Chapter 7: Pricing Strategy

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 Learning Objectives

• Analyze the role and position of price strategy in the

1
marketing mix system.

• Analyze the factors affecting the price decisions.

2

• Understand the process of determining the price for a

3 product.

• Analyze and evaluate methods and strategies as well as

4
determine pricing for a product.

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 Content

The concept and importance of price

Factors influencing the pricing

Valuation methods

Pricing strategy

Pricing process

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Part 1: What is price?

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 What Is a Price?

Price is the amount of money charged for a

product or service, or the sum of all the values that
customers exchange for the benefits of having or
using the product or service.

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 Major Pricing Strategies

FIGURE | 10.1 Considerations in Setting Price

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Part 2: Extenal and internal factors
affecting a firm’s pricing decisions

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Other Internal and External Considerations
Affecting Price Decisions

Overall Marketing Strategy, Objectives, and Mix

Target costing starts with an ideal selling
price based on consumer value
considerations and then targets costs that
will ensure that the price is met.

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Other Internal and External Considerations
Affecting Price Decisions

Organizational Considerations

• Who should set prices?

• Who can influence prices?

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Other Internal and External Considerations
Affecting Price Decisions

The Market and Demand

Before setting prices, the marketer must

understand the relationship between price
and demand for its products.

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Other Internal and External Considerations
Affecting Price Decisions
The Market and Demand
• Pricing in Different Types of Markets

Pure competition
Monopolistic competition
Oligopolistic competition
Pure monopoly

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Other Internal and External Considerations
Affecting Price Decisions

The Market and Demand

Analyzing the Price–Demand Relationship

The demand curve shows the number of units the

market will buy in a given period at different prices
• Demand and price are inversely related.

• Higher price = lower demand

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Other Internal and External Considerations
Affecting Price Decisions

The Market and Demand

Price Elasticity of Demand

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Other Internal and External Considerations
Affecting Price Decisions
The Market and Demand
Price Elasticity of Demand

Price elasticity is a measure of the sensitivity of demand

to changes in price.

Inelastic demand is when demand hardly changes with a

small change in price.

Elastic demand is when demand changes greatly with a

small change in price.

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Other Internal and External Considerations
Affecting Price Decisions
The Economy and Other External Factors

Economic conditions

Reseller’s response to price

Government

Social concerns

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Part 3: Major Pricing Strategy

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 Major Pricing Strategies

• Customer Value-Based Pricing

Value-based pricing uses the buyers’ perceptions

of value rather than the seller’s cost.

– Value-based pricing is customer driven.

– Cost-based pricing is product driven.

– Price is set to match perceived value.

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 Major Pricing Strategies

Customer Value-Based Pricing

Figure 10.2: Value-Based Pricing vs. Cost-Based Pricing

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 Major Pricing Strategies

Customer Value-Based Pricing

Good-value pricing is offering just the

right combination of quality and good
service at a fair price.

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 Major Pricing Strategies

Customer Value-Based Pricing

Everyday low
pricing (EDLP)
involves charging a
constant everyday
low price with few or
no temporary price
discounts.

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 Major Pricing Strategies

Customer Value-Based Pricing

High-low pricing involves charging higher

prices on an everyday basis but running
frequent promotions to lower prices
temporarily on selected items.

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 Major Pricing Strategies

Customer Value-Based Pricing

Value-added pricing attaches value-added

features and services to differentiate the
companies offers and thus their higher prices.

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 Major Pricing Strategies

• Cost-Based Pricing

Cost-based pricing sets prices based on

the costs for producing, distributing, and
selling the product plus a fair rate of return
for effort and risk.

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 Major Pricing Strategies

• Cost-Based Pricing

Fixed costs are the costs that do not vary with

production or sales level.
• Rent
• Heat
• Interest
• Executive salaries

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 Major Pricing Strategies
Cost-Based Pricing

Variable costs vary directly with the level

of production.

• Raw materials

• Packaging

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 Major Pricing Strategies
Cost-Based Pricing

Total costs are the sum of the fixed and

variable costs for any given level of
production.

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 Major Pricing Strategies
Cost-Based Pricing

• Costs at Different Levels

of Production

FIGURE | 10.3 Cost per Unit at Different Levels of Production per Period

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 Major Pricing Strategies
Cost-Based Pricing
Costs as a Function of Production Experience

FIGURE | 10.4 Cost per Unit as a Function of Accumulated Production:

The Experience Curve

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 Major Pricing Strategies
Cost-Based Pricing

Cost-plus pricing adds a standard markup to the cost of the

product.

– Benefits

• Sellers are certain about costs.

• Price competition is minimized.

• Buyers feel it is fair.

– Disadvantages

• Ignores demand and competitor prices

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 Major Pricing Strategies
Cost-Based Pricing

Break-even pricing
(target return
pricing) is setting
price to break
even on costs or to
make a target
return.

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 Major Pricing Strategies
Cost-Based Pricing

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 Major Pricing Strategies

• Competition-based pricing

Competition-
based pricing
is setting prices
based on
competitors’
strategies,
costs, prices,
and market
offerings.

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Part 3: Pricing Strategy

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 New Product Pricing Strategies
Market-skimming Pricing

Market-skimming pricing strategy sets high

initial prices to “skim” revenue layers from the
market.
• Product quality and image must support the price.

