Marketing >> pricing

1. Chapter 9
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2. Objectives
 Understanding the factors that affect the
pricing strategies
 Learn the major strategies and approaches
for pricing.
 Know about the New-Product Pricing
Strategies
 Learn how companies adjust their prices to
take into account different types of
customers and situations.
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3. What Is Price
Price Has Many Names
● Rent
● Fee
● Rate
● Commission
● Assessment
● Tuition
● Fare
● Toll
● Premium
● Retainer
 Bribe
 Salary
 Wage
 Interest
 Tax
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4. What Is Price?
 Definition:
“The amount of money charged for a product or
service. More broadly price is the sum of the
values that consumers exchange for the
benefits of having or using the product or
service.”
Price
Value
The consumer
perception of tangible
and intangible benefits
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5. What Is Price?
 Price and the Marketing Mix:
 Only element to produce revenues
 Most flexible element
 Can be changed quickly
 Common Pricing Mistakes
 Reducing prices too quickly to get sales
 Pricing based on costs, not customer value
 Not taking the rest of the marketing mix into account.
As part of company’s overall value proposition,
price plays a key role in creating customer
value and building customer relationship
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6. Factors To Consider When
Setting Price
Customer
perception
of value
Other internal and
external consideration
____________
Marketing strategy,
objectives and mix
Nature of the market and
demand
Competitors’ strategies
and price
Product
cost
Price ceiling
No demand above
this price
Price floor
No profits below this
price
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7. General Pricing Approaches
Cost-Based
Pricing
Cost-Plus
Pricing
Breakeven
Analysis
And
Target
Profit
Pricing
Buyer-Based
pricing
Value-
Based
Pricing
Competitio
n-Based
Pricing
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8. Value-Based Pricing Versus Cost-
Based Pricing
Product Cost Price Value Customer
customer value price cost Product
Cost-based Pricing
value-based Pricing
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9. Value-based Pricing Versus
Cost-based Pricing
Product Cost Price Value Customer
customer value price cost Product
Cost-based Pricing
value-based Pricing
Idea
generation
Concept
testing
Marketing
strategy
Business
analysis
Product
development
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10. General Pricing Approaches
 Buyer-Based pricing - Value-Based Pricing:
 Uses buyers’ perceptions of value rather than seller’s costs
to set price.
 Measuring perceived value can be difficult.
 Good-Value Pricing: offering just the right combination of
quality and good service at a fair price
○ Introducing less-expensive versions (value menus)
○ Redesigning existing brands for less price (more quality for
the same, or the same quality for less)
 Value-Added Pricing: attaching value-added features and
services to differentiate a marketing offer and support
higher price, rather than cutting price to match
competitions. (spicily in B2B)
o Shifting the focus from price to value
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11. General Pricing Approaches
 Buyer-Based pricing - Competition-Based Pricing:
 Going-rate pricing: is setting the price based largely
on following competitors’ price rather then on company
cost or demand.
○ May price at the same level, above, or below the
competition (different fast-food chains)
 Sealed-Bid Pricing: setting price based on how the
firm thinks competitors will price rather than on its own
cost or demand
○ Used when company bids for jobs.
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12. General Pricing Approaches
 Cost-Based Pricing: Types of Cost
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Fixed cost
(F.C.)
(overhead)
are costs that
do not vary
with
production or
sales level
Example:
salaries, rent
Variable
cost (V.C.)
vary directly
with the level
of production
Example: raw
material
Total cost
(T.C.)
The sum of
the fixed and
variable cost
for any given
level of
production

13. General Pricing Approaches
 Cost-Based Pricing: Cost-Plus Pricing
Adding standard MARKUP to the cost of the product
Markup pricing:
Calculating all the costs associated with a product and then determining a
markup percentage to cover the costs and expected profits.
Example:
Variable costs: $20 Fixed costs: $ 500,000
Expected sales: 100,000 units Desired Sales Markup: 20%
Variable Cost + Fixed Costs/Unit Sales = Unit Cost
$20 + $500,000/100,000 = $25 per unit
Unit Cost/(1 – Desired Return on Sales) = Markup Price
$25 / (1 - .20) = $31.25
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14. General Pricing Approaches
 Cost-Based Pricing: Cost-Plus Pricing
 Ignores demand and competition
 Popular pricing technique because:
○ It simplifies the pricing process
○ Price competition may be minimized
○ It is perceived as more fair to both buyers and
sellers
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15. General Pricing Approaches
 Cost-Based Pricing: Break-Even Analysis and
Target Profit Pricing
Setting a price to break even on the costs of making and marketing a
product; or setting price to make a target profit.
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Fixed Costs
Total Costs
Revenues
Sales Volume in Thousands of Units
Thousands
of Dollars
0 10 20 30 40
1000
800
600
400
200
Break-even
point
Target Profit $200,000
Quantity To Be Sold To
Meet Target Profit
Variable cost

16. Break-even point calculation
The Break-even point (zero profit)
BEP (Units) = Total Fixed Cost
(Price - Variable costs) per unit
BEP (Dollars) = Fixed Costs
Contribution Margin Ratio
= Fixed Costs
(Price–Variable costs)/Price
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17. General Pricing Approaches
 Cost-Based Pricing: Break-Even Analysis and
Target Profit Pricing
 Break-even charts show total cost and total revenues at
different levels of unit volume.
 The intersection of the total revenue and total cost curves
is the break-even point.
 The higher the price the less number of units the company
will need to sell to break even
 This method does not take the price-demand relationship
into account.
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18. Factors to Consider When
Setting Price
Price
=
Money + …..
Value
=
Client Perception,
service, experience
- Segmentation
- Targeting
- Positioning
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Internal Factors
 Overall Marketing Strategy, Objectives And
Mix
• Market positioning influences pricing strategy
•Pricing must be carefully coordinated with the
other marketing mix elements

19. Factors to Consider When
Setting Price
 Pricing objectives:
● Profit-oriented
o To achieve a target return, or to maximise profits.
● Sales-oriented
o To increase sales volume, or to maintain or increase market
share.
● Status-quo oriented
o To stabilise prices, or to meet competition.
● Customer retention
o Relationship building, attract new customers, and profitably
retain existing ones
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20. New-Product Pricing Strategies
 Market-Skimming Pricing
 Setting a high price for a new product to skim
maximum revenues layer by layer from segments
willing to pay the high price.
 Normally used to introduce new products to the
market that attract the innovator market.
 The product quality and image must support its
higher price
 Competitors should not be able to enter the market
easily.
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21. New-Product Pricing
Strategies
 Market-Penetration Pricing
 Setting a low price for a new product in order to
attract a large number of buyers and a large
market share.
 Usually to reach mass markets and discourage
competition.
 The market should be highly price sensitive
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22. Price Adjustment Strategies
 Discount / allowance
 Segmented
 Psychological
 Promotional
 Geographical
 International
Strategies
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Reducing price to reward customer
responses such as paying early,
volume purchases, and off-
season buying, or promoting the
product.
 Types of discounts
 Cash discount
 Quantity discount
 Functional (trade) discount
 Seasonal discount
 Allowances
 Trade-in allowances
 Promotional allowances

23. Price Adjustment Strategies
 Discount / allowance
 Segmented
 Psychological
 Promotional
 Geographical
 International
Strategies
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Adjusting prices to allow for
differences in customer,
products, or locations.
 Types of segmented pricing
strategies:
 Customer-segment (museum)
 Product-form pricing (top
models)
 Location pricing (theaters)
 Time pricing (seasonal)
 Certain conditions must exist
for segmented pricing to be
effective

24. Price Adjustment Strategies
 Conditions Necessary for Segmented
Pricing Effectiveness
 Market must be segmentable
 Segments must show different demand
 Pricing must be legal
 Costs of segmentation can not exceed revenues
earned
 Segmented pricing must reflect real differences
in customers’ perceived value
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25. Price Adjustment Strategies
 Discount / allowance
 Segmented
 Psychological
 Promotional
 Geographical
 International
 The price is used to say
something about the
product.
 Price-quality relationship
 Reference prices
 Differences as small as
five cents can be important
Strategies
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26. Price Adjustment Strategies
 Discount / allowance
 Segmented
 Psychological
 Promotional
 Geographical
 International
 Temporarily charge low price
or even below cost
 Loss leaders
 Special-event pricing
 Low-interest financing, longer
warranties, free maintenance
 Promotional pricing can have
adverse effects
Strategies
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27. Price Adjustment Strategies
 Promotional Pricing Problems
 Easily copied by competitors
 Creates deal-prone consumers
 May grind down brand’s value
 Not a legitimate substitute for effective
strategic planning
 Frequent use leads to industry price wars
which benefit few firms
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28. Price Adjustment Strategies
 Discount / allowance
 Segmented
 Psychological
 Promotional
 Geographical
 International
 Types of geographic
pricing strategies:
 FOB-origin pricing (free on
board) – factory price +
freight-
 Uniform-delivered pricing
 Zone pricing
 Basing-point pricing
 Freight-absorption pricing
Strategies
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29. Price Adjustment Strategies
 Discount / allowance
 Segmented
 Psychological
 Promotional
 Geographical
 International
 Prices charged in a specific
country depend on many
factors
 Economic conditions
 Competitive situation
 Laws / regulations
 Distribution system
 Consumer perceptions
 Corporate marketing objectives
 Cost considerations
Strategies
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