Pricing

Pricing Considerations and

Approaches
 Price
Price is the sum of all the values that consumers
exchange for the benefits of having or using the
product or service.
“Rent, tuition fees, fares, rates, premiums,
honoraria, bribes, dues, bids, assessments,
retainers, salaries, wages, commissions, taxes…”
Why is it so dangerous? (1) Price is the only
element in the marketing mix that produces
revenues (PxQ); all others represent costs. (2)
It’s the easiest element to change.
 What is price ?
To the customer it represents a monetary
sacrifice.
To the seller price is revenue, the primary
source of profits
Pricing is almost always a top management
decision
Often in large corporations Product managers
work on pricing and seek approval of top
management for implementation
 Pricing

Pricing decisions are always team decisions

involving marketing , sales , Operations,
finance, etc.
Each function brings in largely cost inputs
such as material cost, machine cost, labour
cost, finance cost etc.
Marketing and sales bring in competitor and
customer perspectives.
 Price

Price is the most important determinant of the

profitability of a business
Lower price could also mean higher profits
Competition makes pricing a highly dynamic
function
Buyers respond to price differences rather than
to specific prices
Pricing is a high risk decision, a mistake can
affect profits, growth and future
 Four basic rules of pricing

Know your objectives

Know your costs
Know your demand : what factors influence
demand; understand the role of price in the buyer’s
decision; know how buyers use the product;
Know your competitors.
 Setting Pricing Policy

1. Selecting the pricing

objective

2. Determining demand

3. Estimating costs

4. Analyzing competitors’
costs, prices, and offers

5. Selecting a pricing
method

6. Selecting final price

Factors Affecting Price
Decisions

External Factors

Nature of the market

Pricing and demand
Decisions Competition
Other environmental
factors (economy,
resellers, government)
 Internal Factors Affecting Pricing
Decisions: Marketing Objectives
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, Etc.

Objectives Market Share Leadership

Low as Possible Prices to Become
the Market Share Leader.

Product Quality Leadership

High Prices to Cover Higher
Performance Quality and R & D.
 Internal Factors Affecting Pricing
Decisions: Marketing Objectives
Other specific objectives include:
 Set prices low to prevent competition

from entering the market,

 Prices might be reduced temporarily to

create excitement or draw more

customers.
 Types of Cost Factors that
Affect Pricing Decisions
Fixed Costs Variable Costs
(Overhead)
Costs that don’t Costs that do vary
vary with sales or directly with sales or
production levels. production levels.

Executive Salaries, Rent Commissions, Raw materials

Total Costs
Sum of the Fixed and Variable Costs for a Given
Level of Production
 Costs Considerations
Cost Per Unit at Different Levels of Production Per Period

SRAC1 SRAC5
SRAC2 SRAC4
SRAC3
LRAC
 Types of Cost Factors that
Affect Pricing Decisions
As a firm gains experience in production, it learns
how to do it better.
The experience curve indicates that average total
cost drops with accumulated production
experience
Strategy: company should price products low;
sales increases; costs continue to decrease; and
then lower prices further.
Risks are present with this strategy.
Experience curve
External Factors Affecting
Pricing Decisions
Market and
Demand

Competitors’ Costs,
Prices, and Offers

Other External Factors

Economic Conditions
Reseller Needs
Government Actions
Social Concerns
 Market and Demand Factors
Affecting Pricing Decisions
Pricing in Different Types of Markets

Pure Competition
Many Buyers and Sellers Pure Monopoly
Who Have Little Single Seller
Effect on the Price

Monopolistic Oligopolistic
Competition Competition
Many Buyers and Sellers Few Sellers Who Are
Who Trade Over a Sensitive to Each Other’s
Range of Prices Pricing/ Marketing
Strategies
 Demand Curves and Price
Elasticity of Demand
A Demand Curve is a Curve that Shows the
Number of Units the Market Will Buy in a Given
Time Period at Different Prices that Might be
Charged.
Price Elasticity Refers to How Responsive
Demand Will be to a Change in Price.
Price Elasticity of Demand = % Change in Quantity Demanded
% Change in Price
 Demand Curve
Price
Price Quantity
Rs.3
0.00 12
0.50 10
2.50
1.00 8
1.50 6
2.00 2.00 4
2.50 2
1.50 3.00 0
1.00

