PRICING STRATEGY

Assessment
40%
o 10 % attendance,
o 15% group assignment (presentation DAY 10 &11)
o 15% individual test: 50 quizzes (theory and exercises- Chapter 1,2,3,4,6,8)

60%
o Final Test: theory and exercises
o Chapter 1,2,3,4,6,8
o Time: DAY 9
Material
Thomas T. Nagle and Georg Muller (2017). The Strategy and Tactics of Pricing – A guide to
growing more profitably. 6th Edition. Routledge

o Chapter 1: Strategic Pricing

o Chapter 2: Value Creation
o Chapter 3: Price Structure
o Chapter 4: Price and Value Communication
o Chapter 6: Price Level
o Chapter 8: Pricing over Product Life Cycle
Groupwork Presentation
TOPIC:

o 1 – 4. Price strategy over the product life cycle

o 5 – 6. How to set up the most effective price for a product?
o 7. Some techniques of professional buyers when bargain the price on your products/ services
that make you confusing and even offer some extra services/ reduce the price? Suggest some
ways to deal with professional buyers.
o 8. How to set the discount price to boost sale revenues but bring no negative impact to
profit? Use examples to illustrate your points (Price elasticity)
o 9. How can you manage the price of your products/ services across multiple channels? Use 1
case study to illustrate your point
o 10. Identify a situation where a company or an industry moved from a “one-size-fits-all”
approach to pricing to a segmented pricing approach. (segmentation pricing strategy)
CHAPTER 1: STRATEGIC PRICING
Learning objectives:
o Know what is price and key principles for setting price
o Understand price elasticity
o Understand the roles of pricing strategy
o Understand three basic pricing strategies: customer value- based pricing, cost - based pricing,
and competition – based pricing
o The strategic pricing pyramid
What is price?
• Narrowly, price is the amount of money charged for a product or service.

• Broadly, price is the sum of all the values that consumers exchange for the
benefits of having or using the product or service.
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• The price and quantity of good available in a market are determined by the
demand for the good and the supply of good available at any given time
   

• We need to set price when we have:
• a new product, or
• when we enter a new market with an existing product.
• How?
• Need to decide what position you want your product to be in
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• Static Analysis - assumes that competitors will not react to how a firm prices
its products
• Dynamic Analysis - assumes that competitors will react to changes in prices
of a firm’s products
• Static is very unrealistic.
• The Internet had influenced dynamic pricing in two ways:
• Decreased menu costs - cost to change the price
• Interactivity - ease of Internet interaction
n Consumers are heterogeneous in their willingness to pay
n Charge according to consumer price sensitivity. Make sure that people
with inelastic demand pay more and people with elastic demand pay
less.
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n Make sure that prices directed at one segment cannot be taken

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advantage of by the other.

n How should you achieve this?

n Identify a “bad” for the high willingness to pay segment and bundle it
with the product to create a product for the low segment
n This is where product design and pricing comes together.
Price elasticity

7
Price elasticity

8
Price elasticity

9
Price elasticity

10
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• Profit objectives
• Targeted profit return

• Volume objectives ( 7 ' 9 ! 4 % > , << Ⓒ % D E @ ' ! 4 2% " B ' - B ; % $ ) * 0 8 ! 4 $ Ⓒ 5 < % + 1 ' - 9 / . 5 3 A
Anticipate and reaction
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• Dollar or unit sales growth to market change s for

• Market share growth growing profitability

• Other objectives
• Match competitors’price
• Non-price competition


Use Technology as a hard-core for iPhone’s unique differentiation
à Establish a high benchmark for the value of its easy-to-use interface
and capturing a dominant share at competitive prices

Focus on where and how to discount prices

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à Put deepest discounts on some basic-need products (eg:

disposable diapers), that drive frequently repeat visits big
spenders on other products

Offer meals and other bundles for discounted prices

comparing to purchasing each item separately

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Some pricing strategies

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Some pricing strategies

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1. Cost-based pricing
• The most common pricing procedure because it carries an aura of financial
prudence by pricing every product or service to yield a fair return over all costs,
fully and fairly allocated

• 5 types of cost-based pricing:( 7 ' 9 ! 4 % > , << Ⓒ % D E @ ' ! 4 2% " B ' - B ; % $ ) * 0 8 ! 4 $ Ⓒ 5 < % + 1 ' - 9 / . 5 3 A

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ü Cost-plus pricing, Full cost pricing, Target profit pricing, Marginal cost pricing
ü Variable-cost pricing
• Cost-based pricing reflects 3 types of relationship:
ü Ratio of fixed costs to variable costs
ü Economies of scales
ü Cost structure
1. Cost-based pricing
Fixed costs are the costs that do not vary with production or sales level
• Rent
• Heat
• Interest
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Variable costs are the costs that vary with the level of production
• Packaging
• Raw materials

Total costs are the sum of the fixed and variable costs for any given level of production
1. Cost-based pricing
Costs as a Function of Production Experience

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Diseconomies
Economies of scale
Constant
of scale
return to
sale
1. Cost-based pricing
Costs as a Function of Production Experience

Experience or learning curve is

when average cost falls as
production increases because fixed
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costs are spread over more units
1. Cost-based pricing
Cost-based pricing adds a standard markup to the cost of the product

