UNIT 06 1

Learning Objective 1

“What is a price?” and the importance of pricing in today’s fast-

changing environment

Three major pricing strategies and the importance of understanding

customer-value perceptions, company costs, and competitor strategies
when setting prices

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 Price is the amount of money charged for a product or service
 More broadly, price is the sum of all the values that customers give
up in order to gain the benefits of having or using a product or
service
 Price is the assignment of value, or the amount the consumer must
exchange to receive the offering
 Price is the element in the marketing mix that produces revenue
 Price is one of the most flexible marketing mix elements
 Pricing should be customer-centric

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 Cost-based pricing is often product driven based on the cost of the
product. Cost-based pricing is product driven

 Customer value-based pricing uses buyers’ perceptions of value,

not the seller’s cost, as the key to pricing
 The company first assesses customer needs and value perceptions,
then sets its target price based on customer perceptions of value.
This is customer driven

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 Price is set to match perceived value

 Price is considered along with the other marketing mix variables

before the marketing program is set

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 Cost-based pricing sets prices based on the costs for
producing, distributing, and selling the product plus a fair
rate of return for effort and risk

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 Fixed costs are the costs that do not vary with production or sales level
 Rent or opportunity cost
 Air conditioning
 Executive salaries

 Variable costs vary directly with the level of production

 Raw materials
 Packaging
 Elecricity

 Total costs are the sum of the fixed and variable costs for any given
level of production

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 To price wisely, management needs to know how its costs
vary with different levels of production

 Average cost tends to fall with accumulated production

experience

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SRAC Short Run Average Cost LRAC Long Run Average Cost

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 Cost-plus pricing adds a standard markup to the cost of
the product

 Advantages
 Sellers are certain about costs
 Price competition is minimized
 Buyers feel it is fair

 Disadvantages
 Ignores demand and competitor prices

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 Break-even pricing (target return pricing) is setting price to break
even on costs or to make a target return

 It is the practice of setting a basic price point at which a business will

earn zero profits on a sale
 The intention is to use low prices as a tool to gain market share and
drive competitors from the marketplace
 Target pricing uses the concept of a break-even chart that shows the
total cost and total revenue expected at different sales volume levels
 The manufacturer should consider different prices and estimate
break-even volumes, probable demand, and profits for each
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 Good-value pricing is offering just the right combination
of quality and good service at a fair price

 Everyday low pricing (EDLP) involves charging a

everyday low price
 It is a strategy promising consumers a low price without the
need to wait for sale price events. EDLP saves retail stores
the effort and expense needed to mark down prices in the
store during sale events, as well as to market these events
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 High-low pricing involves charging higher prices on an
everyday basis but running frequent promotions to lower
prices temporarily on selected items

 Value-added pricing attaches value-added features and

services to differentiate the companies offers

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 Competition-based pricing is setting prices based on
competitors’ strategies, costs, prices, and market offerings

 Consumers will base their judgments of a product’s value

on the prices that competitors charge for similar products

 No matter what price you charge relative to the

competition, high, low, or in-between, be certain to give
customers superior value for that price

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 Learning Objective 2

Market Mix and Pricing

Important external and internal factors affecting a firm’s pricing

decisions

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 Before setting price, the company must decide on its overall marketing
strategy for the product or service. Pricing strategy is largely determined
by decisions on market positioning
 Price is only one of the marketing mix tools that a company uses to achieve
its marketing objectives
 Price decisions must be coordinated with product design, distribution, and
promotion decisions to form a consistent and effective integrated
marketing program
 Companies often position their products on price and then tailor other
marketing mix decisions to the prices they want to charge

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 Target-costing starts with an ideal selling price based on
consumer value considerations and then targets costs that
will ensure that the price is met

 Companies may de-emphasize price and use other

marketing mix tools to create non-price positions

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 Who should set prices?
 Who can influence prices?

 In small companies, prices are often set by top management rather than by the
marketing or sales departments
 In large companies, pricing is typically handled by divisional or product line
managers
 In industrial markets, sales people may be allowed to negotiate with customers
within certain price ranges
 In industries in which pricing is a key factor, companies often have pricing
departments to set the best prices or to help others in setting them
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 Pure Monopolistic
Competition Competition

Oligopolistic Pure
Competition Monopoly

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 Before setting prices, the marketer must understand the
relationship between price and demand for its products

 Pure Competition-perfect competition

 Monopolistic Competition-similar products but not identical like
restaurants
 Oligopolistic Competition-market dominated by large firms, do not
compete in price rather advertising like automobiles or telecom
 Pure Monopoly-no competitors like LESCO

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 The market consists of many buyers and sellers trading in a
uniform commodity

 No single buyer or seller has much effect on the going

market price

 Ina purely competitive market, marketing research,

product development, pricing, advertising, and sales
promotion play little role

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 The market consists of many buyers and sellers who trade
over a range of prices rather than a single market price

 A range of prices occurs because sellers can differentiate

their offers to buyers

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 The market consists of a few sellers who are highly
sensitive to each other’s pricing and marketing strategies

 There are few sellers because it is difficult for new sellers

to enter the market

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 The market consists of one seller

 The seller may be a government monopoly, a private

regulated monopoly, or a private unregulated monopoly

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 The relationship between the price charged and the resulting demand level
is shown in the demand curve

 In the normal case, demand and price are inversely related; that is, the
higher the price, the lower the demand

 In a monopoly, the demand curve shows the total market demand resulting
from different prices

 If the company faces competition, its demand at different prices will

depend on whether competitors’ prices stay constant or change with the
company’s own prices

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 The demand curve shows the number of units the market
will buy in a given period at different prices

 Demand and price are inversely related

 Higher price = lower demand

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 Price elasticity is a measure of the sensitivity of demand
to changes in price

 In-elastic demand is when demand hardly changes with a

small change in price

 Elastic demand is when demand changes greatly with a

small change in price

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 Buyers are less price sensitive when the product they are
buying is unique or when it is high in quality, prestige, or
exclusiveness or substitute products are hard to find or
when they cannot easily compare the quality of substitutes

 If demand is elastic rather than inelastic, sellers will

consider lowering their prices

 A lower price will produce more total revenue

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 Clearance markdowns for fashion merchandise
 Coupons
 Price bundling
 McDonald’s Value Meal

 Multiple-unit pricing or quantity discount

 Variable pricing by market segments: Charge different groups different prices
 Seniors discounts
 Kids menu

 Zone Pricing: Charge different prices in different stores, markets, regions

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Subscription This is a traditional publisher revenue model
which can be offered for different periods at
different price points.
Pay per view A fee for a single download or view session (relatively
more expensive than a subscription).
E.g. Music service Napster offers vouchers for
download in a similar way to a mobile phone
company “pay as you go” model.
Bundling Different channels or content can be grouped at a
reduced price compared to Pay Per View.

Ad- supported content There is no direct price set here; instead, the
publisher’s main revenue source is through adverts on
the site (either CPM display advertising on-site using
banner ads and skyscrapers or CPC which stands for
cost per click, more typical of search ad networks.
Other options include affiliate revenue from sales on
third-party sites or offering access to subscriber lists.

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 Cinemas are using flexible pricing to fill their seats using price
discrimination

 The Odeon group is experimenting with a flexible ticketing model,

pioneered by airlines and hotels. This sees prices change in real time
depending on demand

 Cinema companies charge more to those who want to see a newly released
blockbuster in the first weeks and for better seats

 In Germany is normal for every seat to be individually priced

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 Medium
(online/
Off-line) Manufacturer
Customer interaction
factors (retailer cost.
(stochastic Private label/
demand) National
brand)

Retailer
Pricing Product type
In-Channel Strategi (fashion,
competition es staple,
(pricing, loss durable) &
leader complement
strategy) arily
Cross-Channel
competition and
store Other
positioning/ marketing mix
Format (promotion,
(department, product
specialty, assortment,
discount, customisation)
grocery, drug,
convenience)
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Source: Kopalle et al (2009)
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 Economic conditions can have a strong impact on the firm’s
pricing strategies

 A boom or recession, inflation, and interest rates affect

consumer spending, consumer perceptions of the product’s
price and value, and the company’s costs of producing and
selling a product

 Social concerns may have to be taken into account

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International pricing framework