Topic 4

Pricing the market offering

(Lambin_2012: Chapter 17 & Kotler_2019: Chapter 16)

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 Marketing management

Strategic
marketing

Market
response
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 What is a price?

• The price of a market offering is the number of units of another item

(usually currency) that is paid for it (i.e., the monetary expression of value).

• Purchasing behavior can be seen as a system of exchange in which

searching for satisfaction and monetary sacrifices compensate each other.

• In competitive markets, prices are usually adjusted by the market and the
firms adopt them. If the firm has a certain level of power in the market
(due to product differentiation or for oligopoly/monopoly scenarios), then
it can influence/decide the price.

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 What is a price?

• Price is an instrument to stimulate demand

• Price is a determinant factor of the firm’s LT profitability
• Fastest to change among the 4Ps

• The choice of a pricing strategy must respect:

– Internal coherence: respecting constraints of costs &
profitability
– External coherence: taking into account market’s purchasing
power & price of competitors

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 Steps in setting the price

1. Selecting the pricing objective

2. Determining demand

3. Estimating costs

4. Analyzing competitors’ costs, prices and offers

5. Selecting a pricing method

6. Selecting the final price

Step 1: Selecting the price objective

• Survival (as long as prices cover costs, it stays in business)

• Maximum current profit (knowledge of demand and cost functions)

• Maximum market share (price penetration pricing)

• Maximum market skimming (market-skimming pricing)

• Product-quality leadership (combining quality, premium prices and

loyal customers)

• Other objectives (e.g. partial cost recovery, non-profit theatre)

Skimming
• High initial price (limit to upper part of market)
• Advantages: big financial returns soon after launch and skims high
end of the market
• Drawback: requires heavy advertising during introduction

Conditions favoring a market-skimming pricing strategy:

• A sufficient number of buyers have high demand
• High price communicates superior product image
• If product life cycle is short or if competitors will copy product
quickly (make as much profit as posisble in short time)
• Demand is inelastic
Price penetration
• Low price from beginning
• Requires high production capacity
• Demand should be price elastic
• Low price discourages competitors to enter the market
• Quick penetration of the market

Conditions favoring penetration pricing strategy:

• Market is highly price sensitive and low prices stimulate market growth

• Production and distribution costs fall with accumulated production

experience
Step 2: Determining demand

A. Price sensitivity

B. Estimating
demand curves
A. Price sensitivity

Definition of price elasticity:

Percentage change in product’s unit sales from a 1% change in price
Factors reducing price sensitivity
B. Estimating demand curves

Direct questions
Conjoint analysis

Causal studies

Time series
Panel data
Scanner data
Step 3: Estimating costs

Fixed costs Variable costs

(Overhead)
Types of
costs Costs not related Costs directly
to the production related to the
or sales levels. production and/or
sales levels.
E.g. Management salaries
Leases
E.g. Raw materials

Total costs
Combination of fixed and variable costs
for a given level of production 13
 Accumulated production and target costing

The experience curve, also known as Costs change with production

the learning curve, is the decline in the scale.
average cost with accumulated
production experience.
Step 4: Analyzing competitors’ costs, prices and
offers

• Consider the nearest competitor’s price

• Evaluate value to customer for

differentiated features

• Anticipate response from competition

Step 5: Selecting a pricing method

D. Going-rate pricing

E. Auction-type pricing
 A. Mark-up pricing
– Adding the profit margin to the total cost per
product (adding markup to unit cost)
– Ignores demand and competition
– Popular technique due to:
• It is pretty simple.
• Price competition is reduced when all competitors use it.
• Taken as fair by buyers and sellers.

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 Mark-up pricing Example
Suppose a toaster manufacturer has the following costs and sales
expectations:
Variable costs: 10€
Fixed costs: 300.000€
Expected sales: 50.000 units
Desired Sales Mark-up: 20%

Unit Cost = Variable Cost + (Fixed Costs/Unit Sales)

Mark-up price = Unit Cost/(1 – Desired Return on Sales)

Estimate the Markup Price 18

 B. Target-return pricing
• Break-even graphs show total cost and revenue for different levels
of sales.
• Cross-point between total cost and revenue is the break-even
point.
• Profit only takes place when sales are above the break-even point.

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 Target-return pricing Example
Suppose the same toaster manufacturer has invested 1 million euro in
the business and wants to set a price to earn a 20% ROI, specifically
200.000€
The target-return price is given by the formula:

Target-r price = unit cost + [(desired return x invested capital)/unit sales]

16€ + [(0.20 x 1.000.000€)/50.000)] = 20€

But what if sales do not reach 50.000 units? Use the break-even chart
to learn what would happen at other sales levels:

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Break-even chart for determining target-return price and break-even volume:

Break-even volume = Fixed costs / (price – variable cost) = 300.000€/(20€ - 10€) = 30.000
 Target-return pricing Example

Break-even volume and profits at different prices:

* See appendix for complete formulaes and detailed example

C. Perceived-value pricing:

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C. Perceived-value pricing:
• Value-based pricing procedure
– Relies on value perception by consumers, not the cost.

• Measuring the perceived value is a complex task!

• It’s based on the multi-attribute product concept and is set

based on the bundle of benefits perceived & costs.
• Measures: value for money, my money’s worth, feeling good,
sense of joy and pleasure from it
Components of perceived-value pricing

• Buyer’s image of • Customer support

product performance
• Supplier reputation
• Ability to deliver on
• Trustworthiness
time
• Esteem
• Warranty quality
 Types of Value Pricing

Fair price given the perceived value of the product

Everyday High-low
low pricing (EDLP) pricing
D. Going-rate pricing
The firm bases its price largely on competitors’ prices.

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 Example comparing Cost-based vs. Market based pricing

Cost-Based Pricing: Starts with cost and desired margin and is marked up along the
channel to a customer selling price of $940

Market-Based Pricing: Price is set based on competitive advantage and value ($1000)
and discounts and costs deducted to arrive at a company margin.
E. Auction-type pricing

• English auctions: ascending bids

• Dutch auctions: descending bids

• Sealed-bid auctions: bidders can submit only one bid and can
not know the other bids.

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Step 6: Selecting the final price
Factors that should be taken into account
when selecting the final price:

• The 3 Cs model for price setting:

Customers
Costs
Competitors

• Consumer psychology of pricing

• Potential price adaptations

Adapting the price
Consumer psychology and pricing
A. Possible consumer
reference prices
 B. Price-quality inferences

• A higher price may signal higher quality

• Price denotes the monetary sacrifice to obtain the product

 C. Price endings
• ‘Left to right’ pricing ($299 versus $300) 5€

• Odd number discount perceptions

5,99€
On
• ‘Sale’ written next to price
Sale
Product-mix pricing
 Pricing in a digital world
Buyers can: Sellers can:

Instantly get a price comparison from Make customized offers

thousands of sellers thanks to
comparisoon platforms (e.g. Give access to special prices to
Rastreator). certain consumers

Propose prices themselves and wait for Let consumers decide the price
a seller to accept it (e.g. Priceline.com)

Get free products (software)

Both can:

Negotiate prices in online auctions

and exchanges (eBay, Wallapop)
 Marketing management

Topic 4
Pricing the market offering

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