CHAPTER 8 : PRICE STRATEGIES

8.1Price and roles of price policy

8.4 Process of setting optimal
8.1.1 Concept of pricing price
8.1.2 Roles of pricing policy 8.4.1 Selecting the pricing objective
8.4.2 Determining the market size
8.4.3 Estimating costs
8.2 Factors affecting pricing
8.4.4 Analyzing competitors’ costs,
8.2.1 External factors
prices and offers
8.2.2 Internal factors 8.4.5 Selecting pricing strategies
8.4.6 Determining the final price
8.3 Pricing strategies
8.3.1 New product pricing strategies
8.3.2 Product mix pricing strategies
8.3.3 Price adjustment strategies
8.3.4 Price changes
8.1. Price and roles of price policy
8.1.1 Fundamentals of pricing:
§ Price is the amount of money that
ü a company charged for a product/service;
ü a customer is willing to pay in exchange for a
product/service.
§ Price is one of the most important elements that affect buyer
choice. It also determines a firm’s market share and
profitability

Price is the only element in the marketing mix that produces revenue;
all other elements represent costs. Price is also one of the most flexible
marketing mix elements.
8.1 Price and roles of price policy
8.1.2. Roles of pricing policy
Price policy is all company’s decisions related to price
and price changes in a period of time.
Price policy determines:

Ø Sales and profitability

Ø Competitiveness
Ø Brand equity

Ø Market penetration and market expansion

8.2 Internal and external considerations affecting
price decisions
8.2.1 External considerations
Ø The market and demand: the relationship between
price and demand for the product, pricing in different
types of market, price elasticity of demand
Q&A: How many types of market regarding competition?
8.2 Internal and external considerations affecting
price decisions
8.2.1 External considerations
Q&A: How many types of market regarding competition?
v Pure competition: the market consists of many buyers and
sellers trading in a uniform commodity. No single buyer or
seller has much effect on the market price
à Marketing research, product development, pricing, sales
promotions play little.
v Monopolistic competition: the market consists of many buyers
and sellers trading over a range of prices. The price gap is
because of sellers want to differentiate their offers to buyers
à Because there are many competitors in such markets, each firm
is less affected by competitors’ pricing strategies than in
ologopolistic markets.
8.2 Internal and external considerations affecting
price decisions
8.2.1 External considerations
v Oligopolistic competition: the market consists of a few sellers
who are highly sensitive to each other’s pricing and marketing
strategies
à Each seller is responsive to competitors’ pricing strategies
v Pure monopoly: the market consists of one seller. The seller may
be a government monopoly, a private regulated monopoly or
a private nonregulated monopoly.
8.2 Internal and external considerations affecting
price decisions
8.2.1 External considerations
Ø The economy:

Economic factors such as a boom or recession, inflation or

interest rates affect pricing decisions because thay affect
consumer spending, consumer perceptions of the productt’s
price and value.
Ø Other external factors: resellers, government, social
concerns, Customers, Competitors’ pricing, Customer
value, psychology and perception of price
8.2 Internal and external considerations affecting
price decisions
8.2.2 Internal considerations
Ø The company’s objectives, MKT strategy and mix

u Aiming at maximizing profit: set price as high as

possible

u Aiming at maximizing market share: set price low

enough to attract customers
u Aiming at high performance quality products: set
relatively high price to cover high cost and create image
for brands.
u Aiming at ensuring survival in the highly competitive
market: set price as low as possible
8.2 Internal and external considerations
affecting price decisions
8.2.2 Internal considerations
Ø Cost and break-even point

At break-even point, total revenue equals to total cost.

8.2 Internal and external considerations
affecting price decisions
8.2.2 Internal considerations
Other considerations

u Terms and conditions of contracts

u Phases of Product Life Cycle

u ….
 8.3. Pricing strategies

Ø New product pricing strategies

Ø Product mix pricing strategies

Ø Price adjustment strategies

Ø Price changes
8.3 Pricing strategies
8.3.1 New-product Pricing Strategies
Q&A: In which phases of Product Life Cycle does a
company use New-product Pricing Strategies?

