors - When setting price, marketers must
take into consideration
several factors which are the result of company decisions
and actions. To a large
extent these factors are controllable by the company and,
if necessary, can be
altered
 External Factors - There are a number of influencing
factors which are not
controlled by the company but will impact pricing
decisions.
Internal Factors
1. Company and Marketing Objectives
 Return on Investment (ROI) - A firm may set as a
marketing objective the requirement that all products
attain a certain percentage return on the organization’s
spending on marketing the product.
 Cash Flow – Firms may seek to set prices at a level that
will insure that sales revenue will at least cover product
production and marketing costs
 Market Share – The pricing decision may be important
when the firm has an objective of gaining a hold in a new
market or retaining a certain percent of an existing market.
 Maximize Profits – Older products that appeal to a
market that is no longer growing may have a company
objective requiring the price be set at a level that
optimizes profits.
Marketing Strategy
Marketing strategy concerns the decisions marketers-
make to help the company satisfy its target market and
attain its business and marketing objectives.
Costs
For many for-profit companies, the starting point for
setting a product’s price is to first determine how much it
will cost to get the product to their customers
 Fixed Costs - Also referred to as overhead costs, these
represent costs the marketing organization incurs that are
not affected by level of production or sales.
 Variable Costs – These costs are directly associated
with the production and sales of products and,
consequently, change has the level of production or sales
changes.
External Market Factors
1.Elasticity of Demand
 Elastic Demand – Products are considered to exist in a
market that exhibits elastic demand when a certain
percentage change in price results in a larger percentage
change in demand.
 Inelastic Demand – Products are considered to exist in
an inelastic market when a certain percentage change in
price results in a smaller percentage change in demand.
 Unitary Demand – This demand occurs when a
percentage change in price results in an equal percentage
change in demand.
 For elastic markets – increasing price lowers total
revenue while decreasing price increases total revenue.
 For inelastic markets – increasing price raises total
revenue while decreasing price lowers total revenue.
 For unitary markets – there is no change in revenue
when price is changed.
Customer and Channel Partner Expectations
Possibly the most obvious external factor that
influences price settings are the expectations of
customers and channel partners. As we discussed, when
it comes to making a purchase decision customers assess
the overall “value” of a product much more than they
assess the price. When deciding on a price marketers
need to conduct customer research to determine what
“price points” are acceptable. Pricing beyond these price
points could discourage customers from purchasing.
Competitive and Related Products
Marketers will undoubtedly look to market
competitors for indications of how price should be set. For
many marketers of consumer products researching
competitive pricing is relatively easy, particularly when
Internet search tools are used. Price analysis can be
somewhat more complicated for products sold to the
business market since final price may be affected by a
number of factors including if competitors allow customers
to negotiate their final price.
Analysis of competition will include pricing by direct
competitors, related products and primary products.
Direct Competitor Pricing – Almost all marketing
decisions, including pricing, will include an evaluation of
competitors’ offerings. The impact of this information
on the actual setting of price will depend on the
competitive nature of the market.
 Related Product Pricing - Products that offer new ways
for solving customer needs may look to pricing of products
that customers are currently using even though these
other products may not appear to be direct competitors.
 Primary Product Pricing - Product Decisions,
marketers may sell products viewed as complementary to
a primary product.
Government Regulation
Marketers must be aware of regulations that
impact how price is set in the markets in which their
products are sold. These regulations are primarily
government enacted meaning that there may be legal
ramifications if the rules are not followed. Price
regulations can come from any level of government and
vary widely in their requirements.
Setting Price
Steps in the Price Setting Process
Step 1: Examine Company and Marketing Objectives
As we discussed in Pricing Decisions, marketing
decisions including price are driven by the objectives set
by the management of the organization. These objectives
come at two levels. First, the overall objectives of the
company guide all decisions for all
functional areas (e.g., marketing, production, human
resources, finance, etc.)
Step 2: Determine an Initial Price
With the objectives in Step 1 providing guidance
for setting price, the marketer next begins the task of
determining an initial price level. We say initial because in
many industries this step involves setting a starting point
from which further changes may be
made before the customer pays the final price.
Cost Pricing
Under cost pricing the marketer primarily looks at
production costs as the key factor in determining the initial
price. This method offers the advantage of being easy to
implement as long as costs are known. But one major
disadvantage is that it does not take into consideration the
target market’s demand for the product. This could
present major problems if the product is operating in a
highly competitive market where competitors frequently
alter their prices. There are several types of cost pricing
including:
Markup Pricing
This pricing method used by many resellers, who
acquire products from suppliers, is one in which final price
is determined by adding a certain percentage
to the cost of the product.
 Markup on Cost – Using this method price is
determined by simply multiplying the cost of each item by
