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1. VOC 198
PRINCIPLES OF MARKETING
FOR COMMUNICATORS
SECTION 01
LECTURE - 6
CHAPTER 10: Pricing Products: Pricing
Considerations And Approaches
CHAPTER 11: Pricing Products: Pricing
Strategies

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PRICING PRODUCTS
 What is price?
It is the amount of money charged for a
product or service. More broadly, it is
the sum of values that consumers
exchange for the benefits of having or
using the product or service.
 Fixed-price policies: Setting one price
for all buyers.
 Dynamic pricing: Charging different
prices depending on individual customers
and situations.
 Importance of the Internet
 Inportance of other new technologies

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FACTORS TO CONSIDER WHEN
SETTING PRICES
 Internal Factors Affecting Pricing Decisions:
1. Marketing Objectives: Pricing strategy is
largely determined by decisions on market
positioning.
 The company may seek additional objectives:
 Survival
 Current profit maximization
 Market share leadership
 Product quality leadership

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2. Marketing Mix Strategy
 Decisions made for other marketing mix
variables may affect pricing decisions.
 Companies generally position their products on
price and then base other marketing mix
decisions on the prices they want to charge.
 Target Costing: It starts with an ideal selling
price based on customer considerations, then
targets costs that will ensure that the price is
met.
 Other companies use other marketing mix tools
to create nonprice positions. Often, the best
strategy is not to charge the lowest price, but
rather to differentiate the marketing offer to
make it worth a higher price

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3. Costs
 The company wants to charge a
price that both covers all its
costs for producing, distributing,
and selling the product and
delivers a fair rate of return for
its effort and risk.
 Fixed costs (Overhead): Costs
that do not vary with production
or sales level.
 Variable costs: They vary
directly with the level of
production.
 Total costs: They are the sum of
the fixed and variable costs for
any given level of production

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4. Organizational Considerations
 Small companies  Prices are often set by
top management rather than by the
marketing or sales departments.
 Large companies  Pricing is typically
handled by divisional or product line
managers
 In industries in which pricing is a key
factor (such as aerospace, steel, railroads
and etc...), companies often have a pricing
department to set the best prices or help
others in setting them.

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External Factors Affecting Pricing
Decisions
1. The Market and Demand
 The market and demand set
the upper limit of prices.
 Pricing in Different Types of
Markets:
 Pure Competition
 Monopolistic Competition
 Oligopolistic Competition
 Pure Monopoly

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1. The Market And Demand
 Price Elasticity of Demand:
 Price Elasticity: It shows how responsive demand will be to a
change in price.
 If demand hardly changes with a small change in price – The
demand is INELASTIC
 If demand greatly changes with a small change in price – The
demand is ELASTIC
 When the product is unique or when it is high in quality,
prestige, or exclusiveness; the buyers are less price sensitive.
What determines the price elasticity of demand?
 Buyers are also less price sensitive when substitute products
are hard to find or when they can not easily compare the
quality of substitutes.
 Finally, buyers are less price sensitive when the total
expenditure for a product is low relative to their income or
when the cost is shared by another party.
 If demand is elastic, sellers will consider lowering their price.
 Differentiation of offerings

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2. Competitors’ Costs, Prices,
And Offers
 Another external factor affecting the
company’s pricing decisions is competitors’
costs and prices and possible competitor
reactions to the company’s own pricing moves.
 Additionally, the company’s pricing strategy
may affect the nature of the competition it
faces.
3. Other External Factors: Economic
conditions, other parties in its environment
such as resellers, the government, social
concerns.

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GENERAL PRICING
APPROACHES
 Product costs set a floor to
the price; consumer
perceptions of the product’s
value set the ceiling. The
company must consider
competitors’ prices and
other external and internal
factors to find the best
price between these two
extremes.

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1. Cost-Based Pricing
a. Cost-plus Pricing: Adding a standard
markup to the cost of the product.
 In fact it is not the best method, it
remains popular for many reasons:
 Sellers are more certain about costs
than about demand.
 When all firms in the industry use this
pricing method, prices tend to be similar
and price competition is minimized.
 Many people feel that cost-plus pricing
is fairer to both buyers and sellers.

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1. Cost-Based Pricing
b. Break-even Pricing (Target Profit Pricing): The
firm tries to determine the price at which it will
break even or make the target profit it is seeking.
 Target pricing uses the concept of a break-even
chart, that shows the total cost and total revenue
expected at different sales volume levels.
 However; although break-even analysis and target
profit pricing can help the company to determine
minimum prices needed to cover expected costs and
profits, they do not take the price-demand
relationship into account.

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2. Value-Based Pricing
 It uses buyers’ perceptions of value, not the
seller’s cost, as the key to pricing. Price is
considered along with the other marketing mix
variables before marketing program is set.
 In value-based pricing; the company sets its
target price based on customer perceptions of
the product value, the targeted value and
price then drive decisions about product
design and what costs can be incurred.
 A company using value-based pricing must find
out what value buyers assign to different
competitive offers.

