10-1

PRINCIPLES OF MARKETING
Eighth Edition
Philip Kotler and Gary Armstrong

Module 9
Pricing Products:
Pricing Considerations
and Approaches
 Copyright 1999 Prentice Hall
Factors to Consider When Setting 10-2

Prices

Internal Factors

Positioning Pricing Target

Objectives Decisions Market

External Factors

 Copyright 1999 Prentice Hall

Internal Factors Affecting Pricing 10-3

Decisions
Marketing
Objectives
Marketing-Mix
Strategy

Costs

Organizational
Considerations

 Copyright 1999 Prentice Hall

Marketing Objectives that Affect 10-4

Pricing Decisions

Survival
Low Prices to Cover Variable Costs and
Some Fixed Costs to Stay in Business.

Current Profit Maximization

Choose the Price that Produces the
Marketing Maximum Current Profit, Cash Flow or ROI.

Objectives Market Share Leadership

Low as Possible Prices to Become
the Market Share Leader.

Product Quality Leadership

High Prices to Cover Higher
Performance Quality

 Copyright 1999 Prentice Hall

Marketing Mix Variables that Affect 10-5

Pricing Decisions
Product Design
and Quality

Marketing-Mix
Non-Price
Factors Strategy Distribution

Promotion

 Copyright 1999 Prentice Hall

  Copyright 1999 Prentice Hall
Level of Production
Sum of the Fixed and Variable Costs for a Given
Total Costs
Variable Costs Fixed Costs
(Overhead)
Costs that do vary Costs that don’t
directly with the vary with sales or
level of production. production levels.
Raw materials Executive Salaries
Rent
Affect Pricing Decisions
10-6
Types of Cost Factors that
Costs Considerations 10-7

Cost Per Unit at Different Levels of Production Per Period

Cost per unit

1
2
3 SRAC
4 LRAC
1,000

3,000

4,000
2,000

Quantity Produced per Day

 Copyright 1999 Prentice Hall

External Factors Affecting Pricing 10-8

Decisions

Market and
Demand

Competitors’ Costs,
Prices, and Offers
Other External Factors
Economic Conditions
Reseller Needs
Government Actions
Social Concerns

 Copyright 1999 Prentice Hall

The Market and Demand Factors that 10-9

Affect Pricing Decisions

Pure Competition Monopolistic Competition
Many Buyers and Sellers Who Many Buyers and Sellers Trading
Have Little Affect on the Price. Over a Range of Prices.

Different Types of Markets

Oligopolistic Competition Pure Monopoly

Few Sellers Each Sensitive to Other’s
Single Seller
Pricing/ Marketing Strategies

 Copyright 1999 Prentice Hall

Demand Curves 10-10

A. Inelastic Demand -
Demand Hardly Changes With
a Small Change in Price.
Price

P2
P1

Q 2 Q1
Quantity Demanded per Period
B. Elastic Demand -
Demand Changes Greatly With
a Small Change in Price.
Price

P’2
P’1

Q2 Q1
Quantity Demanded per Period
 Copyright 1999 Prentice Hall
What is Cost-Plus Pricing and Why 10-11

is it Popular?
Adding a Standard Markup to the Cost of the Product

Sellers Are More Minimizes

Certain About Price
Costs Than Competition
Demand

Perceived
Fairness to
Both Buyers
and Sellers

 Copyright 1999 Prentice Hall

 10-12
Breakeven Analysis or Target Profit Pricing
Tries to Determine the Price at Which a Firm Will
Break Even or Make a Target Profit
Cost in Dollars (thousands)

1,200 Total Revenue

1,000
Target Profit
800 ($200,000)
Total Cost
600
400 Fixed Cost
200

10 20 30 40 50
Sales Volume in Units (thousands)

 Copyright 1999 Prentice Hall

Value-Based Pricing 10-13

Cost-Based Pricing Value-Based Pricing

Product Customer

Cost Value

Price Price

Value Cost

Customers Product
 Copyright 1999 Prentice Hall
Competition-Based Pricing 10-14

Setting Prices

Going-Rate
Company Sets Prices Based on What
Competitors Are Charging.

? Company Sets Prices Based on

Sealed-Bid

? What TheyWillThink Competitors

Charge.

 Copyright 1999 Prentice Hall

 10-15

Pricing Products:
Pricing Strategies

 Copyright 1999 Prentice Hall

New Product Pricing Strategies
10-16

Market Skimming Market Penetration

> Setting a High > Setting a Low
Price for a New Price for a New
Product to Product in Order
Maximize to Attract a Large
Revenues from Number of Buyers.
the Target Market.
> Results in a Larger
> Results in Fewer, Market Share.
More Profitable
Sales.

 Copyright 1999 Prentice Hall

Product Mix Pricing Strategies 10-17

Product Line Pricing

Setting Price Steps Between Product Line Items
i.e. $299, $399
Optional-Product Pricing
Pricing Optional or Accessory Products
Sold With The Main Product
i.e. Car Options
Product Captive-Product Pricing
Mix Pricing Products That Must Be Used
With The Main Product
Pricing i.e. Razor Blades, Film, Software
Strategies By-Product Pricing
Pricing Low-Value By-Products To Get Rid
of Them
i.e. Lumber Mills, Zoos
Product-Bundle Pricing
Pricing Bundles Of Products Sold Together
i.e. Season Tickets, Computer Makers

 Copyright 1999 Prentice Hall

Price-Adjustment Strategies
10-18

Price Adjustment Strategies

Discount & Allowance

Reducing Prices to Reward Segmented
Customer Responses such as Adjusting Prices to Allow
Paying Early or Promoting for Differences in Customers,
the Product. Products, or Locations.

Cash Discount Customer

Quantity Discount Product Form

Functional Discount Location

Seasonal Discount Time

Trade-In Allowance

 Copyright 1999 Prentice Hall

Price-Adjustment Strategies 10-19

• Adjusting Prices for Psychological

Psychological Pricing Effect.
•Price Used as a Quality Indicator.

• Temporarily Reducing Prices to

Promotional Pricing Increase Short-Run Sales.
• i.e. Loss Leaders, Special-Events

• Adjusting Prices to Account for the

Geographical Pricing Geographic Location of Customers.
• i.e. FOB-Origin, Uniform-Delivered,
Zone Pricing, Basing-Point, &
Freight-Absorption.

International Pricing • Adjusting Prices for International

Markets.
• Price Depends on Costs, Consumers,
Economic Conditions & Other Factors.

 Copyright 1999 Prentice Hall

Initiating and Responding to Price 10-20

Changes
Competitor
Reactions
to Initiating
Price Price Cuts
Changes

Price
Changes
Buyer
Reactions Initiating
to Price
Price Increases
Changes

 Copyright 1999 Prentice Hall

Price-Adjustment Strategies
10-21

Has Competitor Cut No Hold Current Price;

Price? Continue to Monitor
Competitor’s Price.

Will Lower Price

Negatively Affect Our No
Market Share & Profits?

Reduce Price

No Raise Perceived
Can/ Should Effective Quality
Action be Taken?
Yes Improve Quality
& Increase Price

Launch Low-Price
“Fighting Brand”

 Copyright 1999 Prentice Hall