You are on page 1of 26


Chapter 11

Factors Affecting Pricing Decisions

(P.417 fig 11.1)

Internal factors Marketing objectives Marketing-mix strategy Costs Organizational considerations

Pricing decisions

External factors Nature of the market and demand Competition Other environmental factors (economy, resellers, government)

Internal Factors Affecting Pricing: Organizational Considerations

Who sets the prices?

Top management Marketing/sales depts. Salespeople Pricing department Accountants

Factors Affecting Pricing Decisions

Marketing objectives: companies may set prices based on

Survival Current profit maximization Market share leadership Product quality leadership; recover high R&D expenses Disincentive to market entry

Discuss social / ethical pricing

Partial cost recovery Social price

Figure 11.1

Factors Affecting Pricing Decisions (continued)

Marketing mix strategy:

Price strategy should be consistent with the other mix elements

Target costing: start with the ideal selling price for the
product and then determine if the costs to produce are within range; follows the marketing concept

Non-price positions: de-emphasize price

Differentiate the market offering to make it worth a higher price Total installed price
Figure 11.1

Internal Factors Affecting Pricing:

Costs and Production Experience

Economies of scale Costs fall with cumulative production Drops faster with volume increase Risk of cheap image Assumes no strong response or leap-frog


Costs set the floor, or lowest amount that should be charged

Ideally, prices charged cover all costs and leave something left over for profit

Fixed costs: costs that do not vary with production; also

known as overhead, eg. Rent, utilities, insurance, management salaries

Variable costs: costs that vary directly with the level of

production, such as raw materials, labour, supplies Total costs: the sum of fixed and variable cost Average cost to produce will lower as volumes increase due to economies of scale

Figure 11.2

New-Product Pricing

Market skimming pricing: setting a high price to

skim maximum revenues layer by layer, from the segments willing to pay the high price

Used when the product is new technology, and not easily copied
Skimming price drops in steps

Market penetration pricing: setting a low

price for a new product to attract a large number of buyers and achieve a large market share

Used when there are advantages to be gained by large volumes early in the life cycle

Factors Affecting Pricing Decisions (continued)

Product line pricing:

Setting the price steps between products in a line Based on cost differences, customer evaluations of different features, and competitors prices General Motors five divisions were originally price stepped

Organizational considerations:
Deciding who will set prices and who will have the ability to change them Management versus sales?

Figure 11.1

External Factors Affecting Pricing Decisions

Types of markets:

Pure competition: many buyers and sellers; no one company has influence over prices charged Monopolistic competition: many buyers and sellers trading over a range of prices charged Oligopolistic competition: few sellers who are highly sensitive to each others pricing and marketing strategies
Figure 11.1

Pure monopoly: only one seller in the market who sets prices; may be regulated

External Factors Affecting Pricing Decisions


Consumers will compare alternatives to determine value A high-price, high margin price strategy will attract competition Companies will attempt to benchmark costs to compare their operations

Other factors:
Economic conditions Reseller cooperation Government Social concerns
Figure 11.1

General Pricing Approaches

Major considerations in setting price
fig 11.5 p.429

Low price
No possible profit at this price Product costs Competitors prices Other internal and External factors

Consumer Perceptions of value

High price
No possible demand at this price

Markup / Markons

markup = % on selling price Example: Selling price = $1.50 cost = $1.00 profit = $0.50 markup = 50/1.50 = 33.3% Mark on = % on cost Example: Mark on = 50/1.00 = 50%

Q: why do markups (or markons) get larger as we move closer to the consumer ? (Hint: think about ratio of fix cost / sales levels)

General Pricing Approaches: ValueBased Pricing

fig. 11.7 p.432

Cost-based pricing
Product Cost Price Value Customers






Value-based pricing

General Pricing Approaches: ValueBased Pricing

Pricing developed early as part of overall marketing program Target price based on perceived value of the extended product Perceived value dictates design and cost Value pricing strategies Value-added - business markets Everyday low pricing - consumer markets High-low pricing - retail level

General Pricing Approaches: Competition-Based Pricing

Consumers use competitors price as reference for products value Going Rate Pricing Firm benchmarks on competitive price Price differences small and constant Going price as indirect measure of demand Sealed-Bid Pricing Lowest price wins - the winner loses?

New Product Pricing Strategies:

Market Skimming Pricing

Setting a high price to skim maximum revenues layer by layer from segments willing to pay the high price, the company makes fewer but more profitable sales Favourable conditions:

Image and quality must support Production costs shouldnt cancel High barriers to entry

New Product Pricing Strategies:

Market Penetration Pricing

Low initial price - win many buyers and large market share quickly Potential economies of scale Favourable conditions:

Market is price sensitive Economies of scale exist Low price an effective market entry barrier

Price Adjustment Strategies

Discount and Allowance pricing Segmented pricing Psychological pricing Reducing prices to reward customer responses such as paying early Adjusting prices to allow for differences in customers, products, or locations Adjusting prices for psychological effect; reference pricing

Promotional pricing
Geographical pricing

Temporarily reducing prices to increase short-run sales

Adjusting prices to account for geographic location of customers

International pricing

Adjusting prices for international markets

Table 11.2

(page 436)

Quantity discounts may be cumulative or non. Payment discounts:

value of 3/15n60 = 3 x 360 60 - 15 = 24% 2/10n30 = 2 x 360 30 - 10 = 36%

These represent the opportunity cost / loss in which to compare.


Include trade-ins, advertising allowances, push money.

Geographical Pricing
(page 439)

Zone pricing: smoothes out delivered prices (Ikea) Uniform or postage stamp pricing: one price for all. Used for high value/low bulk items (jewelry ) FOB = Free on Board

Price-Adjustment Strategies:
Psychological Pricing

p. 437

Psychology considered as well as economics Price as a quality indicator Reference price a mental benchmark

Psychological Pricing
1. 2. 3. 4. 5.

6. 7.

Prestige pricing: high price to lend status & image (Cadillac) Loss leader pricing Bait pricing Odd - even pricing ($1.99 vrs $2.00) (Buick Regal example) Price lining: store sells items at 3 prices at 3 different departments ( to capture 3 different psychographic clients) Demand backward pricing: working backwards. Bundle pricing: (Air Canada vacations or Fido cell phone package)

Questions to consider

In target costing pricing, marketers first design the product, then calculate its cost, and then determine the price. Comment When setting prices, product costs are, by far, the most important factor affecting the companys decision. All other factors are secondary. Comment