Chapter six

Pricing Decisions
 The concepts of pricing

Definition
 Is the amount of money charged for a good or service.

 Price is what must be given up to get the benefits offered by the

rest of a firm’s marketing mix.
 Characteristics

 The only means to generate revenue

 Most flexible marketing mix
 Number one problem that challenges marketers
 Most firms reduce price than convincing customers
 Factors Affecting Pricing Decision

 Internal factors and External company factors affect a company’s

pricing decisions.
Internal factors
A. Marketing objective: The firm’s objective determines the
pricing strategy.
1. Survival
 Companies troubled by too much capacity, heavy competition, or
changing consumer wants set survival as their objective.
 Cont’d
 Lower prices
 The company setting prices that cover Variable costs and some
fixed costs.
 As long as these covered the company stays in the business
 It is a short run objective
 In the long run, how to add value or face extinction

Conditions to use this method

 Overcapacity
 Intense competition
 Changing consumer wants/demands
 2. Current profit maximization
 They estimate the demand and costs associated with alternative
prices and choose the price that produces maximum current profit,
cash flows and rate of return on investment.

 many companies want to set a price that will maximize current

profits, cash flow or return on investment, seeking financial
outcomes rather than long-run performance.
 Cont’d
 Should have knowledge of its demand and cost functions
 The company may sacrifice long-run performance by ignoring the
effects of:

 marketing mix variables

 competitors reactions
 legal restraints on price
 3. Maximum market share/ market penetration
price
 The company is charging lowest prices in order to attract large
number of buyers.
 Believe that a higher sales volume will lead to lower unit costs
and higher long-run profit
 Set the lowest price assuming the market is price sensitive.
The company set price as low as possible to win:
 A large market share
 Experience falling costs and
 Cut its price further as costs fall
 4.Maximum market skimming
 Charging high prices for technologically new products to skim
the market.
Conditions that makes this strategy effective
 A sufficient number of buyers have a high current demand
 The unit costs of producing a small volume are not so high
 The high initial price does not attract more competitors to the
market
 The high price communicates the image of a superior product
 5. Product Quality leadership
 The company product or service is characterized by high levels of
perceived quality, taste and status to set high price.
 By producing quality products, then the firm leads the market by
charging high price. Example, Victoria's secret, BMW cars

 provide superior quality for a high price to capture the luxury

market.
 E.g. Ritz-Carlton has: high capital investment per room
($500,000).; high labor cost per room( to maintain well qualified
staff).;high employee guest ratio to provide luxury service; charge
high price for their luxury service
 Cont’d
Other objectives:
• A company might also use price to attain other, more specific
objectives.
 Set low price to prevent competition from entering the market or
set same price to stabilize the market.
 A fast-food restaurant may reduce prices temporarily to create
excitement for a new product or draw more customers into a
restaurant.
 Opposite pricing strategy can be set for another restaurant which
works so well.
 B. Marketing mix strategy
 Product features, distribution and promotion and their interaction
with pricing.
 Price must be coordinated with product design, distribution and
promotion decisions to form a consistent and effective marketing
program.
C. Cost
 Costs set the floor for the price a company can charge for its
product.
 A company wants to charge a price that covers its costs for
producing, distributing, and promoting the product.
 Beyond covering these costs, the price has to be high enough to
deliver a fair rate of return to investors.
 D. Product differentiation practiced by the firm

 The differentiation/ business strategy performed by the firm also

influences pricing.

Overall price/ cost leadership-providing products or services at the

lowest price
Differentiation-offering differentiating features that make customers
willing to pay premium prices
Price/ cost focus-concentrating on a narrow customer segment and
competing with lowest prices
Differentiation focus

E. The stage of the product on the product life cycle

 External Factors
 External factors affecting pricing decisions include: the nature of
market and demand, competition, and other environmental
elements.
 1. Nature of Market
 Although costs set the lower limits of the prices, the market and
demand set the upper limit.
 Management considered a price increase as way to push revenue
above the break-even point.
 Pricing in different markets:
 Pure competition- consists of many buyers and sellers trading in a
uniform commodity.

 Pure monopoly –consists of one seller and many buyers.

 Monopolistic competition consists of many buyers and sellers

who trade over a range of prices rather than at a single market
price by selling differentiated products./greater price selling
freedom

 Oligopolistic competition- consists of few sellers who are highly

sensitive to each other’s pricing and marketing strategies.
 2.Customer and Channel Partner
Expectations
 Distribution partners expect to receive financial
compensation for their efforts, which usually means they will
receive a percentage of the final selling price.

