Chapter 5: Pricing

Understanding and Capturing Customer

Value

23 July 2022
Lesson Learning Outcome

• Gain in-depth knowledge about the various pricing strategies

that are being practiced in businesses today.

• Discover the purposes for price adjustments.

• Understand price changes and policies that influence pricing of

products and services.
Discussion – What is ‘price’ to you?
 PRICE

• Price is the amount of money charged for a product or a

service.
• In a broader sense it is the sum of all the values that
customers give up to gain the benefits of having or using a
product or service.
• Today, besides price of a product/service, consumers are
more focused on non-price factors.
Non Price Factors

Factors other than the current price that can influence the potential
demand of a product or service.

➢ needs of the consumer

➢ consumer income
➢ consumer taste, preference – cigarette vs vaping
➢ habit – addictive
➢ loyalty to a brand
➢ natural factors – hand sanitizers, face mask
‘Price’ in Marketing Mix (4Ps)

• The only element that produces revenue.

• Flexible – can be changed quickly.
• Key strategic tool for creating and capturing customer value.
• Prices have a direct impact on a company’s net income. A
small percentage improvement in price can generate a large
percentage increase in profitability.
• Key role in creating customer value and building customer
relationships.
MAJOR PRICING STRATEGIES

• Price setting is part of the marketing process and it requires

an in-depth market research.
• The right price can generate more sales while the wrong one
can make potential customers look elsewhere.
• Companies usually find it a challenge when setting a price for
their products; either too low or too high.
oToo low – company will suffer in term of profitability
oToo high – consumers may not buy
3 Major Pricing Strategies
Major Pricing Strategies
1. Customer Value-based Pricing
• Customer decides whether the price is right – customer value.
✓The setting of a product’s price based on the benefits it provides to
consumers.
✓Niche industry products
✓Customer-oriented customized products
• When customers buy a product, they exchange something of value (the price)
to get something of value (the benefits of having or using the product).
• Marketers need to understand how much value customers put on the benefit
they receive from the product – set price that captures the value.
Customer Value-based Pricing

A strategy of setting prices primarily based on a consumer's perceived

value of a product or service:
• Marketers use buyers’ perceptions of value as the key to pricing.
• Marketers 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 begins with analyzing consumer needs and value perceptions,
and the price is set to match perceived value.
Customer Value-based Pricing

• It’s important to remember that “good value” is not the same as

“low price.”
• E.g., some owners consider a luxurious Patek Philippe watch a real
bargain, even at eyepopping prices ranging from $20,000 to
$500,000.
• A company will often find it hard to measure the value customers
attach to its product - measures of satisfaction such as taste,
environment, relaxation, conversation, and status is very hard. Such
value is subjective; it varies both for different consumers and
different situations.
Customer Value-based Pricing
Customer Value-based Pricing

• Still, consumers will use these perceived values to evaluate a

product’s price - the company must work to measure them:
• Companies ask consumers how much they would pay for a
basic product and for each benefit added to the offer.
• Or a company might conduct experiments to test the
perceived value of different product offers.
Steps taken in Customer Value-based Pricing
Steps in Customer Value-based Pricing

1.The product should be focused on a particular segment and not deviate from
the main and only element. Customer perceived value is estimated in this step.
2.The price of the nearest competitor’s products in the same segment is taken to
decide the range of fixed costs. Then, based on feedback from customers, the
price range of the product is determined.
3.To see the product’s value from a customer’s perspective and point out
differentiated features in the product to be priced. To check how much the
customer values the output.
4.Decide a price for this differentiated product feature and price the product
collectively by adding a competitor’s price and extra feature price.
Two (2) Types of Customer Value-based Pricing
i) Good-value Pricing

i) Good-value pricing
• offering the right combination of quality and good service at a
fair price.
• in line with the changes in the economy & consumer’s perception
on price.
• Good-value pricing convinces buyers that the product features
and quality are worth its price because they solve their practical
problems.
• e.g. McDonald’s value meal, Air Asia (budget flights).
ii) Value-added Pricing

ii) Value-added pricing

• Instead of cutting prices to match competitors,
the sellers attach value-added features and services to
differentiate their offers and thus support their
higher prices.
• Value-added pricing refers to adding all features
and elements that differentiate your product and
justify higher prices.

e.g. Organic food, premium airlines (SIA, Etihad, Lufthansa)

Why is Customer Value-based Pricing Important?

