Price is one of the marketing mix. Here price related activities are illustrated in PPT style to make the students, teaching faculty and the other related people to understand easily for their teaching and learning.

1. MARKETING MANAGEMENT
Developing Pricing Strategies
D.V. Madhusudan Rao
Dept. MBA,
School of Graduate Studies,
Jigjiga University
18-2-2013 10.00
ETHOPIA 1
PM

2. Learning Objectives
After studying this chapter, you should be able to:
1. Describe the major strategies for pricing
initiative and new products
2. Explain how companies find a set of prices that
maximize the profits from the total product
mix
3. Discuss how companies adjust their prices to
take into account different types of customers
and situations
4. Discuss the key issues related to initiating and
responding to price changes
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PM

3. Pricing Products
Topic Outline
• New-Product Pricing
Strategies
• Product Mix Pricing
Strategies
• Price Adjustment
Strategies
• Price Changes

4. What Is a Price?
Price is the only
element in the
marketing mix that
produces revenue;
all other elements
represent costs.
So Cost =FACT;
Price (cost+Margin) =
POLICY
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5. Pricing Puzzle
Minimize Optimize Maximize
Costs + Margins = PRICE
VALUE
• Production costs  Product performance
• Indirect costs • Usefulness & Quality
 Image / Aspirations
• Advertising costs
• Brand Equity
• Distribution costs  Availability
• Manufacturer’s margin • Distribution Strategy
• Distributor’s margin  Service
• Seller’s margin • Before/During & After sales

6. A Secret Pie
• Impact of a 1 % price increase on profits
– Coca-Cola 6,4 %
– Nestlé 17,5 %
– Ford 26,0 %
– Philips 28,7 %

7. Synonyms for Price
• Rent • Special assessment
• Tuition • Bribe
• Fee • Dues
• Fare • Salary
• Rate • Interest
• Toll • Donation
• Premium • Commission
• Honorarium • Tax
• Wage
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8. Common Pricing Mistakes
• Determine costs and take traditional
industry margins
• Failure to revise price to capitalize
on market changes
• Setting price independently of the
rest of the marketing mix
• Failure to vary price by product
item, market segment, distribution
channels, and purchase occasion
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9. Customer Perceptions of Value
A price
Understanding
how much value
consumers place
on the benefits
they receive from
the product and
setting a price that
captures that value

10. Pricing Puzzle
4 P’s 4 C’s
• PRODUCT • CUSTOMER VALUE
• PRICE • COST
• PLACE • CONVENIENCE
• PROMOTION • COMMUNICATION
Seller’s Dilemma

11. Pricing Puzzle
4 P’s 4 C’s
• PRODUCT • CUSTOMER VALUE
• PRICE • COST
• PLACE • CONVENIENCE
• PROMOTION • COMMUNICATION
“ Tomorrow’s winner companies will
be those who offer distinct products at
comparatively low market prices ”

12. Key = Differentiation
The key to drive value is to offer relevant and
distinctive product differentiation
• Physical Differences
– Features, performance, durability, conformance, design, etc…
• Availability Differences
– Distribution channels ; Stores, mail-order, internet, etc…
• Service Differences
– Delivery, installation, training, consulting, maintenance, etc…
• Price Differences
– Price positioning (Very high / High / Medium / Low / Very Low)
• Image Differences
– Symbols, atmosphere, events, media, etc…

13. Key = Differentiation
Differentiation : Examples
• Physical Differences
– Levi’s Engineered Jeans (Ergonomic construction, durability, style)
• Availability Differences
– Dell Computer’s customized production, Volkswagen “e.lupo”
• Service Differences
– Acıbadem Hospital – Mother Care Division, Nissan “5-year Warranty”
• Image Differences
– Audi vs Mercedes, DuPont (Innovation Leader)

14. Key = Differentiation
Differentiating commodities…
• Perdue Chicken (USA)
– Guaranteed tenderness (30 % market-share, 10 % premium pricing)
• Flora Drinking Water (Turkey – Sabancı Holding)
– Service, packaging, attributes, operation
• Starbuck’s Coffee (USA)
– Atmosphere, standard service
Everything can be differentiated !...

