Pricing

Chapter 8:
Pricing
Understanding and Capturing
Customer Value
Copyright © 2016 Pearson Education, Inc.

Pricing
Learning Objectives
• Objective 1: Answer the question “What is a price?”

and discuss the importance of pricing in today’s fast-
changing environment.

Pricing
Learning Objectives
• Objective 2: Identify the three major pricing strategies

and discuss the importance of understanding customer-
value perceptions, company costs, and competitor
strategies when setting prices.
• Objective 3: Identify and define the other important

external and internal factors affecting a firm’s pricing
decisions.

A TYPICAL PRICING
PROBLEM
You have invented a new
light bulb that emits a type
of light linked with health
benefits
• Cheapest alternative bulb
is priced at 30p
• What price will you charge
for your bulb?
©Photodisc
• How will you go about
determining the price?
THE BIG PICTURE OF PRICING
Need to consider the environment in which you are

making pricing decisions, and the basic rules of
economics
Is it a fiercely competitive market in which the
market alone determines your price?
Or do you have some degree of control over your
price (you would love to be a monopoly supplier!)
Pricing
Learning Objective 1
• Answer the question “What is a price?” and discuss the

importance of pricing in today’s fast-changing
environment.
What Is a Price?

What Is a Price?
Price is the amount of money charged for a

product or service.
It can also be described as the sum of all the

values that customers give up to gain the
benefits of having a product or service.
It is usually expressed in RM, $, £ and other

currency signs.

What Is a Price?
Economist’s
Pricing
• Identify the three major pricing strategies and discuss

the importance of understanding customer-value
perceptions, company costs, and competitor strategies
when setting prices.
Major Pricing Strategies

COMPANY PRICING
OBJECTIVES
• Profit maximization
• Sales maximization
• Survival
• Social objectives
Considerations in Setting Price

Customer Value-Based Pricing
Value-based pricing uses the buyers’ perceptions of

value rather than the seller’s cost.
• Value-based pricing is customer driven.
• Cost-based pricing is product driven.
• Price is set to match perceived value.

Value-Based Pricing vs. Cost-Based Pricing

Good-value pricing is offering just the right

combination of quality and good service at a
fair price.
For e.g. when McDonald's and other fast food

restaurants offer "value menu" items at
surprisingly low prices.

Everyday low
pricing (EDLP)
involves charging
a constant
everyday low
price with few or
no temporary
price discounts.

High-low pricing involves charging higher prices

on an everyday basis but running frequent
promotions to lower prices temporarily on
selected items.

Value-added pricing attaches value-added

features and services to differentiate the
companies offers and thus their higher prices.

Cost-Based Pricing
Cost-based pricing sets prices based on the

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

Cost-Based Pricing
Fixed costs are the costs that do not vary with

production or sales level.
• Rent
• Heat
• Interest
• Executive salaries

Cost-Based Pricing
Variable costs vary directly with the level of

production.
• Raw materials
• Packaging

Cost-Based Pricing
Total costs are the sum of the fixed and variable
costs for any given level of production.
Cost-Based Pricing
Costs at Different Levels of Production
Cost per Unit at Different Levels of Production per Period

Cost-Based Pricing
Costs as a Function of Production Experience
Cost per Unit as a Function of Accumulated Production: The Experience

Curve

Cost-Based Pricing
Cost-Based Pricing
Cost-Based Pricing
Cost-Based Pricing
Break-even pricing
(target return
pricing) is setting
price to break
even on costs or
to make a target
return.

Competition-based pricing
Competition-based pricing is
setting prices based on
competitors’ strategies, costs,
prices, and market offerings.
Competition-based pricing is a
pricing method that makes use
of competitors' prices for the
same or similar product as basis
in setting a price. The price of
competing products is used a
benchmark. The business may
sell its product at a price above
or below such benchmark.
• Profit-maximising pricing
To obtain the profit maximizing output quantity, we start by recognizing

that profit is equal to total revenue (TR) minus total cost (TC).
Given a table of costs and revenues at each quantity, we can either

compute equations or plot the data directly on a graph.
The profit-maximizing output is the one at which this difference reaches its
maximum.
Diagram of Profit Maximisation
To understand this principle look at the

diagram.
If the firm produces less than Q1, Marginal

Revenue (MR) is greater than Marginal Cost
(MC). Therefore, for this extra output, the
firm is gaining more revenue than it is
paying in costs, and total profit will increase.
Close to Q1, MR is only just greater than

MC; therefore, there is only a small increase
in profit, but profit is still rising.
However, after Q1, the marginal cost of the

output is greater than the marginal revenue.
This means the firm will see a fall in its profit
level because the cost of these extra units is
greater than revenue.
Pricing
• Identify and define the other important external and

internal factors affecting a firm’s pricing decisions.
Other Internal and External Considerations

Affecting Price Decisions

Organizational Considerations
• Who should set prices?
• Who can influence prices?

