Chapter 10

Pricing Products:
Pricing Considerations and Strategies

10-1
Road Map: Previewing the Concepts
Identify and explain the external and internal factors
affecting a firm's pricing decisions.
Contrast the three general approaches to setting
prices.
Describe the major strategies for pricing imitative and
new products.
Explain how companies find a set of prices that
maximizes the profits from the total product mix.
Discuss how companies adjust their prices to take
into account different types of customers and
situations.
Discuss the key issues related to initiating and
responding to price changes. 10-2
Factors Affecting Price Decisions
(Fig. 10-1)

10-3
Internal Factors Affecting Pricing
Decisions: Marketing Objectives
Survival
Low Prices Hoping to Increase Demand.

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.
10-4
Four Seasons Hotel
Four Seasons uses the
product quality
leadership strategy.
It starts with very high
quality service, then
charges a price to
match.
http://www.fourseasons.
com
10-5
Internal Factors Affecting Pricing
Decisions: Marketing Mix Strategy

Product Design

Nonprice
Price Distribution
Positions

Promotion
10-6
Types of Cost Factors that
Affect Pricing Decisions
Fixed Costs Variable Costs
(Overhead)
Costs that don’t Costs that do vary
vary with sales or directly with the
production levels level of production
Executive Salaries, Rent Raw materials

Total Costs
Sum of the Fixed and Variable Costs for Any Given
Level of Production
10-7
External Factors Affecting Pricing
Decisions
Market and
Demand

Competitors’ Costs,
Prices, and Offers

Other External Factors

Economic Conditions
Reseller Reactions
Government Actions
Social Concerns
10-8
Market and Demand Factors
Affecting Pricing Decisions
Pricing in Different Types of Markets

Pure Competition
Many Buyers and Sellers Pure Monopoly
Who Have Little Single Seller
Effect on the Price

Monopolistic Oligopolistic
Competition Competition
Many Buyers and Sellers Few Sellers Who Are
Who Trade Over a Sensitive to Each Other’s
Range of Prices Pricing/ Marketing
Strategies
10-9
Demand Curve (Fig. 10-2)

10-10
Price Elasticity of Demand
A. Inelastic Demand -
Demand Hardly Changes With
a Small Change in Price.
Price

P2
P1

Q2 Q1
Quantity Demanded per Period
B. Elastic Demand -
Demand Changes Greatly With
Price

P’ a Small Change in Price.

2
P’1

Q2 Q1
Quantity Demanded per Period 10-11
Major Considerations in Setting
Price (Fig. 10-3)

10-12
Cost-Based Pricing
Certainty About
Costs
Simplest
Cost-Plus
Ethical
Factors Pricing
Pricing is Pricing is an
Situational Method
Simplified Approach That
Unexpected
Adds a
Standard
Price Competition
Is Minimized Markup to the
Attitudes Ignores
Costofof the Current
Others
Product Demand &
Fairer to Buyers Competition
& Sellers
10-13
Breakeven Analysis or Target Profit
Pricing (Fig. 10-4)
Tries to Determine the Price at Which a Firm
Will Break Even or Make a Certain Target Profit.
Total Revenue
12
Cost in Dollars (millions)

10 Target Profit
($2 million)
8
6 Total Cost
4 Fixed Cost
2

200 400 600 800 1,000

Sales Volume in Units (thousands)
10-14
Cost-Based Versus Value-Based
Pricing (Fig. 10-5)

10-15
After examining Figure 10-5, compare
and contrast cost-based pricing and
value-based pricing.
What are situations that favor each
pricing method?

