Pricing Considerations

and Approaches

Topic 10
 Objectives
• Understand the internal factors
affecting a firm’s pricing decisions.
• Understand the external factors
affecting pricing decisions, including
the impact of consumer perceptions of
price and value.
• Be able to contrast the three general
approaches to setting prices.
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 What is Price?

Price Has Many Names

• Rent • Tuition • Bribe
• Fee • Fare • Salary
• Rate • Toll • Wage
• Commission
• Premium • Interest
• Assessment
• Retainer • Tax
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 Definition
• Price
 The amount of money charged for a
product or service, or the sum of the
values that consumers exchange for the
benefits of having or using the product
or service.

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 What is Price?
• Price and the Marketing Mix:
 Only element to produce revenues
 Most flexible element
 Can be changed quickly
• Price Competition

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 Factors to Consider When
Setting Price
Internal • Market positioning
influences pricing strategy
Factors • Other pricing objectives:
• Marketing objectives
 Survival
• Marketing mix  Current profit maximization
strategies  Market share leadership
 Product quality leadership
• Costs
• Not-for-profit objectives:
• Organizational  Partial or full cost recovery
considerations  Social pricing

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 Factors to Consider When
Setting Price
• Pricing must be carefully
Internal coordinated with the other
Factors marketing mix elements
• Marketing objectives • Target costing is often used
• Marketing mix to support product
positioning strategies based
strategies
on price
• Costs • Nonprice positioning can
• Organizational also be used
considerations
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 Factors to Consider When
Setting Price
Internal • Types of costs:
Factors 

Variable
Fixed
• Marketing objectives
 Total costs
• Marketing mix • How costs vary at different
strategies production levels will
• Costs influence price setting
• Experience (learning) curve
• Organizational
effects on price
considerations
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 Factors to Consider When
Setting Price
Internal • Who sets the price?
 Small companies: CEO or
Factors top management
• Marketing objectives  Large companies: Divisional
• Marketing mix or product line managers

strategies • Price negotiation is

common in industrial
• Costs settings
• Organizational • Some industries have
considerations pricing departments

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 Factors to Consider When
Setting Price
External • Types of markets
 Pure competition

Factors  Monopolistic competition (shoes,

cosmetic)
• Nature of market and  Perfect competition (homogeneus
product)
demand  Oligopolistic competition (petrol,
cars)
• Competitors’ costs,  Pure monopoly (TNB ,
infrastructure)
prices, and offers • Consumer perceptions of price and
• Other environmental value
• Price-demand relationship
elements  Demand curve
 Price elasticity of demand
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 Factors to Consider When
Setting Price
• Consider competitors’ costs,
External prices, and possible reactions
when developing a pricing
Factors strategy
• Nature of market and • Pricing strategy influences the
demand nature of competition
 Low-price low-margin strategies
• Competitors’ costs, inhibit competition
prices, and offers  High-price high-margin
strategies attract competition
• Other environmental • Benchmarking costs against the
elements competition is recommended

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 Factors to Consider When
Setting Price
• Economic conditions
External  Affect production costs

Factors  Affect buyer perceptions of

price and value
• Nature of market and
• Reseller reactions to prices
demand
must be considered
• Competitors’ costs, • Government may restrict or
prices, and offers limit pricing options
• Other environmental • Social considerations may
elements be taken into account

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Limits to Price Setting
Price Ceiling (Demand Limits)

Customers Perception of Values

Other Internal and external considerations

Marketing objectives, strategies and mix

Nature of market and demand

Competitors’ strategies and prices

Product costs
Price Floor (Direct Variable Costs)
 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

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 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

Markup Price on Cost

SP/unit = Cost/unit + Mark up/unit x Cost/unit
SP = $25 + 0.20 x 25 = $ 30
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 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

Markup Price on Sales

SP/unit = Cost/unit + Mark up/unit x SP/unit
1 SP - 0.2 SP = $ 25
SP = $31.25
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 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.

