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 Learning Objectives

• Identify the three major pricing strategies

• Identify external and internal factors
affecting a firm’s pricing decisions.
• Describe the major strategies for pricing
new products.

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 What is Price ?

 Amount of money charged for a

product or service
 Determines a firm’s market share
and profitability
 Produces revenue
 Price is one of the most flexible
marketing mix elements.

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 What is Price ?

Considerations in Setting Price

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 Three major pricing strategies

Cost-based pricing
Pricing
strategies Value-based pricing

Competitive -based
pricing

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 Three major pricing strategies
Price = ?

Price = Cost (….) + profit ? Price = Cost (….) + profit ?

Price = customer’s perception

 Customer Value-Based Pricing

 Based on buyers’ perceptions of value rather

than on the seller’s cost
 Price is considered before the marketing
program is set.
 Types of value-based pricing:
• Good-value pricing
• Value-added pricing

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 Customer Value-Based Pricing

Good-Value Pricing is offering just

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

Value-Added Pricing is the

strategy of attaching value-added
features and services to differentiate
their offers and thus support higher
prices.

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 Cost-Based Pricing

 Based on the costs of producing, distributing, and selling

the product plus a fair rate of return for effort and risk
 Types of costs:
• Fixed costs: (also known as overhead) are costs that do not
vary with production or sales level.
• Variable costs: vary directly with the level of production
• Total costs are the sum of the fixed and variable costs for any
given level of production

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 Types of Cost-Based Pricing

Cost-plus pricing (markup pricing)

• Adding a standard markup to the cost of the product

Break-even pricing (target return pricing)

• Setting price to break even on the costs of making and

marketing a product, or setting price to make a target
return

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 Cost-Based Pricing
•Illustration of mark-up pricing
Variable cost $10
Fixed costs $300,000
Expected unit sales 50,000
_________________________________

Then the manufacturer’s cost per toaster is given by:

Unit Cost = Variable Cost + Fixed Costs = $10 + $300,000 = $16
------------ -----------
Unit Sales 50,000
Now suppose the manufacturer wants to earn a 20 percent markup on sales. The manufacturer’s
markup price is given by:
Markup Price = Unit Cost = $16 = $20
--------------------- -----
(1 – Desired Return on Sales) (1-0.2)

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 Break-Even Pricing
• Break-even chart for determining target profit price and
break-even volume

The total revenue and total cost curves cross at 30,000 units. This is the break-even volume. At
$20, the company must sell at least 30,000 units to break even; that is, for total revenue to cover
total cost. Break-even volume can be calculated using the following formula:

Break-Even Volume = Unit Cost = $300,000 = 30,000

-------------- -----------
Price – Variable Cost $20 – $10

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Value-Based versus Cost-Based Pricing

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 Competition-Based Pricing

 Setting prices based on competitors’ strategies, costs,

prices, and market offerings
 Company should ask several questions to assess
competitors’ pricing strategies:
• How does the company’s market offering compare in terms of
customer value?
• How strong are current competitors?
• What are their current pricing strategies?

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Competition-Based Pricing

Caterpillar dominates the heavy equipment industry

despite charging premium prices.

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Considerations Affecting Pricing Decisions

Internal factors External factors

• Overall marketing • Market and demand

strategy, objectives, • Economy
and mix • Impact on other
• Organizational parties in its
considerations environment

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 Internal factors
Marketing Strategy, Objectives, and Mix
 Pricing decisions must coordinate with packaging,
promotion, and distribution decisions.
 Positioning may be based on price.
 Nonprice positions can be created to differentiate the
marketing offer.
Organizational Considerations
 Management decides who should set prices.
 Varies depending on the size and type of company

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 Internal factors

 Management decides who should set prices.

 Varies depending on the size and type of
company
• Small companies - Top management
• Large companies - Divisional or product managers
• Industries with price as the key factor - Pricing
departments

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 External factors
Pricing in Different Types of Markets

Pure Monopolistic
competition competition

Oligopolistic Pure
competition monopoly

Price is an important
competitive tool for DirecTV
and other cable providers.

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 External factors

Price Elasticity of Demand

 Measure of the sensitivity of demand to changes in price
• Inelastic demand: Demand hardly changes with a small change
in price.
• Elastic demand: Demand changes greatly with a small change
in price.

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 External factors

Economy

Factors impacting pricing strategies

• Boom or recession
• Inflation
• Interest rates

Responses to the frugality of post recession

consumers
• Cut prices and offer discounts
• Develop more affordable items
• Redefine value propositions
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 External factors

Other External Factors

 Company must consider several other factors in its
external environment when setting prices.
• Resellers
• Government
• Social concerns

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 New Product Pricing Strategies

Market-skimming pricing (price skimming)

• Setting a high price to skim maximum revenues from

the segments willing to pay the high price
• Company makes fewer but more profitable sales

Market-penetration pricing

• Setting a low price to attract a large number of buyers

and a large market share

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 New-Product Pricing Strategies

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New Product Pricing Strategies

Samsung has used low initial prices in

emerging mobile device markets.

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 New-Product Pricing Strategies

• Market-skimming pricing

When Apple first introduced the

iPhone, its initial price was as high
as $599 per phone. The phones
were purchased only by customers
who really wanted the sleek new
gadget and could afford to pay a
high price for it. Six months later,
Apple reduced the price to $399 for
an 8 GB model and $499 for the 16
GB model to attract new buyers.
Within a year, its prices dropped
again to $199 and $299 respectively.

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 Product Mix Pricing Strategies

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 Price Adjustment Strategies

 Discount and allowance pricing

 Segmented pricing
 Psychological pricing
 Promotional pricing
 Geographical pricing
 Dynamic pricing
 International pricing

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 Discount and Allowance Pricing

 Discount - a straight reduction in price on

purchases during a stated period of time or of
larger quantities
• Cash, quantity, functional, and seasonal discounts
 Allowance - promotional money paid to
retailers for an agreement to feature the
manufacturer’s products in some way
• Trade-in and promotional allowances

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 Segmented Pricing

 Selling a product or service at two or more

prices, where the difference in prices is not
based on differences in costs
 Forms of segmented pricing:
• Customer-segment pricing
• Product form pricing
• Location-based pricing
• Time-based pricing

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 Psychological Pricing

 Considers the psychology of prices and not

simply the economics
• The price says something about the product.
 Reference prices: Prices that buyers carry in
their minds and refer to when looking at a given
product

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 Promotional Pricing

 Temporarily pricing products below the list price

to increase short-run sales
 Forms of promotional pricing:
• Discounts and special-event pricing
• Limited-time offers and cash rebates
• Low-interest financing and longer warranties
• Free maintenance

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 Geographical Pricing

Uniform-
FOB-origin
delivered Zone pricing
pricing
pricing

Freight-
Basing-point
absorption
pricing
pricing

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 Dynamic and Online Pricing

 Dynamic pricing: Adjusting prices continually to

meet the characteristics and needs of individual
customers and situations
 Prevalent online where the Internet introduces a
new age of fluid pricing

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 Dynamic and Online Pricing

With Amazon’s Price Check, consumers can get

instant product and price comparisons.

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 International Pricing
Price decisions of international companies
• Set a uniform worldwide price
• Adjust prices to reflect local market conditions and cost
considerations

Prices charged depend on many factors

• Economic conditions
• Competitive situations
• Laws and regulations
• Nature of the wholesaling and retailing system
• Consumer perceptions and preferences
• Company’s marketing objectives
• Costs of selling in another country

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mechanical, photocopying, recording, or otherwise, without the prior written
permission of the publisher. Printed in the United States of America.

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