Pricing Considerations

and Pricing Strategies

 What is Price?

◼ Price the amount of money charged for a

product or service (narrowest sense)
◼ Price the sum of all the values that
consumers exchange for the benefits of
having or using the product or service

◼ The major determinant of buyer choice

◼ The only element in the marketing mix that
produces revenue
◼ One of the most flexible elements of the mktg mix
 What is Price?

◼ Dynamic Pricing on the Web allows

SELLERS to:
 Monitor customer behavior and tailor offers.
 Change prices on the fly to adjust for changes
in demand or costs.
 Aid consumers with price comparisons.
 Negotiate prices in online auctions and
exchanges.
 Pricing Decisions
◼ Pricing & price competition important problem
facing many mktg managers

◼ Common mistakes in pricing:

 Companies are too quick to reduce prices in order to sell
 Pricing is too cost-oriented
 Price is not revised often enough to reflect market changes
 Price is set without taking into account other elements of
the marketing mix
 Price is not varied enough for different products, market
segments and purchase occasions
 Factors Affecting Price Decisions

External Factors
Internal Factors
Nature of the market
Marketing Objectives
Marketing Mix Strategy
Pricing and demand
Decisions Competition
Costs
Other environmental
Organizational
factors (economy,
considerations
resellers, government)
Factors Affecting Price Decisions

Internal Factors
◼ Market positioning influences
◼ Marketing objectives pricing strategy
◼ Pricing objectives:
◼ Marketing mix
 Survival
strategies  Current profit
◼ Costs maximization
 Market share leadership
◼ Organizational  Product quality
considerations leadership
 Internal Factors Affecting Pricing Decisions:
Marketing Objectives

Survival
Low Prices to Cover Variable Costs and
Some Fixed Costs to Stay in Business.

Current Profit Maximization

Choose the Price that Produces the
Marketing 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.
 Internal Factors Affecting Pricing Decisions:
Marketing Objectives

◼ Other specific objectives include:

 Set prices low to prevent competition from
entering the market,
 Set prices at competitors’ level to stabilize the
market
 Set prices to keep the loyalty and the support of
resellers
 Prices might be reduced temporarily to create
excitement or draw more customers.
 One product may be priced to help the sales of
other products in the company’s line
Factors Affecting Price Decisions

Internal Factors ◼ Pricing must be carefully

coordinated with the other
marketing mix elements to form
◼ Marketing objectives a consistent mktg program
◼ Some companies make their
◼ Marketing mix pricing decisions first and base
other mktg mix decisions on
strategies  “Target costing” is often used
to support product positioning
◼ Costs strategies based on price
◼ Some others de-emphasize
◼ Organizational price and use other mktg mix
tools to create nonprice
considerations positions
 Factors Affecting Price Decisions

Internal Factors
◼ The company wants to charge
a price that covers all its costs
◼ Marketing objectives and provides a fair rate of
◼ Marketing mix return for its effort and risk
 low-cost producers
strategies
◼ Types of costs
◼ Costs ◼ Management needs to know
how costs vary at different
◼ Organizational production levels
considerations  Experience (learning) curve
affects price
 Types of Costs

Fixed Costs Variable Costs

Costs that don’t Costs that do vary
vary with sales or directly with the
production levels. level of production.
(Executive Salaries, (Raw materials)
Rent )

Total Costs
Sum of the Fixed and Variable Costs for a Given
Level of Production
 Experience Curve

◼ As the firm gains experience in production;

 The experience curve (or the learning curve)
indicates that average cost drops with accumulated
production experience.
 Strategy company lowers the prices → sales
increases → costs continue to decrease → and then
lowers prices further
 Risks are present with this strategy: aggressive
pricing may give the product a “cheap image”
◼ Assumption: the competitors are not fighting back
Factors Affecting Price Decisions

Internal Factors ◼ Who sets the price?

 Small companies: CEO or
top management
◼ Marketing objectives  Large companies:
Divisional or product- line
◼ Marketing mix managers
strategies ◼ Where pricing is a key
factor a pricing
◼ Costs department
◼ Others exerting an
◼ Organizational influence on pricing : sales
managers, production
considerations managers, finance
managers, accountants
Factors Affecting Price Decisions

External Factors ◼ Demand sets a ceiling on the

price that the company can
charge for its product
◼ Nature of market ◼ Pricing freedom varies with
and demand different types of markets
◼ Pricing is affected also by
◼ Competitors’ costs, consumer perceptions of price
prices, and offers and value
◼ Marketers need to know how
◼ Other environmental responsive or elastic the
elements demand would be to a change in
price (Price Elasticity)
Price Elast.of Dem.= % Ch.in Quantity Demanded
% Change in Price
 Price Elasticity of Demand

P2
Price

P1 A. Inelastic Demand -
Demand Hardly Changes With
a Small Change in Price.
Q2 Q1
Quantity Demanded per Period

