Pricing Products:

Pricing
Considerations and
Approaches
[1]

1
 Price
Price
The amount of money charged for a product
or service,or the sum of all the values
that consumers exchange for the
benefits of having or using the product
or service
Why is it so important ?
(1) Price is the only element in the
marketing mix that produces revenues
(PxQ); all others represent costs.
(2) It’s the easiest element to change.
2
 Factors Affecting Price
Decisions
External
External Factors
Factors
Internal
Internal Factors
Factors
Nature
Nature ofof the
the market
market
Marketing
Marketing Objectives
Objectives and
Pricing and demand
demand
Marketing Mix Strategy Pricing
Marketing Mix Strategy Competition
Competition
Costs Decisions
Decisions
Costs Other
Other environmental
environmental
Organizational
Organizational factors
factors (economy,
(economy,
considerations resellers,
considerations resellers, government)
government)

3
 Internal Factors Affecting Pricing
Decisions: Marketing Objectives
Survival
Prices to Cover Variable Costs and
Some Fixed Costs to Stay in Business.
Current Profit Maximization Choose
the Price that Produces the Maximum
Marketing 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
Performance Quality and R & D.
4
 Internal Factors Affecting Pricing
Decisions: Marketing Objectives
Other specific objectives include:
 Set prices low to prevent competition from
entering the market,
 Prices might be reduced temporarily to create
excitement or draw more customers.
Nonprofit and public organization may have
other pricing objectives.

5
 Marketing mix strategy
Types of Cost Factors that
Affect Pricing Decisions
Fixed Costs Variable Costs
(Overhead)
Costs that don’t Costs that do vary
vary with sales or directly with sales or
production levels. production levels.

Executive Salaries, Rent Commissions, Raw materials

Total
TotalCosts
Costs
Sum
Sumof
ofthe
theFixed
Fixedand
andVariable
VariableCosts
Costsfor
foraaGiven
Given
Level
Levelof
ofProduction
Production
6
 Costs Considerations
Cost Per Unit at Different Levels of Production Per Period

1
2 SRAC
3 4
Cost per unit

LRAC
1,000

2,000

3,000

4,000

Quantity Produced per Day

7
 that
Affect Pricing
Decisions
As a firm gains experience in production, it
learns how to do it better.
The experience curve indicates that
average total cost drops with accumulated
production experience
Strategy: company should price products
low; sales increases; costs continue to
decrease; and then lower prices further.
Risks are present with this strategy.

8
Experience Curve
Costs and the Experience Curve

T ot a l C o s t p e r U n it
100
80
Co st pe r Un it

60
40
20
0
0 10 20 30 40
S a le s in H u n d r e d U n it s

Dalrymple & Parsons/Marketing 27

Management 7th edition: Chapter 9

9
External Factors Affecting
Pricing Decisions
Market and
Demand

Competitors’ Costs,
Prices, and Offers

Other External Factors

Economic Conditions
Reseller Needs
Government Actions
Social Concerns
10
 Market and Demand Factors
Affecting Pricing Decisions
Pricing in Different Types of Markets

Pure
PureCompetition
Competition
Many
ManyBuyers
Buyersand
andSellers
Sellers Pure
PureMonopoly
Monopoly
Who
WhoHave
HaveLittle
Little Single
SingleSeller
Seller
Effect
Effecton
onthe
thePrice
Price

Monopolistic
Monopolistic Oligopolistic
Oligopolistic
Competition
Competition Competition
Competition
Many
ManyBuyers
Buyersand
andSellers
Sellers Few
FewSellers
SellersWho
WhoAre
Are
Who Sensitive
Sensitiveto
toEach
EachOther’s
WhoTrade
TradeOver
Overaa Other’s
Range Pricing/
Pricing/Marketing
Rangeof
ofPrices
Prices Marketing
Strategies
Strategies
11
 Demand Curves and Price
Elasticity of Demand
A Demand Curve is a Curve that Shows the
Number of Units the Market Will Buy in a Given
Time Period at Different Prices that Might be
Charged.
Price Elasticity Refers to How Responsive Demand
Will be to a Change in Price.
Price Elasticity of Demand = % Change in Quantity Demanded
% Change in Price
12
Pricing & Demand Curve
Shape of Demand Curve; Price Range/Ceiling
Q = 4000 – 40P

100

80

60 Demand schedule
40
Price

25
20

0
1000 1600 2000 3000
Dalrymple & Parsons/Marketing 400012
Management 7th edition: Chapter 9
Quantity demand in units

13
 Price Elasticity of Demand
A. Inelastic Demand -
Demand Hardly Changes With
Price

a Small Change in Price.

P2
P1

Q2 Q1
Quantity Demanded per Period
B. Elastic Demand -
Demand Changes Greatly With
Price

P’ a Small Change in Price.

