Pricing Strategy

What Is a Price?

• Price is the amount of money charged for

a product or service. It is the sum of all
the values that consumers give up in
order to gain the benefits of having or
using a product or service.

• Price is the only element in the marketing

mix that produces revenue; all other
elements represent costs
 Factors to Consider When
Setting Prices
Customer Perceptions of Value

Copyright © 2010 Pearson Education, Inc.  

Chapter 10- slide 3
Publishing as Prentice Hall
 Pricing Quiz
• How much are you willing to pay for these
products/services?
– A Life Insurance Policy
– A pair of jeans
– One year subscription in a gym
– Athletic shoes
– An SUV
– A regular dental check-up
– A hotel room in Nainital (Lake view, AC room)
– An airline ticket from Delhi-Mumbai in December,
2019
 Customer Perceptions of Value

Effective, customer-oriented pricing involves

understanding how much value consumers
place on the benefits they receive from the
product and setting a price that captures this
value
Value-based pricing versus Cost-based
pricing

Value-based pricing is customer driven

Cost-based pricing is product driven
 Customer Perceptions of Value

Value-based pricing uses the buyers’

perceptions of value, not the sellers’ cost, as
the key to pricing. Price is considered before
the marketing program is set.
Customer Perceptions of Value

Value-based pricing

Good-value pricing

Value-added pricing
• Good-value pricing offers the right
combination of quality and good service at a
fair price
• In many cases, existing brands are being
redesigned to offer more quality for a given
price or the same quality for a lower price

• Eg. McDonald’s value meals; Maruti Suzuki,

Patanjali
 Good-value Pricing

Everyday low pricing (EDLP) involves charging a

constant everyday low price with few or no
temporary price discounts E.g. Wal-Mart, Tesco, D
Mart, No-frills airlines

High-low pricing involves charging higher prices on an

everyday basis but running frequent promotions
to lower prices temporarily on selected items E.g.
retailers such as Macy’s, Marks & Spencer, Shoe
companies, Apparel Companies, Nature’s Basket
 Value-added Pricing

• Value-added pricing attaches value-added

features and services to differentiate offers,
support higher prices, and build pricing power

– E.g. Smartphones, Amazon Prime

 Pricing Power

• Pricing power is the ability to escape price

competition and to justify higher prices and
margins without losing market share

• E.g. Bose, Sony, Nike, Luxury brands

 Cost-based Pricing

• Involves setting prices based on the costs for

producing, distributing, and selling the product
plus a fair rate of return for its effort and risk

• Adds a standard markup to the cost of the

product
 Types of Costs

Fixed Variable Total

costs costs costs
 Cost-Plus Pricing

• Cost-plus pricing adds a standard markup to the

cost of the product E.g. construction companies,
manufacturing

• Benefits
– Sellers are certain about costs
– Prices are similar in industry and price competition is minimized
– Consumers feel it is fair
• Disadvantages
– Ignores demand and competitor prices
Break-Even Analysis and Target Profit Pricing

Break-even pricing (or a variation called

Target profit pricing) wherein the firm tries
to determine the price at which it will break
even or make the target profit it is seeking)

Eg. General Motors

Considerations in Setting Price
Other Internal and External Considerations Affecting Price Decisions

• Overall Marketing Strategy, Objectives and

Mix

• Nature of the market and demand

• Competitors’ strategies and prices

Factors to Consider When Setting Price

• Market positioning influences

Internal Factors strategy
• Other pricing objectives:
Marketing – Survival
objectives – Current profit maximization
– Market share leadership
Marketing mix – Product quality leadership
strategies • Not-for-profit objectives:
Costs – Partial or full cost recovery
– Social pricing
Organizational
considerations
11- 19
Product quality
leadership:
Four Seasons
starts with very
high quality
service, then
charges a price
to match.
Factors to Consider When Setting Price

• Pricing must be carefully

Internal Factors coordinated with the other
marketing mix elements
Marketing • Target costing is often used
objectives to support product
Marketing mix positioning strategies
strategies based on price
• Nonprice positioning can
Costs also be used
Organizational
considerations
11- 21
Swatch used
target costing to
manage costs
carefully and
create a watch
offering the right
blend of fashion
and functions at a
price consumers
would pay.
Factors to Consider When Setting Price

• Types of costs:
Internal Factors – Variable
– Fixed
Marketing – Total costs
objectives • How costs vary at different
Marketing mix production levels will
strategies influence price-setting
Costs • Experience (learning) curve
Organizational effects on price
considerations
11- 23
Factors to Consider When Setting Price

• Who sets the price?

Internal Factors – Small companies: CEO or top
management
Marketing – Large companies: Divisional
objectives or product line managers
Marketing mix • Price negotiation is
strategies common in industrial
Costs settings
• Some industries have
Organizational
pricing departments
considerations
11- 24
External factors must also be considered
when planning pricing strategy.

11- 25
Factors to Consider When Setting Price

• Types of markets
External Factors – Pure competition
– Monopolistic competition
Nature of market – Oligopolistic competition
and demand – Pure monopoly
Competitors’ • Consumer perceptions of
costs, prices, price and value
and offers • Price-demand relationship
Other – Demand curve
environmental – Price elasticity of demand
elements
11- 26
Factors to Consider When Setting Price

• Consider competitors’ costs,

External Factors prices, and possible reactions
when developing a pricing
strategy
Nature of market • Pricing strategy influences the
and demand nature of competition
– Low-price low-margin strategies
Competitors’ inhibit competition
costs, prices, – High-price high-margin strategies
and offers attract competition
• Benchmarking costs against the
Other competition is recommended
environmental
elements
11- 27
PC marketing
has become
extremely price
competitive.
Knowledge of
competitive
prices, offers,
and costs is
key to pricing
strategy.
Factors to Consider When Setting Price

• Economic conditions
External Factors – Affect production costs
– Affect buyer perceptions of
Nature of market price and value
and demand • Reseller reactions to prices
must be considered
Competitors’
• Government may limit or
costs, prices,
restrict pricing options
and offers • Social considerations may be
Other taken into account
environmental
elements
11- 29