P’2
Price

P’1 B. Elastic Demand -

Demand Changes
Greatly With
Q2 Q1 a Small Change in
Quantity Demanded per Period Price.
Factors Affecting Price Decisions

External Factors
◼ Consider competitors’ costs,
prices, and possible reactions
◼ Nature of market ◼ Pricing strategy influences the
nature of competition
and demand  Low-price low-margin
strategies inhibit competition
◼ Competitors’ costs,  High-price high-margin
strategies attract competition
prices, and offers ◼ The company needs to
benchmark its costs against its
◼ Other environmental competitors’ costs (to learn
whether it is operating at a cost
elements advantage or disadvantage)
Factors Affecting Price Decisions

External Factors
◼ Economic conditions
 Affect production costs
◼ Nature of market  Affect buyer perceptions of
price and value
and demand
◼ Reseller reactions to prices
◼ Competitors’ costs, must be considered
prices, and offers ◼ Government may restrict or
limit pricing options
◼ Other environmental ◼ Social considerations may
elements be taken into account
 General Pricing Approaches
◼ Cost-based pricing
 Cost-plus pricing approach that adds a standard
markup to the cost of the product - the simplest
pricing method
◼ Ignores demand and competition

◼ Popular pricing technique because:

 It simplifies the pricing process
 Price competition may be minimized
 It is perceived as more fair to both buyers and sellers
 General Pricing Approaches

 Break-even pricing (target profit pricing)  setting

price to break-even on the cost of making and
marketing products or to make the target (desired)
profit
◼ Break-even charts show total cost and total revenues at
different levels of unit volume.
◼ The intersection of the total revenue and total cost curves
is the break-even point.
◼ Companies wishing to make a profit must exceed the
break-even unit volume.
 General Pricing Approaches
◼ Value-based pricing setting prices based on
buyers’ perceptions of value rather than on the seller’s
cost.
 Uses buyers’ perceptions of value rather than seller’s costs to
set price.
 Measuring perceived value can be difficult.
 Consumer attitudes toward price and quality
 More and more marketers have adopted value pricing
strategies offering just the right combination of quality and
good service at a fair price
◼ Value pricing at the retail level:
Everyday low pricing (EDLP) vs. high-low (hi-lo) pricing
 General Pricing Approaches
◼ Competition-Based Pricing:
 Going-rate pricing prices are set based largely on
following competitors’ prices rather than on company
costs or demand.
◼ Firms feel that the going rate represents the collective
wisdom of the industry
◼ They also feel that holding to the going-rate price will
prevent harmful price wars.
 May price at the same level, above, or below the
competition
 Sealed-bid pricing the firm sets prices based on
how the firm thinks competitors will price rather than
on its own costs or demand estimates
 The Three C’s Model for Price
Setting

Price Floor Competitors’ Price Ceiling

Consumer
Costs prices and perceptions
No possible prices of No possible
profit of value demand
substitutes
below above
this price this price
 Pricing Strategies
◼ A company sets no single price, but a pricing
structure that covers different items in its line

◼ Pricing structure changes over time as products move

through their life cycles

◼ The company adjusts prices in order to reflect changes

in costs and demand & to account for changes in buyers
and situations

◼ The company initiates price changes and respond to

them as the competitive environment changes
 New Product Pricing Strategies
▪ Market Skimming setting a high price for a new
product to “skim” maximum revenue from the
segments willing to pay the high price.

◼ Conditions:
 A sufficient number of buyers must have a high current
demand
 The product’s quality and image must support its high
price (high price should communicate a superior product)
 The unit costs of producing a small volume cannot be so
high that they cancel the advantage of charging more
 The high initial price should not attract more competitors to
the market
Skimming Pricing Example

◼ Most consumer
electronic products
enter at a high price
with skimming.
◼ For example, the
iPod entered around
$259 in 2004. Check
the current price at
amazon.com
 New Product Pricing Strategies
▪ Market Penetration setting a low price for a new
product in order to attract a large number of buyers
and a large market share
◼ Conditions:
 The market must be highly price sensitive and low
price produces more market growth
 Production and distribution costs fall as sales volume
increases (result of accumulated production
experience)
 The low price discourages actual and potential
competition
 Product Mix Pricing

◼ Product Line Pricing

◼ Optional-Product Pricing
◼ Captive-Product Pricing
◼ By-Product Pricing
◼ Product Bundle Pricing
 Product Mix Pricing

1.) Product Line Pricing setting the price steps

between various products in a product line;
based on cost differences between the products,
customer evaluations of different features, and
competitors’ prices.
◼ Sellers use a well-established price points for the
products in their line
◼ The seller’s major task is to establish perceived quality
differences that support the price differences
Product Line Pricing

Oral B has a full line

of electric
toothbrushes. Visit
the site to see the
products and
examine attributes
which justify price
differences
 Product Mix Pricing

2.) Optional Product Pricing pricing optional or

accessory products sold with the main product.

3.) Captive Product Pricing setting a price for

products that must be used along with a main
product.
▪ Two-Part Pricing in the case of services
▪ the price of the service is broken into a fixed fee
plus a variable usage rate
Captive Product Pricing

Companies like Gillette will often price the

razor at or below cost and make the profit on
the blades
 Product Mix Pricing

4.) By-Product Pricing setting a price for

byproducts in order to make the main product’s
price more competitive

5.) Product Bundle Pricing combining several

products and offering the bundle at a reduced
price
Bundle Pricing
 Price Adjustment Strategies
◼ Discount and Allowance Pricing – reducing prices to
reward customer responses such as paying early or
promoting the product
◼ Segmented Pricing – adjusting prices to allow for
differences in customers, products, or locations
◼ Psychological Pricing – adjusting prices for
psychological effect
◼ Promotional Pricing – temporarily reducing prices to
increase short-run sales
◼ Geographical Pricing – adjusting prices to account for
the geographic location of customers
◼ International Pricing – adjusting prices for international
markets
 Price Adjustment Strategies
Discount and Allowance Pricing
◼ A cash discount price reduction to buyers who pay
their bills without delay
◼ A quantity discount price reduction to buyers who
buy in large volumes
◼ A functional discount price reduction offered by the
seller to the trade channel members if they perform
certain functions such as selling, storing and record-
keeping
◼ A seasonal discount price reduction to buyers who
buy merchandise or services out of season
◼ Allowances other types of reductions from the list
price (trade-in-allowances, promotional allowances)
 Price Adjustment Strategies
▪ Segmented (Discriminatory) Pricing when a
company sells a product or service at two or more prices
that do not reflect a proportional difference in costs

◼ Customer-segment pricing different customer groups are

charged different prices for the same product
◼ Product-form pricing different versions of the product are
priced differently but not accoding to differences in their costs
◼ Location pricing the same product is priced differently at
different locations, even though the cost of offering at each
location is the same
◼ Time pricing prices are varied by season, day or hour
Movie
theatres,
resorts and
hotels often
use
segmented
pricing for
children
 Price Adjustment Strategies
▪ Psychological Pricing psychology of prices are
considered in addition to their economics

◼ Especially effective with ego-sensitive products

(such as perfume and expensive cars)
 Relationship between price and quality perceptions
◼ when alternative information about true quality is available 
price becomes a less significant indicator of quality
◼ when this information is not available price acts as a quality
signal
 “Reference prices” prices that buyers carry in their
minds and refer to when looking at a given product
 Setting prices ending with odd numbers (e.g.19.9 YTL)
 Price Adjustment Strategies
▪ Promotional Pricing temporarily pricing
products below the list price and sometimes even
below the cost, to increase short-term sales
◼ Several forms of promotional pricing:
 Loss leader pricing
 Special-event pricing
 Cash rebates
 Low-interest financing
 Longer warranties
 Free maintenance and service contracts
 Discounts from normal prices
 Price Adjustment Strategies
▪ Geographical Pricing involves the company
deciding how to price its products to different
customers in different parts of the country.

◼ Important issues:
 Whether the company should charge higher prices to
distant customers to cover the higher shipping costs
and risk losing their business
 Whether it should charge a lower price hoping that a
lower price will generate a higher sales volume
 How to get paid?
 Price Adjustment Strategies

▪ International Pricing involves companies in

deciding what prices to charge in different
international countries in which they market
◼ The price to be set in a specific country depends on:
 Economic conditions
 Competitive situation
 Laws and regulations
 Development of the retailing and wholesaling system
 Specific consumer perceptions and preferences
 Marketing objectives of the company
 Price Changes
◼ Price Cuts – situations leading a firm to
consider price cutting:
 Excess capacity
 Declining market share
 To dominate the market through lower costs

◼ Price Increases
 Costinflation
 Overdemand
 Price Changes
◼ Buyers’ Reactions to Price Cuts:
 Current models are being replaced by newer models
 Current models have some fault and are not selling well
 The firm is in financial trouble and may not stay in
business
 Price will come down even further
 Quality has been reduced

◼ Buyers’ Reactions to Price Increases:

 The item is in demand and will be unobtainable unless it
is purchased soon
 The item represents an unusually good value
 Price Changes
◼ Competitors are most likely to react when:
 the number of the firms in the industry is small
 the product is homogenous
 the buyers are higly informed

◼ Competitors’ Reactions on a price cut:

 the company is trying to obtain a larger market share
 the company is dooing poorly and trying to increase
its sales
 the company wants the whole industry to reduce
prices to increase total demand
 Price Changes

◼ Responses to Competitors’ Price Cuts:

 Reduce the price to match competitor’s price
 Maintain the company’s price but raise the
perceived quality of its offer
 Improve quality and increase price
 Launch a new low-price fighting brand