13Copyright © 2012 Pearson Education, Inc. Publishing as P.docx

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Pricing Strategies
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CHAPTER OBJECTIVES
What are the roles of price and value in the marketing mix?
How do market structures, costs, and demand affect prices?
What are the most important market factors influencing pricing
decisions?
How do marketers use pricing strategy and pricing objectives to
achieve their goals?
What procedures and strategies do marketers use when making
pricing decisions?
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OBJECTIVE 1
What are the roles of price and value in the marketing mix?
How do market structures, costs, and demand affect prices?
DEFINED
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A Price is the exchange value of a product or service in the
marketplace.
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VALUE
Value = Benefits – Costs
Service Benefits
Brand Benefits

Product Benefits
Price &
Other
Costs
Value
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Performance
Creating value entails adding features to the base product – this
includes greater reliability, better performance, making the
product last longer, increasing safety, and creating a better
design.

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ESTABLISHING PRICES
Price
Product
Place
Promotion
Price is the most closely related element of the marketing mix,
as product, place, and promotion each have a cost associated
with them. Price can also be the easiest to change, since a price
change can literally be implemented overnight.
Prices should be aligned with the overall marketing strategy of
the brand.
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MARKET STRUCTURE
Pure Competition
Oligopoly
Monopolistic Competition

Monopoly
Monopoly – A single firm has the power to set and control price
in a market. Drug manufacturers, due to patent protections, are
examples.
Oligopoly – Several firms share the price power by being able
to control supply. OPEC is an example.
Monopolistic – A limited number of firms compete and prices
are dictated through customer demand for specific brands. Car
manufacturers are examples.
Pure Competition – When numerous producers sell
undifferentiated products.
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COST-BASED PRICING
Profit
Revenue
Costs
Price x Units Sold
Fixed Costs + Variable Costs
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COST-BASED PRICING

A product’s contribution per unit, is the difference between the
selling price and variable costs. The profit margin is product
contribution per unit divided by the selling price. Take for
example the following product:
Unit selling price – $1.59
Unit variable cost – $1.03
Contribution per unit = $1.59 – $1.03 = $0.56
Profit margin = $.56 / $1.59 = 35.2%
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Chart1ProfitVariable Costs
Sales
Selling Price
Profit
2
8
Sheet1SalesProfit2Variable Costs8To resize chart data range,
drag lower right corner of range.
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COST-PLUS PRICING
For a product costing $12.00… Markup %MarginSelling
Price10%11.0%$13.3315%17.6%$14.1220%25.0%$15.0025%33
%$16.0030%42.8%$17.14

Cost-plus pricing is taking the variable cost of a product and
adding a fixed percentage to arrive at a selling price. This chart
highlights the difference between a markup and a margin.
Selling price is calculated by dividing cost by the inverse of the
intended markup percent, or cost (1 – markup %). To calculate
the selling price of a $12 product and a desired markup of 10%,
the formula would be $12 / (1 – .10) or $12 / .9, which equals
$13.33. The margin is determined by dividing the contribution
per unit, $1.33 in this case, by the selling price. In this example
the margin is: $1.33 / $12 = 11%
This can be somewhat confusing for students, but things should
become clearer in the next few slides. The biggest area of
confusion is that these calculations go against most of what they
know regarding margins. Students will typically see a cost of
$12, a 10% margin, and would sell the product for $13.20. This
type of markup is known as markup on costs. The method
outlined in the example on the slide uses markup on the selling
price, which is the most common form of markup.
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BREAK-EVEN POINT
Fixed Cost = $40k; Variable Cost = $5; Selling Price = $10
The formula to calculate break-even is: fixed cost / contribution
per unit; contribution = selling price – variable cost. In the
example from the slide, fixed costs = $40,000; selling price =
$10; and variable cost = $5. Contribution per unit is: $10 – $5 =
$5
So the break-even volume = $40,000 / $5 = 8,000 units
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DETERMINATION OF DEMAND