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2. Value-Based Pricing
 Today, many companies have changed their pricing
approaches to bring them into line with changing
economic conditions and consumer price
perceptions.
 Value pricing: Offering just the right combination
of quality and good service at a fair price
(Introduction of less expensive
versions/Redesigning existing brands in order to
offer more quality for a given price or the same
quality for less).
 Everyday low pricing (EDLP)
 High-low pricing

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3. Competition-Based Pricing
 Consumers will base their
judgements of a product’s value
on the prices that competitors
charge for similar products.
a. Going-rate pricing: A firm bases
its price largely on competitors’
prices, with less attention paid
to its own costs or to demand.
b. Sealed-bid Pricing: A firm
bases its price on how it thinks
competitors will price rather
than on its own costs or on the
demand

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NEW-PRODUCT PRICING
STRATEGIES
The pricing structure changes over time as products
move through their life cycles.
 A. Market-Skimming Pricing: Many companies that
invent new products initially set high prices to skim
revenues layer by layer from the market.
 It makes sense under certain conditions:
 The product’s quality and image must support its higher
price, and enough buyers must want the product at that
price.
 The costs of producing a smaller volume cannot be so
high that they cancel the advantage of charging more.
 Competitors should not be able to enter the market
easily and undercut the high price.

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NEW-PRODUCT PRICING
STRATEGIES
B. Market Penetration Pricing: Setting a low
initial price in order to penetrate the
market quickly and deeply.
 The high sales volume results in falling costs,
allowing the company to cut its price even
further.
 Conditions for well performing market
penetration pricing:
 The market must be highly price sensitive.
 Production and distribution costs must fall as sales
volume increases.
 The low price must help keep out the competition,
and the penetration pricer must maintain its low-
price position.

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PRODUCT MIX STRATEGIES
 The firm looks for a set of prices that maximizes
the profits on the total product mix.
1. Product Line Pricing: Management must decide on
the price steps to set between the various products
in a line.
 These steps should take into account cost differences
between the products in the line, customer evaluations
of their different features, and competitors’ prices.
 In many industries, sellers use well-established price
points for the products in their line.
2. Optional-Product Pricing: Offering to sell optional
or accessionary products along with their main
product.

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PRODUCT MIX STRATEGIES
3. Captive-Product Pricing: Companies that make
products that must be used with a main product are
using captive-product pricing.
 Producers of main products often price them low and
set high markups on the supplies.
 For services  Two-part pricing (Fixed fee and
variable usage rate)
4. By-Product Pricing: If the by-products have no
value and if getting rid of them is costly, this will
affect the pricing of the main product.
 Using by-product pricing, the manufacturer will seek a
market for these by-products and should accept any
price that covers more than the cost of storing and
delivering them. This allows the seller to reduce the
main product’s price to make it more competitive.

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PRODUCT MIX STRATEGIES
5. Product Bundle Pricing: Sellers
often combine several of their
products and offer the bundle at a
reduced price.
 Price bundling can promote the sales
of products consumers might not
otherwise buy, but the combined price
must be low enough to get them to
buy the bundle.

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PRICE ADJUSTMENT
STRATEGIES
1. Discount and Allowance
Pricing:
 Discounts:
 Cash discount
 Quantity discount
 Functional discount
 Seasonal discount
 Allowances:
 Trade-in allowances
 Promotional allowances

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PRICE ADJUSTMENT
STRATEGIES
2. Segmented Pricing:
 Customer-segment pricing
 Product-form pricing
 Location pricing
 Time pricing
3. Psychological Pricing: Sellers consider the psychology of prices and not
simply the economics.
 Reference prices: Prices that buyers carry in their minds and refer to when
looking at a given prouduct. (Current prices/Past prices/Buying Situation)
4. Promotional Pricing: Companies will temporarily price their products below
list price and sometimes even below cost.
 Being loss leader
 Special-event pricing
 Cash rebates
 Low-interest financing, longer warranties, or free maintenance
 Discounts

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PRICE ADJUSTMENT
STRATEGIES
5. Geographical Pricing: A
company must decide how
to price its products for
customers located in
different parts of the
country or world.
 FOB-origin pricing
 Uniform-delivering pricing
 Zone pricing
 Basing point pricing
 Freight-absorption pricing

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PRICE ADJUSTMENT
STRATEGIES
6. International Pricing: In some cases, a company
can set a uniform worldwide price.
 The price that a company should charge in a specific
country depends on many factors, including economic
conditions, competitive situations, laws and
regulations, and development of the wholesaling and
retailing system.
 Consumer perceptions and preferences also may vary
from country to country, calling for different prices.
 Or the company may have different marketing
objectives in various world markets, which require
changes in marketing strategy.
 Price escalations (They may result from differences
in selling strategies or market conditions. In most
cases, it is simply a result of the higher costs of
selling in another country)

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Responding To Price Changes
 The company has to consider its own product’s life
cycle, the product’s importance in the company’s
product mix, the intentions and resources of the
competitor, and the possible consumer reactions to
price changes.
 Once the company has determined that the
competitor has cut its price and that this price
reduction is likely to harm company sales and profits,
it might decide to hold its current price and profit
margin.
 If the company decides that effective action can and
should be taken; it might make:
 Reduce its price
 Raise the perceived quality
 Improve quality and increase price
 Launch a low-price “fighting brand”