Q&A: A brand new product should be priced high or low?

Why?
8.3. Pricing strategies
8.3.1. New-product Pricing Strategies:
Market skimming pricing
Set high initial prices to “skim” revenues layer by layer from the
market.

Characteristics: Gain profit from price

Conditions to apply:
§ The product’s quality and im age should support its
higher price and enough buyers m ust want the product at
that price
§ The cost of producing a sm aller volum e cant be so high
§ Com petitors should not be able to enter the m arket easily
and undercut the high price
§ The com pany has absolute com petitive advantage
§ O ften suitable for very new product that having high
technology
.
8.3. Pricing strategies
8.3.1. New-product Pricing Strategies:
Market penetration pricing
Set a low initial price to penetrate the market quickly and deeply
– attract a large number of buyers quickly and win a large
market share.

Characteristics: Gain profit from quantity sold

Conditions to apply:
§ The market must be highly sensitive so that a low price
produces more market growth.
§ Production and distribution costs must decrease as
sales volume increases (economies of scale)
§ The low price must help keep out the competition
§ Often suitable for convenience product or FMCGs.
8.3 Pricing strategies
8.3.2 Product mix pricing strategies
Q&A: In which phases of Product Life Cycle does a
company use Product Mix Pricing Strategies?

Q&A: The purpose of product mix pricing strategies?

 8.3. Pricing strategies
8.3.2. Product mix pricing strategies:

Product Optional- Captive-

line pricing product product
pricing pricing

By-product Product
pricing bundle
pricing
 8.3. Pricing strategies
8.3.2. Product mix pricing strategies:
Pricing Situation Description

Product line pricing Setting prices across an entire product line

Optional- product pricing Pricing optional or accessory productssold

with the main product

Captive- product pricing Pricing products that must be used with the
main product

By-product pricing Pricing low-value by-products to get rid of

them
Product bundle pricing Pricing bundles of products sold together
8.3. Pricing strategies
8.3.2. Product mix pricing strategies:
Product Line Pricing

§ Setting the price steps between various products in a

product line based on cost differences between the
products, customer evaluations of different features, and
competitors’ prices

§ Examples: Apple’s iPads. An iPad Air with Wi-Fi and

16Gb storage costs $499. An iPad Air with same limited
storage, but has both Wi-Fi and 4G connection costs
$629. The prices continue to rise as you go along the
line of products with higher storage capacity.

.
8.3. Pricing strategies
8.3.2. Product mix pricing strategies:
Optional Product Pricing
§ Offering to sell 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
8.3. Pricing strategies
8.3.2. Product mix pricing strategies:
Optional Product Pricing

§ Example:
Ø A car comes with global positioning system (GPS)
and Bluetooth wireless communication.
Ø A refrigerator comes with an optional ice maker.
Ø A new PC comes with an array of processors, hard
drives, docking systems, software options, and
service plans.
8.3. Pricing strategies
8.3.2. Product mix pricing strategies:
Captive Product Pricing
§ Setting a price for products that must be used along
with a main product.
§ Examples: razor blade cartridges, videogames, and
printer cartridges. Producers of the main products
(razors, videogame consoles, and printers) often price
them low and set high markups on the supplies.
8.3. Pricing strategies
8.3.2. Product mix pricing strategies:
By-Product Pricing
Pricing low-value by-products to get rid of them

Ø Producing products and services often generates by-

products. 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. The by-products themselves
can even turn out to be profitable—turning trash into
cash.
8.3. Pricing strategies
8.3.2. Product mix pricing strategies:
By-Product Pricing
Pricing low-value by-products to get rid of them

Ø Example: metal shavings from steel cutting can be

gathered and processed as scrap metal.
8.3. Pricing strategies
8.3.2. Product mix pricing strategies:
Product Bundle Pricing

Ø Sellers combine several products and offer the bundle

at a reduced price.

Ø Price bundling can promote the sales of products

consumers might not otherwise buy, but the combined
price must be low enough to get them to buy the bundle.