• Buyers must want the product at the price.

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 New Product Pricing Strategies
Market-penetration Pricing

Market-penetration
pricing involves setting a
low price for a new
product in order to attract
a large number of buyers
and a large market share.

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 Product Mix Pricing Strategies

Optional Captive
Product line
product product
pricing
pricing pricing

By-product Product
pricing bundle pricing

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 Product Mix Pricing Strategies
Product Line and Optional Product Pricing

Product line pricing takes into account the cost

differences between products in the line, customer
evaluations of their features, and competitors’ prices.

Optional product pricing takes into account optional

or accessory products along with the main product.

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 Product Mix Pricing Strategies
Captive Product Pricing

Captive product
pricing sets prices of
products that must be
used along with the
main product.

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 Product Mix Pricing Strategies
By-product and Product Bundle Pricing

By-product pricing sets a price for by-products in

order to make the main product’s price more
competitive.

Product bundle pricing combines several

products at a reduced price.
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 Price Adjustment Strategies

Discount and Segmented

allowance pricing pricing

Psychological Promotional
pricing pricing

Geographic Dynamic International

pricing pricing pricing

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 Price Adjustment Strategies
Discount and Allowance Pricing

Discount and allowance pricing reduces

prices to reward customer responses such
as making volume purchases, paying early,
or promoting the product.

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 Price Adjustment Strategies
Segmented Pricing

Segmented pricing
involves selling a
product or service at
two or more prices,
where the difference in
prices is not based on
differences in costs.
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 Price Adjustment Strategies

Segmented Pricing

• Customer-segment pricing
• Product-form pricing
• Location-based pricing
• Time-based pricing

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 Price Adjustment Strategies

Segmented Pricing

For segmented pricing to be effective:

– Market must be segmentable
– Segments must show different degrees of
demand
– Costs of segmenting cannot exceed the extra
revenue
– Must be legal

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 Price Adjustment Strategies
Psychological Pricing

Psychological pricing considers the psychology of

prices and not simply the economics; the price is used
to say something about the product.

Reference prices are prices that buyers carry in their

minds and refer to when they look at a given product.

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 Price Adjustment Strategies
Promotional Pricing

Promotional pricing
is temporarily pricing
products below the
list price, and
sometimes even
below cost, to
increase short-run
sales.

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 Price Adjustment Strategies
Geographical Pricing
Geographical pricing is used for customers in
different parts of the country or the world.

• FOB-origin pricing

• Uniform-delivered pricing

• Zone pricing

• Basing-point pricing

• Freight-absorption pricing
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 Price Adjustment Strategies
Geographical Pricing

FOB-origin (free on board) pricing is a geographical

pricing strategy in which goods are placed free on
board a carrier; the customer pays the freight from
the factory to the destination.

Uniform-delivered pricing is a geographical pricing

strategy in which the company charges the same
price plus freight to all customers, regardless of their
location.

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 Price Adjustment Strategies
Geographical Pricing

Zone pricing is a strategy in which the company sets up

two or more zones where customers within a given
zone pay the same price.

Basing-point pricing means that a seller selects a given

city as a “basing point” and charges all customers the
freight cost from that city to the customer.

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 Price Adjustment Strategies
Geographical Pricing

Freight-absorption pricing is a strategy

in which the seller absorbs all or part of
the freight charges in order to get the
desired business.

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 Price Adjustment Strategies
Dynamic and Internet Pricing

Dynamic pricing involves

adjusting prices
continually to meet the
characteristics and needs
of individual customers
and situations.

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 Price Adjustment Strategies
International Pricing

International pricing sets

prices in a specific country
based on many factors.
– Economic conditions
– Competitive situations
– Laws and regulations
– Wholesaling and retail
systems

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 Price Changes
• Initiating Pricing Changes

Price cuts occur due to:

• Excess capacity
• Increased market share

Price increases occur due to:

• Cost inflation
• Increased demand
• Lack of supply

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 Price Changes

• Buyer Reactions to Pricing Changes

Price
Price cuts
increases
• Product is • New models
“hot” will be
• Company available
greed • Models are not
selling well
• Quality issues

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 Price Changes

Competitor Reactions to Pricing Changes

– Why did the competitor change the price?

– Is the price cut permanent or temporary?
– Is the company trying to grab market share?
– Is the company doing poorly and trying to increase
sales?
– Is it a signal to decrease industry prices to stimulate
demand?

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 Price Changes

• Responding to Price Changes

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 Price Changes

Responding to Price Changes

Effective Action Responses

– Reduce price to match competition
– Maintain price but raise the perceived value through
communications
– Improve quality and increase price
– Launch a lower-price “fighting” brand

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Part 5: Pricing process

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 Pricing process
• Step1: Select target price;

• Step 2: Determine the demand for the product;

• Step 3: Estimated cost;

• Step 4: Analysis of products, costs and prices of the

Corporation;

• Step 5: Selection of valuation method;

• Step 6: Final price.

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 Key terms

• Price

• Price elastic of demand

• Fixed cost

• Variable cost

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 Key terms

• Cost-based pricing

• Value-based pricing

• Allowance

• Different price

• Psychological Pricing

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 Q&A

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