Pricing Products:

Pricing Considerations,
Approaches, and Strategy

1
 Learning Goals
• Understand what is the price and its
importance for the company?
• Identify and define factors affecting a
firm’s pricing decisions
• Describe major pricing approaches
and strategies
• Learn how company adjust their
prices to the environmental changes
 What is Price?
Why the price is so important to a
company?
The price affects both the number of sales the company makes
and how much money it earns. If the price is either too low or too
high not only discourage customers from buying, but also affects
their attitudes towards and perceptions of the product.

What is the price?

The price is the amount of money charged for a product or service,
or the sum of the values that consumers exchange for the benefits of
having or using the product or service..
 What is Price?
Price and the Marketing Mix:
– Only element to produce revenues
– Most flexible element
– Can be changed quickly
Common Pricing Mistakes
– Reducing prices too quickly to get
sales
– Pricing based on costs, not customer
value
 Factors to Consider When
Setting Price

 Market positioning
Internal Factors influences pricing strategy
 Other pricing objectives:
 Marketing objectives – Survival
 Marketing mix – Current profit
maximization
strategies
– Market share
 Costs leadership
 Organizational – Product quality
considerations leadership
 Factors to Consider When
Setting Price

Internal Factors  Pricing must be carefully

coordinated with the other
 Marketing objectives marketing mix elements
 Target costing is often
 Marketing mix used to support product
strategies positioning strategies
 Costs based on price
 Nonprice positioning can
 Organizational also be used
considerations
 Factors to Consider When
Setting Price

Internal Factors  Types of costs:

– Variable
 Marketing objectives – Fixed
 Marketing mix – Total costs
strategies  How costs vary at
different production levels
 Costs will influence price setting
 Organizational  Experience (learning)
considerations curve affects price
 Factors to Consider When
Setting Price

 Who sets the price?

Internal Factors – Small companies:
CEO or top
 Marketing objectives management
 Marketing mix – Large companies:
strategies Divisional or product
line managers
 Costs  Price negotiation is
 Organizational common in industrial
considerations settings where pricing
departments may be
created
 Factors to Consider When
Setting Price
 Types of markets
External Factors – Pure competition
– Monopolistic
competition
 Nature of market and – Oligopolistic
demand competition
 Competitors’ costs, – Pure monopoly
prices, and offers  Consumer perceptions of
 Other environmental price and value
elements  Price-demand
relationship
– Demand curve
– Price elasticity of
demand
 Factors to Consider When
Setting Price
 Consider competitors’
costs, prices, and possible
External Factors reactions
 Pricing strategy influences
the nature of competition
 Nature of market – Low-price low-margin
and demand strategies inhibit
competition
 Competitors’ costs,
– High-price high-margin
prices, and offers strategies attract
 Other competition
environmental  Benchmarking costs
elements against the competition is
recommended
Factors to Consider When
Setting Price

External Factors  Economic conditions

– Affect production
costs
– Affect buyer
 Nature of market and perceptions of price
demand and value
 Competitors’ costs,  Reseller reactions to
prices, and offers prices must be
considered
 Other environmental  Government may
elements restrict or limit pricing
options
 Social considerations
may be taken into
account
 Pricing Strategy over the
Product Life Cycle

 Skimming Pricing Strategy  setting a high

price for a new product to skim maximum revenues layer by
layer from the segments willing to pay the high price

 Penetration Pricing Strategy  setting a low

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

 Competitive Pricing Strategy  setting the

price by considering the market demand and the price
charged by the competitors
 Pricing Methods
1. Cost-Based Pricing
 Cost-Plus Pricing  adding a standard mark-up to the cost of the
product

 Beak-even or Target Profit Pricing  setting price to make a

target profit

2. Value-Based Pricing setting price based on

buyer’s perceptions of value rather than on the seller’s cost

3. Competition-Based Pricing setting price based

on the prices that competitors charge for similar product
 Adjustment Pricing Strategy
 Discount and Allowances  a price reduction for
customers  cash, quantity, seasonal, & trade discounts,
special sale, coupons, cash rebates, trade-in allowances
 Segmented Pricing  selling a product at different
prices, where the difference in prices is not based on
differences in costs.
 Psychological Pricing  setting the prices that have
special appeal to the target customers  reference pricing,
odd-even pricing, prestige pricing.
 Promotional Pricing  setting the price below the list
price or below the costs temporarily to increase short-run
sales.
 Geographical Pricing  selling price for customers who
live in different parts of the country fob-origin pricing,
uniform-delivered pricing, zone pricing, basing-point pricing, &
freight absorption pricing
 Price Changes
 Initiate price cuts when a firm:
 Has excess capacity
 Face falling market share due to price
competition
 Desires to be a market share leader
Initiate price increases when a firm:
 Can increase the profit
 Faces cost inflation
 Faces greater demand than can be
supplied
 Price Changes
 Alternatives to increasing price:
 Shrinking the amount of product instead of
raising the price
 Substituting less expensive materials or
ingredients
 Reducing or removing product features
 Removing or reducing product services,
such as installation or free delivery
 Using less expensive packaging material or
larger package sizes
 Reducing the number of sizes and models
offered
 Creating new economy brands
 Price Changes
Reactions to Price Changes
 Customer Reactions
 Competitor Reactions
 Number of firm is small
 Product is uniform
 Buyers are well informed
 Price Changes
 Responding to Competitors’ Price
Changes
 Evaluate the competitor’s reason for the price change
 Evaluate the marketplace response to the price
change
 Consider own product’s strategy
 Options in Responding to Competitors’
Price Changes
• Reduce price
• Raise perceive quality
• Increase price and improve quality
• Launch a low-price fighter line