100K 200K 300K
Quantity
$0.50
Price
$0.25
$0.10
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Demand tends to be elastic if consumers can easily find
substitutesIf the price of Coca-Cola rises, consumers can switch
to Pepsi or another substituteDemand for luxuries exhibit elastic
demand, while demand for necessities tend to be inelastic
Insulin, a necessity for Diabetics, must be purchased regardless
of the priceThe larger the portion of a budget an item consumes,
the higher the elasticityElasticity is greater for products such as
cars and suits, than for matches or ice
The number of units sold for a given product is based, in part,
on the price being charged. For most products (i.e., elastic
demand), raising prices will lead to a lower unit volume, while
lowering prices lead to a higher unit volume. For products
whose demands are inelastic, a change in price will have little
impact on the number of units sold.
Example: Gumball economics – The average gumball is priced
at $0.25. At this price, the company sells 200,000 units on
average. If the price of gumballs were to increase to $0.50, unit
sales would fall to 100,000. A price decrease, on the other hand,
would lead to an increase in unit sales to 300,000 units. In this
example, gumballs have an elastic demand.

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OBJECTIVE 2
What are the most important market factors influencing pricing
decisions?
DEFINED
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Pricing Practices are considerations (such as legal requirements
or bidding practices) that must be taken into account when
establishing a price for a product or service.
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PRICING PRACTICES
Legal requirements entail the role that governmental regulations

play in setting prices. Firms must ensure that federal antitrust
laws are not violated when setting prices (price is the most
heavily regulated of the 4 P’s). Antitrust laws fall into three
categories: price fixing (collusion among competitors), price
discrimination (charging different prices to different
customers), and predatory pricing (price reduction solely to
drive competitors out of business). These pricing issues, along
with loss-leader pricing (retailers charging a low price to
increase traffic, which harms competitors) deal mainly in the
B2B market, but federal and state governments also regulate
pricing as it relates to consumers. An example here would be
deceptive pricing (bait-and-switch).
Competitive bidding relates to the acquisition of goods/services
in the B2B environment. When a major purchase is undertaken
by a firm, they will issue a “request for quote” (RFQ) that
identifies the exact specifications of the product they are
seeking. Suppliers then submit bids, which are then sealed. All
bids are unsealed on a set date and the lowest bidder, in most
cases, is awarded the contract. For other types of purchases, a
firm’s purchasing agents enter into negotiation with the supplier
before finally settling on the final price. This can be related to
the buying process consumers use for purchasing a house or an
automobile.
Managers must understand the implications of various factors
when pricing for global markets. Factors to be considered
include quotas (limits on the amount of specific foreign
products that are allowed into a country), tariffs (duties or fees
imposed by countries to ensure price parity with local
producers), and currency exchange rates (which can fluctuate
overnight, turning small profit into a loss).
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PRICING PRACTICES
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PRICE REDUCTION EFFECT
Kenneth Wisniewski and Robert Blattberg at the University of
Chicago's Center for Research in Marketing
66% Increase
222% Increase
.89¢
.71¢
.69¢
Researchers from the University of Chicago examined pricing
effects. They reduced the price of margarine from $0.89 to
$0.71 in one group of stores, and $0.69 in another group of
stores. The $0.02 difference resulted in a significant increase in
unit volume.
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OBJECTIVES 3 & 4
How do marketers use pricing strategy and pricing objectives to
achieve their goals?
What procedures and strategies do marketers use when making
pricing decisions?
DEFINED
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A Pricing Strategy identifies what a business will charge for its
products or services.
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PRICING OBJECTIVES
$

$
$
$
Profitability
Profitability – Setting the price to meet a specific profit target.
Volume – If a company can reduce its cost through achieving
economies of scale and/or the experience curve, they may opt to
price its products low in order to generate significant volume.
This is similar to “penetration pricing.” There are numerous
reasons for using this type of strategy – to gain market share
and limit competitors from entering, or to have an entry point in
a crowded market. Nintendo used volume pricing with its Wii
game system and quickly exceeded the sales volume of
PlayStation and Xbox.
Meeting competition – Allows a company to position its product
close to a competitor, if price is a key differentiator.
Prestige – Many brands enjoy perceptions of high quality or
luxury. Since price is often used by buyers as a proxy for
quality, high prices can help maintain the desired image.
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PRICING STRATEGY

