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Factors Affecting Pricing Decision

 Internal Factors - When setting price, marketers must
take into consideration
several factors which are the result of company decisions
PRICE and actions. To a large
extent these factors are controllable by the company and,
In general terms price is a component of an if necessary, can be
exchange or transaction that takes altered
place between two parties and refers to what must  External Factors - There are a number of influencing
be given up by one party (i.e., buyer) in order to factors which are not
obtain something offered by another party (i.e., controlled by the company but will impact pricing
seller). decisions.

 Buyers’ View – For those making a purchase, such as Internal Factors

final customers, price 1. Company and Marketing Objectives
refers to what must be given up to obtain benefits. In most  Return on Investment (ROI) - A firm may set as a
cases what is given marketing objective the requirement that all products
up is financial consideration (e.g., money) in exchange for attain a certain percentage return on the organization’s
acquiring access to a spending on marketing the product.
good or service. But financial consideration is not always  Cash Flow – Firms may seek to set prices at a level that
what the buyer gives will insure that sales revenue will at least cover product
up. Sometimes in a barter situation a buyer may acquire a production and marketing costs
product by giving up  Market Share – The pricing decision may be important
their own product. when the firm has an objective of gaining a hold in a new
market or retaining a certain percent of an existing market.
 Sellers’ View - To sellers in a transaction, price reflects  Maximize Profits – Older products that appeal to a
the revenue generated market that is no longer growing may have a company
for each product sold and, thus, is an important factor in objective requiring the price be set at a level that
determining profit. For optimizes profits.
marketing organizations price also serves as a marketing
tool and is a key element in marketing promotions. Marketing Strategy
Marketing strategy concerns the decisions marketers-
Value refers to the make to help the company satisfy its target market and
perception of benefits received for what someone must attain its business and marketing objectives.
give up. Since price often reflects an important part of
what someone gives up, a customer’s perceived value of Costs
a product will be affected by a marketer’s pricing decision. For many for-profit companies, the starting point for
Any easy way to see this is to view value as a calculation: setting a product’s price is to first determine how much it
will cost to get the product to their customers
Importance of Pricing
 Fixed Costs - Also referred to as overhead costs, these
 Most Flexible Marketing Mix Variable –For marketers represent costs the marketing organization incurs that are
price is the most adjustable of all marketing decisions. not affected by level of production or sales.
 Variable Costs – These costs are directly associated
 Setting the Right Price – Pricing decisions made with the production and sales of products and,
hastily without sufficient consequently, change has the level of production or sales
research, analysis, and strategic evaluation can lead to changes.
the marketing
organization losing revenue. External Market Factors
1.Elasticity of Demand
 Trigger of First Impressions - Often times customers’  Elastic Demand – Products are considered to exist in a
perception of a product market that exhibits elastic demand when a certain
is formed as soon as they learn the price, such as when a percentage change in price results in a larger percentage
product is first seen change in demand.
when walking down the aisle of a store.
 Important Part of Sales Promotion – Many times price  Inelastic Demand – Products are considered to exist in
adjustments are part of an inelastic market when a certain percentage change in
sales promotions that lower price for a short term to price results in a smaller percentage change in demand.
stimulate interest in the
product.
 Unitary Demand – This demand occurs when a As we discussed in Pricing Decisions, marketing
percentage change in price results in an equal percentage decisions including price are driven by the objectives set
change in demand. by the management of the organization. These objectives
come at two levels. First, the overall objectives of the
 For elastic markets – increasing price lowers total company guide all decisions for all
revenue while decreasing price increases total revenue. functional areas (e.g., marketing, production, human
 For inelastic markets – increasing price raises total resources, finance, etc.)
revenue while decreasing price lowers total revenue.
 For unitary markets – there is no change in revenue Step 2: Determine an Initial Price
With the objectives in Step 1 providing guidance
when price is changed.
for setting price, the marketer next begins the task of
determining an initial price level. We say initial because in
Customer and Channel Partner Expectations many industries this step involves setting a starting point
Possibly the most obvious external factor that from which further changes may be
influences price settings are the expectations of made before the customer pays the final price.
customers and channel partners. As we discussed, when
it comes to making a purchase decision customers assess
the overall “value” of a product much more than they Cost Pricing
assess the price. When deciding on a price marketers Under cost pricing the marketer primarily looks at
need to conduct customer research to determine what production costs as the key factor in determining the initial
“price points” are acceptable. Pricing beyond these price price. This method offers the advantage of being easy to
points could discourage customers from purchasing. implement as long as costs are known. But one major
disadvantage is that it does not take into consideration the
Competitive and Related Products target market’s demand for the product. This could
Marketers will undoubtedly look to market present major problems if the product is operating in a
competitors for indications of how price should be set. For highly competitive market where competitors frequently
many marketers of consumer products researching alter their prices. There are several types of cost pricing
competitive pricing is relatively easy, particularly when including:
Internet search tools are used. Price analysis can be Markup Pricing
somewhat more complicated for products sold to the This pricing method used by many resellers, who
business market since final price may be affected by a acquire products from suppliers, is one in which final price
number of factors including if competitors allow customers is determined by adding a certain percentage
to negotiate their final price. to the cost of the product.
Analysis of competition will include pricing by direct
competitors, related products and primary products.  Markup on Cost – Using this method price is
determined by simply multiplying the cost of each item by
