Week 9 - Pricing

Principles of Marketing
Kotler and Armstrong
Chapter 10:
Pricing
Understanding and Capturing Customer
Value
Copyright © 2016 Pearson Education, Inc. 10-1

Pricing

Pricing
Learning Objectives
 Objective 1: Answer the question “What is a price?” and discuss the

importance of pricing in today’s fast-changing environment.

Pricing
Learning Objectives
 Objective 2: Identify the three major pricing strategies and discuss the
importance of understanding customer-value perceptions, company costs,
and competitor strategies when setting prices.
 Objective 3: Identify and define the other important external and internal
factors affecting a firm’s pricing decisions.

Pricing
Learning Objective 1
 Answer the question “What is a price?” and discuss the importance of pricing
in today’s fast-changing environment.
What Is a Price?

What Is a Price?
Price is the amount of money charged for a

product or service, or the sum of all the
values that customers exchange for the
benefits of having or using the product or
service.

Pricing
 Answer the question “What is a price?” and discuss the importance of pricing
in today’s fast-changing environment.
What Is a Price?

Pricing
 Identify the three major pricing strategies and discuss the importance of
understanding customer-value perceptions, company costs, and competitor
strategies when setting prices.
Major Pricing Strategies

FIGURE | 10.1 Considerations in Setting

Price

Customer Value-Based Pricing
Value-based pricing uses the buyers’ perceptions of value rather than the
seller’s cost.
 Value-based pricing is customer driven.

 Cost-based pricing is product driven.
 Price is set to match perceived value.

Figure 10.2: Value-Based Pricing vs. Cost-Based

Pricing

Good-value pricing is offering just the

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

Everyday low
pricing (EDLP)
involves
charging a
constant
everyday low
price with few
or no
temporary
price
discounts. Copyright © 2016 Pearson Education, Inc. 10-13
High-low pricing involves charging higher

prices on an everyday basis but running
frequent promotions to lower prices
temporarily on selected items.

Value-added pricing attaches value-added

features and services to differentiate the
companies offers and thus their higher prices.

Cost-Based Pricing
Cost-based pricing sets prices based on

the costs for producing, distributing, and
selling the product plus a fair rate of
return for effort and risk.

Cost-Based Pricing
Fixed costs are the costs that do not vary with

production or sales level.
 Rent
 Heat
 Interest
 Executive salaries

Cost-Based Pricing
Variable costs vary directly with the level

of production.
 Raw materials
 Packaging

Cost-Based Pricing
Total costs are the sum of the fixed and

variable costs for any given level of
production.

Cost-Based Pricing
Costs at Different Levels of Production
FIGURE | 10.3 Cost per Unit at Different Levels of Production

per Period

Cost-Based Pricing
Costs as a Function of Production Experience
FIGURE | 10.4 Cost per Unit as a Function of Accumulated

Production: The Experience Curve

Cost-Based Pricing
Cost-plus pricing adds a standard markup to the cost of the product.
 Benefits
Sellers are certain about costs.
Price competition is minimized.
Buyers feel it is fair.
 Disadvantages
Ignores demand and competitor prices

Cost-Based Pricing
Break-even pricing (target

return pricing) is
setting price to break
even on costs or to make
a target return.

Cost-Based Pricing
24
Competition-based pricing
Competition-
based pricing is
setting prices
based on
competitors’
strategies, costs,
prices, and
market offerings.

Pricing
 Identify the three major pricing strategies and discuss the importance of
understanding customer-value perceptions, company costs, and competitor
strategies when setting prices.
Customer value-based pricing

Cost-based pricing
Competition-based pricing

Pricing
 Identify and define the other important external and internal factors
affecting a firm’s pricing decisions.
Other Internal and External Considerations

Affecting Price Decisions

Other Internal and External
Considerations Affecting Price
Decisions
Overall Marketing Strategy, Objectives, and
Mix
Target costing starts with an ideal selling

price based on consumer value
considerations and then targets costs that
will ensure that the price is met.