15. • INTERNAL
Pricing Decisions FACTORS
• EXTERNAL
FACTORS – Market
– Marketing Objectives • Pure Competition
• Positioning • Monopolistic Competition
• Target Group • Oligopolistic Competition
– Marketing Mix Strategy • Pure Monopoly
• 4 P’s – Demand
– Costs • Elastic / Inelastic
• Fixed & Variable – Competition
– Management Approach • Competitors’ offers
• Responsibility • Competitiors’ reactions
• Perspective – Economy
• Buying power
– Government Influence
• Laws & Regulations

16. Consumer Psychology
and Pricing
Reference Prices
Price-quality inferences
Price endings
Price cues
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17. Table 14.1 Possible Consumer
Reference Prices
• “Fair price” • Lower-bound
• Typical price price
• Last price paid • Competitor prices
• Upper-bound • Expected future
price price
• Usual discounted
price
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18. Price–Quality Inferences: An Image pricing
for ego-sensitive products. Eg: Perfumes, cars
(over-valued and under-valued)
When information about true quality is known,
price becomes a less significant indicator of
quality. When information is not available, price
acts as a signal of quality.
Price endings: Price tags end with 0 and
5 or 9 are commonly seen examples.

19. Price Cues
• “Left to right” pricing ($299 vs.
$300)
• Odd number discount perceptions
• Even number value perceptions
• Ending prices with 0 or 5
• “Sale” written next to price
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20. Steps in Setting
the Price
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21. Pricing Strategies
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22. Internal Factors Affecting Pricing
Decisions: Marketing Objectives
Survival
Low Prices to Cover Variable Costs and
Some Fixed Costs to Stay in Business.
Current Profit Maximization
Choose the Price that Produces the
Marketing Maximum Current Profit, Etc.
Objectives Market Share Leadership
Low as Possible Prices to Become
the Market Share Leader.
Product Quality Leadership
High Prices to Cover Higher
CHPT: 14-22
Performance Quality and R & D.

23. Internal Factors Affecting Pricing
Decisions: Marketing Mix
Product Design
Nonprice Price Distribution
Positions
CHPT: 14-23 Promotion

24. External Factors Affecting Pricing
Decisions
Market and
Demand
Competitors’ Costs,
Prices, and Offers
Other External Factors
Economic Conditions
Reseller Needs
Government Actions
Competitor Costs
This ad by LCI International accuses its competitors of using
unfair practices in pricing, hiding fees incurred by rounding up.
Social Concerns
Why is LCI focusing on
this practice?
Hidden fees, defined as
“cramming” by the
CHPT: 14-24
FCC, are the number
one source of billing
complaints among
long-distance
customers.

25. Market Skimming
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26. New-Product Pricing Strategies
• Market-skimming
pricing
• Market-penetration
pricing
• Intermediate Pricing

27. Market-skimming pricing is a strategy for setting a high
price for a new product to skim maximum revenues layer
by layer from the segments willing to pay the high price,
the company make fewer (low volume) but more profitable
sales.
• Product quality and image must support the price
• Buyers must want the product at the price
• Costs of producing the product in small volume should
not cancel the advantage of higher prices
• Competitors should not be able to enter the market
easily
•Suitable for products that have short life cycles or which
will face competition at some point in the future (e.g. after
a patent runs out)
•Examples include: Playstation, jewellery, digital
technology, new DVDs, Bic, Biro etc

28. Market-skimming pricing
• For example when Sony introduced
the world first high definition
television (HDTV) to the Japanese
market , the high tech sets cost
43,000$ . These televisions were
purchased only by customers who
really wanted the new technology and
afford to pay high prices.
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29. Penetration Pricing
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30. Market-penetration pricing sets a low
initial price in order to penetrate the
market quickly and deeply to attract a
large number of buyers quickly to gain
market share
• Price sensitive market
• Production and distribution costs must
fail as sales volume increases.
• Low prices must keep competition out
of the market

31. Market-penetration pricing
• For example ,Dell used penetration
pricing to enter the personal
computer market, selling high
quality computer products through
lower cost direct channels.
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PM

32. Price-Quality Strategies
• Philip Kotler identified 9 price-quality strategies
High Price Mid Price Low Price
High Quality
PremiumHigh Super
Value Value
Over Mid Good
Middle Quality
Charging Value Value
False
Rip-off Economy
Economy
Low Quality
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33. Product Mix Pricing Strategies
Product Line Pricing
Product Line Pricing
Setting Price Steps Between Product Line Items
Setting Price Steps Between Product Line Items
i.e. $299, $399
i.e. $299, $399
Optional-Product Pricing
Optional-Product Pricing
Pricing Optional or Accessory Products
Pricing Optional or Accessory Products
Sold With The Main Product
Sold With The Main Product
i.e. Car Options
i.e. Car Options
Product
Product Captive-Product Pricing
Captive-Product Pricing
Mix
Mix Pricing Products That Must Be Used
Pricing Products That Must Be Used
With The Main Product
Pricing
Pricing With The Main Product
i.e. Razor Blades, Film, Software
i.e. Razor Blades, Film, Software
Strategies
Strategies By-Product Pricing
By-Product Pricing
Pricing Low-Value By-Products To Get Rid
Pricing Low-Value By-Products To Get Rid
of Them
of Them
i.e. Lumber Mills, Zoos
i.e. Lumber Mills, Zoos
Product-Bundle Pricing
Product-Bundle Pricing
Pricing Bundles Of Products Sold Together
Pricing Bundles Of Products Sold Together
i.e. Season Tickets, Computer Makers
i.e. Season Tickets, Computer Makers
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34. Product line pricing takes into
account the cost differences
between products in the line,
customer evaluation of their
features, and competitors’ prices
* For example channel offers 20
different collections of bags of all
shapes and sizes at price that
range from under $50 to more
than $1,250.

35. • Optional-product pricing takes
into account optional or accessory
products along with the main
product
• For example : a car buyer may
choose to order a GPS navigation
system & Bluetooth wireless
communication.
• Refrigerators come with optional
ice maker

36. • Captive-product
pricing involves
products that must be
used along with the
main product
• Examples of Captive
products are razor
blade cartridges ,
Gillette once you
bought the razor, you
are committed to
buying replacement
cartridges at $25 an
eight pack

37. • Two-part pricing involves breaking the price
into:
– Fixed fee
– Variable usage fee
– For example : Jawwal company charge a flat
rate for a basic calling plan, then charge for
minutes over what the plan allows.
The service firm must decide how much to
charge for the basic service and how much
for the variable usage.
– Another example is when you visit a park ,
you pay a ticket charge + fee for food and
additional feature

38. • 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 other than the cost to
cover storage and delivery.
• petroleum products often results
in by-products.

39. Product bundle pricing combines
several products at a reduced
price
For example : fast food restaurants
bundle a burger , fries and a soft
drink at a combo price

40. Step 2: Determining Demand
1.Price Sensitivity
2. Estimating
Demand Curves
3. Price Elasticity
of Demand
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41. Fig 14.2 Inelastic and Elastic Demand
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42. Table 14.3 Factors Leading to Less
Price Sensitivity
• The product is more distinctive
• Buyers are less aware of substitutes
• Buyers cannot easily compare the quality of
substitutes
• Expenditure is a smaller part of buyer’s total income
• Expenditure is small compared to the total cost
• Part of the cost is paid by another party
• Product is used with previously purchased assets
• Product is assumed to have high quality and prestige
• Buyers cannot store the product
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43. Influence of Elasticity
• Any pricing decision must be mindful of
the impact of price elasticity
• The degree of price elasticity impacts on
the level of sales and hence revenue
• Elasticity focuses on proportionate
(percentage) changes
• PED = % Change in Quantity
demanded/% Change in Price
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44. Price Elasticity of Demand

45. Influence of Elasticity
• Price Inelastic:
• % change in Q < % change in P
• e.g. a 5% increase in price would be met
by a fall in sales of something less than 5%
• Revenue would rise
• A 7% reduction in price would lead to a rise
in sales of something less than 7%
• Revenue would fall
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46. Influence of Elasticity
• Price Elastic:
• % change in quantity demanded > %
change in price
• e.g. A 4% rise in price would lead to
sales falling by something more than 4%
• Revenue would fall
• A 9% fall in price would lead to a rise in
sales of something more than 9%
• Revenue would rise
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47. Step 3: Estimating Costs
• Types of costs
• Cost Terms and Production
• Fixed costs
• Variable costs
• Total costs
• Average cost
• Cost at different levels of production
• Accumulated production
• Activity-based cost accounting
• Target costing
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48. Figure 14.3 Cost Per Unit at Different
Levels of Production
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49. Figure 14.4 Estimating Cost per Unit as
a Function of Accumulated Production
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50. Target Costing
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51. Step 4: Analysing Competitors’
Costs, Prices and Offers