Direct Competitor Pricing – Almost all marketing a predetermined percentage then adding the result to
decisions, including pricing, will include an evaluation of the cost.
competitors’ offerings. The impact of this information
on the actual setting of price will depend on the Cost-Plus Pricing
competitive nature of the market. In the same way markup pricing arrives at price by
 Related Product Pricing - Products that offer new ways adding a certain percentage to the product’s cost, cost-
for solving customer needs may look to pricing of products plus pricing also adds to the cost by using a fixed
that customers are currently using even though these monetary amount rather than percentage
other products may not appear to be direct competitors.
 Primary Product Pricing - Product Decisions, Break even Pricing
marketers may sell products viewed as complementary to Break even pricing is associated with breakeven
a primary product. analysis, which is a forecasting tool used by marketers to
determine how many products must be sold before the
Government Regulation company starts realizing a profit
Marketers must be aware of regulations that
impact how price is set in the markets in which their
products are sold. These regulations are primarily
government enacted meaning that there may be legal
ramifications if the rules are not followed. Price
regulations can come from any level of government and Market Pricing
vary widely in their requirements. Market pricing is one of the most common
methods for setting price, and the one that seems most
Setting Price logical given marketing’s focus on satisfying customers.
Steps in the Price Setting Process
For those marketers who use market pricing, options
Step 1: Examine Company and Marketing Objectives include:
Backward Pricing the rational for using these often rests in the cost of
In some marketing organizations the price the market is product shipment
willing to pay for a product is an important determinant of  Discounts on Cumulative Purchases – This method
many other marketing decisions. This is likely to allows the buyer to receive a discount as more products
occur when the market has a clear perception of what it are purchased over time.
believes is an acceptable level
of pricing. Trade Discounts
Manufacturers who rely on channel partners to
 Odd-Even Pricing - One effect dubbed “odd-even” distribute their products (e.g., retailers, wholesalers) offer
pricing relates to whole number pricing where customers trade discounts off of list price. These discounts function
may perceive a significant difference in product price as an indirect form of payment for a channel member’s
when pricing is slightly below a whole number value. work in helping to market the product.
Essentially the difference between the trade discounted
 Prestige Pricing - Another psychological effect, called prices paid by the reseller and the price the reseller
prestige pricing, points to a strong correlation between charges its customer will be the re seller's profit.
perceived product quality and price. The higher the
price the more likely customers are to perceive it has
being higher quality compared to a lower priced product Special Segment Pricing
In some industries special classes of customers
Price Lining within a target market are offered pricing that differs from
Price lining or product line pricing is a method that the rest of the market. The main reasons for doing this
primarily uses price to create include: building future demand by appealing to new or
the separation between the different models. younger customers; improving the brand’s image as being
sensitive to customer’s needs; and rewarding long time
Competitive Pricing customers with price breaks
When basing pricing decisions on how competitors are
setting their price, firms Geographic Pricing
may follow one of the following approaches: Products requiring marketers to pay higher costs
 Below Competition Pricing - A marketer attempting to that are affected by geographic area in which a product is
reach objectives that sold may result in adjustments to compensate for the
require high sales levels (e.g., market share objective) higher expense. The most likely cause for charging a
may monitor the market different price rests with the cost of
to insure their price remains below competitors. transporting a product from the supplier’s distribution
 Above Competition Pricing - Marketers using this location to the buyer’s place of business. If the supplier is
approach are likely to be incurring all costs for shipping then they may charge a
perceived as market leaders in terms of product features, higher price for products in order to cover the extra
brand image or other transportation costs
characteristics that support a price that is higher than what
competitors offer. Markdowns
 Parity Pricing - A simple method for setting the initial The most common method for stimulating
price is to price the product customer interest using price is the promotional markdown
at the same level competitors’ price their product method, which offers the product at a price that is lower
than the product’s normal selling price. There are several
Bid Pricing types of markdowns including:
Bid pricing typically requires a marketer to submit a price  Temporary Markdown – Possibly the most familiar
to a potential buyer that is sealed or unseen by pricing method marketers use to generate sales is to offer
competitors. It is not until all bids are obtained and a temporary markdown or “sale’ pricing. These
unsealed that the marketer is informed of the price listed markdowns are normally for a specified period of time the
by competitors. conclusion of which will result in the product being raised
back to the normal selling price.
 Permanent Markdown – Unlike the temporary
markdown where the price will eventually be raised back
to a higher price, the permanent markdown is intended
to move the product out of inventory. This type of
Quantity Discounts markdown is used to remove old products that: are
Options for offering price adjustments based on quantity perishable and close to being out of date (e.g., donuts);
ordered include: are an older model and must be sold to make room for
 Discounts at Time of Purchase – The most common new models; or are products that the marketer no longer
quantity discounts exist when a buyer places an order that wishes to sell.
exceeds a certain minimum level. While quantity discounts  Seasonal – Products that are primarily sold during a
are used by marketers to stimulate higher purchase levels, particular time of the year, such as clothing, gardening
products, sporting goods and holiday-specific items,
may see price reductions at the conclusion of its prime  Buyer Owns Product Outright – The most common
selling season. ownership option is for the
buyer to make payment and then obtain full ownership.
Loss Leaders  Buyer Has Right to Use but Does Not Have
An important type of pricing program used primarily by Ownership – Many products,
retailers is the loss leader. Under this method a product is especially those labeled as services, permit customers to
intentionally sold at or below the cost the retailer pays to make payment in
acquire the product from suppliers. exchange for the right to use a product but not to own it.

