Chapter 10

Strategic Pricing
Techniques

Pacheco, Ivan
Venturayo, Haven Well
Ginggo, Marilyn
(BSA1C)
 Objectives

• Describe six major stages of process to

establish prices
• Explore issues in developing pricing objectives
• Understand importance of identifying target
market’s evaluation of price
• Examine how marketers analyze competitors’
prices
• Describe bases for setting prices
• Explain types of pricing strategies

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Stages For Establishing Prices

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 Development of
Pricing Objectives
 Pricing Objectives

• Survival
• Profit
• Return on Investment (ROI)
• Market Share
• Cash Flow
• Status Quo
• Product Quality

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 Pricing Objectives And
Typical Actions To Achieve Them

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Assessment of the
Target Market’s
Evaluation of Price
 • Price depends on:
– Type of product
– Type of target market
– Purchase situation

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 High-quality
products are
usually priced
to reflect the
quality level

© 2005 BMW of North America, LLC, used with permission. The BMW name and logo are registered trademarks.

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 Examples Of Perceptions
Of Product Value

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 Some prices are
set higher than
the competition
to create an
exclusive image

FIJI ® and all other trademarks, copyrights and intellectual property used herein are
the property of FIJI Water Company LLC or its affiliates." Used by permission

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Evaluation of
Competitors’
Prices
• Competitive pricing strategy is not at all
about price matching and undercutting
competitor prices. It is setting the price of
a service or product based on what the
competition is charging. It is much more
than just possessing an overall idea of the
prices charged by competitors for services
or products. It is also essential to have a
strong knowledge of the trends in which
services/products prices have been
increased or lowered by them.
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• Now, according to the competitive pricing
strategy, 3 different stands can be taken:
- Pricing similar products higher than what your
competitors do, need that your product has
something special to offer. Improvements and
new product features can explain why you
are charging a higher price. For example –
special customer care, installation, delivery or
adding more years of warranty can also mark
distinction and explain the price difference
between similar products.
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 - Pricing lower than what your competitors are
charging depends on your resources. This kind
of strategy is appropriate for you if it possible for
you to maintain and increase the volumes with
no sudden rise in costs. This strategy involves
risk of diminishing your profit margins and might
lead to a loss. Hence, it is essential to identify
competition and evaluate competitors and what
they are up to.

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 - Pricing similar to what your competitors are
offering diminishes the distinguishing factors.
However, this kind of strategy helps put the
focus on your product. If you are selling a
product with more features at the same price,
then it is likely to be successful in the market.

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 Selection of a
Basis of Pricing
 Selection of a Basis of Pricing

• Cost
• Demand
• Competition
• Other

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 Cost Based Pricing

• Cost-based pricing can be defined as a

pricing method in which a certain
percentage of the total cost of production
is added to the cost of the product to
determine its selling price. Cost-based
pricing can be of two types, namely, cost-
plus pricing and markup pricing.

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 Cost Based Pricing

• Cost-plus pricing – adding a specified

amount to the seller’s costs

• Markup – Adding to the cost of the product

a predetermined percentage of that cost

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 • Total Cost or Selling Price = Fixed +
Variable Cost

• Selling Price = Total Cost + Specified

Amount

• Selling Price = Total Cost + Mark-up

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 Demand-Based Pricing

Customers pay a higher price when demand

for the product is strong and a lower price
when demand is weak

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
Non-Price Factors
Affecting Demand
• Product • Market
– Quality – Degree of competition
– Range – Competitor action/reaction
– Nature- essential/luxury – General economic
– Substitutes conditions

• Support
– Service at point of sale
& after
– Advertising/promotion
– Distribution Methods
“Demand based pricing”, N. Coulthurst, 4/3/02,
http://www.accaglobal.com/publications/studentaccountant/404831

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 Competition-Based Pricing

• Competition-based pricing refers to a

method in which an organization considers
the prices of competitors’ products to set
the prices of its own products. The
organization may charge higher, lower, or
equal prices as compared to the prices of
its competitors.

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 Other Pricing

• Value Pricing
• Target Return Pricing
• Going Rate Pricing
• Transfer Pricing

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 Selection of a
Pricing Strategy
 Selection of a Pricing Strategy

• Differential Pricing – different prices to different buyers

for the same product
• New-Product Pricing
• Product-Line Pricing – establishing prices of multiple
products within a product line
• Psychological Pricing – influence customer perception
to make a product’s price attractive
• Professional Pricing – fees set by experienced people
in particular field
• Promotional Pricing

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 Common Pricing Strategies

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Differential Pricing Techniques

• Negotiated – final price established through buyer/seller

bargaining
• Secondary-market – one price for primary target market
and different price for another
• Periodic discounting – systematic temporary price
reduction
• Random discounting – unsystematic temporary
price reduction

Poll and comments on differential

pricing at Amazon.com.

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 New-Product Pricing

• Price skimming – is a product pricing strategy by

which a firm charges the highest initial price that
customers will pay and then lowers it over time.
• Penetration pricing – prices set below competing
brands to penetrate market and gain market
share quickly

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 Steps In
Developing New Product Pricing
1) Develop Marketing Strategy
2) Make Marketing Mix Decisions
3) Estimate Demand Curve
4) Calculate Cost
5) Understand Environmental Factors
6) Set Pricing Objectives
7) Determine Pricing

NetMBA, “Pricing Strategy”, 2005,

http://www.netmba.com/marketing/pricing/

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Product-Line Pricing Strategies
• Captive – Some businesses sell products in
their line at a low price to get consumers to use
the base product and then they encourage them
to buy add-ons or complementary products.
• Premium – pricing highest-quality product
higher than other models
• Bait – low pricing on one item in line with
intention of selling higher-priced item in the line
• Price Lining – limited number of prices for
selected lines of merchandise
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 Psychological
Pricing Techniques
• Reference pricing – moderate pricing positioned
next to a more expensive brand
• Bundles pricing – packaging multiple products
to be sold at a single price
• Multiple-unit pricing – packaging together
two or more identical products to be sold at a
single price
• Everyday low prices (EDLP) – pricing products
low on a consistent basis

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 More Psychological
Pricing Techniques
• Odd-even pricing – ending the price with a
certain number to influences buyers’ perceptions
• Customary pricing – on the basis of tradition
• Prestige pricing – setting prices at a high level to
convey prestige

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 Consumers
associate
higher prices
with higher
quality

Reprinted with permission of Mannington Mills, Inc.

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Sample Prestige Product Prices

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Concept of Professional Pricing

Professional pricing carries the idea that

professional have an ethical responsibility
not to overcharge customers

Aetna Physician Pricing Transparency

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 Types Of
Promotional Pricing
• Price Leader- firm prices a few products below
the usual markup, near cost, or below cost
• Special-Event- advertised sales or price-cutting
linked to a holiday, a season, or an event
• Comparison Discounting- price is set at a
specific level and simultaneously compares it
with a high price

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 Special events
are often
seasonal
and employ
special-event
pricing

Reprinted with permission of Montage, Inc.

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Determination of
Price
 Determination of
Price: Pricing Strategy
• Yields a certain price- may need refining
• Helps in setting final price
• In absence of government price controls,
remains flexible and convenient to adjust the
marketing mix

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