Benefits
• Sellers are certain about costs
• Prices are similar in industry and price competition is minimized
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• Buyers feel it is fair

Disadvantages
• Ignores demand and competitor prices
1. Cost-based pricing

Cost-plus pricing: a fixed percentage of profit will be added to the cost and it will be
taken by manufacturer, wholesaler and retailer. It is also called mark-up pricing

Full-cost pricing: setting price to cover both fixed and variable cost. Total costs will be
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computed by adding variable and fixed incurred in the product. The price of each product
is dependent on costs it creates. It is also called absorption-cost pricing
1. Cost-based pricing
Target profit pricing: setting the price to target specified profit level. It estimates of the
cost and potential revenue at different prices and the break-even has to be made. It is
possible when there is no competition in the market, also called break-even pricing
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Marginal cost pricing: price is fixed on the basis of additional variable costs associated
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with an additional output. The travel industry often employs marginal pricing to fill
capacity

Variable cost-plus pricing: a system for developing prices that adds a markup to the total
amount of variable costs incurred
1. Cost-based pricing

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1. Cost-based pricing

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1. Cost-based pricing

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 1. Cost-based pricing

Break-Even Analysis and

Target Profit Pricing

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Break-even pricing is the price at

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which total costs are equal to total

revenue and there is no profit

Target return pricing is the price at

which the firm will break even or
make the profit it’s seeking
Break-Even Analysis Can Evaluate
Possible Prices

BEP (in units) = Total fixed cost/Fixed cost contribution per unit

Fixed cost (FC) contribution per unit = the selling price per unit - the
variable cost per unit.

Break-even point (BEP)—the quantity where the firm’s total cost will just
equal its total revenue.
Marginal Analysis Considers Both Costs and Demand
The rule for maximizing profit is that
the highest profit is earned at the
price where marginal cost is just
less than or equal to marginal
revenue. At this point, the marginal
profit—the extra profit on the last
unit—is near zero.
1. Cost-based pricing
Variable cost-plus pricing

This approach can work well when variable costs comprise the bulk of all costs incurred.
However, it can result in unusual outcomes when variable costs comprise just a small
proportion of total costs, since the markup multiplier may result in an unusually high or
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low price.

Another situation in which variable cost-plus pricing can be used is when a company
will not incur any additional fixed costs for each additional unit sold (a common
occurrence when there is excess capacity). In this case, variable costs are the same as
total costs, so the effect is the same as would be the case for cost-plus pricing.
1. Cost-based pricing
Variable cost-plus pricing
For example, a manufacturer uses variable cost-plus pricing to develop a quote for a purple
widget. The variable cost to produce one of these widgets is $20, and the firm uses a 40%
markup percentage. This results in a quoted price of $28, which is calculated as follows:
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$20 Variable costs x 1.4 Markup percentage = $28 Price

The company has fixed costs that are allocated at $6 per unit, which results in a total cost of
$26. Since the price is $28, the company earns a $2 profit on the sale of each unit.
2. Customer value-based pricing
Value-based pricing uses the buyers’ perceptions of value, not the sellers cost, as the key to
pricing
• Value-based pricing is customer driven
• Cost-based pricing is product driven
• Price is considered before the marketing program is set
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2. Customer value-based pricing
Factors affecting pricing decision

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2. Customer value-based pricing
Predatory pricing

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2. Customer value-based pricing
Odd pricing

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2. Customer value-based pricing
Psychological pricing

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2. Customer value-based pricing
Good-value pricing: offers the right combination of quality and good service
at a fair price

Everyday low pricing (EDLP) charging a constant everyday low price with
few or no temporary price discounts
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High-low pricing charging higher prices on an everyday basis but running

frequent promotions to lower prices temporarily on selected items

Value-added pricing attaches value-added features and services to

differentiate offers, support higher prices, and build pricing power
3. Competition-based pricing
• Setting prices based on competitors’ strategies, costs, prices, and market
offerings.
• Consumers will base their judgments of a product’s value on the prices that
competitors charge for similar products.
• There are 4 types of competition-based pricing
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ü Premium pricing
ü Discount pricing
ü Going rate pricing
ü Tender pricing
ü High low pricing
 3. Competition-based pricing
• Premium pricing: pricing above the level adopted by competitors
• Discount pricing (loss leader): pricing below the level adopted by competitors
• Going rate pricing (parity): matching competitors pricing
• Tender pricing: the sellers try to base the price of bid on the basis of
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competitor’s price. It is more applicable to industrial products and the products

or services purchased and contracted by institutional customers. Such customers
usually go by competitive bidding through seal tenders or by quotations
• High-low pricing: the list price higher than the competition and discounts are
later applied to tactically deliver a more competitive price point. Purchasers tend
to peg the product value at the list price and ultimately feel they are receiving
tremendous value by buying at the discounted price.
3. Competition-based pricing
Competitive Market Pricing: Status-quo
pricing, also known as competition pricing,
involves maintaining existing prices or basing
prices on what other firms are charging.
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Advantage: avoid price

competition can damage the
company

Disadvantage: need to find

other ways to attract
customers
Summary

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Summary

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Strategic pricing

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