Chapter-six

Pricing Products, Considerations

and Approaches

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At the end of this module SWAT:
Understand the internal and external factors
affecting price.
Explain the impact of cost on price.
See how market structures influence price
setting.
Compare and evaluate the general approaches
to price setting.

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Major Considerations when setting prices
a. Product cost – Set price floor (No profit
below this price)
b. Competitor’s price other inter & Extern.
Factors
c. Consumer perception of value-Set price
ceiling(No demand above this price)

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 Price Definition
Price is the amount of money charged for a product or
service.
 It is the sum of the values that consumers exchange for the
benefits of having or using the product or service.
Amount of money charged for a product/service.
Sum of all value that consumer exchange for benefits of
having/using the product/services.
Pricing policy can be fixed pricing(setting price for all buyers)
and dynamic pricing(setting different price based on
individual customers) policy
Sometimes price is negotiation between buyers and sellers.
Price is the only element that produce revenue, others
represent costs and flexible element.
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 Factors affecting price decisions

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Internal Factors Affecting Pricing Decisions
1. Objectives:
 survival,
 current profit maximization,
 market-share maximization and
 Product quality leadership.

2. Marketing-Mix Strategies
 Product
 Promotion
 Distribution
 Target market and
 Positioning

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 Cont…
3. Costs
Costs set the floor for the price that the company can charge
for its product.
Fixed costs (also known as overhead) are costs that do not
vary with production or sales level.
Variable costs vary directly with the level of production.
Total costs are the sum of the fixed and variable costs for any
given level of production.

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Experience curve (learning curve): The
drop in the average par-unit production cost
that comes with accumulated production
experience.
Economies of scale
4. Organizational Considerations:
Management must decide who within the
organization should set prices.
Top management
Product manager
8 Sales person…
 External Factors Affect Pricing Decisions
1. The Market and Demand: the market and demand set the
upper limit of price.
Types of market structure
Pure competition (many sellers)
Monopolistic competition (Many sellers)
Oligopolistic market (few sellers)
Pure monopoly ( one seller)

2. Competitors' Costs, Prices and Offers

Another external factor affecting the company's pricing
decisions is competitors‘ costs and prices, and possible
competitor reactions to the company's own pricing moves.

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 General Pricing Approaches
Companies set prices by selecting a general
pricing approach that includes one or more
of these three sets of factors (costs,
consumer perception & value and
competitors' prices).
1.Cost-Based Pricing approach
Cost-Plus Pricing: is adding a standard
mark-up to the cost of the product.
It is the simplest pricing methods.
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 (Price = Cost + Profit)
Break-Even Analysis and Target Profit Pricing: is
when a firm tries to determine the price at which it
will break even or make the target profit it is seeking.
Cost oriented pricing approach
Setting price to break-even on the cost of Making &
marketing a product.
BE volume= fixed Cost over price minus variable
cost.
(BEV=FC-VC)
P
Example if Fixed cost = $300,000, Price = $20 and
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variable cost is $10. What is break even Volume?
 Cont…

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 Cont…

If the company wants to make a target profit, it must sell

more than 30,000 units at $20 each.
2. Value /Buyer Based Pricing approach
Setting price based on buyers' perceptions of product values
rather than on cost.
A company using perceived-value pricing must find out what
value buyers assign to different competitive offers.
Marketers cannot design a product & marketing program and
then set price based on buyers perception of values rather
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than on the sellers cost.
Value based pricing reverses the cost based
pricing process.
The company sets its target prices based on
customer perception of the product value.
This price is set to match consumer’s perceived
value
Value based pricing is offering just the right
combination of quality and good service at fair
price. Good value is not same as ”low price”
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 Cost –based Vs Value based pricing

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 3. Competition-Based Pricing
Consumers will based their judgments of a product's value
on the prices that competitors charge for similar products.
So marketers must set its prices largely on competitor’s
price , with less attention paid to its own costs.
 Two forms of competition- based pricing are there: going-
rate pricing and sealed-bid pricing.
Going-rate pricing: Setting price based largely on
following competitors' prices rather than on company
costs or demand.
Sealed-bid pricing: Setting price based on how the firm
thinks competitors will price rather than on its own costs
or demand
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This is used when a company bids for jobs.
 New-Product Pricing Strategies
Pricing strategies usually change as the product passes
through its life cycle.
Companies have two alternative pricing strategies from
which they can choose: Market-Skimming pricing and
Market-Penetration pricing.
Market-Skimming Pricing: Setting a high price for a
new product to skim maximum revenues layer by layer
from the segments willing to pay the high price; the
company makes fewer but more profitable sales.
Market-Penetration Pricing: Setting a low price for a
new product in order to attract large numbers of
buyers and a large market share (this is possible if the
17 customers are price sensitive and fixed cost is high.
 Product-Mix Pricing Strategies
Product line pricing: Setting price steps between
product line items.
Optional product pricing: Pricing optional or
accessory products sold with the main product.
Captive product pricing: Pricing products that
must be used with the main product.
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
Discount and allowance pricing: Reducing prices to
reward customer responses such as paying early or
promoting the product.
Segmented pricing/price discrimination: Adjusting prices
to allow for differences in customers, products, time &
locations.
Psychological pricing: Adjusting prices for
psychological effect.
Value pricing: Adjusting prices to offer the right
combination of quality and service at a fair price.
Promotional pricing: Temporarily reducing prices to
increase short-run sales.
Geographic Pricing: Adjusting prices to account for the
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geographic location of customers.
 THANKS FOR YOUR
ATTENTION!!!

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