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NEW PRODUCT PRICING
Skimming
Price skimming is where a product’s price is set high upon its
introduction and lowered over time. This is done to generate as
much profit as possible, before competitors enter the market.
Innovators and early adopters are likely to pay a higher price
for the latest cool products. The key here is that prices will fall
over time as competitors enter the market.
Penetration pricing is pricing a product low to gain market
share quickly. This could be done to take advantage of the
experience curve, where manufacturing costs are reduced as
more units are produced. A way to get this point across to
students is to ask them about their skill level the first time they
played a particular video game. Most will admit to doing poorly
the first few times. Over time, however, they gain the skills and
knowledge needed to become advanced players. It is the same
way with employees. The more time they perform a task, the
quicker they become. As employees become more skilled, they
can produce more units in less time, thereby reducing cost.
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NEW PRODUCT PRICING
Penetration
When a penetration price is used, the product or service is
offered at a lower price compared to its competition. Although
the product may be sufficiently appealing to command a higher
price, a marketer might prefer to set a lower price to quickly
generate sales volume, market segment penetration, and
production scale.
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PRICING STRATEGIES
Storefront Pricing
Online Pricing
Tiered Pricing
Dynamic Pricing
Auction Pricing
Storefront pricing is when prices are set based on brick-and-
mortar sales. These prices are set based on the required markup
in order to support a physical location. Online retailers do not
incur the same expenses and thus can charge lower prices than
traditional merchants.

Online pricing refers to the setting of prices based on the cost
structure of an Internet retailer. While online retailers still incur
expenses, they are significantly less than a traditional retailer.
Tiered pricing is the practice of offering different products at
different price points to appeal to a wider market audience.
Tiered pricing is used most noticeably with telecommunication
companies through offering various levels of services or plans
that cover a wide range of pricing.
Dynamic pricing is where prices are charged based on various
elements including market conditions, cost to serve differences,
or is based on the value of the customer.
Forward auction is where a buyer announces a desire to
purchase a certain product and a merchant responds with the
price he or she is willing to sell the product for. Negotiations
can take place to finalize the selling price.
Reverse auctions are similar to forward auctions except that the
buyer also states the price they are willing to pay. This is the
type of auction that can be found with Priceline.com.
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PORTFOLIO PRICING
Customer’s willingness to pay
Price ceiling $$$
Price

floor $
Product 1
Product 2
Product 3
Price range for brand/product line
Companies which have multiple brands and multiple lines must
consider how to price each specific product so as to gain the
total maximum revenue for the company. Within a brand family
it is important that each product is priced in a similar fashion.
For example, Johnson’s offers numerous baby products
(shampoos, lotion, powder, etc.) Each of these products are
connected to each other via their shared brand name (Johnson’s
Baby). If prices were inconsistent among the products, that is
one being highest priced in category (shampoo) and another
being low priced (say baby powder), then the buyers may judge
the entire baby product line as being of lower quality.
Companies with multiple brands in the same product category
can be priced at various levels. A company can have three
brands in a category and these can be priced at the low, middle,
or high end. Think of the brands (those currently on the market)
of GM. The vehicles they offer range from the low-end
(Chevrolet) to high-end (Cadillac), and all points in between.
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PRICE ADJUSTMENT STRATEGIES
Cash discount – Receiving a discount for paying with cash (due
to the expense associated with credit card payments).
Quantity discount – Buying more and paying less.
Trade-in – Receiving a cash value for trading in an old item for
a new purchase. Applies to more than just automobiles.
Rebate – Cash payment made to a buyer for purchasing a
product.
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VISUAL SUMMARY
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All rights reserved. No part of this publication may be

reproduced, stored in a retrieval system, or transmitted, in any
form or by any means, electronic, mechanical, photocopying,
recording, or otherwise, without the prior written permission of
the publisher. Printed in the United States of America.
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Product and Service Strategies
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CHAPTER OBJECTIVES
What are products and services? What are their categories?
How do firms manage all of their products and services? What
are the steps in the best development process for new products?
What is the product life cycle, and how is it used?
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OBJECTIVE 1
What are products and services? What are their categories?
DEFINED
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Products are items consumed for personal or business use.
Services are activities that deliver benefits to consumers or
businesses.
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PRODUCTS
Product