a predetermined percentage then adding the result to
the cost.
Cost-Plus Pricing
In the same way markup pricing arrives at price by
adding a certain percentage to the product’s cost, cost-
plus pricing also adds to the cost by using a fixed
monetary amount rather than percentage
Break even Pricing
Break even pricing is associated with breakeven
analysis, which is a forecasting tool used by marketers to
determine how many products must be sold before the
company starts realizing a profit
Market Pricing
Market pricing is one of the most common
methods for setting price, and the one that seems most
logical given marketing’s focus on satisfying customers.
For those marketers who use market pricing, options
include:
Backward Pricing
In some marketing organizations the price the market is
willing to pay for a product is an important determinant of
many other marketing decisions. This is likely to
occur when the market has a clear perception of what it
believes is an acceptable level
of pricing.
 Odd-Even Pricing - One effect dubbed “odd-even”
pricing relates to whole number pricing where customers
may perceive a significant difference in product price
when pricing is slightly below a whole number value.
 Prestige Pricing - Another psychological effect, called
prestige pricing, points to a strong correlation between
perceived product quality and price. The higher the
price the more likely customers are to perceive it has
being higher quality compared to a lower priced product
Price Lining
Price lining or product line pricing is a method that
primarily uses price to create
the separation between the different models.
Competitive Pricing
When basing pricing decisions on how competitors are
setting their price, firms
may follow one of the following approaches:
 Below Competition Pricing - A marketer attempting to
reach objectives that
require high sales levels (e.g., market share objective)
may monitor the market
to insure their price remains below competitors.
 Above Competition Pricing - Marketers using this
approach are likely to be
perceived as market leaders in terms of product features,
brand image or other
characteristics that support a price that is higher than what
competitors offer.
 Parity Pricing - A simple method for setting the initial
price is to price the product
at the same level competitors’ price their product
Bid Pricing
Bid pricing typically requires a marketer to submit a price
to a potential buyer that is sealed or unseen by
competitors. It is not until all bids are obtained and
unsealed that the marketer is informed of the price listed
by competitors.
Quantity Discounts
Options for offering price adjustments based on quantity
ordered include:
 Discounts at Time of Purchase – The most common
quantity discounts exist when a buyer places an order that
exceeds a certain minimum level. While quantity discounts
are used by marketers to stimulate higher purchase levels,
the rational for using these often rests in the cost of
product shipment
 Discounts on Cumulative Purchases – This method
allows the buyer to receive a discount as more products
are purchased over time.
Trade Discounts
Manufacturers who rely on channel partners to
distribute their products (e.g., retailers, wholesalers) offer
trade discounts off of list price. These discounts function
as an indirect form of payment for a channel member’s
work in helping to market the product.
Essentially the difference between the trade discounted
prices paid by the reseller and the price the reseller
charges its customer will be the re seller's profit.
Special Segment Pricing
In some industries special classes of customers
within a target market are offered pricing that differs from
the rest of the market. The main reasons for doing this
include: building future demand by appealing to new or
younger customers; improving the brand’s image as being
sensitive to customer’s needs; and rewarding long time
customers with price breaks
Geographic Pricing
Products requiring marketers to pay higher costs
that are affected by geographic area in which a product is
sold may result in adjustments to compensate for the
higher expense. The most likely cause for charging a
different price rests with the cost of
transporting a product from the supplier’s distribution
location to the buyer’s place of business. If the supplier is
incurring all costs for shipping then they may charge a
higher price for products in order to cover the extra
transportation costs
Markdowns
The most common method for stimulating
customer interest using price is the promotional markdown
method, which offers the product at a price that is lower
than the product’s normal selling price. There are several
types of markdowns including:
 Temporary Markdown – Possibly the most familiar
pricing method marketers use to generate sales is to offer
a temporary markdown or “sale’ pricing. These
markdowns are normally for a specified period of time the
conclusion of which will result in the product being raised
back to the normal selling price.
 Permanent Markdown – Unlike the temporary
markdown where the price will eventually be raised back
to a higher price, the permanent markdown is intended
to move the product out of inventory. This type of
markdown is used to remove old products that: are
perishable and close to being out of date (e.g., donuts);
are an older model and must be sold to make room for
new models; or are products that the marketer no longer
wishes to sell.
 Seasonal – Products that are primarily sold during a
particular time of the year, such as clothing, gardening
products, sporting goods and holiday-specific items,
may see price reductions at the conclusion of its prime
selling season.
Loss Leaders
An important type of pricing program used primarily by
retailers is the loss leader. Under this method a product is
intentionally sold at or below the cost the retailer pays to
acquire the product from suppliers.
 Buyer Owns Product Outright – The most common
ownership option is for the
buyer to make payment and then obtain full ownership.
 Buyer Has Right to Use but Does Not Have
Ownership – Many products,
especially those labeled as services, permit customers to
make payment in
exchange for the right to use a product but not to own it.