• Customers are happy paying for your product and the value
they are getting.
• Create an experience for the customer that is more aligned
to their expectations.
• Customer’s believe that they are paying for the benefits they
receive from purchasing the product – e.g. satisfaction,
increased efficiency, stability, status.
Advantages of Customer Value-based Pricing

• The price set supports product image.

• The value added helps increase product sales.
• Differentiation attracts new customers.
• Increased profits for the manufacturer.
• Customer loyalty is higher in these types of pricing.
• Customization of products is possible.
• Better quality of product and service.
• Better understanding and rapport between customer and
manufacturer.
Disadvantages of Customer Value-based Pricing

• Calculations may ignore product costs.

• It might forget about existing competitors.
• It requires great selling techniques.
• Products are priced very high.
• A seller may target only a niche market.
• Difficult to scale up the production due to a lack of market scope.
• The competitor could launch a similar product at a similar price range,
and the seller will have to sacrifice the market share.
• Labor costs are also very high, involving more skilled labor to produce and
service.
Major Pricing Strategies
2. Cost-based Pricing
• Involves setting prices based on the costs of producing, distributing,
and selling the product, in addition to a fair rate of return for the
company’s effort and risk.

• The company sets a price by adding a fixed amount or percentage to

the cost of making or buying the product.

• Still widely used - quite an old-fashioned pricing strategy and

somewhat lacks credibility.
Cost-based Pricing

• Customers are normally quite oblivious to what it costs to make the

product – they are interested in what value the product provides them.

• Many companies mass-producing goods such as textiles, food and

building materials use this pricing technique.

❖Cost-based pricing is a pricing method that is based on the cost of

production, manufacturing, and distribution of a product.
Types of Costs

i) Fixed costs
e.g. Rental, salary of employees, electricity and water bill.
It in dependent on the amount of sales a company makes.
ii) Variable costs
Cost that directly vary based on the level/amount of production.
e.g. Laptop – cost involves price of computer chips, wires, plastic, packaging,
and other inputs.

Total costs = Fixed Cost + Variable costs for any given level of production.
Types of Cost-based Pricing
i) Break-even Pricing

• Under break-even pricing, a company aims to cover its fixed cost.

• Such pricing is mostly used by industries having high fixed costs,
such as the aviation industry.
• In this pricing method, a company finds the price using a level of
sales at which it would break even.
• In other words, the company determines the amount that will
cover the variable and fixed costs – to allow in setting the selling
price above the break-even price using mark-up or cost-plus
pricing.
• cost and income are equal and there is neither profit nor loss.
Break-even Pricing - Formula

Fixed Costs ÷ (Sales price per unit – Variable costs per unit)
= Break-Even point (units)

e.g. Fixed cost – rental, electricity, water, salary, operating

machinery (loan, lease)
Variable cost – cost incurred when purchasing raw
materials.
 ii) Target Profit Pricing

• Under target profit pricing, a company first sets the target profit that
it wants to achieve.
• A cost-based pricing strategy that tells the management the total
units to be sold to achieve the targeted profit for a particular period.
• Under this strategy, after considering total costs and profit targets,
the management decides on the total production and sales for a
particular period.
• Based on the target profit, the company calculates the selling price.
• This strategy helps the companies earn profits over and above the
breakeven point.
Target Profit Pricing - Formula

Total Sales Volume (Units) =

Target Profits + Total Fixed Costs / Contribution
Margin Per Unit

Total Sales Revenue =

Total Sales Volume * Selling Price Per Unit
 Assumptions of Target Profit Pricing

• Target Profit Pricing strategy has a few assumptions on which the whole
strategy works. They are as follows:-
i) Selling price and market conditions are assumed to be constant in this pricing
strategy. The management completely ignores current market conditions and
their implications on the selling price.
ii) In this strategy, Sales Mix is assumed to be constant.
iii) Productivity and efficiency are assumed to be constant.
iv) Variable cost varies only with the change in the sales volume. This strategy
ignores other factors influencing the variable cost.
v) This Strategy completely ignores mixed costs - only considers separate fixed
costs and separate variable costs.
Sales Mix - Assumptions of Target Profit Pricing

• Generally, sales mix refers to the proportion of sales a single

product accounts for in a company's total sales.
• It is used to determine which products are performing well and
which products are sinking so that inventory adjustments can be
made down the line.
• E.g. Your café might plan to sell 500 nasi lemak and 500 burgers =
50-50 sales mix. But at the end of the day, you sell 1200 nasi lemak
& 800 burgers = 60 – 40 sales mix.
iii) Cost-plus Pricing

• Widely used in retailing, where the retailer wants to know

with some certainty the gross profit margin of each sale.
• A company adds a fixed percentage of the total cost as a
mark-up to come up with the selling price.
• Can also be referred to as ‘average cost pricing’.
• Usually, manufacturers use cost-plus pricing.
Cost-plus Pricing – Formula

• E.g. Total cost of making a sandwich is RM4 at your cafe.

You adds 50% of the cost to get its selling price. As a
result, the selling price of the sandwich is RM6 (RM4 + 50%
* RM4).
Cost-plus Pricing - Advantages

1. It’s that simple!

• Ask anybody who understands simple business and wants to earn

profit, to come up with the price of a product.
• The first strategy that they will unknowingly apply is Cost Plus pricing
method.
• We factor in the input cost, add our desired profit and come up with
the final price.
Cost-plus Pricing

2. Freedom with markup percentage

• It is completely dependent on the seller to determine the profits that

are to be earned.
• This ensures that there is freedom to vary this percentage for
different commodities.
Cost-plus Pricing - Advantages

3. Easy to justify:

• This strategy does not require any fancy terms and games to be
played with the consumer.
• You can very simply explain how you did price the products.
• If a price increase is causing an upheaval, what can you do ?
Notify the consumers about the increase in input cost and justify the
increase.
 Cost-plus Pricing - Disadvantages

1. The main disadvantage is that cost-plus pricing may lead to products that are
priced un-competitively.

2. Cost Plus Pricing Undermines your Value

• How much does it cost Netflix to extend a subscription to you and offer to you
all the movies when you join in as a new customer?
• That cost is negligible!
• All the movies are hosted on the Netflix server already and all it does is create
a new user access for you whenever you pay for it for the first time.
• Going by cost-plus pricing, Netflix should charge you literally peanuts (or
popcorns) for the subscription that you purchase.
 Cost-plus Pricing - Disadvantages

3. Cost Plus Pricing Undermines your Positioning

• At the end of the day, a marketer needs to remember that each of the four Ps is
just a lever that can be pulled to fulfill the product positioning for the target
audience.
• Customers usually don’t care
about the cost of making the
product.
• Consumers care about the value
the product has in their life.
 Cost-plus Pricing - Disadvantages

4. Not customer centric

• Changing your markup for more profits is not customer centric at
all. Maybe you’re marking up too much and therefore, maybe you are
losing out on a lot of the customers who could buy if the product was
optimally priced.
• Or maybe you’re marking up too less and you are losing out on a lot of
more money that you could have made.
Cost-plus Pricing - Disadvantages

4. Overpricing & Underpricing Problems

• People usually do understand why cost-plus pricing
may lead to underpricing.
• But not many understand that how can it lead to
overpricing.
• Here’s why. If you produce your product for RM100
and sell it for RM150, while the market values it only
worth RM80, you are clearly overpricing it.
• And what’s the corrective action?
➢You probably need to work on your operations
and get the costs down.
Cost-plus Pricing - Disadvantages

5. Cost Plus Pricing Doesn’t Keep Your Customers in Mind

• Any pricing method that doesn’t take into the picture the
customers’ is a bad pricing strategy.
• So, your aim as a new product manager has to be to make pricing a
completely customer-centric decision.
Cost-plus Pricing – Why Is It Important?
 iv) Mark-up Pricing

• Under markup pricing, the reseller adds a certain amount or percentage of the cost
to arrive at the selling price - most retailers use such pricing.
• Markup pricing is essential and nothing but adding a margin to the cost to generate
enough profits for the business.
• This is quite essential for the smooth running, existence, and growth of the
business. Profit obtained is usually shared by all the stakeholders of the business,
who have invested in the business and taken the risk of business associated with it.
• The higher the markup price of the offering of a business, the higher will be its
profits.
E.g. a retailer buys a mobile from the distributor for RM800. On RM800, the retailer
would add a mark-up of RM200 to earn a profit.
 Mark-up Pricing – Pros & Cons

Pros:
• It keeps an eye on existing and emerging rivals in the industry and provides
smart data to make more effective pricing decisions.
• Setting the right price according to market state helps gain competitiveness.

Cons:
• You risk losing profits if you do not take into account information on your
purchase price and margins. You need to check on your price elasticity.
• It needs an effective price monitoring system. Automation is key in this respect
to avoid manual tracking
Cost-based Pricing Vs. Value-based Pricing

❖ Costs play an important role in setting prices. But, like everything else in
marketing, good pricing starts with the customer
 Difference Between Value-based &
Cost-based Pricing
1. In value-based pricing, the price decided is irrelevant to the cost
incurred. In contrast, in cost-based pricing, the price is determined
mainly based on the cost incurred for production and other tangible
overheads.
2. Value-based pricing is done using intangible parameters as perceived
by the customer. Whereas in cost-based pricing, the cost incurred is
real.
3. Cost-based pricing is always less expensive. In comparison, value-
based pricing is priced at a premium depending on the product’s value.
 Difference Between Value-based &
Cost-based Pricing

4. Value-based pricing has a bigger range of prices for products. At

the same time, cost-based pricing does not have a price range
depending on the product range, and cost incurred.

5. The profit margin is higher in value-based, but the number of

products is less than cost-based, with a lesser profit margin.
Major Pricing Strategies
3. Competition-based Pricing

• Competition-based pricing involves setting prices based on

competitors’ strategies, costs, prices, and market offerings.
• If there is strong competition in a market, consumers are
faced with a wide choice of who to buy from. E.g. they might
buy from the cheapest provider or from the one who offers
the best customer service.
• Consumers are aware of the market price – reasonable.
Competition-based Pricing

• Most firms in a competitive market do not have sufficient

power to be able to set prices above their competitors.
• They use “going-rate” pricing – i.e. setting a price that is in
line with the prices charged by direct competitors.
• In effect such businesses are “price-takers” – they must
accept the going market price as determined by the forces of
demand and supply
• E.g. cost of renting a house in a particular location
Competition-based Pricing
Competition-based Pricing – Pros & Cons

Pros:
• Selling prices should be line with rivals, so price should not be
a competitive disadvantage.

• It keeps an eye on existing and emerging rivals in the industry

and provides smart data to make more effective pricing
decisions.
Competition-based Pricing – Pros & Cons

Pros:
• Setting the right price according to market state helps gain
competitiveness.

• If you have a fairly solid grasp on your product’s quality,

target audience and cost of production, this method will most
likely never lead to bankruptcy.
Competition-based Pricing – Pros & Cons

Cons:
• Business needs some other way to attract customers - use
non-price methods to compete – e.g. providing distinct
customer service, better amenities, value-added features,
etc.

• Simply copying your market’s prices leads to a lot of wrong

prices and lost profits, even if you do think you’re doing well.
Competition-based Pricing – Pros & Cons

Cons:
• Companies might end up either keeping the same price
forever, because competitor A hasn’t changed her price or
you’ll simply raise or lower prices in response to trigger happy
competitors.

• The lowering of prices in most industries leads to doubts

about quality and lower revenue from tiny profit margins even
though customers would be willing to pay more.
NEW PRODUCT PRICING STRATEGIES

• Pricing strategies usually change as the product passes through its life
cycle.
• The introductory stage is especially challenging. Companies bringing
out a new product face the challenge of setting prices for the first
time.
• They can choose between two broad strategies: (i) market-skimming
pricing and (ii) market-penetration pricing
Strategies in New Product Pricing
 (i) Market Skimming Pricing

• Price-skimming (or market-skimming) calls for setting a high price for

a new product to skim maximum revenues layer by layer from those
segments willing to pay the high price.
• The company lowers the price stepwise to skim maximum profit from
each segment – resulting in more profitable sales in spite of fewer
sales.

❖ Price skimming is a strategy where a company will list a product as

high as possible, gradually lowering the price until it meets
a market average.
 Market Skimming Pricing

• Market skimming makes sense only under the following conditions:

i. The product’s quality and image must support its higher price, and
enough buyers must want the product at that price.
ii. The costs of producing a smaller volume cannot be so high that they
cancel the advantage of charging more.
iii. Competitors should not be able to enter the market easily and
undercut the high price.
Example of Market Skimming Pricing

• First iPhone - its initial price was rather high for a phone
– RM1721.
• The phones were only purchased by customers who really
wanted the new gadget and could afford to pay a high
price for it.
• After this market segment had been skimmed for six
months, Apple dropped the price considerably to attract
new buyers (USD399). Within a year, prices were dropped
again (USD199).
• The company skimmed off the maximum amount of
revenue from the various segments of the market
 (ii) Market Penetration Pricing

• Companies set a low initial price to penetrate the market quickly and deeply—
to attract a large number of buyers quickly and win a large market share.
• The high sales volume results in reduction in costs, allowing companies to cut
their prices even further.

❖Penetration pricing is a marketing strategy used by businesses to attract

customers to a new product or service by offering a lower price during its
initial offering. The lower price helps a new product or service penetrate the
market and attract customers away from competitors.
 Market Penetration Pricing - Examples

• E.g. Nike increases its stores and retailers in the United States to sell
more athletic shoes to American consumers – 1048 stores worldwide.

• E.g. Ikea - by introducing products at very low prices, a large number

of buyers are attracted, making Ikea the biggest furniture retailer
worldwide. Although the low prices make each sale less profitable,
the high volume results in lower costs and allows Ikea to maintain a
healthy profit margin.
 Market Penetration Pricing

• There are several conditions that allows market penetration pricing

more effective:
i. The market must be highly price sensitive so that a low price
produces more market growth.
ii. Production and distribution costs must decrease as sales volume
increases.
iii. The low price must help keep out the competition, and the
penetration pricer must maintain its low-price position. Otherwise,
the price advantage may be only temporary.
 PRODUCT MIX PRICING STRATEGIES

• Most individual products are part of a broader product mix and must be priced
accordingly.
• Pricing is difficult because the various products have related demand and costs
and face different degrees of competition.
• Product mix - several products that a company offers to its customers –
products are fairly similar.
• E.g. a company might sell toothpaste, toothbrush and mouthwash (Colgate-
Palmolive Malaysia)
❖ A product mix pricing strategy is your roadmap to making multiple sales and
leveraging sales in your product lines to increase profitability.
5 Product Mix Pricing Situations
 1. Product Line Pricing

• Takes into account the cost difference between products in the line,
customer evaluation of their features, and competitors’ prices.
• The price differences represent the perceived quality differences.

• Coca Cola Original (320ml) = RM1.58

• Coca Cola Light (320ml) = RM1.75
• Coca Coal Zero (320ml) = RM1.90
 2. Optional-Product Pricing

• Takes into account optional or accessory products

along with the main product.
• Companies must decide which items to include in
the base price and which to offer as options.

• E.g. refrigerator with ice maker &

water dispenser
 3. Captive-Product Pricing

• Involves setting of a price on products that might be used along with

the main product
• Producers of the main products (razors, video-game consoles,
printers, single-cup coffee brewing systems, and tablet computers)
usually price them low and set high
markups on the supplies.
• Captive products can account for a
substantial portion of a brand’s sales
and profits.
 4. By-Product Pricing

• Refers to products with little or no value produced as a result of the main

product. If the by-products have no value and if getting rid of them is costly, this
will affect the pricing of the main product.
• Using by-product pricing, the company seeks a market for these by-products to
help offset the costs of disposing of them and help make the price of the main
product more competitive
• Producers will seek little or no profit.
• Producers should accept any price that covers more than the cost to cover
storage and delivery.
• E.g. wheat germ is a byproduct of wheat milling; molasses is a byproduct of
refining sugar.
 5. Product Bundle Pricing

• Using product bundle pricing, sellers often combine several products and offer
the bundle at a reduced price.
• Price bundling can promote the sales of products.
 PRICE ADJUSTMENT STRATEGIES

• Companies adjust basic prices

to account for various customer
differences and changing
situations.
7 Price Adjustment Strategies
i) Discount & Allowance Pricing

• Most companies adjust their basic price to reward

customers for certain responses - such as paying bills early,
volume purchases, and off-season buying.

• These are called discounts and allowances — can take many

forms:
➢ Discounts
➢ Allowances
 ~ Discounts ~

➢ Discounts
• Cash discount - for paying promptly.
• Quantity discount - for buying in
large volume.
• Functional (trade) discount - for
selling, storing, distribution, and
record keeping.
• Seasonal discount - price reduction
to buyers who buy merchandise or
services out of season.
~ Discounts ~
 ~ Allowance ~

➢ Allowances
• Trade-in allowance - for turning in an old item when buying a new
one.

• Promotional allowance - to reward dealers for participating in

advertising or sales support programs.
E.g. a household product company gives a grocery chain store a
promotional allowance to display their new detergent at a special
place where the product is clearly visible.
ii) Segmented Pricing

• Segmented pricing is used when a company sells a product at two or

more prices even though the difference is not based on cost.
• Companies will often adjust their basic prices to allow for differences
in customers, products, and locations.
• Airlines, hotels and restaurants – revenue management or to generate
maximum revenue from perishable inventory (e.g. hotel rooms, airline
seats) – also known as ‘yield management’.
• E.g. KTM offers different fare for students and senior citizen.
Segmented Pricing

• Customer segment pricing is when different customer pay for

different prices for the same product or service.
• Product form segment pricing is when different versions of the
product are priced differently but not according to differences in cost.
• Location pricing is when the product is sold in different geographic
areas and priced differently in those areas even though the cost is the
same.
• Time pricing is when a firm varies its prices by the season, the
month, the day, and even the hour.
Segmented Pricing

• To be effective:
✓Market must be segmentable.
✓Segments must show different degrees of demand.
✓Cost of segmenting & reaching the single parts of the market
cannot exceed the extra revenue obtained from the price
difference.
✓Pricing segmentation must be legal.
✓Segmented prices should reflect real differences in customers’
perceived value but companies must treat all their customers
fairly and give them the best service.
 iii) Psychological Pricing

• Price says something about the product. For example, many

consumers use price to judge quality. A $100 bottle of perfume may
contain only $3 worth of scent, but some people are willing to pay the
$100 because this price indicates something special.

• Sellers use psychology of price to influence their consumers and set

pricing of a product – consumers usually perceive that a high priced
product is of better quality.
 Psychological Pricing

E.g. Who would you perceive to be a better lawyer? A lawyer that

charges RM50per hour or the one who charges RM500 per hour?

When a consumer does not have enough information to judge quality,

they turn to pricing.

Most of us would simply assume that the higher-priced lawyer is better.

 Psychological Pricing

• Another aspect of psychological pricing is reference prices—prices

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.
• Sellers can influence or use these consumers’ reference prices when
setting price. E.g. a grocery retailer might place its store brand of
bran flakes and raisins cereal priced at $2.49 next to Kellogg’s Raisin
Bran priced at $3.79.
 Psychological Pricing

• Even if actual price differences might

be small, the impact of such
psychological tactics can be big.
 iv) Promotional Pricing

• Promotional pricing is when prices are temporarily priced below list

price or cost to create buying excitement and urgency - increase
demand:
• Loss leaders – setting of price lower than cost – new product in the
market.
• Special event pricing
• Cash rebates
• Low interest financing
• Longer warrantees
• Free maintenance
 Promotional Pricing

• Risks of promotional pricing:

oUsed too frequently
oCan create “deal-prone” customers who will wait for promotions
and avoid buying at regular price.
oCreates price wars.
oErode brand name & its value

• To avoid such problems, companies must be careful to balance short-

term sales incentives against long-term brand building.
 Promotional Pricing

• Loss leaders are products sold below cost to attract customers in the
hope they will buy other items at normal markups.
• Special event pricing is used to attract customers during certain
seasons or periods.
• Cash rebates are given to consumers who buy products within a
specified time.
• Low interest financing, longer warrantees, and free maintenance
lower the consumer’s “total price.”
 v) Geographical Pricing

• Geographical pricing is used for customers in different parts of the

country or the world.

• 5 strategies:
o‘Free on-board’ pricing
oUniformed delivery pricing
oZone pricing
oBasing point pricing
oFreight absorption pricing
 Geographical Pricing – 5 Strategies

• FOB (free on board) pricing means that the goods are placed free on
board a carrier. At that point the title and responsibility passes to the
customer, who pays the freight from the factory to the destination.

• Uniformed delivery pricing means the company charges the same

price plus freight to all customers, regardless of location.

• Zone pricing means that the company sets up two or more zones
where customers within a given zone pay a single total price.
 Geographical Pricing – 5 Strategies

• Basing point pricing means that a seller selects a given city as

“basing point” and charges all customers the freight cost associated
from that city to the customer location regardless of the city from
which the goods are actually shipped.

• Freight absorption pricing means that the seller absorbs all or part of
the actual freight charge as an incentive to attract business in
competitive markets.
 vi) Dynamic Pricing & International Pricing

• Dynamic pricing is when prices are adjusted continually to meet the

characteristics and needs of the individual customer and situations.
• International pricing is when prices are set in a specific country
based on country-specific factors.
–Economic conditions
–Competitive conditions
–Laws and regulations
–Infrastructure
–Company marketing objectives
 vi) Dynamic Pricing & International Pricing

• Dynamic pricing is when prices are adjusted continually to meet the

characteristics and needs of the individual customer and situations.
• E.g. In 2020 – hand sanitizers, face mask & toilet papers
• Prices that are highly flexible and can change based on real-time
requirement.
 International Pricing - strategies

1.Costs – firstly, it’s critical to get a handle on all your costs related to your
product/service offering. This includes development,
manufacturing/production, packaging, distribution, storage, marketing,
freight, tax, custom duty.
2.Competitors – understanding the competitive landscape is another key
element. From a brand positioning perspective, understand where you sit
within the positioning map in relation to your competitors. E.g., premium vs
economy, as this will influence prices.
3.Customers – at this stage in formulating your GTM strategy, you should have a
firm understanding of your target customers and how much they are willing to
pay for your product/service. If you don’t know, you need to find out.
 International Pricing - strategies

4. Cultural differences – this comes back to understanding the local

culture and your target customer’s perception of your brand versus
your competitors. For example, Starbucks deploy huge price variations
due to market positioning: in Russia, they position themselves as a
luxury high-end coffee house, whereas in the US, their target market is
“Regular Joes”; therefore, their US prices are relatively lower than in
Russia.
5. Channels of distribution – how many organisations are involved in
your global supply chain? For example, agents, importers, wholesalers,
retailers. The more companies which are involved, the higher your
costs.
 International Pricing - strategies

6. Currency rates – handling multiple currencies means that you are

vulnerable to exchange rate fluctuations. This should be factored into
your pricing strategy.
7. Control by government – government regulations could potentially
add to the complexity. For example, in the UK, there is a national
minimum wage enshrined in law, so regardless of the size of your
business, you would need to factor this in for UK workers.
 PRICE CHANGES
• After developing their pricing structures and strategies, companies often face
situations in which they must initiate price changes or respond to price
changes by competitors.

Initiating Pricing Changes

• Price cuts - a reduction in selling price.
• Excess capacity
• Increase market share
• Price increases - an increase in selling price
• Cost inflation
• Increased demand and lack of supply
 PRICE CHANGES

Buyers’ Interpretation to Price Changes

• Price cuts
• New models will be available
• Models are not selling well
• Quality issues
• Price increases
• Product is “hot”
• Company greed
 PRICE CHANGES

Responding to Price Changes

• Questions
• Why did the competitor change the price?
• Is the price cut permanent or temporary?
• What is the effect on market share and profits?
• Will competitors respond?
• Solutions
• Reduce price to match competition
• Maintain price but raise the perceived value through communications
• Improve quality and increase price
• Launch a lower-price “fighting brand”
 PUBLIC POLICIES & PRICING

• Price competition is a core element of our free-market economy. In

setting prices, companies usually are not free to charge whatever
prices they wish.

• E.g. in setting their prices, pharmaceutical firms must balance their

development costs and profit objectives against the sometimes life-
and-death needs of drug consumers.
PUBLIC POLICIES & PRICING

i. Pricing Within Channel Levels

• Price fixing: Sellers must set prices without talking to competitors.

• Predatory pricing: Selling below cost with the intention of punishing
a competitor or gaining higher long-term profits by putting
competitors out of business.
 PUBLIC POLICIES & PRICING

ii. Pricing Across Channel Levels

• Retail (resale) price maintenance is when a manufacturer requires a
dealer to charge a specific retail price for its products.
• Deceptive pricing occurs when a seller states prices or price savings
that mislead consumers or are not actually available to consumers.
–Scanner fraud: Failure of the seller to enter current or sale prices
into the computer system.
–Price confusion results when firms employ pricing methods that
make it difficult for consumers to understand what price they are
really paying.