MARKETING

MANAGEMENT.

PRICING CONSIDERATIONS &

STRATEGIES.
 WHAT IS A PRICE?
 It is said that cost is a fact and price is a policy.
 Price is the amount of money charged for a product
or service.
 Price 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.
 Historically price has been the major factor affecting
buyer choice.
 In recent decades, non price factors have gained
increasing importance. However price still remains
one of the most important elements determining a
firms market share and profitability.
 PRICE …
 Is the only element in the marketing mix that
produces revenue; all other elements represent
costs.
 One of the most flexible marketing mix elements.
 Unlike product features and channel
commitments, prices can be changed quickly.
 Pricing is one major problem faced by many
marketing executives .
 Many companies do not handle pricing well.
 Too cost oriented rather than customer value
oriented.
 FACTORS TO CONSIDER WHEN
SETTING PRICES.
INTERNAL FACTORS:
 MARKETING OBJECTIVES.
 MARKETING MIX STRATEGIES.
 COST.
 ORGANIZATIONAL
CONSIDERATIONS.
 MARKETING OBJECTIVES:
Market positioning influences pricing
strategy
 Other pricing objectives:

 Survival.
 Current profit maximization.
 Market share leadership.
 Product quality leadership.
 MARKETING MIX
STRATEGIES:
 Pricing must be carefully coordinated with
the other marketing mix elements.
 Target costing is often used to support
product positioning strategies based on
price.
 Non-price positioning can also be used.
 COST:
 Types of costs:
 Variable.
 Fixed.
 Total costs.
 How costs vary at different production
levels will influence price setting.
 Experience (learning) curve affects price.
ORGANIZATIONAL CONSIDERATION:

 Who sets the price?

 Small companies: CEO or top
management.
 Large companies: Divisional or product
line managers.
 Price negotiation is common in
industrial settings where pricing
departments may be created.
 EXTERNAL FACTORS:
 NATURE OF MARKET AND
DEMAND.
 COMPETITOR’S, COST, PRICES,
AND OFFERS.
 OTHER ENVIRONMENTAL
ELEMENTS.
NATURE OF MARKET AND DEMAND:

 Types of markets:
 Pure competition.
 Monopolistic competition.
 Oligopolistic competition.
 Pure monopoly.
 Consumer perceptions of price and value.
 Price-demand relationship:
 Demand curve.
 Price elasticity of demand.
COMPETITOR’S, COST, PRICES, AND
OFFERS:
 Consider competitors’ costs, prices, and
possible reactions.
 Pricing strategy influences the nature of
competition:
 Low-price low-margin strategies inhibit
competition.
 High-price high-margin strategies attract
competition.
 Benchmarking costs against the competition is
recommended.
 OTHER ENVIRONMENTAL
ELEMENTS:

 Economic conditions:
 Affect production costs.
 Affect buyer perceptions of price and value.
 Reseller reactions to prices must be considered.
 Government may restrict or limit pricing
options.
 Social considerations may be taken into
account.
GENERAL PRICING APPROACHES:
 COST-BASED PRICING: COST-PLUS
PRICING:
 Adding a standard markup to cost.
 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:
COST-BASED PRICING EXAMPLE:

- Variable costs: $20 - Fixed costs: $ 500,000

- Expected sales: 100,000 units - Desired Sales Markup:
20%

Variable Cost + Fixed Costs/Unit Sales = Unit Cost

$20 + $500,000/100,000 = $25 per unit

Unit Cost/(1 – Desired Return on Sales) = Markup Price

$25 / (1 - .20) = $31.25
GENERAL PRICING APPROACHES:
 COST-BASED PRICING: BREAK-EVEN
ANALYSIS AND TARGET PROFIT PRICING:
 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:
 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
have shifted during the last decade.
 Value pricing at the retail level:
 Everyday low pricing (EDLP) vs. high-low
pricing.
GENERAL PRICING APPROACHES:
 COMPETITION-BASED PRICING:
 Also called going-rate pricing.
 May price at the same level, above, or
below the competition.
 Bidding for jobs is another variation of
competition-based pricing:
 Sealed bid pricing.
 PRICING STRATEGIES:
 NEW PRODUCTS: SKIMMING STRATEGY:

DEFINITION: Setting a relatively high price during the

initial stage of a product’s life.

OBJECTIVES:
(a)To serve customers who are not price conscious
while the market is at the upper end of the demand
curve and competition has not yet entered the market.
(b) To recover a significant portion of promotional and
research and development costs through a high margin.
 NEW PRODUCTS: SKIMMING STRATEGY:

REQUIREMENTS: Use of marketing mix variables, especially

design and communication efforts. 
Heavy promotional expenditure to introduce product, educate
consumers, and induce early buying. 
Relatively inelastic demand at the upper end of the demand
curve. 
Lack of direct competition and substitutes.

EXPECTED RESULTS: 
(a) Market segmented by price-conscious and not so price
conscious customers. 
(b) High margin on sales that will cover promotion and
research and development costs.
Opportunity for the firm to lower its price and sell to the mass
market before competition enters.
 NEW PRODUCTS: PENETRATION STRATEGY:

DEFINITION: Setting a relatively low price during the initial

stages of a product’s life.

OBJECTIVES: To discourage competition from entering the

market by quickly taking a large market share and by gaining
a cost advantage through realizing economies of scale.

REQUIREMENTS: Use of marketing mix variables, especially

design and communication efforts. 
Product must appeal to a market large enough to support the
cost advantage.
Demand must be highly elastic in order for the firm to guard
its cost advantage.
 EXPECTED RESULTS: 
High sales volume and large market share. 
Low margin on sales. 
Lower unit costs relative to competition due to
economies of scale.
 ESTABLISHED PRODUCTS: MAINTAIN THE PRICE:

DEFINITION: To maintain position in the marketplace (i.e., market

share, profitability, etc) 

Objectives: Maintain Status Quo.

REQUIREMENTS: 
Firm’s served market is not significantly affected by changes in the
environment. 
Uncertainty exists concerning the need for or result of a price
change. 
Firm’s public image could be enhanced by responding to
government requests or public opinion to maintain price. 

EXPECTED RESULTS:
(a)Status quo for the firm’s market position. 
(b) Enhancement of the firm’s public image.
 ESTABLISHED PRODUCTS: REDUCE THE PRICE:

OBJECTIVES:
To act defensively and cut price to meet the competition. 
To act offensively and attempt to beat the competition. 
To respond to a customer need created by a change in the
environment.

REQUIREMENTS:
Firm must be financially and competitively strong to fight in a price
war if that becomes necessary. 
Must have a good understanding of the demand function of its
product.

EXPECTED RESULTS:
Lower profit margins (assuming costs are held constant).
Higher market share might be expected, but this will depend upon the
price change relative to competitive prices and upon price elasticity.
 ESTABLISHED PRODUCTS: INCREASING THE PRICE:

OBJECTIVES:
To maintain profitability during an inflationary period. 
To take advantage of product differences, real or perceived. 
To segment the current served market.

REQUIREMENTS: 
Relatively low price elasticity but relatively high elasticity with respect
to some other factor such as quality or distribution. 
Reinforcement from other ingredients of the marketing mix; for
example, if a firm decides to increase price and differentiate its product
by quality, then promotion and distribution must address product
quality.

EXPECTED RESULTS:
Higher sales margin. 
Segmented market (price conscious, quality conscious, etc.).
Possibly higher unit sales, if differentiation is effective
 PRICE FLEXIBILITY STRATEGY: ONE PRICE:

DEFINITION: Charging the same price to all customers under

similar conditions and for the same quantities.

OBJECTIVES: 
To simplify pricing decisions. 
To maintain goodwill among customers.

REQUIREMENTS:
Detailed analysis of the firm’s position and cost structure as
compared with the rest of the industry. 
Information concerning the cost variability of offering the
same price to everyone. 
Knowledge of the economies of scale available to the firm.
Information on competitive prices; information on the price
that customers are ready to pay.
 EXPECTED RESULTS:
Decreased administrative and selling
costs. 
Constant profit margins.
Favourable and fair image among
customers. 
Stable market.