2

P’1

Q2 Q1
Quantity Demanded per Period 14
Competitors costs,prices
& offers

15
 Other environmental
factors
Economy
Resellers
Government

16
 Cost-Based Pricing
Certainty About
Costs
Simplest
Cost-Plus
Ethical F
actors Pricing
Pricing is Pricing is an aS on
itu
l Method
Simplified Approach That U
ctd
exp
n
Adds a Standard
Markup to the
Price Competition
Is Minimized Cost of the
Attitudes Ignores
of
Product Current
Others Demand &
Much Fairer to Competition
Buyers & Sellers
17
 Breakeven Analysis or
Target Profit Pricing
Tries to Determine the Price at Which a
Firm Will Break Even or Make a Certain Target
Profit.
Total
Cost in Dollars (millions)

12 Revenue
10 Target Profit
($2 million)
8
6 Total
Cost
4 Fixed Cost
2

200 400 600 800 1,000

Sales Volume in Units (thousands)
18
 Cost-Based Versus Value-
Based Pricing
Cost-Based Pricing Value-Based
Pricing
Product
Product Customer
Customer

Cost
Cost Value
Value

Price
Price Price
Price

Value
Value Cost
Cost

Customers
Customers Product
Product
19
Competition-Based Pricing
Setting Prices

Going-Rate
Company Sets Prices Based on What
Competitors Are Charging.

Sealed-Bid
? Company Sets Prices Based on
? What They Think Competitors
Will Charge. 20
 Pricing Products:
Pricing Considerations
and Strategies
[2]

21
 New Product Pricing
Strategies: Market Skimming
MarketSkimming
Market Skimming Assumptions:
 SettingaaHigh
 Setting HighPrice
Pricefor
foraa
 Seeks high profit per
NewProduct
New Productto
to“Skim”
“Skim” unit
MaximumRevenues
Maximum Revenuesfrom
from  Inelastic market, few
theTarget
the TargetMarket.
Market. substitutes
Resultsin
 Results inFewer,
Fewer,But
But  Recover initial costs
MoreProfitable
More ProfitableSales.
Sales.
Problems:
 Attracts competition

22
 New Product Pricing
Strategies: Market
Penetration
Assumptions: Market Penetration
Market Penetration
 Elastic market, few Setting aa Low
 Setting Low Price
Price for
for

barriers, many
aa New
New Product
Product in
in Order
Order
substitutes to “Penetrate”
“Penetrate” the
the
to
 Market share is Market Quickly
Market Quickly and
and
important Deeply.
Deeply.
 Avoid competition Attract aa Large
 Attract Large Number
Number

Problems: of Buyers
of Buyers andand Win
Win aa
Larger Market
Larger Market Share.
Share.
 Might not recover
initial costs
23
Product Mix-Pricing
Strategies:
Product Line Pricing
Involves setting price
steps between various
products in a product
line based on:
 Cost differences
between products,
 Customer evaluations
of different features,
and
 competitors’ prices.

24
 Psychological Pricing
Considers the psychology of
prices and not simply the
economics.
Customers use price less when
they can judge quality of a
product.
Valu Price becomes an important
e $22. quality signal when customers
Sale 00
can’t judge quality; price is
$14.
99 used to say something about a
product.
25
 Other Price Adjustment
Strategies
• AdjustingPrices to Account
for the Geographical Location
Geographical Pricing of Customers.

• Adjusting Prices for

International Markets.
• Price Depends on Costs,
Consumers, Economic
International Pricing Conditions, Competitive
Situations & Other Factors.

26
Price Discounts &
Allowances
Cash discount
Quantity discount
Functional discount
Seasonal discount
Allowance

27
 This Sprint ad offers f reelong distance on Fridays.

WhycanSprint affordt ooffer this promotion on Fridays rat her

than onanother day (like Monday)?

Promotional Pricing
Loss
LossLeaders
Leaders Temporarily
Pricing Products
Special-Event
Special-EventPricing
Pricing Below List Price to
Increase Short-
Cash
CashRebates
Rebates Term Sales
Low-Interest Through:
Low-InterestFinancing
Financing
Longer
LongerWarranties
Warranties
Longer
Longerpayment
paymentterrms
terrms
Discounts
Discounts
28
0

29
Initiating & Responding to
Price changes
Initiating price cuts may lead
to:
1. low-quality trap
2. fragile-market share trap
3. shallow-pockets trap

30
Reactions to price changes
Customer reactions
Competitor reactions
Distributors reactions
Suppliers reactions
Government reactions

31
Assessing/Responding to
Competitor’s Price Changes

32
Impact of Five “C” s on
pricing
Cost
Competitor
Customer
Consumer
Circumstances

33