BRAC University

BRAC Business School

EMBA Program (Fall 2019)

Welcome

Marketing Principles and Practices (MKT 701)

Week 9 Lecture

1
Today’s agenda………….
Pricing
Objective Outline

New-Product Pricing Strategies

Describe the major strategies for pricing new
1
products.

Product Mix Pricing Strategies

Explain how companies find a set of prices that
2
maximizes the profits from the total product mix.
Objective Outline

Price-Adjustment Strategies
Discuss how companies adjust their prices to take
3
into account different types of customers and
situations.

Price Changes
4 Discuss the key issues related to initiating and
responding to price changes.
What is a price?
 Setting the Price
A firm must set a price for the first time-
1. When it develops a new product,
2. When it introduces its regular product into a new
distribution channel or geographical area, and
3. When it enters bids on new contract work. The firm
must decide where to position its product on
quality and price.
4. There can be competition between price-quality
segments.
New-Product Pricing Strategies

Skimming Pricing Strategy

Penetration Pricing Strategy
Market-skimming pricing
Setting a high price for a new product to skim
maximum revenues layer by layer from the segments
willing to pay the high price: the company makes
fewer but more profitable sales.
The conditions:
1. A sufficient number of buyers have a high current

demand;

2. The product has unique features

3. The market is quality sensitive

4. No possibility of imminent competition.

Market-penetration pricing
Setting a low price for a new product in order to attract
a large number of buyers and a large market share.
The conditions:
1. The market is highly price sensitive.

2. Demand for the product is low.

3. The product has no special feature.

4. Possibility of imminent competition.

Product Mix Pricing Strategies
The strategy for setting a product’s price often has to be
changed when the product is part of a product mix.
In this case, the firm looks for a set of prices that
maximizes its profits on the total product mix.
Pricing is difficult because the various products have
related demand and costs and face different degrees of
competition.
Product Line Pricing
Product line pricing sets the price steps between various
products in a product line based on cost differences
between the products, customer evaluations of different
features, and competitors’ prices.
In product line pricing, management must determine the
price steps to set between the various products in a line.
The price steps should take into account cost differences
between products in the line.
More importantly, they should account for differences in
customer perceptions of the value of different features.
Optional Product Pricing
Many companies use optional product pricing ─
offering to sell optional or accessory products along
with the main product.
And when you order a new computer, you can select
from a bewildering array of processors, hard drives,
docking systems, software options, and service plans.
Captive Product Pricing
Captive-product pricing sets a price for products
that must be used along with a main product, such as
blades for razor and games for a video-games console.
By-Product Pricing
Using by-product pricing, the company seeks a
market for these by-products to help offset the costs of
disposing of them and help make the price of the main
product more competitive.
The by-products themselves can even turn to be
profitable ─ turning trash into cash.
Product Bundle Pricing
Using product bundle pricing, sellers often several
products and offer the bundle at a reduced price.
Price Adjustment Strategies

Companies usually adjust their basic prices to account

for various customer differences and changing
situations.
 Functional Discount
Discount and Allowance Pricing
Cash Discount (Trade Discount)

Discount
A price reductionis toabuyers whoreduction
straight pay A sellers
in price
offerson purchases
a discount to trade-
theirduring
bills promptly.
a stated period of timechannel members
or in larger who perform
quantities.
Discount has many forms. certain functions, such as selling,
storing, and record keeping.
Quantity Discount

A price reduction to buyers who buy

large volumes. Seasonal Discount

A price reduction to buyers who

buy merchandise or services out
of season.
Psychological Pricing
In using psychological pricing, sellers consider the
psychology of prices, not simply the economics.
Another aspect of psychological pricing is reference
prices ─ prices that buyers carry in their minds and refer to
when looking at a given product.
The reference price might be formed by noting current
prices, remembering past prices, or assessing the buying
situation.
 Geographical Pricing

 Using this strategy, the seller absor

 It falls between FOB-origin pricing
 This  Using all or part of the
basing-point actualthe
pricing, freight char
 practice
Geographical means that
and the goods are
uniform-delivered pricing.
It’s the oppositepricing sets prices
of FOB pricing.
seller to get
selects
for
the
a
customers
desired
given citybusiness.
as a “basing
placed free on board aThe
carrier.
company sets up two or more

located
Here, thein different partspoint”
company charges of 
thethe
same
Thecountry
price
seller or
plusallworld.
might reason that if it ca
 At that point the title zones.
and responsibility and charges customers the
We freight look
to all customers, regardless ofpricing
more their
business, its average costs wil
pass to will
the customer, at
five geographical
pays freight
whocustomers
All cost
the freight
within from
a given strategies
that city
zone to thefor
location. customerdecrease andregardless
location, more thanofcompensa
the
the
from following
the factory to hypothetical
the destination.
pay a single
 The freight charge is set atcity situation.
total
the from
price;
average
the
freight
its extra
more
freight cost.are
distant the zone, thewhich
higherthethe
goods
cost. actually shipped.
price.

FOB- Uniform- Basing- Freight-

Zone
origin delivered point absorption
pricing
pricing pricing pricing pricing
 Steps in setting pricing

(1) Selecting the pricing objective;

(2) Determining demand;
(3) Estimating costs;
(4) Analyzing competitors costs, prices, and
offers;
(5) Selecting a pricing method; and
(6) Selecting the final price
 Step 1: Selecting the pricing objective

A company can pursue any of five major objectives through pricing:

-Survival,

-Maximum current profit,

-Maximum market share,
-Maximum market skimming,
-Product-quality leadership.
 MARKUP PRICING
The most elementary pricing method is to add a standard markup to the product’s
cost.
Suppose a toaster manufactures has the following costs and sales expectations:
Variable cost per unit $ 10
Fixed cost $ 300,000
Expected unit sales 50,000

The manufacturer’s unit cost is given by

fixed cost $300,000
Unit cost  variable cost   $10   $16
unit sales 50,000
Now assume the manufacturer wants to earn a 20 percent markup on sales. The
manufacturer’s markup price is given by:

unit cost $16

Markup price    $20
(1 - desired return on sales) 1  0.2
The manufacturer would charge dealers $20 per toaster and make a profit of $4
per unit.
Types of Costs

Fixed
FixedCosts
Costs Variable
VariableCosts
Costs
(Overhead)
(Overhead)
Costs
Coststhat
thatdon’t
don’t Costs
Coststhat
thatdo
dovary
vary
vary
varywith
withsales
salesor
or directly
directlywith
withthe
the
production
productionlevels.
levels. level
levelof
ofproduction.
production.
Executive
ExecutiveSalaries
Salaries Raw
Rawmaterials
materials
Rent
Rent

Total
TotalCosts
Costs
Sum
Sumof
ofthe
theFixed
Fixedand
andVariable
VariableCosts
Costsfor
foraaGiven
Given
Level
Levelof
ofProduction
Production
 Special Considerations of Service Pricing
Demand Considerations

Cost Considerations

Customer Considerations

Competitive Considerations

Profit Considerations

Product Considerations

Legal Considerations
Any Question????????

Thanks a Lot