0.50

Quantity of
0 1 2 3 4 5 6 7 8 9 10 11 12 Ice-Creams
 Inelastic Demand
- Elasticity is less than 1
Price

5
1. A 25%
increase
in price... 4

90100 Quantity
2. ...leads to a 10% decrease in quantity.
 Elastic Demand
- Elasticity is greater than 1
Price

1. A 25%
increase 5
in price...
4

50 100 Quantity
2. ...leads to a 50% decrease in quantity.
 Price-Quality Strategies

The 9 price-quality strategies

High Price Low Price

High Quality Premium High Super
Value Value

Over Mid Good

Charging Value Value

False
Low Quality Rip-off
Economy
Economy

21
 Cost-Plus Pricing
Certainty About
Costs
Simplest
Cost-Plus
Ethical
Factors Pricing
Pricing is Pricing is an
Situational Method
Simplified Approach That
Unexpected
Adds a
Standard
Price Competition
Is Minimized Markup to the
Attitudes Ignores
Costofof the Current
Others
Product Demand &
Much Fairer to Competition
Buyers & Sellers
 Cost-Based Versus Value-
Based Pricing
Cost-Based Pricing Value-Based Pricing
Product Customer

Cost Value

Price Price

Value Cost

Customers Product
 Competition-Based Pricing
Setting Prices

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

Sealed-Bid
?Company Sets Prices Based on what they think competitors?
will charge.
 Pioneering Pricing
Y

Skimming
Price
Price

Penetration
Price

X
0

25
 NEW PRODUCT PRICING STRATEGIES
Market skimming pricing : Setting a high price for
a new product to skim maximum revenues layer
by layer from the segment willing to pay the high
price, the co makes fewer but more profitable
sales.
Suitable under following conditions:
The product has unique and distinctive features
desired by the consumers.
Demand is fairly inelastic. Lower prices are
unlikely to produce greater total revenue.
Product is protected through one or more entry
barriers. (patents)
 NEW PRODUCT PRICING STRATEGIES

Market penetration pricing : Setting a low

price for a new product to attract a large no
of buyers and a large market share.
Most suitable when:
Market size is large and is growing.
Used as an entry strategy
There is intensive competition
 PRODUCT MIX PRICING STRATEGIES
PROD LINE PRICING – Setting the price steps
between various products in a product line based
on cost differences between the products,
customer evaluations of different features, and
competitors prices. ( eg. Sony, Maruti etc )
Companies often develop product lines rather
single products – factors to be considered are
difference between the products in a line ,
customers evaluation of their different features &
competitors prices ) ( eg 3 slabs of shirts – 299,
499 & 699 )
 OPTIONAL PRODUCT PRICING
A strategy of setting the price of the main product
very low to attract a base of customers. The main
product will have a loading of lesser profit margin.
The firm will then set the prices of optional products
with a higher profit margin.
Eg. cars – GM introduced a basic model at a low
price, and every other optional product like AC,
power searing, powers windows etc. with a high
margin.
 CAPTIVE PRODUCT PRICING
A strategy of setting the price of the main product
very low to attract a base of customers. The main
product will have a loading of lesser profit margin.
Once the customers buy the main product, they are
then forced to buy the captive product at a higher
price.
Eg. blades for razor, film for cameras, printers &
cartridges. Basic product is offered at a low price
and a low profit margin & captive product is
offered at a higher price and a higher profit
margin.
BY PRODUCT PRICING
Setting a price for by product in
order to make the main products’
price more competitive.
To make the price of Sugar more
competitive, sugar companies also
consider the price of Molasses.
PRICE ADJUSTMENT STRATEGIES :
Discount and allowance pricing : A straight
reduction in price on purchases during a stated
period of time. (Companies adjust their basic
prices to reward their customers for certain
response such as early payment of bills, volume
purchases, off season buying etc ).
Types : cash discount ( early payment 2% off ),
quantity disc (100 units Rs.10 & more than 100
Rs. 9 ), functional discount ( channel members
inventory ), seasonal discount ( channel
members early orders – sweaters, water heaters
etc )
Allowance
Promotional money paid by a
manufacturer to retailers in return for
an agreement to feature the
manufacturers product in some way.
This is an attempt to gain support of
retailers to favour a product over
competitors.
 SEGMENTED PRICING
Selling a product or a service at two or
more prices, where the difference in
price is not based on the difference in
costs of production.
Customer segment pricing : Museums,
gardens charge different prices to
different age groups, students, children,
adults, etc.
 SEGMENTED PRICING
Location prices : Theaters: stall, balcony,
majestic circle etc are charged differently.
Time pricing : Hotels ( happy hours ),
multiplex theaters etc.
 Conditions : The market must be segment
able, have different degree of demand,
those who pay low should not be able to sell
to those who can pay high, etc.
PROMOTIONAL PRICING
Temporarily pricing products below their list
prices, & sometimes even below costs to
increase short run sales. ( super markets price
some insignificant products at discounts so
that customers are attracted and can make
higher purchases, some offer low interest
rates, longer warranties, free maintenance –
Losses – a brand may lose its value for
frequent sales, consumers may wait for a sale
to come )
 GOGRAPHICAL PRICING
Adjusting prices to account for the geographic location
of consumers
FOB origin pricing : A geographic pricing strategy in
which goods are placed free on board a carrier, the
customer pays the freight from the factory to the
destination.
Uniform delivery pricing : A geographic pricing
strategy in which the company charges the same price
plus freight to all customers, regardless of their
location. ( national price is offered)
Zone pricing : A geographic pricing strategy in
which the company sets up two or more zones.
All customers within the zone pay the same
total price, the more distant the zone the higher
the price (east, west, south , north )
Basing point pricing : A geographic pricing
strategy in which the dealer designates some
city as a basing point and charges all customers
the freight cost from that city to the customers
location.
International Pricing
INTERNATIONAL PRICING : Adjusting prices
for international markets.
additional costs for product modification
shipping & insurance
Import / export tariffs and taxes
Exchange rate fluctuations
Physical distribution
 Yield Management