Ø Example:
§ Fast-food restaurants bundle a burger, fries, and a
soft drink at a “combo” price.
§ Telecommunications companies bundle TV service,
phone service, and high-speed Internet connections
at a low combined price.
8.3. Pricing strategies
8.3.3. Price adjustment strategies:
Companies usually adjust their basic prices to account for
various customer differences and changing situations.
Discount and
Segmented
allowance
pricing
pricing

Psychological Promotional
pricing pricing

Geographic Dynamic International

pricing pricing pricing
 8.3. Pricing strategies
8.3.3. Price adjustment strategies:
Pricing Situation Description

Discount and allowance Reducing prices to reward customer responses such as

pricing paying early or promoting the product
Segmented pricing Adjusting prices to allow for differences in customers,
products, or locations
Psychological pricing Adjusting prices for psychological effect

Promotional pricing Temporarily reducing prices to increase short-run sales

Geographical pricing Adjusting prices to account for the geographic location

of customers
Dynamic pricing Adjusting prices continually to meet the characteristics
and needs of individual customers and situations

International pricing Adjusting prices for international markets

 Discount and allowance pricing
Ø Discount is a straight reduction in price on purchases
during a stated period of time or of larger quantities.
§ Cash discount: a price reduction to buyers who pay
their bills promptly.
§ Quantity discount: a price reduction to buyers who buy
large volumes.
§ Functional discount (trade discount): a seller offers to
trade- channel members who perform certain functions,
such as selling, storing, and record keeping.
§ Seasonal discount: a price reduction to buyers who buy
merchandise or services out of season.
 Discount and allowance pricing

ØAllowance is promotional money paid by manufacturers to

retailers in return for an agreementt to feature the
manufacturer’s products in some way

§Trade-in allowances: price reductions given for turning

in an old item when buying a new one.

§Promotional allowances: payments or price reductions to

reward dealers for participating in advertising and sales
support programs.
8.3.3. Price adjustment strategies::
Segmented Pricing
The company sells a product or service at two or more prices,
even though the difference in prices is not based on differences in
costs.

§ Customer-segment pricing: different customers pay

different prices for the same product or service
§ Product-form pricing: different versions of the product are
priced differently but not according to differences in their
costs
§ Location-based pricing: a company charges different prices
for different locations, even though the cost of offering each
location is the same.
§ Time-based pricing: a firm varies its price by the season,
the month, the day, and even the hour
8.3.3. Price adjustment strategies:
Segmented Pricing

Conditions to apply:

ü The market should be segmentable, and segments must

show different degreees of demand.
ü The cost of segmenting and reaching the market cant
exceed the extra revenue obtained from the price
difference.
ü The segmented pricing must be legal.
8.3.3. Price adjustment strategies::
Psychological Pricing
Considers the psychology of prices, not simply the economics;
the price says something about the product.
Ø When the consumer cannot judge quality because they lack
the information or skill, price becomes an important quality
signal

Ø Reference prices: prices that buyers carry in their minds and

refer to when looking at a given product.

Ø Digit has symbolic and visual qualities that should be

considered in pricing (E.g.: 8 is round and even and
creates a soothing effect, whereas 7 is angular and creates
a jarring effect).
Ø Companies often use 00. endings on regularly priced items
and 99 endings on discount merchandize.
8.3.3. Price adjustment strategies::
Promotional pricing
Temporarily pricing products below the list price, and sometimes
even below cost, to increase short-run sales.

§ Offering discounts to increase sales and reduce inventories.

§ Using special-event pricing in certain seasons to draw more
customers
§ Offering cash rebates to consumers who buy within a
specified time
§ Offering low interest financing, longer warranties, or free
maintenance to reduce the consumer’s “price.”.
§ BOGO, buy 5 for 3, refund, cashback, vouchers, coupons
Warning: Used too frequently and copied by competitors, price
promotions can create “deal-prone” customers who wait until
brands go on sale before buying them. Or, constantly reduced
prices can erode a brand’s value in the eyes of customers.
 8.3.3. Price adjustment strategies::
Geographical Pricing
Setting prices for customers located in different parts of the country
or world.