Decisions
Organizational Considerations
 Who should set prices?
 Who can influence

prices?

Decisions
The Market and Demand
Before setting prices, the marketer must

understand the relationship between
price and demand for its products.

Decisions
Pricing in Different Types of Markets
Pure competition
Monopolistic competition
Oligopolistic competition
Pure monopoly
Decisions

Analyzing the Price–Demand Relationship
The demand curve shows the number of units the market will buy in a given
period at different prices
 Demand and price are inversely related.

 Higher price = lower demand

Decisions

Price Elasticity of Demand

Decisions
Price Elasticity of Demand
Price elasticity is a measure of the sensitivity of demand to changes in price.
Inelastic demand is when demand hardly changes with a small change in

price e.g. utilities, prescription drugs
Elastic demand is when demand changes greatly with a small change in price
e.g. toys, T.V.,

Decisions
The Economy and Other External Factors
Economic conditions
Reseller’s response to price
Government
Social concerns

Pricing
 Identify and define the other important external and internal factors
affecting a firm’s pricing decisions.
 Overall Marketing Strategy, Objectives, and

Mix
 Organizational Considerations
 The Market and Demand
 The Economy
 Other External Factors

Kotler and Armstrong
Chapter 11:
Insert
Textbook Pricing Strategies
Cover Image
Additional Considerations

Pricing Strategies

Pricing Strategies
Learning Objectives
 Objective 1: Describe the major strategies for pricing new products.
 Objective 2: Explain how companies find a set of prices that maximizes the
profits from the total product mix.

Pricing Strategies
Learning Objectives
 Objective 3: Discuss how companies adjust their prices to take into
account different types of customers and situations.
 Objective 4: Discuss the key issues related to initiating and responding to price
changes.
 Objective 5: Overview the social and legal issues that affect pricing decisions.

Pricing Strategies
 Describe the major strategies for pricing new products.
New Product Pricing Strategies

Market-skimming Pricing
Market-skimming pricing strategy sets high initial prices to “skim” revenue layers
from the market.
Product quality and image must support the

price.
Buyers must want the product at the price.

Market-penetration Pricing
Market-penetration
pricing involves
setting a low price
for a new product in
order to attract a
large number of
buyers and a large
market share.

Pricing Strategies
 Describe the major strategies for pricing new products.
Market-skimming pricing
Market-penetration pricing

Pricing Strategies
 Explain how companies find a set of prices that maximizes the profits from
the total product mix.
Product Mix Pricing Strategies

Optional Captive
Product line
product product
pricing
pricing pricing
Product
By-product
bundle
pricing
pricing

Activity - What is the product mix
pricing strategy? – Group 1
47
Activity -What is the Product
mix pricing Strategy? –Group 2
48
Activity - What is the Product
Mix Pricing Strategy? Group 3
49
Product Line and Optional Product
Pricing
Product line pricing takes into account the cost differences between products in
the line, customer evaluations of their features, and competitors’ prices.
Optional product pricing takes into account optional or accessory products along
with the main product.

Captive Product Pricing
Captive product pricing sets

prices of products that
must be used along with
the main product.

By-product and Product Bundle
Pricing
By-product pricing sets a price for by-products in order to

make the main product’s price more competitive. E.g.
orange peel – extracted essential oil sold for household
cleaners etc.
Product bundle pricing combines several products at a

reduced price.

Pricing Strategies
 Explain how companies find a set of prices that maximizes the profits from
the total product mix.
Product line pricing

Optional product pricing
Captive product pricing
By-product pricing
Product bundle pricing

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

Discount and
Segmented
allowance
pricing
pricing
Psychological Promotional
pricing pricing
Geographic Dynamic International

pricing pricing pricing

Activity -What is the Price Adjustment
Strategy that a cinema might use? –
Group 4
56
Activity - What is the Price Adjustment
strategy that P&G used in Nigeria with
its reduced features pampers? Group 5
57
Activity – What is the price adjustment
strategy that Courts is using? Group 6
58
Discount and Allowance Pricing
Discount and allowance pricing reduces

prices to reward customer responses such
as making volume purchases, paying early,
or promoting the product.

