pricing marketing management

1. Pricing:
Approaches and
Strategies
Sessi
on 5
Chapter 10

2. Objectives
o Understand the internal & external factors affecting a
firm’s pricing decisions.
o Be able to contrast the three general approaches to
setting prices.
o Learn the major strategies for pricing imitative and
new products.
o Understand how companies find a set of prices that
maximizes the profits from the total product mix.
o Learn how companies adjust their prices to take into
account different types of customers and situations.
o Know the key issues related to initiating and
responding to price changes.

3. Price
o The amount of money charged for a product, or
the sum of the values that consumers exchange
for the benefits of having/using the product or
service.
o Price and the Marketing Mix
• Only element to produce revenues
• Most flexible element
• Can be changed quickly
o Price as a tool of Competition
o Common Pricing Mistakes

4. Factors to Consider in Setting Price
o Marketing objectives
o Marketing mix strategies
o Costs
o Organizational
considerations
o Market positioning influences
pricing strategy
o Other pricing objectives:
• Survival
• Current profit maximization
• Market share leadership
• Product quality leadership
o Not-for-profit objectives:
• Partial or full cost recovery
• Social pricing
Internal Factors

5. o Marketing objectives
o Marketing mix strategies
o Costs
o Organizational
considerations
o Pricing must be carefully
coordinated with the other
marketing mix elements
o Target costing is often used to
support product
positioning strategies based
on price
o Non-price positioning can also
be used
Internal Factors
Factors to Consider in Setting Price (contd.)

6. o Marketing objectives
o Marketing mix strategies
o Costs
o Organizational
considerations
o Types of costs:
• Variable
• Fixed
• Total costs
o How costs vary at different
production levels will influence
price setting
o Experience (learning) curve
effects on price
Internal Factors
Factors to Consider in Setting Price (contd.)

7. Strategic Impact & Cost Analysis: Pareto Law
Effect
CitiBank NA Example
o 80% of Cost Structure on staff and
even Marketing Expenses is
caused by 20% of Accounts for
their Low Deposits and high
Transaction Volume.
o There are only few things that are
really important.
o If you successfully improve 20% of
the most important problems, you
will gain the same effect as you
would by improving the rest 80%.
This represents a big advantage
with respect to cost versus effect.
20%
80%
80% 20% No. of
Customers
20%
No. of
Services
Service
Revenue
80%
Cu
stom
er
Reven
ue
C
u
ge
ation
20
%
80
%
For an Effective Cost-Structure:
o 20% of the Customers and 20% of the Services contribute 80% of Revenue.
o Rationalize 80% services & Purify 80% Accounts as they contribute only 20% of revenue.
o Eliminate Services & Accounts in the Bottom-Right-Cell as they are certainly running at a loss.

8. o Marketing objectives
o Marketing mix strategies
o Costs
o Organizational
considerations
o Who sets the price?
• In Small companies:
CEO or top management
• In Large companies:
Divisional or product line
managers
o Price negotiation is common
in industrial settings
o Some industries have pricing
departments
Internal Factors
Factors to Consider in Setting Price (contd.)

9. o Nature of market and
demand
o Competitors’ costs,
prices, and offers
o Other environmental
elements
o Types of markets
• Pure competition
• Monopolistic competition
• Oligopolistic competition
• Pure monopoly
o Consumer perceptions of
price and value
o Price-demand
relationship
• Demand curve
• Price elasticity of
demand
External
Factors
Factors to Consider in Setting Price (contd.)

10. o Nature of market and
demand
o Competitors’ costs,
prices, and offers
o Other environmental
elements
o Consider competitors’ costs,
prices, and possible reactions
when developing a pricing
strategy
o Pricing strategy influences the
nature of competition
• Low-price low-margin strategies
inhibit competition
• High-price high-margin
strategies attract competition
o Benchmarking costs against the
competition is recommended
External
Factors
Factors to Consider in Setting Price (contd.)

11. o Nature of market and
demand
o Competitors’ costs,
prices, and offers
o Other environmental
elements
o Economic conditions
• Affect production costs
• Affect buyer perceptions of
price and value
o Reseller reactions to prices
must be considered
o Government may restrict or
limit pricing options
o Social considerations may
be taken into account
External
Factors
Factors to Consider in Setting Price (contd.)

12. 1. Cost-Based Pricing: a) Cost-Plus Pricing
• Adding a standard markup to cost
• 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
Example
Variable costs: Tk. 20
Expected sales: 100,000
units
Fixed costs: Tk. 500,000
Desired Sales Markup: 20%
Variable Cost + Fixed Costs/Unit Sales = Unit Cost
Tk. 20 + Tk. 500,000/100,000 = Tk. 25 per unit
Unit Cost/(1 – Desired Return on Sales) = Markup
Price
General Pricing Approaches

13. b) Break-Even Analysis & Target Profit Pricing
o Break-even charts show total cost and total revenues at different
levels of unit volume.
o The intersection of the total revenue and total cost curves is the
break-even point.
o Companies wishing to make a profit must exceed the break-even unit
volume.
General Pricing Approaches
(contd.)
Fixed
Costs
Total Costs
Revenues
10 20 30 40
Sales Volume in Thousands of
Thousands
Taka
0
1000
800
600
400
200
Break-even
point
Target Profit Tk.
200,000
Quantity To Be Sold
To Meet Target Profit