The Market and Demand
Before setting prices, the marketer must

understand the relationship between price
and demand for its products.

Analyzing the Price–Demand Relationship
The demand curve shows the number of units the

market will buy in a given period at different prices
• Demand and price are inversely related.
• Higher price = lower demand

Price Elasticity of Demand
Price elasticity is a measure of the sensitivity of

demand to changes in price.
Inelastic demand is when demand hardly changes with

a small change in price.
Elastic demand is when demand changes greatly with a

small change in price.



MARKET STRUCTURE IS CRUCIAL TO

PRICING
MARKET STRUCTURE IS DEFINED BY:
· the number of buyers and sellers in a market
· the barriers which exist to prevent new firms from
entering or leaving the market
· the extent to which the supply is concentrated in the
hands of a small number of sellers
· the degree of collusion which occurs between buyers
and / or sellers in the market
MAIN FORMS OF MARKET
STRUCTURE:
Pure competition
Pure monopoly
Monopolistic competition
Oligopolistic competition

• Pricing in Different Types of Markets
• Pricing in Different Types of Markets
Pepsi is a good substitute for Coca-Cola.

Pricing

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Chapter 8:

Copyright © 2016 Pearson Education, Inc.

• Objective 1: Answer the question “What is a price?”

Copyright © 2016 Pearson Education, Inc.

• Objective 2: Identify the three major pricing strategies

• Objective 3: Identify and define the other important

Copyright © 2016 Pearson Education, Inc.

Need to consider the environment in which you are

• Answer the question “What is a price?” and discuss the

Copyright © 2016 Pearson Education, Inc.

Price is the amount of money charged for a

It can also be described as the sum of all the

It is usually expressed in RM, $, £ and other

Copyright © 2016 Pearson Education, Inc.

• Identify the three major pricing strategies and discuss

Major Pricing Strategies

Copyright © 2016 Pearson Education, Inc.

Considerations in Setting Price

Copyright © 2016 Pearson Education, Inc.

Value-based pricing uses the buyers’ perceptions of

Copyright © 2016 Pearson Education, Inc.

Value-Based Pricing vs. Cost-Based Pricing

Copyright © 2016 Pearson Education, Inc.

Good-value pricing is offering just the right

For e.g. when McDonald's and other fast food

Copyright © 2016 Pearson Education, Inc.

Copyright © 2016 Pearson Education, Inc.

High-low pricing involves charging higher prices

Copyright © 2016 Pearson Education, Inc.

Value-added pricing attaches value-added

Copyright © 2016 Pearson Education, Inc.

Cost-based pricing sets prices based on the

Copyright © 2016 Pearson Education, Inc.

Fixed costs are the costs that do not vary with

Copyright © 2016 Pearson Education, Inc.

Variable costs vary directly with the level of

Copyright © 2016 Pearson Education, Inc.

Cost per Unit at Different Levels of Production per Period

Copyright © 2016 Pearson Education, Inc.

Cost per Unit as a Function of Accumulated Production: The Experience

Copyright © 2016 Pearson Education, Inc.

Copyright © 2016 Pearson Education, Inc.

To obtain the profit maximizing output quantity, we start by recognizing

Given a table of costs and revenues at each quantity, we can either

To understand this principle look at the

If the firm produces less than Q1, Marginal

Close to Q1, MR is only just greater than

However, after Q1, the marginal cost of the

• Identify and define the other important external and

Other Internal and External Considerations

Copyright © 2016 Pearson Education, Inc.

• Who should set prices?

• Who can influence prices?

Copyright © 2016 Pearson Education, Inc.

The Market and Demand

Before setting prices, the marketer must

Copyright © 2016 Pearson Education, Inc.

The demand curve shows the number of units the

Copyright © 2016 Pearson Education, Inc.

Price elasticity is a measure of the sensitivity of

Inelastic demand is when demand hardly changes with

Elastic demand is when demand changes greatly with a

Copyright © 2016 Pearson Education, Inc.