Ø FOB-origin (free on board) : goods are placed free on

board a carrier; the customer pays the freight from the
factory to the destination.
Ø CIF: cost, insurance, freight
 8.3. Pricing strategies
8.3.4. Price changes:
Initiating Price cuts
§ Decrease in tax, salary or interest
§ Company wants to dominate the market
through lower costs (Lenovo, Quang
Chau fashion, Hao Hao noodles)
§ Excess capacity
§ Falling demand in strong price
competition
§ Product in the decline period of PLC
§ Weakened economy
§ Price wars (commercial competition
characterized by the repeated cutting of
prices among competitors)
8.3. Pricing strategies
8.3.4 Price changes:
Initiating Price Increases
§ Inflation
§ Rising costs
§ Overdemand (when a company
cant supply all that its customers
need)
§ Increase in tax, salary, interest
§ More advantages, benefits for
products
8.4. Process of setting optimal price

q Selecting the pricing objective

q Determining the market size
q Estimating costs
q Analyzing competitors’ costs, prices and offers
q Selecting pricing strategies
q Determining the final price
8.4. Process of setting optimal price

8.4.1. Selecting the pricing objective

Companies often follow the whole target that optimizing the

long-term profit. However, in some cases, a company has to
follow another objective in the short-run:
Ø Leading in market share
Ø Leading in quality on the market
Ø Ensuring the survival…
 8.4. Process of setting optimal price
8.4.2. Determining the market size

Ø Define the demand

Qd = nqp
Trong đó, Qd: quantity of demand
n: number of customers in the target market
q: average number of products that a customer buy
p:the estimated price

Ø Define the price elasticity of demand.

8.4. Process of setting optimal price
8.4.2. Determining the market size
If demand is elastic, sellers will consider lowing their prices.
A lower price will produce more total revenue. If demand is
inelastic, sellers will consider raising their prices.

Ø Define the customer philosophy in price

8.4. Process of setting optimal price

8.4.3. Estimating costs and break-even

TC = FC +VC
- TC: total costs
- FC: fixed costs (overhead): costs that do not vary with
production or sales level
- VC: variable costs: vary directly with the level of
production
 8.4. Process of setting optimal price

8.4.4. Analyzing competitors’ price

When analyzing the competitors’ price, it is necessary to analyze the
typical price level of some main competitors: typical low prices,
typical high prices and typical average prices.

When analyzing each type of the price level, enterprises must

consider:

Ø Which particular price for which particular type of product and

its characteristics.
Ø Analyze the cost and price of that product.
Ø The market share of that product.
Ø Coordinate with Marketing-Mix activities to decide: Which
price can apply to which distribution channels, and ways to
promote the product.
8.4. Process of setting optimal price
8.4.5. Choosing pricing strategies
 8.4.5. Choosing pricing strategies

Cost-plus based pricing

Setting prices based on the costs for producing, distributing and
selling) plus a fair rate of return for its effort and risk
Option 1:
P = AC + M
P: Price per product
AC: Average cost per product
M : Estimated profit per product

Option 2:
P = AC + mAC
P = AC (1 + m)
P: Price per product
AC: Average cost per product
m : percentage of profit/cost
 8.4.5. Choosing pricing strategies
Cost-plus based pricing
v Advantage:
ü Simply because sellers are more certain about costs
than about demand
ü When all firms use this pricing method, prices tend to
be similar, so price competition is minimized
ü Fairer to both buyers and sellers. Seller earn a fair
return on their investment when buyers’ demand
becomes great

v Disadvantages:
Inflexible and do not consider competition factor in the
industry (if competitors has lower price, the firms may lost
customers).
 8.4.5. Choosing pricing strategies
Competition-based Pricing
Setting prices based on competitors’ strategies, costs, prices and
market offerings.
Consumers will base their judgements of a product’s value on
the prices that competitors charge for similar products.
8.4.5. Choosing pricing strategies
Customer Value-based pricing
Use buyers’ perceptions of value, not the seller’s cost, as the key to
pricing
8.4. Process of setting optimal price

8.4.6. Determining the final price and quote