CHAPTER SIX

PRICING PRODUCT

6.1 The meaning of Price

• In the narrowest sense, price is the amount of money charged for a
product or service. More broadly, price is the sum of all the values that
consumers exchange for the benefits of having or using the product or
service.
• Price is the only element in the mix that produces revenue; the other
elements produce costs.
• Price is also one of the most flexible elements of the marketing mix.
Unlike product feature and channel commitments, price can be changed
quickly.

1
6.2 Factors Affecting Pricing Decision

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

factors and external environmental factors.
• Internal factors affecting pricing decisions
Firms have to consider the internal factors in setting their pricing
policy. Factors include the company’s marketing objectives,
marketing mix strategy, costs and organizational considerations.
• 1. Marketing objectives: -before setting a price, the company must
decide on its strategy for the product.
• If the company has selected its target market and positioning
carefully, then its marketing mix strategy, including pricing will be
fairly strait forward.
• For e.g. if the company decided to target high income group, this
suggests that the price will be higher or if it positioned its product
as economical this requires low price. A company may also set its
2
price low to prevent competition from new entrants.
2. Marketing mix strategy: Price is only one
of marketing mix elements that a
company uses to achieve its objectives.
Hence, price decision must be
coordinated with other marketing mix
decisions (product design, distribution
and promotion) to form a consistent and
effective marketing program.
Decisions made for other marketing mix
variable may affect pricing
3
3. Costs: costs set the floor for setting price
that a company can charge for its product.
Most often under normal circumstances,
companies need 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. Generally a
company’s cost has paramount implication
upon the price the company needs to charge
for e.g. a company interested to charge lower
prices cannot do so unless it has lower cost of
production.
4
4. Organizational consideration: Responsibility for
setting prices is different from organization to
organization for e.g. in small companies the top
management may be involved in setting prices
for products while in the case of large
companies this may be the responsibility area of
divisional or product manager. In any case the
organizational set up by itself has implication
upon the pricing aspect.

5
 External factors affecting pricing
1. The market and demand: While cost determines
the lower limit of prices, the market and demand
set the upper limit.
The sellers’ freedom of setting price varies
according to the type of market for e.g. in a
competitive market situation and monopolistic
market situation, a company’s freedom of setting
price will not be the same. As we all know
according to Economists, demand and price are
inversely related, that is the higher the price is
the lower the demand will be and vice versa.
6
2. Competitor’s costs, prices and offers :
A consumer who is considering buying a given
company’s product will evaluate the prices and
values of a company against the prices and
values of other companies producing that
product.
In addition, the company’s pricing strategy may
affect the nature of the competition it faces for
e.g. a company pursuing high price, high margin
strategy may change the nature of the
competition as compared to a company whose
strategy is low price, low margin. 7
3. Other external factors: in setting its price,
evidently a company should consider its
economic situation such as inflation, deflation,
booming etc as such factors affect both the
price of the company and the perception of
consumers about the company’s product value
and price. In addition, a company should
consider the effect of its price on other parties
in its environment such as resellers,
government, etc .

8
6.3 Pricing Objectives
 Survival:- Companies pursue survival, as their
major objective if they are troubled/plagued by
overcapacity, intense competition or changing
customer wants. To keep the plant going a
company will set a low price, hoping to increase
demand in this case, profits are less important
than survival
 Current profit maximization:- Many companies use
current profit maximization as their pricing goal.
They estimate what demand and costs will be at
different prices and choose the price that will
produce the maximum current profit, cash flow,
or return on investment .
9
 Market share leadership : They believe that
the company with the largest market share
will enjoy the lowest costs and highest long
run profit to become the market share
leader; these firms set prices as low as
possible.
Product quality leadership: A company might
decide that it wants to achieve product
quality leadership. This normally calls for
charging a high price to cover such quality
and high cost of R&D .
10
6.4 General Approaches to Pricing
Cost –plus pricing: is the simplest pricing method that adds a
standard markup to cost of the product in order to determine
the price of a product.
• It does not take into consideration the demand and
competitors price but it entirely depends on the cost of the
company and the desired profit the company wishes to get
thereof. .
Break-even or target profit pricing: when a firm tries to set its
price at a level that equates its cost to sale or makes the target
profit it seeking.
• The company will determine what price will make it break
even or desired profit at a given level of sales.
• It takes into consideration only the cost aspect and the
desired profit, it does not take into consideration the price-
demand relationship. 11
Value based pricing: is a method that the price of a
product is decided based on the perception of
consumers rather than sellers cost as the key factor.
price is to be determined in such a way that the
combination of the quality of the product along with
its service are reasonable enough to justify the
benefits customers expect to get from the product. (at
a fair price).
• Competition based pricing: is a method that considers
the competition as the most important factor to
determine the price of a company.
Hence, the company’s price is to be determined in such a
way that it is capable enough to attract consumers than
competitors’ products (price that meet the competition
12
6.5 New product Pricing Strategies
1. Market-skimming pricing:
 Set high prices initially to “skim” revenues layer by layer
from the market.
(e.g. Intel )
Market –skimming pricing makes sense if...
1) Product quality and image must support the higher price,
and enough demand exists at higher price
2) Costs of producing a smaller volume cannot cancel the
advantage of charging more
3) Competitors should not be able to enter the market easily
and undercut the high price