Segmented Pricing
Segmented pricing involves
selling a product or service
at two or more prices,
where the difference in
prices is not based on
differences in costs.

Segmented Pricing
 Customer-segment pricing
 Product-form pricing
 Location-based pricing
 Time-based pricing

Segmented Pricing
For segmented pricing to be effective:
 Market must be segmentable

 Segments must show different degrees of
demand
 Costsof segmenting cannot exceed the extra
revenue
 Must be legal

Psychological Pricing
Psychological pricing considers the psychology of prices and not simply the
economics; the price is used to say something about the product.
Reference prices are prices that buyers carry in their minds and refer to
when they look at a given product.

Promotional Pricing
Promotional pricing is temporarily

pricing products below the list
price, and sometimes even below
cost, to increase short-run sales.

Geographical Pricing
Geographical pricing is used for customers in different parts of the country

or the world.
FOB-origin pricing
Uniform-delivered pricing
Zone pricing
Basing-point pricing
Freight-absorption pricing

FOB-origin (free on board) pricing is a geographical pricing strategy in which

goods are placed free on board a carrier; the customer pays the freight
from the factory to the destination.
Uniform-delivered pricing is a geographical pricing strategy in which the

company charges the same price plus freight to all customers, regardless of
their location.

Zone pricing is a strategy in which the company sets up two or more zones
where customers within a given zone pay the same price.
Basing-point pricing means that a seller selects a given city as a “basing

point” and charges all customers the freight cost from that city to the
customer.

Freight-absorption pricing is a strategy

in which the seller absorbs all or part of
the freight charges in order to get the
desired business.

Dynamic and Internet Pricing
Dynamic pricing involves adjusting

prices continually to meet the
characteristics and needs of
individual customers and situations.

International Pricing
International pricing sets prices in a

specific country based on many
factors.
 Economic conditions
 Competitive
situations
 Laws and regulations
 Wholesaling and
retail systems

Pricing Strategies
 Discuss how companies adjust their prices to take into account different
types of customers and situations.
Discount and allowance pricing

Segmented pricing
Psychological pricing
Promotional pricing
Geographical pricing
Dynamic and Internet pricing
International pricing

Pricing Strategies
 Discuss the key issues related to initiating and responding to price changes.
Price Changes

Price Changes
Initiating Pricing Changes
Price cuts occur due to:

• Excess capacity
• Increased market share
Price increases occur due to:

• Cost inflation
• Increased demand
• Lack of supply

Price Changes
Buyer Reactions to Pricing Changes
Price Price cuts

increases
• Product is • New models
“hot” will be
• Company available
greed • Models are not
selling well
• Quality issues

Price Changes
Competitor Reactions to Pricing Changes
 Why did the competitor change the price?

 Is the price cut permanent or temporary?
 Is the company trying to grab market share?
 Is the company doing poorly and trying to increase sales?
 Isit a signal to decrease industry prices to stimulate
demand?

Price Changes
Responding to Price Changes

Price Changes
Responding to Price Changes
Effective Action Responses

 Reduce price to match competition
 Maintainprice but raise the perceived

value through communications
 Improve quality and increase price
 Launch a lower-price “fighting” brand

Pricing Strategies
 Discuss the key issues related to initiating and responding to price changes.
Initiating Price Changes

Buyer Reactions to Price Changes
Competitor Reactions to Price Changes
Responding to Price Changes

Pricing Strategies
 Overview the social and legal issues that affect pricing decisions.
Public Policy and Pricing


Pricing Within Channel Levels
Price fixing legislation requires sellers to set prices

without talking to competitors.
Predatory pricing legislation prohibits selling below cost

with the intention of punishing a competitor or gaining
higher long-term profits by putting competitors out of
business.

Pricing Across Channel Levels
Robinson-Patman Act prevents unfair price discrimination by ensuring that

the seller offer the same price terms to customers at a given level of
trade.
 Price discrimination is allowed if the seller:
 can prove that costs differ when selling to different retailers
 manufactures different qualities of the same product for different retailers

Retail (or resale) price maintenance is

when a manufacturer requires a dealer
to charge a specific retail price for its
product, which is prohibited by law.

Deceptive pricing occurs when a seller states prices or price savings that
mislead consumers or are not actually available to consumers.
Bogus reference or comparison prices

Scanner fraud and price confusion

Pricing Strategies
 Overview the social and legal issues that affect pricing decisions.
Pricing Within Channel Levels

Pricing Across Channel Levels

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Principles of Marketing

Kotler and Armstrong

Copyright © 2016 Pearson Education, Inc. 10-1

Copyright © 2016 Pearson Education, Inc. 10-2

 Objective 1: Answer the question “What is a price?” and discuss the

Copyright © 2016 Pearson Education, Inc. 10-3

Copyright © 2016 Pearson Education, Inc. 10-4

Copyright © 2016 Pearson Education, Inc. 10-5

Price is the amount of money charged for a

Copyright © 2016 Pearson Education, Inc. 10-6

Copyright © 2016 Pearson Education, Inc. 10-7

Major Pricing Strategies

Copyright © 2016 Pearson Education, Inc. 10-8

FIGURE | 10.1 Considerations in Setting

Copyright © 2016 Pearson Education, Inc. 10-9

 Value-based pricing is customer driven.

Copyright © 2016 Pearson Education, Inc. 10-10

Figure 10.2: Value-Based Pricing vs. Cost-Based

Copyright © 2016 Pearson Education, Inc. 10-11

Good-value pricing is offering just the

Copyright © 2016 Pearson Education, Inc. 10-12

High-low pricing involves charging higher

Copyright © 2016 Pearson Education, Inc. 10-14

Value-added pricing attaches value-added

Copyright © 2016 Pearson Education, Inc. 10-15

Cost-based pricing sets prices based on

Copyright © 2016 Pearson Education, Inc. 10-16

Fixed costs are the costs that do not vary with

Copyright © 2016 Pearson Education, Inc. 10-17

Variable costs vary directly with the level

Copyright © 2016 Pearson Education, Inc. 10-18

Total costs are the sum of the fixed and

Copyright © 2016 Pearson Education, Inc. 10-19

FIGURE | 10.3 Cost per Unit at Different Levels of Production

Copyright © 2016 Pearson Education, Inc. 10-20

FIGURE | 10.4 Cost per Unit as a Function of Accumulated

Copyright © 2016 Pearson Education, Inc. 10-21

Cost-plus pricing adds a standard markup to the cost of the product.

Copyright © 2016 Pearson Education, Inc. 10-22

Break-even pricing (target

Copyright © 2016 Pearson Education, Inc. 10-23

Copyright © 2016 Pearson Education, Inc. 10-24

Major Pricing Strategies

Customer value-based pricing

Copyright © 2016 Pearson Education, Inc. 10-25

Other Internal and External Considerations

Copyright © 2016 Pearson Education, Inc. 10-26

Target costing starts with an ideal selling

Copyright © 2016 Pearson Education, Inc. 10-27

 Who should set prices?

 Who can influence

Copyright © 2016 Pearson Education, Inc. 10-28

The Market and Demand

Before setting prices, the marketer must

Copyright © 2016 Pearson Education, Inc. 10-29

Pricing in Different Types of Markets

The Market and Demand

 Demand and price are inversely related.

Copyright © 2016 Pearson Education, Inc. 10-31

The Market and Demand

Copyright © 2016 Pearson Education, Inc. 10-32

Price elasticity is a measure of the sensitivity of demand to changes in price.

Inelastic demand is when demand hardly changes with a small change in

Copyright © 2016 Pearson Education, Inc. 10-33