2/20/2021

UNIT 7
PRICING STRATEGIES

• Factor affecting prices

• General pricing approaches
• Pricing strategies

PRICE

Price is 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.

Dynamic pricing: charging different

prices depending on individual
customers and situations
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FACTORS AFFECTING PRICES

• Internal factors
• External factors

FACTORS AFFECTING PRICE DECISIONS

Internal factors
External factors

• Nature of the market &

• Marketing Objectives
Pricing demand
• Marketing mix strategies
Decisions • Competition
• Costs
• Other environmental factors
• Organizational considerations
(economy, resellers,
government)

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INTERNAL FACTORS
 Marketing Objectives: Common objectives are:
 Survival
 Current profit maximization
 Maximum market share
 Product quality leadership
 Marketing mix strategies:
 Price is the only one of the marketing mix
tools used to achieve its marketing objectives
 Price decision must be coordinated with
product design, distribution, & promotion

INTERNAL FACTORS
 Cost:
 Set the floor for the price
 Price should cover all cost for producing,
distributing, promoting, selling & delivering
 Fixed cost: cost that do not vary with
production or sales level
 Variable cost: cost that vary directly with the
level of production
 Total cost: the sum of the fixed and variable
costs for any given level of production
 Cost per unit at different levels of production
will be different

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INTERNAL FACTORS
 Organizational consideration:
 If the company want to be seen as the
top quality, price should be high
 If the company want large market share –
price should be competitive
 Size of the company (small or large?)

EXTERNAL FACTORS
 Market and demand:
 Pricing in different types of markets
 Consumer perception of price and values
 Analyzing the price-demand relationship

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EXTERNAL FACTORS
❖ Consumer perception of price and values
 Consumer will compare the value they
receive from having the product and the
cost paying for it
 Market consists of many buyers &
sellers who trade the product
 If the perceived value is greater than
perceived cost they then will purchase

EXTERNAL FACTORS
❖ Analyzing the price-demand relationship
 A demand curve shows the number of
units the market will buy in a given time
period, at different prices that might be
charged
 In normal case, demand and price are
inversely related: the higher the price,
the lower the demand and vice versa

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DEMAND CURVE
P P

P2 P2’

P1 P1’

Q2 Q1 Q Q2’ Q1’ Q

Inelastic demand Elastic demand

MARKET AND DEMAND

❖ Price Elasticity of demand
 A measure of the sentitivity of demand
to changes in price

 Elasticity of demand = (% change in

quantity demanded)/(% change in price)

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EXTERNAL FACTORS
 Competition:
 Consumers compare between different
companies before making their purchase
decisions.
 Hence, a firm must know about its
competitor‘s price, quality, costs.
 Once aware of these facts, the firm can
use it as a starting point for their own
pricing policies.

EXTERNAL FACTORS
 Economic condition:
 During healthy economic times, higher
prices can be set & vice versa
 Inflation; interest rates also affect pricing
decisions

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EXTERNAL FACTORS
 Government:
 Government imposes import taxes or
other types of trading restrictions or
provides subsides will cause the
marketer to either price high or low,
depending on the situation.
 Rules on ceiling or floor price of certain
products

GENERAL
PRICING APPROACHES

• Cost based pricing

• Market based pricing

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COST-BASED PRICING
Cost-based pricing
 Firm calculates its cost
 and then adds a standard mark-
up to the cost of product
 ignores market considerations
 Another approach to cost-based
pricing is to use target profit
pricing
 firm tries to determine the price at
which it will make the target profit
it is seeking

MARK-UP/ COST PLUS

 Set price by adding percentage to unit cost
 Example: contractors, and consumer packaged goods
often use markup

Markup/
Unit cost Percentage: %
Cost plus price

Unit cost = (Variable cost) + (Fixed cost)/ unit sales Unit cost = (Variable cost + Fixed cost)/ unit sales

Variable cost – Cost of labor & materials to
manufacture each unit
Fixed cost = Cost that remain fixed as we increase
the number of units manufactured
Unit sales = Quantity of units that we sell
Marup price = (Unit cost)/(1 – Marup percentage)
Variable cost = $10 per bulb; fixed cost = $400,000
Unit sales estimate = 40,000
Marup percentage = 20%
Unit cost = $10 + ($400,000)/40,000 = $10 + $10
=$20 per bulb
Markup price = ($20)/ (1- 20%) = $25 per light bulb

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MARKET BASED PRICING

Customer-based pricing
/Perceived-value
 It is also called value-based pricing
 It is based on the product’s
perceived value
 Price is considered before the
marketing program is set
 The company sets a target price
based on customers’ feedback
about the product’s value
 then make decisions about the
product design and costs

COST-BASED VS CUSTOMER BASED

Cost-based approach

Product Cost Price Value Customer

Customer-based approach

Customer Value Price Cost Product

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MARKET BASED PRICING

 Competition-based pricing/Going rate
pricing
 A firm considers closely its competitors
prices
 One approach is to use going-rate prices
 the firm will set at the price at which
competitors are selling with little
attention paid to its own costs or to
demand
 Another approach is sealed-bid pricing,
where firms submit bids for a project
 To win the contract, it needs to set prices
similar or lower than the competitors

GOING RATE

 Set price to align with those of competitors

 Example: Gasoline station in same area often sell gas
at similar prices
 Acme sell compact flourescent lapms (CFLs) to home
improvement retailers. Retailers can choose from
many suppliers to purchase CFLs so price is set by
“going rate” with those suppliers

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VALUE IN USE

 Set prices based on product’s value to the customer

 Example: Rhino Shiled ceramic coating lasts 25
years, “never paint again”

VALUE IN USE

 Annual light bulb cost = cost for parts (light bulbs) + cost of labor
(to replace light bulbs) = 100 light bulbs *$5 each * 2
changes/year + 100 light bulbs * $20/each * 2 changes/year =
$1,000/year + $4,000/year = $5,000/year
 $5,000 = 100 light bulbs * $VIU/each * 0.5 changes/year + 100
light bulbs * $20/each * 0.5 changes/year
 VIU = $80 each for the Acme LUX LED light bulb

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PRICING STRATEGIES

• Price for new products

• Product mix pricing
• Price adjustment strategies

NEW PRODUCT
PRICING STRATEGIES

❖Market skimming strategy

❖Market penetration strategy

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SKIMMING STRATEGY
The product’s quality & image
must support its higher price,
& enough buyers must want
the product at that price

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
The cost of producing a smaller
volume cannot be so high that
they cancel (anul) the
advantage of charging more

Competitors should not be

able to enter the market
easily & undercut the
high price

CREAMING/SKIMMING
Skim the cream of the top of the market

Creaming price
Market

 Set price high during new product introduction

 Example: Panasonic set high prices for its new
3D TVs during launch
 Acme can use creaming for its Acme LUX
premium LED light bulb. Charge $30 for Acme
LUX bulb, even though incandescent is available
for $1

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PENETRATION STRATEGY
The market must be highly
price sensitive so that a low
price produces more
market growth

Setting a low price for a new

Production & ditribution costs
product in order to attract a large
must fall as sales volume
number of buyers and a increases
large market share

The low price must help

keep out the competition, and
the penetration pricer must
maintain its low-price position

PENETRATION
Competitors
Penetration price
Company

 Set price low to attract new customers and expand

market share
 Example: P&G and Unilever use penetration pricing to
expand into new areas
 Sample for calculation for Acme example: $252
million market in CFLs in 2010. Acme could cust its
price for its CFLs to penetrate levels to gain market
share

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PRODUCT MIX PRICING STRATEGIES

Strategy Description

Optional pricing Pricing optional or accessory product sold with the

main product (car with power window, CD player..)
Captive-product pricing Pricing products that must be used with the main
product (printer and cartridge)
By-product pricing Pricing low-value by-products to get rid of them
(Lumber-mill and its bark chip and sawdust)
Product bundle pricing Pricing bundles of products sold together (combine
several products and offer the bundle at a reduce
price)

PRICE ADJUSTMENT STRATEGY

 Discount and allowance pricing

 Discount: A straight reduction in price on purchases
during a stated period of time
 Allowance: Promotional money paid by
manufacturers to retailers in return for an
agreement to feature the manufacturer’s products
in some way - turning old item for new one

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PRICE ADJUSTMENT STRATEGY

 Segmented pricing
 Selling a product or service at two or more prices,
where the difference in prices is not based on
differences in cost
 Customer-segment pricing (student price and foreign)
 Product-form pricing (different version of products)
 Location pricing (different price for different location)
 Time pricing
 Conditions
 The market must be segmented, ̃the segments must show
different degrees of demand
 Members of the segment paying the lower price should not
be able to turn around ̃ resell the product to the segment
paying the higher price
 Segmented price should reflect real differences in
customers’ perceived value

PRICE ADJUSTMENT STRATEGY

 Psychological pricing
 A pricing approach that considers the psychology
of prices and not simply the economics; the price is
used to say something about the product
 Consumers usually perceive higher-priced product
as having higher quality
 Reference prices: price that buyers carry in their
minds and refer to when looking at a given product
 The reference price might be formed by noting
current prices, remembering past prices, or
assessing the buying situation

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BUYER ATTITUDES TOWARD PRICE

 Some people buy regardless of the price

 Some people buy because the product is
expensive, others because it is cheap
 Some people buy without knowing the
price
 Repeat purchasers are likely to buy
based on other factors than price
 Good marketing can make price less
important or wholly unimportant

PRICE ADJUSTMENT STRATEGY

Promotional pricing
 Temporarily pricing products below the list price,
and sometimes even below cost, to increase
short-run sales
 Cash rebates
 Low interest financing
 Longer warranties – free or low warranty or
service constract
 Free maintenance
 ...

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PRICE ADJUSTMENT STRATEGY

Geographical pricing
 Price its product for customers located in
different parts of the country or world

PRICE CHANGE

Price change
staregies

Initiating Initiating
Price cut Price increase

Buyer Competitor
reaction reaction

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WHAT MIGHT BUYERS THINK WHEN

THE PRICE CHANGES?
When price goes down
 The business is in trouble
 The products are being
replaced be newer model
 The products have some
fault
 The company has a large
inventory
 The quality of the product
has been reduced
 The price will come down
even further
When price goes up
 Demand exceeds supply
 The quality of the product
has been improved
 The price may go up
further. Therefore it is
better to buy soon
 The cost have increased
 The company is greedy

WHEN THE CHEAPEST IS NOT THE BEST?

 If nobody knows you are the cheapest?

 If many buyers do not care the price?
 If enough buyers want “the best” and actually
assume the most expensive is the best
 If your service is at least equal with the
competitor or can be perceived as better
 If the demand for your product is higher than
your production capacity

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