13
2. Market-penetration pricing
 Set Low initial price to penetrate market quickly – high
sales volume results in falling costs, allowing the
company to cut prices even further (e.g. Dell initially)
Market penetration pricing makes sense if...
1) Market must be highly price sensitive, so that low
price produces more market growth
2) Production and distribution costs must fall as sales
volume increases
3) Low prices must keep competition out of the
market.

14
 6.6 Price Adjustment Strategies
1. Discount and allowance pricing :- reduces prices to reward
customer for certain responses such as paying early, volume
purchases, and off -season buying.
– Discounts
• Cash discount for paying promptly
• Quantity discount for buying in large volume
• Functional (trade) discount for selling, storing, distribution, and
record keeping
– Allowances
• Trade-in allowance for turning in an old item when
buying a new one
• Promotional allowance to reward dealers for
participating in advertising or sales support programs
11-15
2. Segmented pricing is used when a company
sells a product at two or more prices even
though the difference is not based on cost.
• Adjust basic prices to allow for differences in
customers, products, timing and locations

11-16
• Customer segment pricing: is when different
customer pay for different prices for the same
product or service.
• Product form segment pricing: is when different
versions of the product are priced differently but not
according to differences in cost.
• Location pricing: is when the product is sold in
different geographic areas and priced differently in
those areas even though the cost is the same.
• Time pricing: is when a firm varies its prices by the
season, the month, the day, and even the hour.

11-17
3. Psychological pricing: is occurs when sellers consider the
psychology of prices and not simply the financial side
• Adjusting Prices for Psychological Effect.
• In this case Price Used as a Quality Indicator.
– Reference prices :- are prices that buyers carry
in their minds and refer to when looking at a given
product.
e.g - Noting current prices
– Remembering past prices
– Assessing the buying situations

18
4. Promotional pricing
• Temporarily Reducing Prices to
Increase Short-Run Sales.
• i.e. Special- Events , longer warranty , free
maintenance
5.International pricing :
• Adjusting Prices for International Markets.
• Price Depends on Costs, Consumers,
Economic Conditions , laws and regulation & Other Factors
6. Geographical pricing :charge the same price for
customers in different locations(based on transport
costs) or the same price for all customers ( and
different profits at different locations). They
includes:-
19
• FOB (free on board) pricing: means that the goods are
placed free on board a carrier. At that point the title and
responsibility passes to the customer, who pays the
freight from the factory to the destination.
• Uniformed delivery pricing: means the company
charges the same price plus freight to all customers,
regardless of location.
• Zone pricing: means that the company sets up two or
more zones where customers within a given zone pay a
single total price.
• Basing point pricing: means that a seller selects a given
city as “basing point” and charges all customers the
freight cost associated from that city to the customer
location regardless of the city from which the goods are
actually shipped.
• Freight absorption pricing: means that the seller
absorbs all or part of the actual freight charge as an
incentive to attract business in competitive markets. 20
 6.7 Product-Mix Pricing Strategies
The firm looks for a set of prices that maximizes the
profits on the total product mix.
Five product mix pricing situation includes:-
Product line pricing takes into account the cost
difference between products in the line, customer
evaluation of their features, and competitors’ prices.
– the price differences represent the perceived quality
differences

11-21 Normal Hair Anti-dandruff Hair Fall Defense Oily Hair

$3.90 $4.90 $4.90 $3.90
Optional product pricing: takes into account optional
or accessory products along with the main product. –
Decide which items to include in the base price and which to
offer as options

New car with sports rims

$60,000
New car with ordinary rims
$59,000

11-22
Captive product pricing:- involves products that must
be used along with the main product.
– Price the main or driver product low and seek
high margins on the supplies
• For services: two-part pricing is where the price is
broken into fixed fee and variable usage fee.
– Decide how much to charge for the basic service
and how much for the variable usage
– The fixed amount should be low enough to induce
usage of the service; profit can be made on the
variable fees
11-23
 Product-Mix Pricing Strategies

By-product pricing:- refers to products with little or no

value produced as a result of the main product.
• Producers will seek little or no profit
• Producers should accept any price that covers more
than the cost to cover storage and delivery.

11-24
 Product-Mix Pricing Strategies

Product bundle pricing combines several products and

offer the bundle at a reduced price.
• Price bundling can promote the sales of products

1 bottle: $2.70 Bundled 2 bottles: $4.90

11-25
…for your active
participation !!
If you have a question you
26