CHAPTER SEVEN

PRICING DECISIONS

“There are two fools in every market. One

charges a very high price and another
charges a very low price”
 PRICE
 Price is the amount of money charged for a product or service.
 Of all marketing mix elements price is the only one which generates
revenue for the company.
 Price is said to be the most flexible element of the marketing mix as it
can be changed quickly.
 Price to a large extent depends on the number of competitors and level
of competition.
WHAT IS PRICE?

3
 The amount of money needed to purchase something
 Price is that which is given in an exchange to acquire goods
or services.
 Price is the only revenue generating element amongst the
4ps, the rest being cost centers.

Copy
right
Weli
ngka
rs
DHR
M
2009
 WHAT IS PRICING?

 The evaluation of something in terms of its price

 Pricing is one of the four Ps of the marketing mix. The

4
other three aspects are product, promotion, and place.
 Pricing is an important strategic issue because it is
related to product positioning.

Copy
right
Weli
ngka
rs
DHR
M
2009
 How to Set a Price on a
Product or Service
Establish pricing goals

5
Estimate demand, costs, and profits

Choose a price strategy

Fine tune with pricing tactics

Copy
right
Weli
ngka
Results lead to the right price rs
DHR
M
2009
 PRICING OBJECTIVES
 Profit Maximization in Short Term/ Long Term
 A minimum return on Investments.

 Achieving Particular Market Share.

 Deeper Penetration of the market

 Entering New Markets.

 Counter the Competition.

 Keeping at Pace with Competition.

 Providing the commodities at prices that will stimulate Economic

Development.
 Providing the commodities at prices affordable by weaker section.
PRICING AND BUSINESS
 How companies price a product or service ultimately
depends on the demand and supply for it
 Three influences on demand and supply:
1. Customers
2. Competitors
3. Costs
INFLUENCES ON DEMAND AND
SUPPLY
1. Customers – influence price through their effect on
the demand for a product or service, based on factors
such as quality and product features
2. Competitors – influence price through their pricing
schemes, product features, and production volume
3. Costs – influence prices because they affect supply
(the lower the cost, the greater the quantity a firm is
willing to supply)
 Major Influences on
Pricing Decisions

Customers influence prices through

their effect on demand.
Competitors influence prices through
their actions.
Costs influence prices because they
affect supply.

12 - 9
 Time Horizon of
Pricing Decisions

Short-run decisions Long-run decisions

have a time horizon involve a time horizon
of less than a year: of a year or longer:
 pricing a one-time-  pricing a product in
only special order a major market where
 adjusting product price setting has
mix and output volume some leeway

12 - 10
 Time Horizon of
Pricing Decisions

1. Costs that are often 2. Profit margins in

irrelevant for short-run long-run pricing
pricing decisions decisions are often set
(fixed costs) are often to earn a reasonable
relevant in the long run. return on investment.

12 - 11
Target Price and Target Cost

Target price is the estimated price for

a product (or service) that potential
customers will be willing to pay.
Target Price
– Target operating income per unit
= Target cost per unit

12 - 12
 Implementing Target Pricing
and Target Costing

Latisha’s management wants a 15% target

operating income on sales revenues of CC.
Target sales revenue is $750 per unit.
What is the target cost per unit?
$750 × .15 = $112.50, $750 – $112.50 = $637.50
Current full cost per unit of CC is $662.80
12 - 13
 Cost-Plus Pricing

The general formula for setting a

cost-based price is to add a markup
component to the cost base.
Cost base $ X
Markup component Y
Prospective selling price $X + Y

12 - 14
 Cost-Plus Pricing

Assume that Latisha’s engineers

have redesigned CC into CCI at
a new cost of $637.50.
The company desires a 20% markup
on the full unit cost.
What is the prospective selling price?

12 - 15
 Cost-Plus Pricing

Cost base: $637.50

Markup component: (637.50 × .20) 127.50
Prospective selling price: $765.00

12 - 16
 Cost-Plus Pricing

Assume that the capital investment needed for

CCI is $75 million, and the company (pretax)
target rate of return on investment is 17%.
What is the target annual operating income
that Latisha needs to earn from CCI?
$75,000,000 × .17 = $12,750,000

12 - 17
 Cost-Plus Pricing

What is the target operating income per unit?

$12,750,000 ÷ 100,000 units = $127.50/unit

12 - 18
 Cost-Plus Pricing

The 17% target rate of return on investment

expresses the company’s expected annual
operating income as a percentage of investment.
The 20% markup expresses operating
income per unit as a percentage of the
full product cost per unit.

12 - 19