CHAPTER SIX

PRICE

PRICE
 6.1. WHAT IS A PRICE?

 price is the amount of money charged for a product or

service.
 More broadly, price is the sum of all the values that
customers give up in order to gain the benefits of having
or using a product or service
 Price is the only element in the marketing mix that
produces revenue; all other elements represent costs.
 Price is also one of the most flexible marketing mix
elements. Unlike product features and channel
commitments, prices can be changed quickly.
 Cont.

• Pricing is a process of fixing the value that a manufacturer will

receive in the exchange of services and goods.
• Pricing method is exercised to adjust the cost of the producer’s
offerings suitable to both the manufacturer and the customer.
• The pricing depends on the company’s average prices, and the
buyer’s perceived value of an item, as compared to the perceived
value of competitors product.

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 Cont.

• Every businessperson starts a business with a motive and intention of

earning profits. This ambition can be acquired by the pricing method of a
firm. While fixing the cost of a product and services the following point
should be considered:
• The identity of the goods and services

• The cost of similar goods and services in the market

• The target audience for whom the goods and services are produces

• The total cost of production (raw material, labour cost, machinery cost,
transit, inventory cost etc).
• External elements like government rules and regulations, policies, economy,
etc.,
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 6.2. Pricing Objectives

Before setting price, the company

must decide on its strategy for the
product.
common objectives are
1. survival,
2. current profit maximization,
3. market share leadership, and
4. product quality leadership
 I. Survival

Companies pursue survival, as their major objective if they are

troubled/plagued by overcapacity, intense competition or
changing customer wants
 company sets a low price
 hoping to increase demand,
 profits are less important
 It is only a short-term objective
 in the long run, the firm must learn how to add value or face
extinction
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 II. Current profit maximization
 Set the price that will produce the maximum current
profit
 cash flow or return on investment.
III. Market share leadership
 firms set prices as low as possible.
 wants to share a market(lowest costs and highest
long run profit)
IV. Product quality leadership
charging a high price(quality and high cost of R&D)

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 How to Set Price

The global manager must develop systems and

policies that address Price
floor: minimum price
Price ceiling: maximum price
Optimum prices: function of demand Must be
consistent with global opportunities and
constraints

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6.3. Factors to be considered when setting prices

 A company’s pricing decisions are affected by both internal

company factors and external environmental forces.

A. Internal factors affecting pricing decisions

 Internal factors affecting pricing include the company’s
marketing objectives, marketing mix strategy, company’s costs
and organizational considerations.
CONT.
 a. Marketing mix strategies
 pricing decisions must be coordinated with product design,
distribution, and promotion decision.
 Decisions made for other marketing mix variables may
affect pricing decisions.
 For example, producers using many resellers who are
expected to support and promote their products may have
to build larger reseller margins into their prices.
 The decision to position the product on high performance
quality will mean that the seller must charge a high price to
cover higher costs.
b. Costs
 Costs set the floor for the price that the company can charge
for its product.
 The company wants to charge a price that both covers all its
costs for producing, distributing, and selling the product and
delivers a fair rate of return for its effort and risk

C. Organizational considerations
 In small companies , prices are often set high
 In large companies, you will find the other way
 B. External factors affecting pricing decisions
 External factors that affect pricing decision include the nature of
the market, demand level, competition and other
environmental elements.
a. The nature of the market and demand level
 Whereas costs set the lower limit of prices, the market demand set
the upper limit.
 Economists recognize four types of market structure; pure
competition, monopolistic competition, oligopolistic and pure
monopoly. Each market structure presents a different pricing
challenge. The sellers’ pricing freedom varies with different types
of market structure.
1.Pure competition/perfectly competitive
 Under pure competition, the market consists of many buyers and sellers
trading in a uniform commodity. No single buyer or seller has much effect
on the going market price. A seller cannot charge more than the going
price because buyers can obtain as much as they need at the going price.

2. Monopolistic competition
 Under monopolistic competition, the market consists of many buyers and
sellers that trade over a range of prices rather than a single market price.
 A range of prices occurs because sellers can differentiate their offers to
buyers.
3. Oligopolistic competition
 Under oligopolistic competition, the market consists of a few
sellers that are highly sensitive to each other's pricing and
marketing strategies.
 Each seller is alert to competitors' strategies and moves.

4. Pure monopoly
 A single seller exists in the market being a sole supplier of a
particular product.
b. Demand
 level of demand the company might lead to a different price.
 In the normal case, demand and price are inversely related; that
is, the higher the price, the lower the demand.
 Specifically, it relates the rate at which demand changes in
response to price changes.
 Elastic demand. If demand is elastic, an increase in price will
produce a decrease in demand and a decrease in total revenue.
 Inelastic Demand. Happen when demand does not decrease at all
in response to price increases, it is said to be perfectly inelastic.
C. COMPETITORS’ COSTS, PRICES AND OFFERS

 Another external factor affecting the company’s pricing

decisions is competitors’ cost and prices and possible
competitors’ reactions to the company’s own pricing moves.

d. Other external factors

 When setting prices, the company also must consider other
factors in its external environment. Economic conditions can
have a strong impact on the firm's pricing strategies.
 Economic factors such as boom or recession, inflation, and
interest rates affect pricing decisions because they affect both the
costs of producing a product and consumer perceptions of the
product's price and value.
 6.4. General pricing approaches
 Companies set prices by selecting a general pricing approach

We will examine the following approaches:

 The cost-based approach (cost-plus pricing, break-even analysis
and target profit pricing);
 The buyer-based approach (perceived-value pricing); and the
 Competition-based approach (going-rate and sealed-bid pricing).
i. Cost-based

 The simplest pricing method is cost-plus pricing-adding a

standard markup to the cost of the product.
 by estimating the total project cost and adding a standard
markup for profit.
ii. Value-based pricing
 An increasing number of companies are basing their prices on the
product’s perceived value.
 The company set its target price based on customer perceptions of
the product’s value.
 Value based pricing uses buyers’ perception of value, not the
seller’s costs, as the key to pricing.
iii. Competition based pricing
 Consumers will base their judgments of a product’s value on the
prices that competitors charge for similar products.
 One form of competition based pricing is going rate pricing, in
which a firm basis its price largely on competitors’ prices with
less attention paid to its own costs or to demand.
 The firm might charge the same, more or less price than its major
competitors.
 6.5. PRICING POLICY

Establishing a pricing policy frees you from making the same

pricing decisions over and over again and lets employees and
customers know what to expect.
 • A flexible-price policy is one in which customers pay
different prices for the same type or amount of merchandise.
 • A one-price policy is one in which all customers are charged
the same price for all the goods and services offered for sale
STEPS IN SETTING PRICE
 CONT.

Step 1: Selecting the Pricing Objective

 Survival

 Maximum current profit

 Maximum market share

 Maximum market skimming

 Product-quality leadership
 CONT.
Step 2: Determining Demand
 Price Sensitivity
 Estimating Demand Curves
 Price Elasticity of Demand
 Factors Leading to Less Price Sensitivity

 The product is more distinctive

 Buyers are less aware of substitutes
 Part of the cost is paid by another party
 The product is used with previously purchased assets
 Buyers are less aware of substitutes
 The product is assumed to have high quality and prestige
 CONT.

 Step 3: Estimating Costs Types of Costs

 Fixed costs

 Variable costs

 Total costs

 Average cost

 Cost at different levels of

 CONT.
Step-4 Selecting a Pricing Method
 Markup pricing

 Target-return pricing

 Perceived-value pricing

 Value pricing

 Going-rate pricing

 Competitive based pricing

 Break-even pricing
 CONT.
Step 5: Selecting the Final Price
 Impact of other marketing activities
 Company pricing policies
 Gain-and-risk sharing pricing
 Impact of price on other parties
 6.6. Pricing Strategies

A. New Product Pricing Strategies

i. Market Skimming Pricing

 it is setting a high price for a new product to skim maximum
revenue layer by layer from the segments
 Market skimming makes sense only under certain conditions.
 The products quality and image must support its higher price and
enough buyers must want the product at that price.

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 Cont’d
The costs of producing a smaller volume cannot be so
high that they cancel the advantage of charging more.
Competitors should not be able to enter the market
easily and undercut the high price.

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 ii. Market Penetration-Pricing
setting a low price for a new product in order to penetrate
the market quickly and deeply to attract a large number of
buyers quickly and win a large market share.
The market must be highly price sensitive so that a low
price produces more market growth.

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 Cont’d
production and distribution cost must fall as sales volume
increase
The low price must help out competition and the
penetration prices must maintain its low price position
otherwise the price advantage maybe only temporary

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 CONT.

B. Product Mix Pricing Strategy

• The strategy for setting a product’s price often has to be changed
when the product is part of a product mix.
• In this case, the firm looks for a set of prices that maximizes its
profits on the total product mix.
• Pricing is difficult because the various products have related
demand and costs and face different degrees of competition.

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 Cont.

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END OF CHAPTER SIX