52. Step 5: Selecting a Pricing
Method
• Markup pricing
• Target-return pricing
• Perceived-value pricing
• Value pricing
• Going-rate pricing
• Auction-type pricing

53. Markup /Cost-Plus Pricing
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54. Markup/ Cost-Plus Pricing
• Calculation of the average cost (AC)
plus a mark up
• AC = Total Cost/Output
Eg: An Immersion Rod mfg. costs are: Variable C=$10,
FC=$300,000, Expected unit sales = 50,000.
A Unit Cost = VC + FC/Unit sales
=10+300k/50k = $16.
IF mfr. Wants to earn a 20% markup on sales,
Markup price = Unit cost/ 1-desired return on sales
= $16/1-0.2 = $20 per unit
Hence Mfr can sell to Dealers at $ 20 and earn $4 as
profit
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55. BEP / Target-return pricing
An expected percentage of profit on mfr’s investment(Return on Invst)
Target-return pricing = unit cost + desired return x invested capital
Unit sales
Break-even volume = Fixed cost
(price-variable cost)

56. Figure 14.6 Break-Even Chart
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57. Break-even
• BE= Fixed Costs/Contribution (SP-VC)
• Example - Meal - SP = $20, VC = $8
• Fixed costs are $2400 a day
• BE=$2400/$12 = 200
• Need to sell 200 meals @ $20 to break-
even
• VC = 40%, contribution = 60%
• BE = $2400/.6 = $4000

58. Break-even Analysis or Target
Profit Pricing

59. Perceived Value Pricing
Table 14.2 Consumer Perceptions vs. Reality for Cars
Overvalued Brands Undervalued
• Land Rover Brands
• Kia • Mercury
• Volkswagen • Infiniti
• Volvo • Buick
• Mercedes • Lincoln
• Chrysler

60. Some important pricing definitions
• Utility: The attribute Value Example: Caterpillar
Tractor is $100,000 vs.
that makes it Market $90,000
capable of want $90,000 if equal
satisfaction 7,000 extra durable
6,000 reliability
• Value: The worth in 5,000 service
terms of other 2,000 warranty
$110,000 in benefits -
products $10,000 discount!
• Price: The monetary
medium of
exchange.

61. Value Pricing
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62. Value Pricing
• Price set in
accordance with
customer
perceptions about
the value of the
product/service
• Examples include
status Companies may be able to set prices
products/exclusive according to perceived value.
products Copyright: iStock.com
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63. Going Rate (Price Leadership)
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64. Going Rate (Price Leadership)
• In case of price leader, rivals have difficulty in
competing on price – too high and they lose
market share, too low and the price leader
would match price and force smaller rival out
of market
• May follow pricing leads of rivals especially
where those rivals have a clear dominance of
market share
• Where competition is limited, ‘going rate’
pricing may be applicable – banks, petrol,
supermarkets, electrical goods – find very
similar prices in all outlets
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65. Auction / Tender Pricing
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66. Auction-Type Pricing
English auctions
Dutch auctions
Sealed-bid auctions

67. Step 6: Selecting the Final Price
• Impact of other
marketing activities
• Company pricing
policies
• Gain-and-risk
sharing pricing
• Impact of price on
other parties