 When it comes to making a purchase decision customers

assess the overall “value” of a product much more than they
assess the price
 3. Price –Demand Relationships
 Each price a company can charge will lead to a different level
of demand.
 The relationship between price charged and demand -
inversely related,

 i.e. the higher the price the lower the demand.

 Price elasticity of demand
 The law of demand states that consumers usually purchase more
units at a low price than the high price.
 The price Elasticity of demand shows the sensitivity of buyers to
price changes in terms of quantities they will purchase.

1. Elastic demand occurs if relatively small changes in price result

in large changes in quantity demanded.
2. In elastic demand takes place if considerable price change has
little impact on quantity demanded.
3. Unitary demand exists when there is no impact of price on
demand.
4. Negative demand exists if change in price has the adverse impact
on demand. Price increase leads to increase in demand.
 4. Competitors’ Prices and Offers
 Competitors’ prices and their possible reaction to a company’s
own pricing moves are other external factors affecting pricing
decisions.
 Price
 Cost
 Offer
 5. Other external elements
5.1. Government Regulation:
 Price fixing
 Price Discrimination
 Predatory Pricing
5.2. Economic aspects
 Inflation, Income level of customers
 Methods of pricing/General pricing approach
1. Cost plus/ mark up pricing
 Charging the price by adding a standard mark up on the cost of the
product.
 Is the easiest and most popular pricing method

Advantages
• It is easy to estimate
• It may minimize competition
• It is fair for both the buyer and seller
Disadvantages
• It is not logical as it ignores current demand and competition
Example:
Variable cost ------------------------------- Br 10
Fixed Costs --------------------------------- Br 300,000
Expected unit sales ------------------------- 50,000 units
Unit cost = variable cost +Fixed costs/unit sales.
=10+300000/50000=Br 16
• If the manufacturer wants to earn a 20% markup on sales, the
manufacturer’s markup price is given by:
Markup price = Unit cost/(1-Desired Return on Sales)
= 16/1-0.2 = Br 20
 2. Perceived value pricing
 Is setting price by analyzing consumer needs and value
perceptions to match with consumers perceived value.
 Primarily considered the perceived value of customers to set price
 Companies use the non-price variables (heavy advertising and
promotion) to enhance the value of a product in the minds of the
buyers.
 Then they set a high price to capture the perceived value.
3. Value pricing
 Is charging fairly low price for quality products.
 It is not simply setting lower price rather, it is used to become a
lower cost producer without ignoring quality.
 4. Going rate pricing
 Charging prices based on competitors price by paying less
attention to its own costs and demand.
 The company might charge the same, higher or lower price than
that of competitors.
 It is important when cost is difficult to measure.

5. Sealed bid pricing

 Setting lower prices than competitors to win the contract.
 Very common in contract business where firms bid for jobs
 6. Auction type pricing

 Important to dispose unused goods .

 If there is excess inventories.
 PRICING POLICES AND STRATEGIES
1. Market-entry pricing option
 Suggests relatively lower price or selling below a given price
 There is low price in order to attract large number of buyers
The main objectives
 Encourage initial purchase for new products
 To enter in to market and holding good shares
 Build /develop demand for new products
 Used to clear supply
 Focuses on demand maximization and share development
 Is mostly employed for short period of time, until the company
accomplishes its objectives
 Factors should be considered in advance to
increase price
 Supply and demand situation
 Buyers reaction to the potential increase of price
 Competitors price
 Expected change in market share
 2. Product mix pricing strategy
A) Optional feature pricing strategy
 A pricing strategy for optional or accessories products along
with the main product.
 Different options example, Refrigerator with special ice maker.
 Then charging relatively higher prices for accessories
B) Captive product pricing
 Setting prices for products that must be used along with the
main product
 Example, Gun and Bullets- lower for the main product, higher
the next product item
 Camera with film
 C) By- product pricing
 Extra products that manufactured with the normal product and
fix other price for extra products
 Example, Chemicals, Petroleum, Wood items, sugar

D) Product line pricing

 Setting price for products in the product line of various products
based on the difference between cost of difference product,
competitors price and customer evaluation of different features

 Example, Samsung TV use product line pricing for different

models of TV
 E) Product bundle pricing
 Setting a price for several combination of products and offering
the bundle at a reduced price
 It saves time by decreasing purchase frequency other than
obtaining reduced price
 It can also be organized by selling the first item with full price and
the second one at a discounted price
 It is an indirect price incentive to customers
 It is about buying products as a package
 Pure bundling
 Mixed bundling