Chapter 6 discusses various pricing strategies and objectives that a company can pursue, such as survival, profit maximization, market share, and product-quality signaling. It details pricing methods like markup pricing, target-return pricing, and perceived-value pricing, along with various strategies such as everyday low pricing and geographical pricing. Additionally, it covers factors affecting price sensitivity and different pricing tactics like discounts, promotional pricing, and discriminatory pricing.

1. CHAPTER 6
MANAGING PRICE

2. Defining Price
Price is the only element that generates money for the company.
Price is the amount of money charged for a product or service, or the
sum of the values that consumers exchange for the benefits of having
or using the product or service.

3. Pricing Objectives
A company can pursue any of five major objectives through pricing:
• Survival (deals with overcapacity or
intense competition)
• Maximize current profit (focuses on short-run gain
following high consumer
demand and shortage in supply)
• Maximize market share (utilizes a market-penetration
pricing strategy)
• Maximize market skimming (prices start high and slowly drip
over time)
• Signal Product-quality leadership (prices are set high for all-time
to signal high quality, prestige, and
status)

4. Pricing Methods
Markup Pricing
Markup pricing is a strategy in which a company first calculates the
cost of the product, then adds a proportion of it as markup.
Target-Return Pricing
A pricing method in which a formula is used to calculate the price to
be set for a product to return a desired profit or rate of return
on investment assuming that a particular quantity of the product
is sold.
Perceived-Value Pricing
An increasing number of companies base their price on the customer’s
perceived value. The valuation of good or service according to how
much consumers are willing to pay for it, rather than upon its
production and delivery costs.

5. Value Pricing
In recent years, several companies have adopted value pricing, in which
they win loyal customers by charging a fairly low price for a high-
quality offering.
Going Rate Pricing
In going rate pricing, the firm bases its price largely on competitors’
prices. The firm might charge the same, more, or less than major
competitors. Going rate pricing is quite popular. Where costs are
difficult to measure or competitive response is uncertain, firms feel
that the going price is a good solution because it is thought to reflect
the industry’s collective wisdom.
Auction/ Sealed-Bid Pricing
In auction-bids, the price is neither set nor arrived at by negotiation, but is
discovered through the process of competitive and open bidding.

6. Components of Price
Retail prices have two components:
1. Cost: Cost is the portion of a retail price paid to the supplier.
2. Markup: Markup is the amount added to cost to establish a retail price.
Retail Price = cost + markup
When a retailer adds a $2 markup to an item purchased at a wholesale
price of $6, the retail price is $8 ($6 + $2).
When any two elements of the formula are known, we can compute the
other. For example, when retail price and cost are known, we can
derive markup as follows:
markup = retail - cost
= $8 - $6
= $2

7. Markup
Markup can be expressed in two ways:
1. markup as a percentage of retail price
2. markup as a percentage of cost
Markup as a percentage of retail
markup dollars
markup percent = --------------------- X 100
retail price
$2
= --------------------- X 100
$8
= 25%

8. Markup as a percentage of cost
markup dollars
markup percent = --------------------- X 100
cost
$2
= --------------------- X 100
$6
= 33%
Thus, markup on an item priced at $8 can be expressed either as 25% or 33%.

9. Setting retail price based on mark-up percentage
Suppose, a toaster manufacturer has variable cost $10 per unit, fixed cost $300000, and expected
unit sales 50000 units. The unit cost of the toaster will be:
Fixed cost
Unit cost = Variable cost + ----------------------
Expected unit sales
300000
= 10 + ------------ = 10 + 6 = 16
50000
Now, assume the manufacturer wants to earn a 20% markup on sales. The manufacturer's markup
price is given by:
Unit cost
Mark-up = -----------------------
(1 – mark-up %)
16 16
= ------------ = ---------- = 20
(1 – 0.20) 0.80

10. Popularity of Mark-Up Pricing
Markup pricing remains popular for a number of reasons.
• Sellers can determine costs much more easily than they can
estimate demand.
• Where all firms in the industry use this pricing method, their
prices tend to be similar. Price competition is therefore
minimized.
• This method is fair to both buyers and sellers. Sellers do not take
advantage of buyers when the latter's demand becomes acute, and
the sellers earn a fair return on their in­
vestment.

11. Return on Investment Pricing
In target-return pricing, the firm determines the price that would yet its target rate
of return on investment (ROI).
Suppose the toaster manufacturer has invested $1 million and wants to earn a
20% ROI, specifically $200,000. The ROI price is given as follows:
desired return X invested capital
ROI price = unit cost + -------------------------------------------
unit sales
0.20 X 1000000
= 16 + ----------------------- = 20
50000

12. Break-Even Pricing
Variable cost per unit Tk. 15
Selling price per unit Tk. 25
Fixed cost Tk. 1, 00, 000
What should be the Break-Even unit sales?
Fixed cost
BEP = --------------------------------------
Selling price – Variable cost
100000 100000
= ------------ = ------------ = 10000 units
25 – 15 10

13. Break-Even Profit Pricing
Variable cost per unit Tk. 15
Selling price per unit Tk. 25
Fixed cost Tk. 1, 00, 000
Expected profit Tk. 20000
What should be the Break-Even Profit sales?
Fixed cost + Expected profit
BEP = ------------------------------------------
Selling price – Variable cost
100000 + 20000 120000
= ---------------------- = ------------ = 12000 units
25 – 15 10

14. Pricing Strategies

15. Everyday Low Pricing (EDLP)
Everyday low pricing (EDLP) is a value pricing strategy involving
continuous promotional pricing without the support of advertised
events. EDLPs are either a retailer’s lowest promotional price, or a
price between the retailer’s highest regular price and lowest
promotional price.
EDLP is a shopping advantage for customers too busy to chase
promotions. Wal-Mart and Toys ‘R’ Us use this strategy.