YM is a strategy which aims to monitor consumer

behaviour to gain and achieve maximum profit
through selling goods and services that are
perishable. The theory behind this strategy is to
focus on the following aspects:
Buying behaviour patterns of consumers
External environmental factors
Market price to successfully gain the most profit. 
 Yield Management
For example, a customer may purchase an airline ticket in the
day time for Rs.3,500 and another customer may purchase the
same airline ticket on the same day in the evening for Rs.4,500.
During the day time the airline had many seats that were spare
which needed to be occupied and sold.
Thus, prices were decreased in order to attract the customers
into buying an airline ticket with great deals or offers.
However, during the evening time most seats were filled and the
firm decided to increase the price of the airline ticket for the
desperate customers who needed to purchase the seats that
were available.
This type of strategy is a vigilant way of connecting with the
target consumers as well as flourishing the business.
Price-Adjustment Strategies
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”
 Costumers’ Price Sensitivity
Nine "laws" or factors that influence how a consumer perceives a given
price and how price-sensitive they are likely to be with respect to
different purchase decisions.

Reference Price Effect – buyer's price sensitivity for a given product

increases the higher the product's price relative to perceived
alternatives. Perceived alternatives can vary by buyer segment, by
occasion, and other factors.
Difficult Comparison Effect – buyers are less sensitive to the price
of a known or more reputable product when they have difficulty
comparing it to potential alternatives.
Switching Costs Effect – the higher the product-specific investment
a buyer must make to switch suppliers, the less price sensitive that
buyer is when choosing between alternatives.
 Costumers’ Price Sensitivity

Price-Quality Effect – buyers are less sensitive to price the more

that higher prices signal higher quality. Products for which this
effect is particularly relevant include: image products, exclusive
products, and products with minimal cues for quality.
Expenditure Effect – buyers are more price-sensitive when the
expense accounts for a large percentage of buyers' available
income or budget.
End-Benefit Effect – the effect refers to the relationship a given
purchase has to a larger overall benefit.
Eg. If you are required to add a software to your computer and
only then you could access the zoom classes for the next one
month, you would be less sensitive to the price of the software ie.
You will but the software even at a higher price to gain access to
the larger benefit.
 Costumers’ Price Sensitivity

Shared-cost Effect – the smaller the portion of the

purchase price buyers must pay for themselves, the less
price sensitive they will be.
Fairness Effect – buyers are more sensitive to the price of
a product when the price is outside the range they perceive
as "fair" or "reasonable" given the purchase context.
The Framing Effect – buyers are more price sensitive
when they perceive the price as a loss rather than a
forgone gain, and they have greater price sensitivity when
the price is paid separately rather than as part of a bundle.