Good
Service
Tangible
Intangible
A product is the overall term given for both goods and services.
Many use the term product and good interchangeably, which
often leads to confusion. The next slide outlines how a service
differs from a good.
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DISTINCTIONS OF A SERVICE
Intangible
Inseparable
Perishable
Variability
Intangible – A service that cannot be perceived through the five
senses.

Inseparable – The service and the service provider are one and
the same.
Perishable – A service that cannot be stored for later use. An
example can be an airline – once a plane departs, an empty seat
cannot be saved and sold for a later flight.
Variability – Differences exist in the quality of the service
being provided. This is true not only for differences between
service providers, but also among the same service providers.
Each time a service is performed, it is different from the
previous performance (and will be for all future performances).
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GOODS – SERVICES CONTINUUM
Hair Brush
Haircut
Hair Transplant
Pure Good
Pure Service
Hybrid

Products fall on a continuum with pure goods and pure services
anchoring each end. In between, there are hybrids, where both a
service and a good are being provided. The example used in this
slide comes from the text (minus the inclusion of hair
transplants). You can expand on this by using pizza.
Pure good – Buying the raw materials to make and bake your
own pizza at home.
Heavy product/some service – pizza preparation (pick up
unbaked pizza from “Papa Murphy’s” or “Pizza-U-Bake”).
Pure hybrid – The establishment where you make, bake, and eat
pizza at store front location.
Heavy service/some product – pizzeria restaurant.
Pure service – Watching a cooking show where the hosts
explains how to make a pizza.
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LEVELS OF PRODUCT
Core Benefits
Actual Product
Augmented Product
Brand Name
Attributes
Packaging
Style
Design
Delivery

Financing
Service
Warranty
Customer Support
Core benefits are the fundamental benefits that the customer is
buying. For the purchase of an automobile, the core benefit is
transportation.
The actual product is a combination of the tangible and
intangible attributes that deliver the core benefit. Automobiles
have a combination of attributes such as horsepower and fuel
economy, which determine its acceleration and cost of
ownership (gas mileage, etc.) The brand name is also a part of
the actual product.
Augmented products are the additional services or benefits that
enhance product ownership. For automobiles, this could be an
extended warranty and financing, among other benefits.
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CONSUMER PRODUCT CLASSIFICATIONS
Shopping
Specialty
Unsought
Convenience

Convenience products, such as potato chips or gum, are bought
frequently with little or no advanced planning. They are usually
low priced goods and are widely distributed.
Shopping products are more complex and are purchased less
frequently than convenience products. Consumers spend more
time comparing features between brands. Consumers are also
willing to make great efforts to find shopping products and thus
are distributed to fewer locations. Advertising and personal
selling play a key role in the process. Examples include travel
tickets, TVs, and blue jeans.
Specialty products have unique characteristics such as highly
prized brand names (think Rolex watches and Waterford crystal)
or one-of-a-kind features. These products are purchased
infrequently and consumers expend great effort and search more
locations (although they are sold in limited locations) to find
exactly what they want. Products are high priced and
promotional activities are targeted to specific audiences or
lifestyles, due to the inefficiencies of mass communications.
Unsought products are those products which buyers do not like
to think about. There is limited knowledge regarding brand
names due to purchase infrequency. Examples include caskets,
life insurance, etc.
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INDUSTRIAL PRODUCT CLASSIFICATIONS
MRO Products

Processed Materials and Services
Components
Equipment
Raw Materials
In outlining the classifications of industrial products, farming
will be used as an overall example. Equipment include tractors,
combines, etc. These types of products are primarily sold
through personal selling and are often customized based on the
buyer’s needs.
MRO (maintenance, repair, and operation) products are
purchased frequently and as such, prices are kept affordable.
Examples are fuel, oil, and other parts needed to keep farm
equipment operating. Products in this category are considered
“fungible,” as there are numerous sources available and buyers
easily substitute one brand for another.
Raw materials are the seeds the farmers purchase to plant. In an
industrial setting, raw materials can be lumber, steel, and other
materials used in the production of products. Low price and
superior customer service are key strategies for marketing raw
materials.
Processed materials and services are products that are used to
directly manufacture other products. An example would be
fertilizers. Delivery of the material or service is deemed
critical, as a missed delivery can hamper the buyer’s ability to
carry out its activities.
Components are the finished products that are used to fabricate
other products. For a greenhouse operator, the plastic trays in
which bedding plants grow are the component products.
Components parts are easily identified even after becoming part
of the final product.

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NEW PRODUCT DEVELOPMENT
Idea Generation
Idea Screening
Concept Development
Business Analysis
Market Testing
Commercialization
The new product development process generally follows the 6-
step process outlined here. New product ideas can be dropped at
any step (hence the garbage can). There are various statistics in
the literature that quantify this process and each will be context
specific. There are some reports which state that it takes 300
ideas in the generation stage to produce one product that
reaches the market. The hit rate (ideas to commercialize new
products) will vary between the consumer (more ideas required)

and industrial markets (fewer ideas required).
Idea generation – Dream up the idea for a new product or
service. Ideas can come from anywhere, including internal
(R&D departments) and external sources (customers making
product suggestions). In this stage, the more ideas the better.
Idea screening – Review the ideas and discard the bad ideas in
an attempt to find the best ones to advance to the next stage.
Concept development – In this stage, the concept is becoming
more focused as the features and benefits of the product idea are
being outlined. These features and benefits can change later
after business analysis and market testing stages are conducted.
Business analysis – Outline of the sales and profit objectives to
see if the new product will meet set goals. Products that fail this
stage may get a second life by reformulating the concept.
Perhaps finds ways to lower costs, increase price, or expand the
target market.
Concept testing – Develop prototypes of the product and test
them with market research. The goal is to confirm product
acceptance (or rejection) by the market. Rejecting a product at
this stage can save considerable expense, considering the costs
associated with the launch of a product. The types of research
vary but they can be traditional test markets (where a product is
launched into select markets to determine consumer response)
or simulated test markets (small samples of consumers are
invited to a private location). Traditional test markets are losing
favor among many consumer companies, as these tests provide
competitors with valuable information.
Commercialization – Launch the new product into the market.
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TYPES OF NEW PRODUCTS
Cosmetic
(Incremental)
Context
(New Direction)
Concept
(Breakthrough)
iPod/iTunes
PC, Airplanes
Cosmetic, or incremental changes, are minor enhancements or
upgrades to an existing product. It is basically taking what is
existing and making it better.
Context, or new direction changes, are taking existing products
or concepts and repackaging them in a new way. Apple took the
MP3 market in a new direction by integrating players and music
together.
Concept, or breakthrough changes, are “new to the world”
products that alter everything. DNA, the PC, and airplanes are
examples.
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OBJECTIVE 2
How do firms manage all of their products and services? What
are the steps in the best development process for new products?
DEFINED
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A Product Portfolio is the collection of all products and services
offered by a company.
THINK
ABOUT
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SONY U.S. PRODUCT
PORTFOLIOComputerCamerasTelevisions
TheatrePortable ElectronicsSony PicturesGamesVAIO
-Notebook
-Desktop

Digital home
Disc burner
Location free
Mylo
SoftwareCyber-shot
Alpha SLR
Handycam
Printers
Digital picture frames
Photo servicesTelevisions
Home theatre systems
Blu-ray disc
DVD players
Home audio componentsWalkman Video MP3
Rolly
Reader digital book
Sony cell phone
GPSMovies
-Theatre

-DVD
-Blu-ray
Television
-Comedy
-Drama
-Daytime
-Cartoons
MusicPlayStation
-PS3
-PS2
-Portable
This slide highlights Sony’s product portfolio.
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SONY U.S. PRODUCT PORTFOLIO

Product Mix Width
Product Mix Depth
Product mix width is the number of product lines a company
offers. In the Sony example previously shown, there are 6
distinct product lines.
Product mix depth is the number of products within each
product line, or all of the different computer products that Sony
offers.
Product mix length is the total number of products that Sony
offers (depth x width).
Companies generally ensure that each product line is related to
each other in some way. For example, Honda’s product line
(automobiles, garden power tools, etc.) has a connection based
on the engine. For Sony, the connection is in the form of
entertainment.
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OBJECTIVE 3
What is the product life cycle, and how is it used?
DEFINED

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The Product Life Cycle is a model describing the evolution of a
product’s sales and profit throughout its lifetime.
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PRODUCT LIFE CYCLE
Note: The product life cycle applies to a product category and
not to one particular product. Each phase will be discussed in
the next four slides.
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INTRODUCTION STAGE
Sales Volume
Product Features
Retail Outlets
Marketing Goal
In the introduction stage, sales volume for the entire category is
low. Models introduced during this stage have limited features
and often perform worse than existing (substitute) products.
Think of electric or hybrid cars. Electric cars have limited range
as compared to cars that are powered by gasoline. Few retailers
or distributors carry the product. The goal for the marketer is to
generate awareness of the product category first, and then build
awareness of their particular brand. In many cases, multiple
companies competing in the category will work together to
build awareness.
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GROWTH STAGE
Sales Volume
Product Features
Retail Outlets
Marketing Goal
In the growth stage, managers are seeking to retain existing
buyers, as additional competitors are entering the market.
Changes are made to specific products and seek to enhance
brand image. While profits are beginning to become tangible,
competitive pricing is also becoming a factor, due to
competitive pressures. These pressures are coming from the
existing brands, which have not yet gained a sufficient spot in
the market (and will soon be exiting the market).
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MATURITY STAGE
Sales Volume
Product Features
Retail Outlets
Marketing Goal
In the maturity stage, managers are trying to maximize sales by
trying to find new buyers. This is done by making
improvements to the product and finding ways to increase
product usage.
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DECLINE STAGE
Sales Volume
Product Features
Retail Outlets
Marketing Goal

In the decline stage, sales volume is decreasing, profits have
disappeared, and companies are reducing expenses for the
product. Products can be stripped down to the basic elements by
eliminating the bells and whistles. Managers have several
options during the decline stage – they can either harvest profits
by cutting all marketing expenses, modify the product in hopes
of restarting growth (think Arm & Hammer Baking Soda), or
eliminate the product completely.
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DIFFUSION OF INNOVATION
Innovators
Early Adopters
Early Majority
Late Majority
Laggards
2.5%
13.5%
34%
34%
16%
Innovators (2.5% of the population) are willing to try new
innovations, as they are open-minded, adventurous, and are
often younger, better educated, and more financially secure.
They try new things because they like new things.

Early adopters (13.5% of the population) look at new products
very differently than innovators. They consider the social aspect
(such as prestige) of being the first to own a product. They are
heavy users of the media, and the more mainstream groups (the
early and late majority), rely on early adopters for cues on the
next big thing.
Early majority (34% of the population) do not wish to be the
first to try new technologies, nor do they wish to be the last to
adopt them. If early adopters accept a new innovation, then the
early majority will begin to purchase. Once the early majority
has adopted an innovation, these products are no longer new or
cutting edge – they are now in the mainstream.
Late majority (34% of the population) are older and more
conservative than the other groups and as such, they will not
adopt a product that they consider risky. Adoption by the late
majority will only occur if the product is considered a
necessity, or if social pressures are great.
Laggards (16% of the population) are great followers of
tradition and are the last to adopt an innovation. By the time
this group has adopted an innovation, the product is often made
obsolete by the next innovation.
Levens
*
Prentice Hall
12-*
VISUAL SUMMARY

Prentice Hall
12-*
All rights reserved. No part of this publication may be
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form or by any means, electronic, mechanical, photocopying,
recording, or otherwise, without the prior written permission of
the publisher. Printed in the United States of America.

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