16. Geographical Pricing
Adjusting the selling price of a product or service according to a
customer’s geographic location.
Many buyers lack sufficient hard currency to pay for their purchases
and they want to offer other items in payment, this type of practice
known as counter trade.
Counter trade may take several forms: barter, compensation deals,
buyback agreements, and offset.

17. Barter
The direct exchange of goods, with no money and no third party involved.
Compensation Deal
The seller receives some percentage of the payment in cash and the rest in products. A
British aircraft manufacturer sold planes to Brazil for 70 percent in cash and the rest
in coffee.
Buyback Arrangement
The seller sells a plant, equipment, or technology to another country and agrees to
accept as partial payment products manufactured with the supplied equipment. A
U.S. chemical company built a plant for an Indian company and accepted partial
payment in cash and the remainder in chemicals manufactured at the plant.
Offset
The seller receives full payment in cash but agrees to spend a substantial amount of the
money in that country within a stated time period. PepsiCo sold its cola syrup to
Russia for Rubles and agreed to buy Russian vodka at a certain rate for sale in the
U.S.

18. Discounts and Allowances
1. Cash Discount: The payment of merchandise bought on credit is stimulated by
offering a discount if paid before the allowed time. If a merchandise is bought on
credit and a 30-day payment period is granted, the seller might encourage the
credit buyer to pay the amount by giving a discount (say, 5%) before the expiry of
the payment period (say, within the first 10 days). It typically looks “5/10, net 30”.
2. Consumer Allowance: When customers buy in cash, a discount is offered on the
spot from the list price of merchandise.
3. Quantity Discount: Discount is offered for more buys. For example, if a 1-liter
beverage bottle is sold at Tk.50, the same beverage containing a 2-liter bottle may
be offered at Tk. 90.
4. Seasonal Discount: To promote the sale of merchandise out of season, discounts
are offered. For example, sweaters can be discounted for sale in summer.
5. Functional discount: Discount (also called trade discount) offered by a
manufacturer to trade channel members if they will perform certain functions, such
as selling, storing, and record keeping.

19. Promotional Pricing
1. Psychological Discounting: Sometimes marketers sell their
merchandises using tags reading ‘Previous price 1299’ and
‘Reduced price 899’ simultaneously, customers get convinced
that the price of the merchandise has been reduced a lot and as
such get stimulated to buy the merchandise. Most of the times,
the prices are artificially created to attract customers.
2. Loss-leader Pricing: Supermarkets and department stores drop
the price on well-known brands to stimulate additional store
traffic. In this strategy, a product is sold at a reduced price and
intended to ‘lead’ to the subsequent sales of other items. Loss-
leader products are usually those products that are frequently
bought by customers and these products are generally placed in
an inconvenient part of the store, so that customers must walk
past other goods that have higher profit margins.

20. 3. Cash Rebate: To promote sale of merchandise, a discount is
offered for buys within a certain time period.
4. Special-Event Pricing: Sellers will establish special prices in
certain seasons to draw in more customers.
5. Low-Interest Financing: Instead of cutting its price, the company
can offer customers low- interest financing.
6. Longer Payment Terms: Sellers, especially mortgage banks and
auto companies, stretch loans over longer periods and thus lower
the monthly payments.
7. Warranties & Service Contracts: Companies can promote sales by
adding a free or low-cost warranty or service contract.

21. Discriminatory Pricing
1. Customer-segment Pricing: Prices vary for different customer
segments. For example, airline tickets are different for adults,
children, and infants.
2. Product-form Pricing: Prices vary for different forms of the same
product. For example, Sunsilk is sold in varying prices for its 400
m.l. container, 200 m.l. container, and 2 m.l. mini-pack sachet.
3. Time Pricing: Prices differentiate for varying time periods. For
example, call rates are different for peak periods and off-peak
periods.
4. Location Pricing: Prices differ due to differences in the location and
the advantages associated with that. For example, movie tickets are
sold at different prices for the front rows and back rows. Or house
rents are lower for top floors.

22. 5. Image pricing: Practice of keeping the price of a product or
service artificially high in order to encourage favorable
perceptions among buyers.
6. Channel pricing: Method in which the price depends on
the means of delivery of a good or service. For example,
merchants usually offer lower than the store prices for
items sold through internet.

23. Product-Mix Pricing
1. Product-line Pricing: Prices vary due to variance in product lines.
For example, Nokia N series, E series, or X series are sold at
different price ranges.
2. Captive Product Pricing: Some products have complementary parts
and the products can function only when the complementary
products are used simultaneously. To promote the sales of the
products the manufacturers lower the price of the main product and
charge high price on the complementary products. For example,
printers are priced little cheap; but cartridges are priced very high to
make profit.
3. By-product Pricing: By-products can be priced. For example,
petroleum jelly, which is sold in the marketplace as cosmetic item,
is a by-product of crude oil refinery.
4. Product-bundling Pricing: If people buy in bundles, they are offered
reduced price. For example, we pay less when we buy any product
in bundle (say, a dozen of pencils; or a combo meal at a fast-food
restaurant).

24. 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
• The expenditure is a smaller part of buyer’s total income
• The expenditure is small compared to the total cost of the end product
• Part of the cost is paid by another party
• The product is used with previously purchased assets
• The product is assumed to have high quality and prestige
• Buyers cannot store the product

25. Thank You