principles of MARKETING

Chapter 10

Pricing Strategies
 Chapter Objectives
Identify internal factors affecting pricing
Identify external factors affecting pricing
Contrast three approaches to setting prices
Describe major strategies for pricing new
products and product lines
Discuss how to initiate and respond to pricing
changes
 Pricing Considerations:
Definition of Price
Amount of money
charged for a product
or service or the sum
of values consumers
exchange for the
benefits of having or
using the product or
service
 Pricing Considerations
Fixed price policies
Dynamic pricing
Role of the Internet
Only element of 4Ps
that produces revenue
Changed quickly
Value-based pricing
Pricing Best Practices
Develop a 1% pricing
mindset
Consistently deliver
more value
Price strategically, not
opportunistically
Know competition
Make pricing a
process
 Factors Affecting Pricing
Decisions
Internal
Internalfactors
factors External
Externalfactors
factors
Marketing
Marketing Nature
Natureof ofthe
the
objectives
objectives market
marketand
anddemand
demand
Marketing-mix
Marketing-mix Pricing
Pricing Competition
Competition
strategy
strategy decisions
decisions Other
Otherenvironmental
environmental
Costs
Costs factors
factors(economy,
(economy,
Organizational
Organizational resellers,
resellers,
considerations
considerations government)
government)
Internal Factors Affecting Pricing:
Marketing Objectives
Largely determined by Prevent competition
market positioning Maintain loyalty
Common objectives: Create excitement
Survival Non-profit and public
Current profit
organizations
maximization
Partial cost recovery
Market share
Social price
Product quality
leadership
 Internal Factors Affecting Pricing:
Marketing Mix Strategy
Coordinate pricing
with other marketing-
mix elements
Target costing/design
to price positioning
Non-price positions
Internal Factors Affecting Pricing:
Costs
Sets floor for range of possible prices
Fixed Costs
Do not vary with production or sales
Variable Costs
Vary directly with level of production
Total Costs
Sum of Fixed + Variable costs
Impact of production volume on costs
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
 The Experience Curve
$10
Cost per unit

$8
$6
$4
$2

100 000 200 000 300 000 400 000

Accumulated production
Internal Factors Affecting Pricing:
Organizational Considerations
Who sets the prices?
Top management
Marketing/sales depts.
Salespeople
Pricing department
Accountants
External Factors Affecting Pricing:
Market and Demand
Sets the upper limit of price possibilities
Latitude of price decisions depends on
nature of market competition
Pure competition
Monopolistic competition
Oligopolistic competition
Pure monopoly
Consumers buy when price matches value
Price
Demand Curves

P2 P2
P1 P1

Q2 Q1 Q2 Q1
Quantity demanded Quantity demanded
per period per period
A. Inelastic demand B. Elastic demand
 External Factors Affecting
Pricing:Competitors Costs, Prices and
Offers
Reactions
Nature of competition
Benchmark against
competition
Learn about
competitors offers
External Factors Affecting Pricing:
Other Factors
Economic conditions
Resellers
Government
Social concerns
 General Pricing Approaches
Major considerations in setting price

Low price High price

Competitors prices Consumer
No possible Product costs Other internal and Perceptions No possible
profit at External factors of value demand at
this price this price
 General Pricing Approaches:
Cost-Plus Pricing
Adding standard markup
to the cost of the product
Markup = Unit cost
price ---------------------
(1-desired return)
Example: if unit cost
is $16 and desired
return is 20% then
the selling price is
$20
$16
------ = $20
(1-.2)
 General Pricing Approaches:
Break Even Analysis and Target
Profit
Total revenue
12 Target profit
$2 million
Dollars (millions)

10 Total cost

8
6 Fixed cost
4
2
0
200 400 600 800 1,000
Sales volume in units (thousands)
 General Pricing Approaches:
Value-Based 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:
Value-Based Pricing
Cost-based pricing

Product Cost
Cost Price
Price Value
Value Customers
Customers

Customers
Customers Value
Value Price
Price Cost
Cost Product
Product

Value-based pricing
 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
 Product-Mix Pricing Strategies

Strategy Description

Product line pricing Setting price steps between product items

Captive-product pricing Pricing products that must be used with
the main product
Product-bundle pricing Pricing bundles of products sold together
 Product-Mix Pricing Strategies:
Product Line Pricing
Decide price steps
between products
Perceived quality to
support price difference
Customer evaluations
Cost differences
Competitors prices
Price points
 Product-Mix Pricing Strategies:
Captive Product Pricing
Price set along with price
of main product
Total profit from
combined margins
Potentially large profit
source
 Product-Mix Pricing Strategies:
Product Bundle Pricing
Combine several
products in a bundle,
offer at reduced price
Promotes products not
purchased otherwise
Combined price must
stimulate buying
Watch overbundling
 Price-Adjustment Strategies
Strategy Description

Discount and allowance Setting prices to reward customer

pricing responses such as 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
 Price-Adjustment Strategies
Strategy Description

Value pricing Adjusting prices to offer the right

combination of quality and service at a
fair price
Geographical pricing Adjusting prices to account for the
geographic location of customers
International pricing Adjusting prices for international
markets
 Price-Adjustment Strategies:
Discount and Allowance Pricing
Cash discount - prompt
payment
Quantity discount -
large volume buyers
Allowances
Trade-in
Promotional
 Price-Adjustment Strategies:
Segmented Pricing
Customer segment pricing
Each segment pays different prices for same product
Product-form pricing
Product versions priced according to cost
Location pricing
Price changes with location - cost constant
Time pricing
Price for specific period
 Price-Adjustment Strategies:
Psychological Pricing
Psychology
considered as well as
economics
Price as a quality
indicator
Reference price a
mental benchmark
 Price-Adjustment Strategies:
Promotional Pricing
Temporarily pricing below list sometimes
below cost to increase short run sales
Loss leaders
Special-event pricing
Cash rebates or low-interest financing
Extended warranties or free maintenance
Can damage brand equity
Easily copied - Customers wait for deals
 Price-Adjustment Strategies:
Geographical Pricing
Risk distant business by
charging shipping?
Spread or absorb costs?
FOB-origin pricing
Uniform delivered
Zone
 Price-Adjustment Strategies:
International Pricing
Economic conditions
Competitive situations

Laws and regulations

Distribution system ?
Consumer perceptions
Marketing objectives
Costs
Price escalation
 Price Changes
Reasons for initiating:
Excess capacity
Market share falling to competition
Strong price competition
Rising costs and falling profit margins
Watch price gouging
Communicate the reasons
Watch competitive response
 Responding to Price Changes
No Hold
Holdcurrent
currentprice;
price;
Has
Hascompetitor
competitor continue
cut continueto
tomonitor
monitor
cutprice?
price? competitors
competitorsprice
price

Reduce
Reduceprice
price
Will
Willlower
lowerprice
price No
negatively
negativelyaffect
affectour
our Raise
Raiseperceived
perceived
market
marketshare
share& & profits?
profits? quality
quality
Improve
Improvequality
quality
No and
andincrease
increaseprice
price
Can/should
Can/shouldeffective
effective
action Launch
Launchlow-price
actionbe
betaken?
taken? low-price
Yes fighting
fightingbrand
brand