68. Price-Adjustment/ Adaption Strategies
Price Adaptation Strategies
Price Adaptation Strategies
Discount & Allowance
Discount & Allowance Segmented
Reducing Prices to Reward
Reducing Prices to Reward Segmented
Customer Responses such as Adjusting Prices to Allow
Adjusting Prices to Allow
Customer Responses such as for Differences in Customers,
Paying Early or Promoting
Paying Early or Promoting for Differences in Customers,
the Product. Products, or Locations.
Products, or Locations.
the Product.
Cash Discount
Cash Discount Customer
Customer
Quantity Discount
Quantity Discount Product Form
Product Form
Functional Discount
Functional Discount Location
Location
Seasonal Discount
Seasonal Discount Time
Time
Trade-In Allowance
Trade-In Allowance
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69. Price-Adjustment Strategies
• Adjusting Prices for Psychological
Psychological Pricing Effect.
•Price Used as a Quality Indicator.
• Temporarily Reducing Prices to
Promotional Pricing Increase Short-Run Sales.
• i.e. Loss Leaders, Special-Events
• Adjusting Prices to Account for the
Geographical Pricing Geographic Location of Customers.
• i.e. FOB-Origin, Uniform-Delivered,
Zone Pricing, Basing-Point, &
Freight-Absorption.
International Pricing • Adjusting Prices for International
Markets.
• Price Depends on Costs, Consumers,
Economic Conditions & Other Factors.
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70. Price-Adjustment Strategies
Geographical pricing is used for
customers in different parts of the
country or the world
• FOB pricing
• Uniformed-delivery pricing
• Zone pricing
• Basing-point pricing
• Freight-absorption pricing
• Counter trade (Barter,Compensation deal,
Buyback arrangement, Offset)

71. Price Adjustment Strategies
• FOB (free on board) pricing means
that the goods are delivered to the
carrier and the title and responsibility
passes to the customer
• Uniformed-delivery pricing means
the company charges the same price
plus freight to all customers,
regardless of location

72. Price Adjustment Strategies
• 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 a “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

73. Price-Adjustment Strategies
• Freight-absorption pricing
means the seller absorbs all or
part of the actual freight charge
as an incentive to attract business
in competitive markets

74. Price-Adjustment Strategies
Dynamic pricing is
when prices are
adjusted continually
to meet the
characteristics and
needs of the Ex. Alaska airlines
creates unique
individual customer prices and
and situations advertisements for
people as they surf
the web

75. Price Adjustment Strategies
International pricing is when prices are set
in a specific country based on country-
specific factors
• Economic conditions
• Competitive conditions
• Laws and regulations
• Infrastructure
• Company marketing
objective

76. International pricing
• For example : Boeing sells its
jetliners at about the same price
everywhere, whether in the United
states , Europe or the third world
• A pair of Levi’s selling for $30 in
Canada might go for $ 63 in Tokyo
and $ 88 in Paris
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77. Discount and allowance pricing
reduces prices to reward
customer responses such as
paying early or promoting the
product
• Discounts
• Allowances

78. Price-Adjustment Strategies
Price Discounts and Allowances
Quantity discount: The more you buy, the cheaper it
becomes-- cumulative and non-cumulative.
Trade discounts” functional”: Reductions from list for
functions performed-- storage, promotion.
Cash discount: A deduction granted to buyers for paying
their bills within a specified period of time, (after first
deducting trade and quantity discounts from the base price)
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79. Price Adjustment Strategies
Functional discount: discount offered by a manufacturer to
trade-channel members if they will perform certain functions.
Seasonal discount: a price reduction to those who buy out of
season.
Allowance: an extra payment designed to gain reseller
participation in special programs.
a)Trade in allowances: are price reductions given for turning
in an old item when buying a new one ( Automobiles industry)
b)Promotional allowances: are payments or price reductions
to reward dealer for participating in advertising and sales
support program
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80. Promotional Pricing Tactics
• Loss-leader pricing
• Special-event pricing
• Cash rebates
• Low-interest
financing
• Longer payment
terms
• Warranties and
service contracts
• Psychological
discounting

81. Price-Adjustment Strategies
Promotional pricing is when prices are
temporarily priced below list price or
cost to increase demand
• Loss leaders
• Special event pricing
• Cash rebates
• Low-interest financing
• Longer warrantees
• Free maintenance

82. Price-Adjustment strategies
Promotional Pricing
• Loss-leader pricing: supermarkets and
department stores often drop the price on well
known brands to stimulate additional store traffic
• Special-event pricing: sellers well establish
special pricing in certain seasons to draw in more
customers
• Cash rebates: companies offer cash rebates to
encourage purchase of the manufacturers
products within a specified time period
• Low-interest financing: the company can offer
customers low-interest financing
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83. Price-Adjustment strategies
• Longer payment terms: sellers especially
mortgage banks and auto companies stretch
loans over longer periods and thus lower the
monthly payment
• Warranties and service contracts: companies
can promote sales by adding a free or low cost
warranty or service contract
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84. Price-Adjustment Strategies
Risks of promotional pricing
• Used too frequently, and copies by
competitors can create “deal-
prone” customers who will wait for
promotions and avoid buying at
regular price
• Creates price wars

