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Developing Pricing
Strategies and Programs
Kotler on Marketing
“Sell value,
not price.”

Price: is the sum of all

values that consumers
exchange for the benefits
of having or using the
product or service.

2
Developing Price Strategies and Programs

 rent, tuition, fees, fares, rates, honoraria,

bribes, salaries, wages, commissions, taxes

 Why is price viewed as the “most

dangerous” element of the marketing mix?

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 Common Pricing Mistakes

 Failure to revise price to capitalize on market

changes
 Setting price independently of the rest of the
marketing mix
 Failure to vary price by product item, market
segment, distribution channels, and purchase
occasion

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 Consumer Psychology and Price Cues

 Reference Prices
 Price Quality Inference
 Price Cues:
 “Left to right” pricing ($299 versus $300)
 Ending prices with 0 or 5 (makes it easy for consumers)
 “Sale” written next to price

 When to use price cues? Infrequently purchased items, new customers,

design/quality/size variations, seasonal items

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 Developing Price Strategies and Programs

Basic Determinants of Price?

1. Cost factors (FC, VC, TC)

2. Competition (Monopoly, oligopoly…)
3. Demand (value, price elasticity)
4. Profit (profit maximization)
5. Objectives and Policies of the Firm (market share)

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Steps in Setting Pricing

7
 Setting the Price

 Step 1: Selecting the pricing objective

 Survival (as long as prices > VC and some FC)
 Meet competition
 Maximize current profits or ROI
 Maximize market share
 New product/service pricing:
 Market penetration
 Market skimming (e.g., product/quality leader)
 Partial cost recovery (nonprofits; public org.)

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 Setting the Price: New Product Pricing

 Market skimming: set a high initial price and

gradually lower it to tap other price segments.
 Assumptions? Problems?
 Market penetration: set a low initial price in
order to build volume or market share.
 Assumptions? Problems?

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 Setting the Price
 Step 2: Determining Demand
 Price sensitivity (price elasticity)

10
Developing Price Strategies and Programs

 Step 3: Estimating Costs

 Fixed costs: do not vary with the quantity produced and
sold.
 Variable costs: do vary with the quantity produced and
sold (e.g., labor, materials, commissions)
 Average cost (TC/unit): tends to decline due to
economies of scale and FC spread over greater units.

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 Setting the Price
 Step 4: Analyzing Competitors’ Cost, Prices, and Offers
 Step 5: Selecting a Pricing Method

Cost-based pricing methods:

 Markup pricing
 Break-even pricing
 Target return pricing
 Variable cost pricing
 Peak-load pricing

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 Setting the Price

 Markup Pricing
Unit Cost = variable cost + (fixed cost/unit sales)

For Example: Unit Cost = Tk. 10 +300,000/50,000 = Tk. 16

Markup price= Unit Cost/(1- desired return on sales)

For Example: Markup Price = Tk. 16/(1- 0.2) = 20

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Break-Even Chart for Determining
Break-Even Volume

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 Setting the Price

Break-Even Volume F ormula

Breakeven volume 
total fixed costs
price  variable costs

Dalrym ple & Parsons/Marketing 34

Management 7th edition: Chapter 9

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 Setting the Price

Break-Even Volume Formula

Break - even volume Tk. 300,000

 30,000
Tk. 20  Tk. 10

Dalrymple & Parsons/Marketing 34

Management 7th edition: Chapter 9

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 Setting the Price
 Variable cost pricing: the objective is to cover
variable costs and try to make some
contribution to fixed costs.
 Peak-load pricing: rates are raised during
peak, high demand periods to above average
cost and reduced to variable cost during off
peak periods.

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 Setting the Price

 Step 6: Selecting the Final Price

Issues: reference prices; quality; PLC; company

policy; impact on other parties – distributors, sales
force, competitors

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