10-16
Competition-Based Pricing
Methods for
Setting Prices

Going-Rate
Company Sets Prices Based on What
Competitors Are Charging
Sealed-Bid
? Company Sets Prices Based on
? What They Think Competitors
Will Charge
10-17
New-Product Pricing Strategies
Market-Skimming Use Under These
Conditions:
 Setting a High Price for Product’s Quality and
a New Product to Image Must Support Its
“Skim” Maximum Higher Price.
Revenues from the Costs Can’t be so High that
Target Market. They Cancel the Advantage
of Charging More.
 Results in Fewer, But Competitors Shouldn’t be
More Profitable Sales.
Able to Enter Market Easily
 I.e. Intel and Undercut the High
Price.
10-18
New-Product Pricing Strategies
Use Under These Market Penetration
Conditions:
Market Must be Highly  Setting a Low Price for
Price-Sensitive so a Low a New Product in Order
Price Produces More to “Penetrate” the
Market Growth. Market Quickly and
Production/Distribution Deeply.
Costs Must Fall as Sales
Volume Increases.  Attract a Large Number
Must Keep Out Competition of Buyers and Win a
& Maintain Its Low Price Larger Market Share.
Position or Benefits May
Only be Temporary.  I.e. Dell
10-19
Form students into groups of three to five.
Which pricing strategy--market skimming or
market penetration--does each of the
following companies use?
McDonald’s,
Sony (television and other home electronics),
Bic Corporation (pens, lighters, shavers, and
related products), and
IBM (personal computers).

10-20
Product Mix-Pricing Strategies:
Product Line Pricing
Involves setting price
steps between various
products in a product
line based on:
Cost differences between
products,
Customer evaluations of
different features, and
Competitors’ prices.

10-21
Product Mix-Pricing Strategies
Optional-Product
Pricing optional or
accessory products sold
with the main product.
i.e camera bag.
Captive-Product
Pricing products that
must be used with the
main product. i.e. film.

10-22
Product Mix-Pricing Strategies

By-Product Product-
Pricing low-value Bundling
by-products to
Combining
get rid of them
and make the several products
main product’s and offering the
price more bundle at a
competitive. reduced price.
I.e. sawdust, I.e. theater
Zoo Doo season tickets.

10-23
Discount and Allowance Pricing

Adjusting Basic Price to Reward Customers

For Certain Responses

Cash Discount Seasonal Discount

Quantity Discount Trade-In Allowance

Functional Discount Promotional Allowance

10-24
Segmented Pricing

Selling Products At 2 or More Prices Even

Though There is No Difference in Cost

Customer - Segment Location Pricing

Product - Form Time Pricing

10-25
Psychological Pricing
Considers the psychology of
prices and not simply the
economics.
Customers use price less
when they can judge quality
of a product.
Price becomes an important
quality signal when
customers can’t judge
quality; price is used to say
something about a product.
10-26
Promotional Pricing
Loss Leaders
Temporarily Pricing
Special-Event Pricing Products Below List
Cash Rebates Price Through:

Low-Interest Financing

Longer Warranties
Free Maintenance
Discounts
10-27
Other Price Adjustment
Strategies
•Pricing products for customers
located in different parts of
Geographical Pricing the country or world.
• i.e. FOB-Origin, Uniform-
Delivered, Zone, Basing-
Point, & Freight-Absorption.

• Adjusting prices for customers

International Pricing in different counties.
• Price Depends on Costs,
Consumers, Economic
Conditions, Competitive
Situations, & Other Factors.
10-28
Initiating Price Changes

Why? Why?
Excess Capacity Cost Inflation
Falling Market Share Overdemand:
Dominate Market Company Can’t
Through Lower Costs Supply All Customers’
Needs

10-29
Reactions to Price Changes
Price Cuts Are Seen by Buyers As: Competitors Mostly React When:

Being Replaced by Number of Firms is

Newer Models Small

Current Models Are Not Product is Uniform

Selling Well
Company is in Financial Buyers are Well
Trouble Informed
Quality Has Been
Reduced
Price May Come Down
Further
10-30
Assessing/Responding to
Competitor’s Price Changes (Fig. 10-
6)

10-31
Public Policy Issues in Pricing
(Fig. 10-7)

10-32
Rest Stop: Reviewing the Concepts
Identify and explain the external and internal factors
affecting a firm's pricing decisions.
Contrast the three general approaches to setting prices.
Describe the major strategies for pricing imitative and
new products.
Explain how companies find a set of prices that
maximizes the profits from the total product mix.
Discuss how companies adjust their prices to take into
account different types of customers and situations.
Discuss the key issues related to initiating and
responding to price changes.

10-33