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7
PRICING
Learning Outcomes
After studying this chapter, you should be able to:

Define price
Describe factors that influence price decisions
Describe the initial pricing strategies of a new
product
Describe the different price-adjustment strategies
Principles of Marketing Third Edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2017 7– 3
Chapter Overview

Price
 ‘Price is the amount of money charged for a

product or service, or
 The sum of all the values that customers give in
order to gain benefits of having or using a
product or service’ It is the perceived value at
the time of the transaction and depends on the
amount of expected satisfaction from the goods
or services.
 It does not have to be stated in money terms.
Importance of Right Pricing
 Price influence whether consumers or

organizations will make purchases
 Suitable with other marketing mix strategies
 Price determine the profit of a firm
 Affects competitor’s action

Setting the Price

Value-based Pricing
 Consumer’s perception of a product’s value

determines the maximum price (price ceiling)
they are willing to pay for a product.
 Value-based pricing considers the worth that
the customers place on the product.
 It does not use the seller’s cost as a basis of
pricing.

Competitive-based Pricing
 Strategies:
– Price the product below the market price in order
to gain market share
– Price the product above the market price if it has
a unique competitive advantage
– Price the product equal to the prevailing price to
avoid price war and if it can succeed with non-
price competition

Cost-based pricing
 Company's costs serve as a price floor of which

a good should not be priced under it
 Marketers need to set a price of a product that
will generate sufficient revenue to cover the
cost of production, marketing, and a fair rate of
return at every level of production.

Cost-based pricing
- Product cost elements
 Variable costs refer to costs that change with the

level of output
 Fixed costs refer to costs that do not vary as output
is increased or decreased. Fixed cost includes rent,
building insurance, vehicles insurance and
administrative salaries.
 Average variable cost is total variable costs divided
by the quantity of output.
 Average total cost refers to total costs divided by
total output.
 Marginal cost is the change in total costs in relation
to a unit change of output.
Cost-based pricing
- Costs behaviour
at different production
levels
 Economies of scale lead to reduction in the average costs
per production unit as production approaches a plant
production size capacity because the fixed costs of the
plant are spread over more production units
Cost per unit at different levels in the short run (a) and in long run (b)

Cost-based pricing
- Costs behavior at different production levels
 Learning curve is the reduction in average costs per

production unit that comes from build-up knowledge and
experience of producing products
Learning curve
Cost-based pricing
- Mark-up pricing
 The selling price is calculated by adding to
the cost of a product a standard mark-up for
profit and for expenses not covered in cost
e.g.
Variable costs: RM10 per unit Fixed costs: RM100,000
Expected sales: 20,000 units Desired mark-up on selling price: 20%
a. Mark-up price based on costs:

Selling price = (Mark-up x Cost per unit) + Cost per unit
Selling price = (0.20 x RM15) + RM15
Selling price = RM 18
b. Mark-up price based on selling price:

Selling price = (Mark-up x Selling price) +Cost per unit
Selling price = (0.20 x RMp) + RM 15
Selling price = RM15/0.80
Selling price = RM 18.75
Cost-based pricing
- Break-even pricing
 Price where the total revenue just covers the

costs at a particular sales quantity
Break-even pricing
Factors Influencing Pricing
Decision
- Pricing objectives
 Sales-oriented pricing objectives:

– market share and sales maximization depend on
actual sales of the product rather than on the
firm’s overall cost structures or production
efficiencies
 Profit-oriented pricing objectives:
– profit maximization refers to determining prices so
that total revenue is as large as possible relative
to the total costs for a given item

Decision
- Pricing objectives
 Survival objectives:
– Price of goods will normally be set at or below the
total cost.
 Social responsibility objectives:
– Pricing decisions which consider whether the
people who need the products or services have
the ability to pay
 Prestige objectives:
– Price for products of high image where
consumers perceived that the product is of
premium value when the product is expensive
Decision
- Marketing mix decisions
 Complement other marketing mix decisions

 Consistent with the elements of other marketing
mix
 Supports the firm’s decision in positioning a
product in the target customers’ mind

Decision
- Demand
 Demand and supply equilibrium determines
the equilibrium price of the product’s market
The elasticity of demand curve and implications on revenue when price changes