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 General Pricing
Approaches
Break-Even Analysis and Target Profit Pricing

Revenues
1000 Target Profit $200,000

Thousands 800 Total Costs

of Dollars Break-even
600 point

400
Fixed Costs
200

0 10 20 30 40 Quantity To Be Sold To
Sales Volume in Thousands of Units Meet Target Profit
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 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.
 Introduction of less expensive versions of
established brands has become common.

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Value Based Pricing
Decide on planned selling price
based on customer wants and
competitive prices
-

Subtract desired profit

=

Determine target cost

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 General Pricing
Approaches
• Value-Based Pricing:
 Business-to-business firms seek to retain
pricing power
 Value-added strategies can help
 Value pricing at the retail level
 Everyday low pricing (EDLP) vs. high-low pricing

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 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

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Pricing Strategies
 Objectives
• Learn the major strategies for new
products.
• Understand how companies find a set
of prices that maximizes the profits
from the total product mix.

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 Objectives
• Learn how companies adjust their
prices to take into account different
types of customers and situations.
• Know the key issues related to
initiating and responding to price
changes.

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 Pricing New Product
• Market-Skimming Pricing
 Setting a high price for a new product to skim
maximum revenues layer by layer from
segments willing to pay the high price.

• Market-Penetration Pricing
 Setting a low price for a new product in order
to attract a large number of buyers and a large
market share.

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 Product Mix
Pricing Strategies
• Product Line Pricing
 Setting price steps between product line
items.
 Price points
• Optional-Product Pricing
 Pricing optional or accessory products sold
with the main product e.g. Cars

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 Product Mix
Pricing Strategies
• Captive-Product Pricing
 Pricing products that must be used with
the main product
 High margins are often set for supplies
 Services: two-part pricing strategy
 Fixed fee plus a variable usage rate

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 Product Mix
Pricing Strategies
• By-Product Pricing
 Pricing low-value by-products to get rid
of them
• Product Bundle Pricing
 Pricing bundles of products sold
together

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 Price Adjustment Strategies
To take into account different customers and situation
Strategies • Types of discounts
 Cash discount
• Discount / allowance  Quantity discount
 Functional (trade) discount
• Segmented  Seasonal discount
• Psychological • Allowances
• Promotional  Trade-in allowances
 Promotional allowances
• Geographical
• International
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 Price Adjustment
Strategies
Strategies • Types of segmented pricing
strategies:
 Customer-segment
• Discount / allowance  Product-form pricing
 Location pricing
• Segmented  Time pricing
• Psychological • Also called revenue or yield
management
• Promotional • Certain conditions must exist
• Geographical for segmented pricing to be
effective
• International
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 Price Adjustment
Strategies
Strategies • The price is used to say
something about the
product.
• Discount / allowance  Price-quality relationship
• Segmented  Reference prices
 Differences as small as five
• Psychological cents can be important
•  Numeric digits may have
Promotional symbolic and visual qualities
• Geographical that psychologically
influence the buyer
• International
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 Price Adjustment
Strategies
Strategies • Temporarily pricing
products below the list price
or even below cost
• Discount / allowance
• Loss leaders
• Segmented  Special-event pricing
 Cash rebates
• Psychological  Low-interest financing, longer
• Promotional warranties, free maintenance
• Promotional pricing can
• Geographical have adverse effects
• International
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 Price Adjustment
Strategies
Strategies • Types of geographic
pricing strategies:
• Discount / allowance  FOB-origin pricing
•  Uniform-delivered
Segmented
pricing
• Psychological  Zone pricing
• Promotional  Basing-point pricing
•  Freight-absorption
Geographical pricing
• International
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 Price Adjustment
Strategies
Strategies • Prices charged in a specific
country depend on many
• Discount / allowance factors
 Economic conditions
• Segmented  Competitive situation
• Psychological  Laws / regulations
 Distribution system
• Promotional
 Consumer perceptions
• Geographical  Cost considerations
• International
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The End