14. 2. Value-Based Pricing
o Uses buyers’ perceptions
of value rather than seller’s
costs to set price.
o Measuring perceived value
can be difficult.
o Consumer attitudes toward
price and quality have
shifted during the last
decade.
• Introduction of less
expensive versions of
established brands has
become common.
General Pricing Approaches (contd.)
o Business-to-business
firms seek to retain
pricing power
• Value-added strategies
can help
o Value pricing at the
retail level
• Everyday low pricing
(EDLP) vs. high-low
pricing

15. 3. Competition-Based Pricing
• Also called going-rate pricing
• May price at the same level, above, or below the
competition
• Bidding for jobs is another variation of competition-
based pricing
• Sealed bid pricing
General Pricing Approaches
(contd.)

16. o 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.
o 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.
o Market Rate Pricing
• Ceding the initiative to the key competitors to set the price.
• Dangerous for leaving the strategic initiative to competitors
• Potential threat of ‘Sudden Price Shift’ by newer, or ‘Changes in
delivery system capability’.
o Relationship Pricing
• Different price for Different class of customers depending on
relationship and the potentiality of cross-selling or future business.
Other Pricing
Approaches

17. o Product Line Pricing
• Setting price steps between
product line items.
•Line of products rather
single one
• Price points
o Optional-Product Pricing
• Pricing optional or accessory
products sold with the main
product
o By-Product Pricing
• Pricing low-value by-products to
get rid of them
Product Mix Pricing Strategies
o Captive-Product Pricing
• Pricing products that must
be used with the main
product
• High margins
are often set for supplies
• Services: two-part pricing
strategy
• Fixed fee plus
a variable usage rate
o Product Bundle Pricing
• Pricing bundles of products
sold together

18. Price Adjustment Strategies
o Types of discounts
• Cash discount
• Quantity discount
• Functional (trade) discount
• Seasonal discount
o Allowances
• Trade-in allowances
• Promotional allowances
Strategies
o Discount / allowance
o Segmented
o Psychological
o Promotional

19. Price Adjustment Strategies (contd.)
o Types of segmented pricing
strategies:
• Customer-segment
• Product-form pricing
• Location pricing
• Time pricing
o Also called revenue or yield
management
o Certain conditions must
exist for segmented pricing to
be effective
Strategies
o Discount / allowance
o Segmented
o Psychological
o Promotional

20. Conditions Necessary for
Segmented Pricing Effectiveness
o Market is segmentable
oLower priced
segments are not able to
resell
o Competitors can not
undersell segments
charging higher prices
o Pricing must be legal
o Costs of segmentation
can not exceed revenues
earned
o Segmented pricing must
reflect real differences in
customers’ perceived
value

21. o The price is used to say
something about the product.
• Price-quality relationship
• Reference prices
• Differences as small as five
cents can be important
• Numeric digits may have
symbolic and visual qualities
that psychologically influence
the buyer
• Odd
• rounding
Strategies
o Discount / allowance
o Segmented
o Psychological
o Promotional
Price Adjustment Strategies (contd.)

22. o Temporarily pricing products below
the list price or even below cost
o Loss leaders
• Special-event pricing
• Cash rebates
• Low-interest financing, longer
warranties, free maintenance
o Promotional pricing can have
adverse effects
Strategies
o Discount / allowance
o Segmented
o Psychological
o Promotional
Price Adjustment Strategies (contd.)

23. Promotional Pricing Problems
o Easily copied by
competitors
o Creates deal-prone
consumers
o May erode brand’s
value
o Not a legitimate substitute
for effective strategic
planning
o Frequent use leads to
industry price wars which
benefit few firms

24. o Customer Discrimination
• for students only
o Product-form Discrimination
• Telecom products
o Place Discrimination
• service at ATM versus at counters
o Time Discrimination
• peak -hours/ off-peak-hours
Price Discrimination

25. o Initiating Price Cuts is Desirable When a Firm
• Has excess capacity
• Faces falling market share due to price competition
• Desires to be a market share leader
o Price Increases are Desirable
• If a firm can increase profit, faces cost inflation, or faces
greater demand than can be supplied.
o Methods of Increasing Price
o Alternatives to Increasing Price
• Reducing product size, using less expensive materials,
unbundling the product.
Price Changes

26. o Buyer reactions to price changes must be considered.
o Competitors are more likely to react to price changes
under certain conditions.
• Number of firms is small
• Product is uniform
• Buyers are well informed
o Respond to Price Changes only if:
• Market share / profits will be negatively affected if nothing is
changed.
• Effective action can be taken:
• Reducing price
• Raising perceived quality
• Improving quality and increasing price
• Launching low-price “fighting brand”
Price Changes (contd.)

27. o Pricing within Channel Levels
• Price-fixing
• Competitors can not work with each other to set prices
• Predatory pricing
• Firms may not sell below cost with the intention of
punishing a competitor or gaining higher long-run profits or running
a competitor out of business.
o Pricing across Channel Levels
• Price discrimination
• Retail price maintenance
• Deceptive pricing
• Bogus reference / comparison pricing
• Scanner fraud
• Price confusion
Public Policy and Pricing