The document discusses various factors involved in pricing decisions and strategies. It describes how pricing objectives, demand analysis, cost analysis, competitor analysis, and various pricing methods all feed into the process of determining the final price. Different pricing strategies are outlined, including penetration pricing, market skimming, value pricing, loss leaders, and psychological pricing. The document also discusses the influence of elasticity on pricing and revenue.

1. PRICING
 Pricing is the process of determining what a company
will receive in exchange for its product or service.
Pricing factors are manufacturing cost, market place,
competition, market condition, brand, and quality of
product.
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2. PRICING
 Deciding what to charge from customers
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3. Process of Pricing
Selecting the
pricing objective
Determining Demand
Estimating Cost
Analyzing Competitors’
Cost, Prices, and Offers
Selecting the
Pricing method
Selecting the
Final price
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4. 1.Selecting the pricing objective
 Survival
 Maximize current profits
 Maximize their market share
 Quality leadership
 Other Objective
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5. 2.Determining the demand
• Price sensitivity
• Estimating demand curves
• Price elasticity of demand
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6. 3.Estimating Cost
 Types of Cost and Levels of Production
 Fixed costs (overhead)
 Variable cost
 Total cost
 Average cost
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7. 4.Analyzing Competitors’ Cost,
Prices, and Offers
 Within the range of possible prices determine by
market demand and company costs, the firm must
take competitors cost, prices and possible price
reactions into account.
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8. 5.Selecting a Pricing Method
 Markup Pricing
 Target-Return Pricing
 Perceived value pricing
 Going rate pricing
 Bid pricing
 Sealed bid pricing
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9. 6.Selecting the final price
 Psychological Pricing
 Reference price
 Gain-and-Risk-Sharing Pricing
 Influence of the Other Marketing Elements
 Company Pricing Policies
 Impact of Price on Other Parties
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10. Market and demand factors
affecting pricing decisions
Pricing in
different
type of
market
Pure
monopoly
Oligopolistic
competition
monopolistic
Pure competition
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12. Pricing Strategies
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13. Penetration Pricing
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14. Penetration Pricing
 Price set to ‘penetrate the market’
 ‘Low’ price to secure high volumes
 Typical in mass market products – chocolate bars,
food stuffs, household goods, etc.
 Suitable for products with long anticipated life
cycles
 May be useful if launching into a new market
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15. Market Skimming
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16. Market Skimming
 High price, Low volumes
 Skim the profit from the
market
 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, etc.
Many are predicting a firesale in laptops
as supply exceeds demand.
Copyright: iStock.com
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17. Value Pricing
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18. Value Pricing
 Price set in accordance
with customer
perceptions about the
value of the
product/service
 Examples include status
products/exclusive
products Companies may be able to set prices according
to perceived value.
Copyright: iStock.com
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19. Loss Leader
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20. 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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21. Psychological Pricing
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22. 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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23. Going Rate (Price Leadership)
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24. 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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25. Tender Pricing
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26. Tender Pricing
 Many contracts awarded on a tender basis
 Firm (or firms) submit their price for carrying out the
work
 Purchaser then chooses which represents best value
 Mostly done in secret
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27. Price Discrimination
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28. Price Discrimination
 Charging a different price
for the same good/service
in different markets
 Requires each market to
be impenetrable
 Requires different price
elasticity of demand in
each market
Prices for rail travel differ for the same journey
at different times of the day
Copyright: iStock.com
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29. Destroyer Pricing/Predatory Pricing
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30. 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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31. Absorption/Full Cost Pricing
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32. 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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33. Marginal Cost Pricing
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34. 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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35. 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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36. Contribution Pricing
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37. 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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38. Target Pricing
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39. 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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40. Cost-Plus Pricing
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41. Cost-Plus Pricing
 Calculation of the average cost (AC) plus a mark up
 AC = Total Cost/Output
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42. Influence of Elasticity
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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. 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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45. 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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