Sales Promotions 2. Early Payment Incentives

As we noted in pricing, marketers may offer several types
of pricing promotions to simulate demand. While we have
already discussed “sale” pricing
as a technique to build customer interest, there are
several other sales promotions that are designed to lower
price. These include rebates, coupons,
trade-in, and loyalty programs.
Bundle Pricing
Another pricing adjustment designed to increase
sales is to offer discounted pricing when customers
purchase several different products at the same time.
Termed bundle pricing, the technique is often used to sell
products that are complementary to a main product. For
buyers, the overall cost of the purchase shows a savings
compared to purchasing each product individually
Dynamic Pricing
The concept of dynamic pricing has received a great deal
of attention in recent years due to its prevalent use by
Internet retailers. But the basic idea of dynamic pricing
has been around since the dawn commerce. Essentially
dynamic pricing allows for the point-of-sale (i.e., at the
time and place of purchase) price adjustments to take
place for customers meeting certain criteria established by
the seller.
For many years marketers operating primarily in the
business market offered
incentives to encourage their customers to pay early.
Typically, business customers are
given a certain period of time, normally 30 or 60 days,
before payment is due.
3. Currency Considerations
Product pricing can be dramatically altered by
international monetary exchange
rates. A company that desires to be a low-price market
leader may find this strategy
works in their home market but currency differences may
move their product’s price to a
mid-price level in other countries.
4. Auction Pricing
One pricing approach that does not fit neatly into the price
setting process we’ve
described is the auction pricing model. Auction pricing is
the reverse of bid pricing, which
we discussed earlier, since it is the buyer who in large part
sets the final price.

Form of Payment
 Immediate Payment in Full – Requires the customer
make full payment at the
time the product is acquired.
 Immediate Partial Payment – Requires the customer
make a certain amount or
percentage of payment at the time the product is acquired.
 Future Payment – Provides the buyer with the
opportunity to acquire use of the
product with payment occurring sometime in the future.
Future payment may
require either payment in full or partial payment.

Other Considerations

1. Ownership Options
An important decision faced by marketers as they are
formulating their marketing
strategy deals with who will have ownership of the product
(i.e., holds legal title) once an
exchange has taken place. The options available include: