REVIEWER IN PRICING STRATEGY
CHAPTER 1
Introduction: Pricing as an Element of the
Marketing Mix
Commercial exchange. This is where a seller
provides a product to a buyer in return for
something in exchange (usually an amount of
money).
Good. The product could be something tangible.
Service. The product could be the result of human
or mechanical effort.
Consumer. An individual who purchases a product
for his or her own use.
Buyer. Could be a business customer, an individual
or group who purchases the product in order to
resell it or for other business purposes.
Figure 1.1 The Commercial Exchange
Free-market economy. The distribution of most
goods and services is governed.
Figure 1.2 Some Terms Used to Mean “Price”
PRICING AS A MARKETING ACTIVITY
Marketing activities are those actions an
organization can take for the purpose of facilitating
commercial exchanges.
There are four categories of marketing activities
that are particularly important, which are
traditionally known as the four elements of the
marketing mix
Product—designing, naming, and packaging goods
and/or services that satisfy customer needs.
Distribution—efforts to make the product available
at the times and places that customers want.
Promotion—communicating about the product
and/or the organization that produces it.
Pricing—determining what must be provided by a
customer in return for the product.
Value will refer to the benefits, or the satisfactions
of needs and wants, that a product provides to
customers.
Figure 1.3 Pricing Harvests the Value Created by
the Other Three Marketing Mix Elements
Marketing concept can be expressed as follows:
The key to business success is to focus on satisfying
customer needs.
The marketing concept is a modern form of the
philosophical viewpoint known as “enlightened
self-interest”.
Medium of exchange. Something that is widely
accepted in exchange for goods and services in a
market.
THREE CATEGORIES OF PRICING ISSUES
1. Buyer–Seller Interactivity in Determining
Prices. Throughout most of history, prices
were not the fixed amounts displayed in
stores and advertising that are so familiar
today. Rather, prices were negotiated
during an interaction between the buyer
and the seller.
Interactive Price. A price arrived at by the buyer–
seller interactions of negotiation or the interactions
of auction bidding.
Fixed price. The practice of stating to the customer
the price that they actually expected to receive and
sticking to it.
2. Price Structure. Although there are benefits
to moving from negotiated prices to fixed
prices, there are also disadvantages. One
strength of interactive pricing is that it
makes it easy for the seller to charge
different prices to different buyers.
Price Segmentation. The practice of charging
different customers different prices for the same.
3. Price Format. The third category of pricing
issues involves how a price is expressed
when it is communicated to potential
customers. Price format also involves the
question of how many numbers are
required to express an item’s price.
Price partitioning. The issue of the question of
whether a price should be expressed as a single
number or as the sum of more than one number.
THE PRICING ACTIVITY
The activity of making decisions about prices
consists of two general components.
1. Price setting. Which consists of decisions about
individual prices. These decisions concern the
price of a specific item to a specific customer or
market in the current marketing environment
or situation at hand.
2. Pricing policy. Which involves decisions that
guide and regulate the setting of individual
prices. Broadly, pricing policies are the
organization’s rules that govern particular
price-setting decisions.
Fixed-price policy. Which would require the
organization to maintain fixed prices. It could also
be more specific, such as indicating the situations
when it would be permissible for the organization
to offer volume discounts.
Participants in the Pricing Activity
Some of the individuals in a large organization who
play a role in pricing will have very direct pricing
involvement and responsibility. Here are some
examples of such direct roles:
 In a department store, it is usually the
merchandise buyer who will do most of the
price setting for the items he or she buys to
be sold in the store.
 In many large consumer products
organizations, a brand’s product manager
will have much of the responsibility for
setting the prices of a brand.
 In companies that sell to business
customers, salespeople and their managers
play a crucial role in the negotiation
processes by which prices are determined.
 In service industries, such as airlines and
hotels, there will often be pricing
departments with specialists trained in
revenue management, a set of complex
price-setting techniques that are frequently
used in these industries.
Organization of Pricing Activities
Invoice price. The price of the item that will appear
on the customer’s bill.
Pocket price. The amount that’s actually left in the
company’s pocket after the transaction.
Four types of factors that determine the market’s
price-change response:
(1) economic,
(2) competitive,
(3) cognitive, (4) emotional.
CHAPTER 2: The Starting Point in Setting an Initial To convert a percent gross margin to a markup, we
Price must do something to increase the %GM side of the
equation that relates the two. The formula that
COST-BASED PRICING. When the setting of an accomplishes this is as follows:
item’s initial price begins with a consideration of the
item’s costs. M = %GM × [100 / (100 − %GM)]
Cost-plus pricing. This pricing method involves The second method of using a gross margin for
determining the amount to be added to an item’s price setting is to compute the product’s price
cost and then adding that amount to arrive at the directly from the gross margin percentage. The
item’s price. If C is an item’s cost, then its price (P) is formula for doing this is as follows:
calculated as follows: P = C + added amount
P = C / [1 − (%GM/100)]
Markup Pricing. Type of cost-based pricing that the
Figure 2.2 Gross Margin–Markup Equivalents
percentage used could be the same for all of the
company’s products or there could be a separate
standard percentage for each type of product sold
by the company.
Markup. The standard percentage used in markup
pricing. It is the amount added to an item’s cost (C)
expressed as a percentage of that cost. A markup
(M will be used in to represent markup in the
equations) could be calculated as follows:
M = (added amount/C) × 100
To determine a price based on a markup, the
markup must first be converted into a proportion
(by dividing it by 100) and then multiplied by the
cost. The result of this multiplication is then added
to the cost. This method of calculating a price is
expressed symbolically as follows: Advantages and Disadvantages of Cost-Based
P = C + [(M/100) × C] Pricing

Keystone pricing (or “keystoning”). Doubling an Advantages

item’s cost to arrive at its price (i.e., applying a 100
percent markup).
Gross margin is the amount of a company’s sales
revenue that remains after subtracting the “cost of
goods sold,” a standard accounting measure of the
costs of manufacturing or acquiring the items that
are sold.
Percent gross margin is the gross margin as a
percentage of the sales revenue. In symbols, a
percent gross margin (%GM) could be written as
follows:
%GM = (added amount/P) × 100
1. One advantage of cost-based pricing is its
simplicity. The idea of starting with costs is
intuitive, and cost-based prices are
relatively easy to calculate.
2. A second advantage of cost-based pricing
stems from the common practice of using
standard markup or margin levels in an
industry or for a particular type of product.
Disadvantages
1. A major disadvantage of cost-based pricing
is perhaps related to what is often
considered an advantage. There is
 frequently the presumption that by looking
first at costs and then setting the price
sufficiently above those costs that one can
insured a good profit on what one sells.
COMPETITION-BASED PRICING. When the setting of
an item’s initial price begins with the examination
of competitors’ prices, the process.
Parity pricing. The pricing method when a seller’s
intent is to match the levels of competitors’ prices.
Customer-based pricing. Price-setting process can
begin with thinking about the customer’s needs
and, especially, about the ability of the seller’s
product to satisfy those needs.
Estimating the Value to the Customer
This value created by the product, distribution, and
promotion elements of the marketing will be known
as the product’s value to the customers (VTC).
Figure 2.5 Four Steps of Value to the Customer
Estimation
The price of this alternative product could be
referred to as the reference value of your product.
Differentiating factors, the factors that differentiate
your product from this next closest substitute.
If your product is superior to the next closest
substitute on a factor, then this differentiating
factor’s monetary value is a positive differentiation
value.
If your product is inferior to the next closest
substitute on a factor, then this differentiating
factor’s monetary value is a negative differentiation
value.
CHAPTER 3: Assessing Value to the Customer
Types of Product Characteristics
1. Core-quality characteristics. These are
characteristics that affect the product’s
ability to accomplish what is considered by
customers to be its primary purpose, or
function.
2. Features and styling characteristics. These
characteristics contribute to benefits
beyond the product’s primary function. This
category includes aspects sometimes
referred to as “bells and whistles.”
3. Reputation and support service
characteristics. These include
characteristics that support a product’s
primary and secondary benefits and that
could be characteristics of the selling
company rather than only of the product
itself.
Need is used here broadly, to include a customer’s
wants, preferences, desires, enjoyments,
satisfactions, and so on. In everyday speech, needs
that are strong or essential are referred to as needs,
and needs that are weaker or more discretionary
are referred to as “wants.”
Consumer products (products purchased by
consumers).
Business products (products purchased by business
customers).
Objective performance. It involves results that are a
matter of observable facts, as opposed to a matter
of opinion.
Objective performance needs. The needs buyers
have for this objective product performance.
Subjective performance involves results that can be
directly evaluated only by the person consuming
the product.
Need for Hedonic and Aesthetic Performance
“hedonic”. The more sensual pleasures, such as for
food and drink.
“aesthetic.” The pleasures of music, art, literature,
and the performing arts.
Products and product characteristics that are valued
for the hedonic and aesthetic pleasures they create
could be said to satisfy the consumer’s
hedonic/aesthetic performance needs.
Need for Social Performance
Social performance needs. To satisfy product
characteristics valued by a customer for their
expected effects on the customer’s social image.
Need for Performance Reliability
Performance reliability needs. The customer’s
desires to avoid the expenses and anxieties of
product inconsistency or failure.
Need for Product Convenience
Product convenience needs. Satisfying the
customer product characteristics that reduce the
effort involved in receiving the product’s benefits.
UNDERSTANDING THE INDIVIDUALS INVOLVED IN
THE CUSTOMER’S BUYING DECISION
Buying center. The set of people in the buying
organization involved in a business-to-business
purchase decision.
To help identify these people, it is useful to consider
the decision process roles that have been
described.
User—those in the organization who use the
product.
Influencer—specialists, such as engineers, financial
analysts, or legal advisors, who have input on the
purchase process.
Gatekeeper—those who control the flow of
information to other members of the purchase
process, such as those who decide which companies
are invited to submit proposals.
Decider—managers, who rule on whether or not
the purchase should take place.
Purchaser—those in the organization who carry out
the purchase.
DETERMINING A DIFFERENTIATING FACTOR’S
VALUE BYCONSIDERING MONETARY
CONSEQUENCES
Conjoint analysis. A commonly used market
research technique to measure such trade-offs.
Quantifying Uncertainty
It is often the case that there is uncertainty involved
in the monetary consequences of a differentiating
factor.
Probability is a means of quantifying uncertainty. It
is a measure of the likelihood of an event expressed
as the ratio of the number of occurrences of the
event to the number of instances when the event
could have occurred.
Translating Probabilities Into Profits
Expected value. Applying this type of detailed
understanding of customer needs to arrive at an
estimate of monetary consequences requires the
concept of the expected value of a variable.
The expected value of a variable is the long-run
average of the variable. It is equal to the sum of
each possible value of the variable multiplied by the
probability of that value occurring.
In this discussion of the use of expected values in
determining differentiation values, it is helpful to
keep in mind that the word value is being used here
in two different senses.
In expected values, the word value means what a
variable could equal.
In differentiation values, the word value means
the customer benefits (or lack of them) associated
with a differentiating factor.
Conjoint Analysis. Which is also known as trade-off
analysis. Conjoint analysis involves carrying out a
study where a set of possible alternative products
are presented or described to respondents and the
respondents are asked to rate, rank, or choose
among these alternative products.
Analyzing the Responses Figure 4.1 Fixed Costs and Variable Costs Are
Distinguished By Their Behavior With Respect to
To help keep the analysis simple, the highest Unit Sales
number rank will represent the most preferred
alternative product in the set, and the lowest
number rank will represent the least preferred
alternative.
Multiple regression, a statistical procedure for
examining the relationships between variables in a
data set.
In multiple regression, the variable we want to
explain is known as the dependent variable (DV). In Price ceiling. A product’s VTC forms the upper
this case, the respondents’ preference rankings of bound of its price.
the alternative products would be the DV.
Price floor. The level of a product’s variable costs
A variable that may affect the DV is known as an forms the lower bound of its price.
independent variable (IV).
Figure 4.2 Bounds of the Typical Price
Data matrix. The multiple regression procedure
requires the construction of a rectangular array of
numbers.
Coding refers to how the variables in a study are
converted into numbers.
Dummy-variable coding. To make the results easy
to interpret, these are best coded using only 0s and
1s.
1 indicates that an attribute of interest exists, and 0
indicates that it does not exist.
BASIC STRATEGIES FOR SETTING AN INITIAL PRICE
The formulation attribute has two levels:
Skimming strategy involves setting a price so high
Enzymes and no enzymes. If we assume that having
that most potential customers will decline to buy
enzymes (as opposed to not having them) is the
the new product.
differentiating factor of interest, then it would make
sense to code the formulation IV so that having Penetration strategy involves setting a price so low
enzymes = 1 and not having enzymes = 0. that the new product sells briskly in the market.
CHAPTER 4 Basic Pricing Strategies and the Use of In-line strategy. Rather than setting a price so high
Breakeven Analysis as to deter customers or so low as to attract
customers, this strategy involves setting the price to
Fixed costs are those that do not vary with changes
be “in line with” the prices of competing offerings.
in the number of product units that are sold.
Variable costs vary directly with the number of
product units that are sold.
Initial-Pricing Strategies as Customer-Based
Figure 4.3 The Three Basic Initial-Pricing Strategies
Search characteristic. Philip Nelson pointed out that
a product characteristic that a customer can
examine before purchase.
Experience characteristic. Is easier to appreciate
than a product characteristic that can be observed
only after purchasing and using the product.
Credence characteristics. Characteristics require
customer belief or faith.
STRATEGIC FACTORS IN SETTING INITIAL PRICES
Figure 4.4 Strategic Factors in the Setting of Initial
Prices
Factors Supporting Skimming
Innovations. New-tomarket products.
There are at least three types of risk that might be
involved in an innovative product:
 Economic risk, such as the risk that a
consumer product involving a large
expenditure may not perform as expected
or the risk for a business customer that a
new product’s failure might cause costly
disruptions in the company’s operations
 Physical risk, such the chance that a new
recreational product could lead to accidents
or that a new medical procedure could have
serious unforeseen side effects
 Social risk, such as the possibility that a
new clothing style or automobile body
design could lead to negative reactions
among one’s peers
Contribution Margin
Contribution Margin. The amount of a product’s
price that remains after subtracting the product’s
variable costs.
In dollar terms, a product’s contribution margin is
equal to its price (P) minus its per-unit variable
costs (VC):
CM = P – VC
It is sometimes useful to talk about the
contribution margin as a percent of the product’s
price (%CM). This is calculated as follows:
%CM = [(P − VC)/P] × 100
Breakeven Analysis
Breakeven Analysis. Is the determination of the
number of units of a product that must be sold so
that the organization’s profit after a managerial
decision is equal to that before the decision.
Incremental fixed costs (ΔFC). They equal the
change in the organization’s level of fixed costs
(new fixed costs minus old fixed costs) that is due to
the decision to offer the new product.
This is expressed in the breakeven formula:
BE = ΔFC/CM
CHAPTER 5 Development and Use of the
Generalized Breakeven Formula
Best price. The price that results in more profits
than prices that are higher or lower.
Base sales. The number of units that would
otherwise have been sold.
Change in contribution margin (ΔCM). Involves
identifying of computing the change in total
contribution dollars due to the effect of the price
change on profit from base sales.
New contribution margin. The contribution margin
that would result from the price change taking
place.
Old contribution margin (CMo ). The contribution
margin that would result if the price change did not
take place will usually be the contribution margin
that existed before the price change was
considered.
USING THE GENERALIZED BREAKEVEN FORMULA
WHEN FIXED COSTS CHANGE
Figure 5.8 The Behavior of Incremental Fixed Costs
With Respect to Unit Sales
Identifying Incremental Fixed Costs
In identifying incremental fixed costs, it is important
to consider the following points:
Sunk costs are never incremental. If a fixed cost has
been incurred before the prospective price change
and cannot be reversed, then it is a sunk cost and
should not be considered in the breakeven
calculation for the prospective price change.
Use changes in real market value to estimate
depreciation. Although tax law and accounting
practice have various formulas for calculating the
depreciation of an asset, for pricing purposes an
asset’s depreciation over a particular period is the
market value at the start of the period minus the
market value at the end of the period.
Consider the opportunity costs of capital. If
resources are being tied up in an asset, then
relevant costs associated with that asset include
opportunity costs—the money that could be earned
by an alternative use of those resources.
Activity-based costing. In assessing incremental
fixed costs, it is often helpful to consider how a
company’s activities affect the organization’s
expenses.
Figure 5.9 An Activity-Based Cost Hierarchy for a
Large Equipment Manufacturer
CHAPTER 6 Predicting Price-Change Response:
Economic and Competitive Factors
Price sensitivity. The market’s responsiveness to a
price change of market.
Insensitive. When a price change causes very little
sales response to the price change.
Sensitive. When a price change causes a very large
sales response to the price change.
In this book, we group the many factors that
determine a market’s price sensitivity into four
categories:
1. Economic. Concern the amount of money
involved in the price change and in
responding to the price change.
2. Competitive. Concern the actions that a
company’s competitors take in response to
the company’s price changes.
3. Cognitive. Concern the customer’s
awareness and knowledge of price levels
and price meanings.
 4. Emotional. Concern the customer’s feelings
about prices and price changes.
THE PRICE ELASTICITYMEASURE
Price elasticity. This creates a measure that is
independent of how sales and price changes are
measured and thus can be compared over various
situations.
Its definition is as follows:
You can think of the phrase more elastic as
indicating more “stretching” of sales in response to
a price change and the phrase less elastic as
indicating sales rigidity, or the market “not
bending” in response to a change in price.
Demand curve shows the relationship between
various prices a product can have and the sales that
would occur at that price.
Category price elasticity (also known as primary
demand elasticity) is the percent change in sales for
an entire product category divided by the percent
change in the average price for an item in that
product category.
ECONOMIC FACTORS AFFECTING PRICE-CHANGE
RESPONSE
Consider the following four economic factors:
1. Amount of money involved in the price
change. Customers can be expected to show a
greater response to a price change the greater
the amount of money that is involved in the
price change.
2. Amount of the price change that the customer
will actually pay. If we define customer as the
person who is primarily responsible for making
the purchasing decision, there are occasions
when this decision maker is not also the person
responsible for paying the full amount of a
product’s price.
3. Customer’s switching costs. When switching
from one brand to another is costly to a
customer, then these switching costs are likely
to impair a customer from responding to a
price change.
4. Customer’s search costs. When the process of
evaluating the price or benefits of alternative
brands is costly to a customer, then these
search costs are likely to impair a customer
from responding to a price change
Three Basic Competitive Stances
Competitive stance is a company’s posture, or set
of response tendencies similar to an attitude. It can
and does change, but companies are often found to
hold the same stance for long periods.
1. Cooperative stance does not want to rock
the boat. This competitor is satisfied with
the current situation with respect to the
price-change initiator and prefers that
things remain the same.
2. Aggressive stance wants to improve his or
her position at the expense of the price-
change initiator. This competitor would like
to see things change with respect to the
initiator, in the direction of the competitor’s
benefit.
3. Dismissive stance feels that whatever the
initiator does will not substantially affect
him or her. This competitor simply ignores
the price-change initiator and makes no
special response to the initiator’s price-
change decisions.
Figure 6.7 Competitive Stance and Likely Price-
Change Response
Determining the Stance of Your Competitors
The following four competitive dimensions
1. Relative size. Competitors of approximately
equal size are likely to feel comparably
powerful, which would tend to discourage
the perception that an advantage could be
 gained by changing the price differential
between them. The resulting tendency for
their prices to rise and fall together is an
example of what is known as parallel
pricing.
2. Degree of brand differentiation. Lack of
brand differentiation between two
competitors (such as between Exxon and
Shell gasoline) would mean that changing
the price differential between them would
be likely to substantially change their
relative market shares.
3. Differences in unit costs. Competitors with
comparable per-unit costs are likely to
adopt a cooperative stance toward each
other.
4. Goals. A competitor’s strategic goals will
map onto its likely competitive stance.
Price Signaling. When this publicly available price-
related information is intentionally managed to
have an effect on competitors.
Publicity. As opposed to paid advertising, to
communicate pricing information.
Price warfare—companies successively exceeding
each other’s price cuts—which can drastically
reduce profits for all of the warring competitors.
APPLYING GAME THEORYTO MANAGING PRICE
COMPETITION
Payoff matrix. A useful tool of game theory is a
diagram known as?
QUIZ NO. 1
VALUE refers to the benefits, or the satisfaction of
needs and wants that a product or service provides.  already have a price, there is no question that all
PARITY PRICING is a pricing method when a seller’s
intent is to match the levels of competitors’ prices.  competition, and (3) CUSTOMER NEEDS.
CONJOINT ANALYSIS involves carrying out a study
where a set of possible alternative products are
presented or described to respondents and the
respondents are asked to rate, rank, or choose
among these alternative products.
Whether a price elasticity is calculated from a price
increase or from a price decrease, the elasticity will
usually be a NEGATIVE NUMBER.
COMPETITIVE STANCE is a company’s posture, or
set of response tendencies similar to an attitude.
There are THREE categories of price signaling
strategies.
TRUE To estimate a product’s VTC, it is important to
consider the widest array of potential
differentiating  factors.
GATEKEEPERS are those who control the flow of
information to other members of the purchase
process.
DECIDERS are those who rule whether or not the
purchase should take place.
TRUE The key to effectively estimating
differentiation values is to understand the
customer’s needs well enough to fully appreciate
the implications of differences between a product
and its next closest substitute.
TRUE. When demand for your product is high and
supply is low, you can command a high price.
PENETRATION PRICING is very
common in the Food Industry.
VARIABLE COST changes depending on the number
of units sold.
TRUE A product’s contribution margin is a measure
of its profitability.
When setting a price for a product that does not
three types of information (1) costs, (2)
What is the risk that a consumer product involving a
large expenditure may not perform as expected or
the risk for a business customer that a new
product’s failure might cause costly disruptions in
the company’s operations?
ECONOMIC RISK
What stance that competitor is satisfied with the
current situation with respect to the price-change
initiator and prefers that things remain the same.
COOPERATIVE STANCE
What risk from a new recreational product that
could lead to accidents or that a new medical
What strategy that sets prices higher to attract
customers most interested in the product or service
to maximize short-term profits? SKIMMING
When setting the price for a good, a service, or and
idea, which of the following is not a factor to
consider? LOCATION
Additional area of a product subjective performance
is the degree to which it leads the buyer to
experience increased social acceptance or respect
from others. NEED FOR SOCIAL PERFORMANCE
Most commonly used of the survey methods is
conjoint analysis, which is also known as
___________ Analysis. TRAFE-OFF
The percentage change in quantity demanded
relative to a percentage change in price. PRICE
ELASTICITY DEMAND

procedure could have serious unforeseen side
effects? PHYSICAL RISK
What stance that competitor wants to improve his
or her position at the expense of the price-change
initiator? AGGRESSIVE STANCE
What support a product’s primary and secondary
benefits and that could be characteristics of the
selling company rather than only of the product
itself? REPUTATION AND SUPPORT SERVICE
CHARACTERISTICS

What risk of possibility that a new clothing style or

automobile body design could lead to negative
reactions among one’s peers? SOCIAL RISK
What stance that competitor simply ignores the
price-change initiator and makes no special
response to the initiator’s price-change decisions?
DISMISSIVE STANCE
It involves examining possible patterns of behaviors
in order to help predict and manage price
competition. GAME THEORY
The multiple regression procedure requires the
construction of a rectangular array of numbers,
which is referred to as a DATA MATRIX
It refers to how the variables in a study are
converted into numbers. CODING