Discuss how marketing objectives, marketing-mix strategy and costs and other company factors affect pricing decisions.
List and discuss factors outside the company that affect pricing decisions.
Explain how price setting depends on consumer perceptions of price and on the price-demand relationship.
Describe the major strategies for pricing new products.
Comprehend the way in which companies establish a set of prices that maximises the profits from the total product mix.
Explain how companies adjust their prices to take into account different types of customers and situations.
What is Price?
In simple terms, price is the amount of money the seller charges for the product (goods or services).
For the consumer, it is the total of values he/she gives up in exchange for the benefits of having or using the product.
Price is the only element of the marketing mix that produces revenue for the seller.
All other elements represent costs.
A company does not usually set a single price, but rather a pricing structure that covers different items in its product line.
A company will often adjust product prices to reflect changes in its business costs, and to respond to variations in market situations and in buyer demand.
To the seller, price is the source of revenue
To the buyer, price is the cost of exchange
Considerations in Setting Price
The price a company charges will usually fall somewhere between a price that is too high to produce any demand (‘ceiling’), and a price that is too low to produce any profit (‘floor’).
The company must consider a number of internal and external factors, including marketing strategy and mix; the nature of demand; competitors’ strategies and prices.
Customers will decide whether the price of a product is correct. Decisions should, therefore, start with customer value.
Value-based pricing is setting the price based on the buyers’ perceptions of value, rather than on the seller’s costs.
Good-value pricing is offering just the right combination of quality and service that customers want, at a fair price.
Value-added pricing refers to a firm including value-added features/ services to differentiate its offerings. This supports higher prices.
Internal Factors to Consider
Current profit maximisation short-term
Market-share leadership long-term
Product-quality leadership long-term
Price must be closely linked to other elements
A firm must be clear in its marketing objectives and in its desired ‘positioning’
Cost Based Pricing
Total costs (fixed + variable)
Costs at different levels of production
Costs as a function of production experience
Costs will determine the ‘price floor’
for a product
Cost Per Unit at Different Levels of Production
Cost Per Unit as a Function of Production Experience
Adding a ‘mark up’ to the base cost of the product .
Assessing the selling price at which a firm can fully recover its costs (break even) of manufacturing and marketing its product. Identifies the anticipated total cost/ total revenue at different sales volumes.
Target Profit pricing
Setting a selling price above the breakeven point, so that a desired level of profit can be achieved .
Selling price is $20. Projected Cost is $16.
External Factors to Consider
The Market and Demand
Pricing for different types of markets
Consumer Perceptions of Price and Value
Price/ Demand Relationship
Price Elasticity of Demand
Competitors’ Prices and Offers
Other External Factors (e.g. reseller margins)
The level of demand will determine the
‘ price ceiling’ for a product
the quantity of a product that will be bought in a market at various specific prices
the quantity of a product that will be offered to a market at various specific prices
when the market consists of many buyers and sellers trading in a uniform product, where no single buyer or single seller has much effect on the price that can be charged in that market.
Sellers will be influenced by their competitors.
when the market consists of many buyers and sellers, and a range of prices occurs because sellers are able to differentiate their product offering to the buyers.
Sellers not heavily influenced by competitors.
Pricing for Different Types of Markets
when the market consists of a few sellers who are highly sensitive to each other’s pricing and marketing strategies. Often only a few sellers, because it is difficult for new firms to enter the market. Product can be uniform or non-uniform.
A pure monopoly
when there is only one seller. The seller may be a government monopoly; a private regulated monopoly; or a private, non-regulated monopoly.
Pricing would be handled differently in each case.
The demand curve shows the number of units the market will buy in a given time period at different prices.
‘ Price elasticity’ is the measure of the likely change in demand for a product as a result of a change in the price.
Two Hypothetical Demand Schedules
Hypothetical Examples of Demand Curves
Effects of ‘non-price’ variables
Inelastic and Elastic Demand
Price Elasticity of Demand
How the Demand for a product will be affected by a change in the Price of that product
A percentage increase, or decrease, in the price will produce a smaller percentage change in demand
The percentage change in quantity purchased will be much greater than the % change in price
PRICE goes DOWN Revenue goes DOWN
PRICE goes UP Revenue goes UP
PRICE goes DOWN Revenue goes UP
PRICE goes UP Revenue goes DOWN
The more ‘inelastic’ the demand, the more the seller benefits from an increase in product price
Competitors’ Strategies and Prices
A firm must consider its competitors’ prices, and any possible reactions to the firm’s own pricing moves, in order to select the most appropriate price between the two extremes of ‘floor price’ and ‘ceiling price’.
A firm needs to study the price and quality of each competitor’s offer. This can be done in a number of ways including, comparison shopping; examining the competitors’ products and pricing; speaking to consumers.
New-Product Pricing Strategies: Pricing an ‘Innovative’ Product
Setting a relatively high price for a new product to skim maximum revenue from those segments willing to pay the high price. The firm will make fewer, but more profitable, sales.
Setting a relatively low price for a new product in order to attract a large number of buyers and gain a greater market share.
New-Product Pricing Strategies: Pricing an ‘Imitative’ New Product
A company that plans to develop an imitative product faces a product-positioning decision.
It must decide where to position the product in terms of both quality and price.
It must consider the level of competition, and the size and potential growth of the market.
Nine Price/Quality Strategies
Product-Mix Pricing Strategies
Setting ‘price steps’ between product line items .
Optional-Product/ Service Pricing
Pricing optional products sold with the main product.
Pricing products that must be used with the main product.
Two-part pricing is a strategy for pricing services in which price is broken into a fixed fee plus a variable usage rate.
Price by-products to help price main product competitively.
Pricing bundles o f products that are sold as a package.