Initial Pricing Strategy For A
New Product
 New Product Pricing

– Price skimming strategy
– Price penetration strategy
 Pricing Product Line
– Price lining
– Optional product pricing
– Captive product pricing

Price Adjustment Strategies

Rewards
 Marketers reduce their base price in order to reward customers

for certain responses
– Discounts – reduction in price
• Quantity discount is a reduction in price for every unit
purchased by a customer
• Seasonal discount is a price reduction for out-of-season
products or for products during low demand season
• Trade discount is a percentage reduction from list
price/base price offered to members of the trade

Rewards (cont.)
 Marketer reduce their base price in order to reward customers

for certain responses
– Discounts – reduction in price
• Cash discount is a reduction offered to prompt
payment of a receipt. It is created as an incentive
for purchasers to pay quickly.
• Functional discount is for wholesalers and
retailers who perform distribution channel
functions
– Allowances – offers in return for goods provided
– Rebates – cash refund

Geographic Pricing
 Customers may be based at different countries all over

the world or may be located at different regions within
a country
 F.O.B. Origin Pricing
– Free on board (FOB) strategy requires purchaser to
absorb the freight costs.
 Uniform Delivered Pricing
– The seller is responsible for the transport arrangement,
any damages during shipment, and pays the freight
charges
 Zone Pricing
– Single-zone pricing means that the seller bills every
purchaser an identical flat freight charges irrespective of
the location

Geographic Pricing (cont.)
 Freight Absorption Pricing

– Sellers pay the whole or part of the actual freight
charges and do not pass them to the buyers.
 Base Point Pricing
– Sellers choose a base point and charge the buyers
freight cost from the base point regardless of the
origin of product.

Special Pricing
 These tactics are used to stimulate demand

for specific products, to increase store
patronage, and to offer wider choice of
merchandise at a specific price point.
 Single Pricing
– Using this strategy, firms sell all goods and services at the
same price (for two or three prices)
 Flexible Pricing
– A seller may charge different customers different prices for
the same merchandise bought in equal quantities.

Special Pricing (cont.)
 Odd–Even Pricing (Psychological Pricing)

– A strategy of setting prices a few ringgit or cents below a round
number
 Bundle Pricing
– Two or more goods or services are packaged together for a
special price.
 Two-part Pricing
– Two separate prices to consume a single product or service

Changes in Price
 Product life cycle

– Growth stage
– Maturity stage
– Decline stage
 Other price changes
– Price cuts
– Price increase


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7

After studying this chapter, you should be able to:

Principles of Marketing Third Edition All Rights Reserved

Principles of Marketing Third Edition All Rights Reserved

 ‘Price is the amount of money charged for a

 Price influence whether consumers or

Principles of Marketing Third Edition All Rights Reserved

Principles of Marketing Third Edition All Rights Reserved

 Consumer’s perception of a product’s value

Principles of Marketing Third Edition All Rights Reserved

Principles of Marketing Third Edition All Rights Reserved

 Company's costs serve as a price floor of which

Principles of Marketing Third Edition All Rights Reserved

 Variable costs refer to costs that change with the

Principles of Marketing Third Edition All Rights Reserved

 Learning curve is the reduction in average costs per

a. Mark-up price based on costs:

b. Mark-up price based on selling price:

 Price where the total revenue just covers the

 Sales-oriented pricing objectives:

Principles of Marketing Third Edition All Rights Reserved

 Complement other marketing mix decisions

Principles of Marketing Third Edition All Rights Reserved

Principles of Marketing Third Edition All Rights Reserved

 New Product Pricing

Principles of Marketing Third Edition All Rights Reserved

Principles of Marketing Third Edition All Rights Reserved

 Marketers reduce their base price in order to reward customers

Principles of Marketing Third Edition All Rights Reserved

 Marketer reduce their base price in order to reward customers

Principles of Marketing Third Edition All Rights Reserved

 Customers may be based at different countries all over

Principles of Marketing Third Edition All Rights Reserved

 Freight Absorption Pricing

Principles of Marketing Third Edition All Rights Reserved

 These tactics are used to stimulate demand

Principles of Marketing Third Edition All Rights Reserved

 Odd–Even Pricing (Psychological Pricing)

Principles of Marketing Third Edition All Rights Reserved

 Product life cycle

Principles of Marketing Third Edition All Rights Reserved

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