Sales Promotions 2. Early Payment Incentives

As we noted in pricing, marketers may offer several types For many years marketers operating primarily in the
of pricing promotions to simulate demand. While we have business market offered
already discussed “sale” pricing incentives to encourage their customers to pay early.
as a technique to build customer interest, there are Typically, business customers are
several other sales promotions that are designed to lower given a certain period of time, normally 30 or 60 days,
price. These include rebates, coupons, before payment is due.
trade-in, and loyalty programs.
3. Currency Considerations
Bundle Pricing Product pricing can be dramatically altered by
Another pricing adjustment designed to increase international monetary exchange
sales is to offer discounted pricing when customers rates. A company that desires to be a low-price market
purchase several different products at the same time. leader may find this strategy
Termed bundle pricing, the technique is often used to sell works in their home market but currency differences may
products that are complementary to a main product. For move their product’s price to a
buyers, the overall cost of the purchase shows a savings mid-price level in other countries.
compared to purchasing each product individually
4. Auction Pricing
Dynamic Pricing One pricing approach that does not fit neatly into the price
The concept of dynamic pricing has received a great deal setting process we’ve
of attention in recent years due to its prevalent use by described is the auction pricing model. Auction pricing is
Internet retailers. But the basic idea of dynamic pricing the reverse of bid pricing, which
has been around since the dawn commerce. Essentially we discussed earlier, since it is the buyer who in large part
dynamic pricing allows for the point-of-sale (i.e., at the sets the final price.
time and place of purchase) price adjustments to take
place for customers meeting certain criteria established by
the seller.

Form of Payment
 Immediate Payment in Full – Requires the customer
make full payment at the
time the product is acquired.
 Immediate Partial Payment – Requires the customer
make a certain amount or
percentage of payment at the time the product is acquired.
 Future Payment – Provides the buyer with the
opportunity to acquire use of the
product with payment occurring sometime in the future.
Future payment may
require either payment in full or partial payment.

Other Considerations

1. Ownership Options
An important decision faced by marketers as they are
formulating their marketing
strategy deals with who will have ownership of the product
(i.e., holds legal title) once an
exchange has taken place. The options available include: