Pricing Strategy

1. Strategic Marketing
Price

2. What is Price
• Price and Relationship to Cost

3. What is Price
• Buying something means paying a price. But
what exactly is “price? ”
• Price is the money charged for a good or
service. For example, an item of clothing costs
a certain amount of money. Or a computer
specialist charges a certain fee for fixing your
computer.

4. • Price is also what a consumer must pay in
order to receive a product or service. Price
does not necessarily always mean money.
Bartering is an exchange of goods or services
in return for goods or services. For example, I
teach you English in exchange for you teaching
me about graphic design.
• Price is the easiest marketing variable to
change and also the easiest to copy.

5. • Even though the question, “How much? ”
could be phrased as “How much does it cost?
” price and cost are two different things.

6. • Whereas the price of a product is what you,
the consumer must pay to obtain it, the cost is
what the business pays to make it. When you
ask about the cost of a good or service, you’re
really asking how much will you have to give
up to get it.

7. • Different Perspectives on Price
• The perception of price differs based on the
perspective from which it is being viewed.
• The Customer’s View

8. • A customer can either be the ultimate user of
the finished product or a business that
purchases components of the finished
product. It is the customer that seeks to
satisfy a need or set of needs through the
purchase of a particular product or set of
products

9. • Consequently, the customer uses several
criteria to determine how much they are
willing to expend, or the price they are willing
to pay, in order to satisfy these needs. Ideally,
the customer would like to pay as little as
possible.

10. • For the business to increase value, it can
either increase the perceived benefits or
reduce the perceived costs.
• Both of these elements should be considered
elements of price.

11. • To a certain extent, perceived benefits are the opposite of
perceived costs. For example, paying a premium price is
compensated for by having this exquisite work of art
displayed in one’s home. Other possible perceived benefits
directly related to the price-value equations are:
• status
• convenience
• the deal
• brand
• quality
• choice

12. • Many of these benefits tend to overlap. For
instance, a Mercedes Benz E750 is a very high-
status brand name and possesses superb
quality. This makes it worth the USD 100,000
price tag.

13. • Further, if one can negotiate a deal reducing
the price by USD 15,000, that would be his
incentive to purchase.

14. • Likewise, someone living in an isolated
mountain community is willing to pay
substantially more for groceries at a local
store than drive 78 miles (25.53 kilometers) to
the nearest Safeway.
• That person is also willing to sacrifice choice
for greater convenience.

15. • Increasing these perceived benefits are
represented by a recently coined term, value-
added.
• Providing value-added elements to the
product has become a popular strategic
alternative.

16. • Perceived costs include the actual dollar
amount printed on the product, plus a host of
additional factors. As noted, perceived costs
are the mirror-opposite of the benefits.

17. • When finding a gas station that is selling its
highest grade for USD 0.06 less per gallon, the
customer must consider the 16 mile (25.75
kilometer) drive to get there, the long line, the
fact that the middle grade is not available, and
heavy traffic.

18. • Therefore, inconvenience, limited choice, and
poor service are possible perceived costs.
Other common perceived costs include risk of
making a mistake, related costs, lost
opportunity, and unexpected consequences.

19. • Ultimately, it is beneficial to view price from
the customer’s perspective because it helps
define value — the most important basis for
creating a competitive advantage.

20. Society’s View
• Price, at least in dollars and cents, has been
the historical view of value. Derived from a
bartering system (exchanging goods of equal
value), the monetary system of each society
provides a more convient way to purchase
goods and accumulate wealth.

21. • Price has also become a variable society
employs to control its economic health. Price
can be inclusive or exclusive.

22. • In many countries, such as Russia, China, and
South Africa, high prices for products such as
food, health care, housing, and automobiles,
means that most of the population is excluded
from purchase

23. • In contrast, countries such as Denmark,
Germany, and Great Britain charge little for
health care and consequently make it
available to all.

24. • There are two different ways to look at the
role price plays in a society; rational man and
irrational man. The former is the primary
assumption underlying economic theory, and
suggests that the results of price manipulation
are predictable.

25. • The latter role for price acknowledges that
man’s response to price is sometimes
unpredictable and pretesting price
manipulation is a necessary task.

26. Terms Used to Describe Price
• Depending on whether they are describing a
good or a service and the product’s industry,
people may use terms other than the word
price.

27. • We’ve been using the word “price” a lot.
There are, however, other terms you may
come across in your studies and daily life that
serve as synonyms.

28. Price Point
• The price of an item is also called the price point, especially
where it refers to stores that set a limited number of price
points.
• For example, Dollar General is a general store or “five and
dime” store that sets price points only at even amounts,
such as exactly one, two, three, five, or ten dollars (among
others). Other stores will have a policy of setting most of
their prices ending in 99 cents or pence.
• Other stores (such as dollar stores, pound stores, euro
stores, 100-yen stores, and so forth) only have a single price
point ($1, £1, 1€, ¥100), though in some cases this price
may purchase more than one of some very small items.
Price is relatively less than the cost price.

29. • Price Point
• The price of an item is also called the price
point, especially where it refers to stores that
set a limited number of price points.
• For example, Dollar General is a general store
or “five and dime” store that sets price points
only at even amounts, such as exactly one,
two, three, five, or ten dollars (among others).

30. • Other stores will have a policy of setting most
of their prices ending in 99 cents or pence.
Other stores (such as dollar stores, pound
stores, euro stores, 100-yen stores, and so
forth) only have a single price point ($1, £1,
1€, ¥100), though in some cases this price may
purchase more than one of some very small
items.
• Price is relatively less than the cost price.

31. • Charge
• When someone wants to know the price of a
service, they may ask, “How much do you
charge? ” In this context, the word “charge” is
a synonym for price.

32. • Value
• From a customer’s point of view, value is the sole
justification for price. Many times customers lack
an understanding of the cost of materials and
other costs that go into the making of a product.
But those customers can understand what that
product does for them in the way of providing
value. It is on this basis that customers make
decisions about the purchase of a product.

33. • Fee
• Dubai Metro: A “fare” is the price to ride a
Metro/Train.
• Service providers may present you with a fee
list as opposed to a price tag if you ask for the
price of their services.

34. • Fare
• You pay a price to fly, ride the bus and take the
train. The price in these industries is
expressed as a fare.

35. • The Importance of Price to Marketers
• Since pricing has a direct impact on a
company’s revenue, and thus profit, setting
the right price is essential to a company’s
success.

36. • Price is important to marketers because it
represents marketers’ assessment of the value
customers see in the product or service and
are willing to pay for a product or service.

37. • The other elements of the marketing mix
(product, place and promotion ) may seem to
be more glamorous than price, and thus get
more attention, but determining the price of a
product or service is actually one of the most
important management decisions.

38. Here is why?
• While product, place and promotion affect
costs, price is the only element that affects
revenues, and thus, a business’s profits. Price
can lead to a firm’s survival or demise.

39. • Adjusting the price has a profound impact on
the marketing strategy, and depending on the
price elasticity of the product, it will often
affect the demand and sales as well. Both a
price that is too high and one that is too low
can limit growth. The wrong price can also
negatively influence sales and cash flow.

40. • Problems occur if the marketer fails to set a
price that complements the other elements of
the marketing mix and the business
objectives, as pricing contributes to how
customers perceive a product or a service

41. • A high price indicates high quality. The term
luxury comes to mind. If, however, a firm
wants to position itself as a low-cost provider,
it will charge low prices. Just as they do with
high-end providers, consumers know what to
expect when they see low prices.

42. • So, as you can see, it is important that a
company sets the right price. A company’s
success can depend on it. However, with so
many factors to consider along with the lack
of a crystal ball that will show the effect of a
price change, It isn’t so easy to do.

43. • Value and Relative Value
• Value is the worth of goods, and relative value
is attractiveness measured in terms of utility
of one good relative to another.

44. Key Points
• Value is the worth of goods and services as
determined by markets.
• Something is only worth what someone is
willing to pay for it.
• The utility for the seller is not as an object of
usage, but as a source of income.
• In term of pricing, prices of valued items
undergo questionable fluctuations.

45. • Key Terms
• utility: The ability of a commodity to satisfy
needs or wants; the satisfaction experienced by
the consumer of that commodity.
• marginal utility: The additional utility to a
consumer from an additional unit of an economic
good.
• Surplus value: The part of the new value made by
production that is taken by enterprises as generic
gross profit.

46. • What is Value?
• Value is the worth of goods and services as
determined by markets. Thus, an important
part of economics is the study of policies and
activities for the generation and transfer of
value within markets in the form of goods and
services.

47. • Often a measure for the worth of goods and
services is units of currency such as the US
Dollar.
• But, unlike the units of measurements in
Physics such as seconds for time, there exists
no absolute basis for standardizing the units
for value.

48. • One of the most complicated and most often
misunderstood parts of economy is the
concept of value. One of the big problems is
the large number of different types of values
that seem to exist, such as exchange value,
surplus value, and use value.

49. • The Buyer’s Utility
• The discussion of values all start with one
simple question: What is something worth?

50. • Today’s most common answer is one of those
answers that are so deceptively simple that it
seems obvious when you know it. But then
remember that it took economists more than
a hundred years to figure it out: something is
worth whatever you think it is worth.

51. • This statement needs some explanation. Take
as an example two companies that are
thinking of buying a new copying machine.

52. • One company does not think they will use a
copying machine that much, but the other
knows it will copy a lot of papers.
• This second company will be prepared to pay
more for a copying machine than the first one.
They find a greater utility in the object.

53. • The companies also have a choice of models.
The first company knows that many of the
papers will need to be copied on both sides.
The second company knows that very few of
the papers it copies will need double- sided
copying

54. • Of course, the second company will not pay
much more for this feature, while the first
company will. In this example, we see that a
buyer will be prepared to pay more for the
increase in utility compared to alternative
products.

55. • So we can summarize this with the statement
that the economic value of an item is set by
the increase in utility for customers.
• This increase in utility is called marginal utility,
and this is all known as the marginal theory of
value.

56. • The Seller’s Utility
• But how does the seller value things? Well, in
pretty much the same way. Of course, most
sellers today do not intend to use the object
he sells himself.

57. • The utility for the seller is not as an object of
usage, but as a source of income. And here
again it is marginal utility that comes in. For
what price can you sell the object? If you put
in some more work, can you get a higher
price?

58. • Here we also get into the utility for resellers.
Somebody who deals in trading will look at an
object, and the utility for him is to be able to
sell it again. How much work will it take, and
what margins are possible?

59. • Subjective Value
• Not only do the two different buyers have a
different value on an object, the salesman
puts his value on it, and the original
manufacturer may have put yet another value
on it. The value depends on the person who
does the valuation–it is subjective.

60. • Relative Value and Pricing
• Relative value in the marketing context is
attractiveness measured in terms of utility of
one product relative to another.

61. • In term of pricing, prices of valued items
undergo questionable fluctuations.
• For example, even though housing provides
the same utility to the individual over time,
and supply and demand are relatively
constant and stable, the relative price of
housing fluctuates, even more so than with
stocks, oil, and gold.

62. • This price volatility appears to occur in cycles
and is caused by a myriad of factors. Figure 1
is an attempt to overlay the prices of housing,
stocks, oil, and gold by normalizing the price
streams.

63. • Normalizing is achieved by applying a
discounting formula which converts a price to
the price it would be at a certain date, given a
certain discount rate.
• This would normally be used to cancel the
effects of inflation, in which case the inflation
rate would be used.