85. Differentiated/segmented Pricing
• Customer-segment pricing
• Product-form pricing
• Image pricing
• Channel pricing
• Location pricing
• Time pricing
• Yield pricing
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86. Price-Adjustment Strategies
Segmented pricing
is used when a
company sells a
product at two or
more prices even
though the
difference is not
based on cost

87. Segmented pricing
a) Customer segment pricing: different
customers pay different prices for the same
product or service . For ex. Museums charge
a lower admission for students .
b) Product from pricing: different versions of the
product are priced differently but not
according to differences in their costs
c) Location pricing: company charges different
prices for different locations
d) Time pricing : a firm varies it prices by the
season , the month , the day and even the
hour
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88. Price-Adjustment Strategies
Segmented Pricing
To be effective:
• Market must be segmentable
• Segments must show different
degrees of demand
• Watching the market cannot exceed
the extra revenue obtained from the
price difference
• Must be legal

89. Price-Adjustment Strategies
• Psychological pricing occurs when sellers
consider the psychology of prices and not
simply the economics” the price is used to say
something about the product”
• Reference prices are prices that buyers carry
in their minds and refer to when looking at a
given product
– Noting current prices
– Remembering past prices
– Assessing the buying situations
– For example : a company could display its
product next to more expensive ones in order
to imply that it belongs in the same class

90. Initiating and Responding to Price
Changes
Competitor
Reactions
to Initiating
Price Price Cuts
Changes
Price
Changes
Buyer
Reactions Initiating
to Price
Price Increases
Changes
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91. Traps in Price Cutting Strategies
• Low-quality trap
• Fragile-market-share trap
• Shallow-pockets trap
• Price-war trap
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92. Should We Raise Prices?
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93. Methods for Increasing Prices
• Delayed quotation pricing
• Escalator clauses
• Unbundling
• Reduction of discounts
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94. Price Changes
Initiating Pricing Changes

95. Price Changes
Buyer Reactions to Pricing
Changes

96. Price Changes
Responding to Price Changes
Questions
– Why did the competitor change the
price?
– Is the price cut permanent or
temporary?
– What is the effect on market share
and profits?
– Will competitors respond?

97. Price Changes
Responding to Price Changes
Solutions
– Reduce price to match competition
– Maintain price but raise the perceived
value through communications
– Improve quality and increase price
– Launch a lower-price “fighting” brand

98. Brand Leader Responses to Competitive Price Changes
Brand Leader Responses to Competitive Price Changes
Has Competitor Cut
Has Competitor Cut No Hold Current Price;
Price? Hold Current Price;
Price? Continue to Monitor
Continue to Monitor
Competitor’s Price.
Competitor’s Price.
Will Lower Price
Will Lower Price
Negatively Affect Our No
Negatively Affect Our
Market Share & Profits?
Market Share & Profits?
Reduce Price
Reduce Price
No Raise Perceived
Raise Perceived
Can/ Should Effective Quality
Quality
Can/ Should Effective
Action be Taken?
Action be Taken? Yes Improve Quality
Improve Quality
& Increase Price
& Increase Price
Launch Low-Price
Launch Low-Price
“Fighting Brand”
“Fighting Brand”
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99. Public Policy and Pricing
Pricing Within Channel Levels
Price fixing: Sellers must set prices
without talking to competitors
Predatory pricing: Selling below
cost with the intention of
punishing a competitor or gaining
higher long-term profits by
putting competitors out of
business , this will protect small
sellers from larger ones

100. Public Policy and Pricing
Pricing Across Channel Levels
Robinson-Patman Act prevents
unfair price discrimination by
ensuring that the seller offer the
same price terms to customers at
a given level of trade

101. Public Policy and Pricing
Pricing Across Channel Levels
Robinson-Patman Act
• Price discrimination is allowed:
– If the seller can prove that costs
differ when selling to different
retailers
– If the seller manufactures different
qualities of the same product for
different retailers

102. Public Policy and Pricing
Pricing Across Channel Levels
Retail (or resale)
price maintenance
is when a
manufacturer
requires a dealer to
charge a specific
retail price for its
products

103. Public Policy and Pricing
Pricing Across Channel Levels
Deceptive pricing occurs when a seller
states prices or price savings that
mislead consumers or are not actually
available to consumers
• Scanner fraud failure of the seller to
enter current or sale prices into the
computer system
• Price confusion results when firms
employ pricing methods that make it
difficult for consumers to understand
what price they are really paying

104. Loss Leader
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105. Loss Leader
• Goods/services deliberately sold below
cost to encourage sales elsewhere
• Typical in supermarkets, e.g. at
Christmas, selling bottles of gin at £3 in
the hope that people will be attracted to
the store and buy other things
• Purchases of other items more than
covers ‘loss’ on item sold
• e.g. ‘Free’ mobile phone when taking on
contract package
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106. Psychological Pricing
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107. Psychological Pricing
• Used to play on consumer
perceptions
• Classic example - £9.99 instead of
£10.99!
• Links with value pricing – high
value goods priced according to
what consumers THINK should be
the price
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108. Price Discrimination
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109. Price Discrimination
• Charging a different
price for the same
good/service in
different markets
• Requires each
market to be
impenetrable
• Requires different
Prices for rail travel differ for the same
journey at different times of the day
price elasticity of
demand in each
Copyright: iStock.com market
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110. Destroyer Pricing/Predatory Pricing
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111. Destroyer/Predatory Pricing
• Deliberate price cutting or offer of ‘free
gifts/products’ to force rivals (normally
smaller and weaker) out of business or
prevent new entrants
• Anti-competitive and illegal if it can be
proved
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112. Absorption/Full Cost Pricing
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113. Absorption/Full Cost Pricing
• Full Cost Pricing – attempting to
set price to cover both fixed and
variable costs
• Absorption Cost Pricing – Price set
to ‘absorb’ some of the fixed costs
of production
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114. Marginal Cost Pricing
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115. Marginal Cost Pricing
• Marginal cost – the cost of producing ONE
extra or ONE fewer item of production
• MC pricing – allows flexibility
• Particularly relevant in transport where fixed
costs may be relatively high
• Allows variable pricing structure – e.g. on a
flight from London to New York – providing the
cost of the extra passenger is covered, the
price could be varied a good deal to attract
customers and fill the aircraft
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116. Marginal Cost Pricing
• Example:
Aircraft flying from Bristol to Edinburgh – Total Cost (including
normal profit) = £15,000 of which £13,000 is fixed cost*
Number of seats = 160, average price = £93.75
MC of each passenger = 2000/160 = £12.50
If flight not full, better to offer passengers chance of flying at
£12.50 and fill the seat than not fill it at all!
*All figures are estimates only
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117. Contribution Pricing
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118. Contribution Pricing
• Contribution = Selling Price – Variable
(direct costs)
• Prices set to ensure coverage of
variable costs and a ‘contribution’ to the
fixed costs
• Similar in principle to marginal cost
pricing
• Break-even analysis might be useful in
such circumstances
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119. Target Pricing
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120. Target Pricing
• Setting price to ‘target’ a specified
profit level
• Estimates of the cost and potential
revenue at different prices, and
thus the break-even have to be
made, to determine the mark-up
• Mark-up = Profit/Cost x 100
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121. Chapter Questions
• How do consumers process and evaluate
prices?
• How should a company set prices initially
for products or services?
• How should a company adapt prices to
meet varying circumstances and
opportunities?
• When should a company initiate a price
change?
• How should a company respond to a
competitor’s price challenge?
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122. One Final Word
“ A product is not a product unless it sells.
Otherwise, it’s just a museum piece…”
Ted Levitt

123. For Review
• How do consumers process and evaluate
prices?
• How should a company set prices initially
for products or services?
• How should a company adapt prices to
meet varying circumstances and
opportunities?
• When should a company initiate a price
change?
• How should a company respond to a
competitor’s price challenge?
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124. Marketing Debate
 Is the right price a fair price?
Take a position:
1. Prices should reflect the value that
consumers are willing to pay.
or
2. Prices should primarily just reflect the cost
involved in making a product.

125. Marketing Discussion
 Think of all the pricing methods
described in the chapter.
 As a consumer, which pricing method
do you personally prefer to deal with?
 Why?

126. Reference
• Kotler, Kelly, Koshy and Jha (2009) Marketing Management:
A South Asian Perspective, 14th ed. Pearson Prentice Hall,
pp.368-99