Chapter 10:

Recah Jule C. Saceda

Jay Arwin J. Lipayon

Objectives
• What is price?
• Major Pricing Strategies
• Other Internal and External
Considerations Affecting Price
Decisions

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 1. What is PRICE?
Price is the amount of money charged for a product
or a service. More broadly, price is the sum of all the
values that customers give up to gain the benefits of
having or using a product or service.

Price is the only element in the marketing mix that

produces revenue.

Price is also one of the most flexible marketing mix

elements.

2. Major Pricing Strategies

• Customer Value–Based Pricing
• Cost-Based Pricing
• Competition-Based Pricing

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 Considerations in Setting Price

Major Pricing Strategies

Customer Value–Based Pricing
It uses buyers’ perceptions of value as the key to pricing.
Value-based pricing means that the marketer cannot
design a product and marketing program and then set the
price. Price is considered along with all other marketing
mix variables before the marketing program is set.
Pricing decisions, like other marketing mix decisions, must
start with customer value.

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 Major Pricing Strategies
Value-Based Pricing versus Cost-Based Pricing

Major Pricing Strategies

Customer Value–Based Pricing

A company will often find it hard to measure the

value customers attach to its product such as
assigning measures of satisfaction. Such value is
subjective; it varies both for different consumers
and different situations.

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 Two types of value-
based pricing
• Good-value pricing
• Value-added pricing

Value Based Pricing

Good-Value Pricing
• offering the right combination of quality and
good service at a fair price.
• this has involved introducing less- expensive
versions of established brand name products
or new lower-price lines.
• In other cases, good-value pricing involves
redesigning existing brands to offer more
quality for a given price or the same quality for
less.
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 Value Based Pricing

Good-Value Pricing
• Everyday low pricing 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.

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Value Based Pricing

Value-Added Pricing
• Value-based pricing doesn’t mean simply
charging what customers want to pay or
setting low prices to meet competition.
Instead, many companies adopt value-added
pricing strategies. Rather than cutting prices to
match competitors, they add quality, services,
and value-added features to differentiate their
offers and thus support their higher prices.

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 2. Major Pricing Strategies
• Customer Value–Based Pricing
• Cost-Based Pricing
• Competition-Based Pricing

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Major Pricing Strategies

Cost-Based Pricing
Whereas customer value perceptions set the price
ceiling, costs set the floor for the price that the company
can charge. Cost-based pricing involves setting prices
based on the costs of producing, distributing, and selling
the product plus a fair rate of return for the company’s
effort and risk. A company’s costs may be an important
element in its pricing strategy.

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 Cost-Based Pricing

Types of Costs
• Fixed costs
• Variable costs
• Total costs

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Cost-Based Pricing
• 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.
*The company must watch its costs carefully. If it costs the company
more than its competitors to produce and sell a similar product, the
company will need to charge a higher price or make less profit,
putting it at a competitive disadvantage.
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 Cost-Based Pricing
Costs at Different Levels of Production
• To price wisely, management needs to know
how its costs vary with different levels of
production.

Cost per Unit at Different Levels of Production per Period

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Cost-Based Pricing
Costs as a Function of Production Experience
• The drop in the average cost with
accumulated production experience.

Cost per Unit as a Function of Accumulated Production: The

Experience Curve

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 Cost-Based Pricing
Costs as a Function of Production Experience
• If a downward-sloping experience curve
exists, this is highly significant for the
company. Not only will the company’s unit
production cost fall, but it will fall faster if
the company makes and sells more during a
given time period. But the market has to
stand ready to buy the higher output.

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Cost-Based Pricing
Cost-plus pricing (markup pricing)

• Adding a standard markup to the cost of

the product.
• Some sellers tell their customers they will
charge cost plus a specified markup

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 Cost-Based Pricing
Cost-plus pricing (markup pricing)

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Cost-Based Pricing
Cost-plus pricing (markup pricing)
Does using standard markups to set prices make
sense?

Generally, no. Any pricing method that

ignores demand and competitor prices is not
likely to lead to the best price.

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 Cost-Based Pricing
Cost-plus pricing (markup pricing)
Still, markup pricing remains popular for many
reasons:
First, sellers are more certain about costs than about
demand.

Second, when all firms in the industry use this pricing

method, prices tend to be similar, so price competition
is minimized.

 Third, many people feel that cost-plus pricing is fairer

to both buyers and sellers.

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Cost-Based Pricing

Break-Even Analysis and Target Profit Pricing

•Setting price to break even on the

costs of making and marketing a
product or setting price to make a
target return.
•Uses the concept of a break-even
chart

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 Cost-Based Pricing
Break-Even Analysis and Target Profit Pricing

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Cost-Based Pricing
Break-Even Analysis and Target Profit Pricing

• Break-even volume can be calculated using the following

formula:

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 Cost-Based Pricing
Break-Even Analysis and Target Profit Pricing

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Cost-Based Pricing

Break-Even Analysis and Target Profit Pricing

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 2. Major Pricing Strategies
• Customer Value–Based Pricing
• Cost-Based Pricing
• Competition-Based
Pricing

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Major Pricing Strategies

Competition-Based Pricing

•Setting prices based on competitors’ strategies,

prices, costs, and market offerings.

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 Competition-Based Pricing
In assessing competitors’ pricing strategies, a company should ask
several questions:
• How does the company’s market offering compare with
competitors’ offerings in terms of customer value?
• How strong are current competitors, and what are their current
pricing strategies?
• What principle should guide decisions about prices to charge
relative to those of competitors?

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Competition-Based Pricing

Competition-Based Pricing
How strong are current competitors, and what are their current pricing
strategies?
• If the company faces a host of smaller competitors charging high prices
relative to the value they deliver, it might charge lower prices to drive
weaker competitors from the market.
• If the market is dominated by larger, lower-price competitors, a company
may decide to target unserved market niches by offering value-added
products and services at higher prices.

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 Competition-Based Pricing
Competition-Based Pricing
How does the company’s market offering compare with competitors’
offerings in terms of customer value?
• If consumers perceive that the company’s product or service provides
greater value, the company can charge a higher price.
• If consumers perceive less value relative to competing products, the
company must either charge a lower price or change customer perceptions
to justify a higher price.

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Ex: When a commercial customer once asked a Caterpillar

dealer why it should pay $500,000 for a big Caterpillar
bulldozer when it could get an “equivalent” Komatsu dozer
for $420,000, the Caterpillar dealer famously provided an
analysis

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 Competition-Based Pricing
Competition-Based Pricing
What principle should guide decisions about prices to
charge relative to those of competitors?
•No matter what price you charge—high, low, or in
between— be certain to give customers superior value
for that price.

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3. Other Internal and External

Considerations Affecting Price Decisions
Internal External
Company’s
Company’soverall
overall
marketing
marketingstrategy,
strategy, Nature of the market and
Objectives,
Objectives,Marketing demand
mix
Marketing mix

Other organizational Other environmental

considerations factors

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 Other Internal and External Considerations Affecting Price De

Overall Marketing Strategy, Objectives, and Mix

• Sometimes, a company’s overall strategy is built around its
price and value story.
• If a company has selected its target market and positioning
carefully, then its marketing mix strategy, including price,
will be fairly straightforward
• Finding that magical price-value trade-off can be very
difficult, and pricing strategies often require regular
realignment to meet changes in the pricing environment.
• Price decisions must be coordinated with product design,
distribution, and promotion decisions to form a consistent
and effective integrated marketing mix program.

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Other Internal and External Considerations Affecting Price De

Overall Marketing Strategy, Objectives, and Mix

What principle should guide decisions
about prices to charge relative to
those of competitors?
•No matter what price you charge—
high, low, or in between— be certain
to give customers superior value for
that price.

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 Other Internal and External Considerations Affecting Price De

Overall Marketing Strategy, Objectives, and Mix

What principle should guide decisions
about prices to charge relative to
those of competitors?
•No matter what price you charge—
high, low, or in between— be certain
to give customers superior value for
that price.

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3. Other Internal and External

Considerations Affecting Price Decisions
Internal External
Company’s overall
marketing strategy, Other
Nature of the market and

mix
organizational
Objectives, Marketing demand

considerations
Other organizational Other environmental
considerations factors

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 Other Internal and External Considerations Affecting Price De

Organizational Considerations
Companies handle pricing in a variety of ways:
• In small companies, prices are often set by top
management rather than by the marketing or
sales departments.
• In large companies, pricing is typically handled
by divisional or product managers.
• In industrial markets, salespeople may be
allowed to negotiate with customers within
certain price ranges.

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3. Other Internal and External

Considerations Affecting Price Decisions
Internal External
Company’s overall
Nature Nature
marketing strategy, of the of the market and
Objectives, Marketing demand
mix market and
Other organizationaldemand
Other environmental
considerations factors

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 Other Internal and External Considerations Affecting Price De

The Market and Demand

• Good pricing starts with understanding how

customers’ perceptions of value affect the prices
they are willing to pay.
Pricing in Different Types of Markets:
pure competition
monopolistic competition
oligopolistic competition
pure monopoly

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Other Internal and External Considerations Affecting Price De

The Market and Demand

• Good pricing starts with understanding how

customers’ perceptions of value affect the prices
they are willing to pay.
Pricing in Different Types of Markets:
pure competition
monopolistic competition
oligopolistic competition
pure monopoly

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 Other Internal and External Considerations Affecting Price De

The Market and Demand

Pricing in Different Types of Markets
pure competition
• the market consists of many buyers
and sellers trading in a uniform
commodity, such as wheat, copper, or
financial securities
monopolistic competition
• the market consists of many buyers and
sellers trading over a range of prices
rather than a single market price

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Other Internal and External Considerations Affecting Price De

The Market and Demand

Analyzing the Price–Demand
Relationship
•Understanding a brand’s
price-demand curve is
crucial to good pricing
decisions.

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 Other Internal and External Considerations Affecting Price De

The Market and Demand

Price Elasticity of Demand
• Price elasticity- A measure of the sensitivity of demand
to changes in price.
Demand is…
• Inelastic- If demand hardly changes with a small change in
price
• Elastic- If demand changes greatly
-sellers will consider lowering their prices under
this condition

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Other Internal and External Considerations Affecting Price De

The Economy
• Economic factors such as:
 a boom or recession,
 inflation,
interest rates
affect pricing decisions…..

• Because they affect:

 consumer spending,
consumer perceptions of the product’s price,
value, and
the company’s costs of producing and selling a
product.

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 Other Internal and External Considerations Affecting Price De

The Economy
• Lower prices make products more affordable and help
spur short-term sales. However….
 lower prices mean
 Deep discounts may cheapen a brand in consumers’ eyes.
Once a company cuts prices, it’s difficult to raise them
again
• Rather than cutting prices on their main-market
brands, many companies are holding their price
positions but redefining the “value” in their value
propositions.

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3. Other Internal and External

Considerations Affecting Price Decisions
Internal External
Company’s overall
marketing strategy, Other
Nature of the market and
Objectives, Marketing demand
mix Environmental/
External Other
Other organizational Factors
environmental
considerations factors

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 Other Internal and External Considerations Affecting Price De

Other Environmental/External Factors

Companies must know what impact its prices will have on:
• Resellers- The company should set prices that give resellers a
fair profit, encourage their support and help them to sell the
product effectively
• Government-
• Social concerns-

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Thanks!

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