Chapter Four: Pricing Decisions

Meaning and significance of price

• All profit and nonprofit organizations must set
prices on their products and services.
• Price goes by many names (rent, tuition, fee, fare,
rate, interest, toll, premium, et cetera).
 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.
 Pricing is one of the four Ps of the marketing mix.
The other three aspects are product, promotion, and
place.
 Price is the only revenue generating element
amongst the 4ps,the rest being cost centers.
 Historically, price has been the major factor
affecting buyer choice.
 Recently, however, non price factors have become
increasingly important in buyer-choice behavior.
 Throughout history, prices were set by negotiation
between buyers and sellers.
 Fixed price policies-setting one price for all buyers-
-is a relatively modern idea that arose with the
development of large-scale retailing at the end of the
nineteenth century.
 Today, we may be returning to dynamic pricing--
charging different prices depending on the individual
customers and situations.
 Price is also one of the most flexible of elements of
the marketing mix.
 It has been stated that pricing and price competition
is the number-one problem facing many marketing
executives.
 Many companies do not handle pricing well.
 Common mistakes that they make are:
1. Pricing is too cost-oriented.
2.Prices are not revised often enough to reflect
market changes.
3. Prices do not take into account the other elements
of the marketing mix.
4. Prices are not varied for different products,
market segments, and purchase occasions.
Significance Of Price
1. Price communicates value
 The more expensive a product or service is, the
more valuable people often perceive it to be. By
setting a high price, marketers communicate that the
offering delivers a proportionate amount of value.
2. Prices affect profits fast
 Price is the most important lever in your business.
3. Strategic prices increase your customer base
 Pricing isn’t always about a constant increase,
though. Marketing can go in the complete opposite
direction and decrease prices. This strategy builds up
your base of customers.
4. The competitive situation
 The strength of competition in the market
influences a service organization’s discretion
over its prices.
5. Price as an indicator of service quality
 One of the intriguing aspects of pricing is that
buyers are likely to use price as an indicator of
both service costs and service quality.
6. To maximize profit
 One of the objectives of pricing is to maximize
the profit.
 Factors influencing pricing
1. Internal factors affecting pricing
 Internal factors are related to the overall marketing
objectives of the company or cost of the production.

 The internal factors affecting price include: company

objectives and strategies (with an emphasis on
integration); costs and classification (including fixed
and variable costs); economies of scale; experience
effects; price escalation; and the cost of
implementing various pricing schemes.
 Cost—in the long run, the price should not fall below
the cost of making and distribution the product or
service.

 Company and marketing objectives/resources—all

marketing decisions including pricing decision, need
to reflect and be consistent with overall company and
marketing objectives.

 In general, marketing objectives, marketing mix-

strategy, costs and organizational considerations
are internal factors affecting pricing decision of
companies.
2. External factors affecting price
 A core issue of pricing is the impact of price on
demand and sales volume.
 Price-volume relationships relate to basic supply
and demand theory and include the effect of
branding and stages in the product life cycle on
demand.
 Recognition has to be given to the differences
between individual customers and industrial
customers.
 The effect of the competitive environment on
competitive activity is also important including the
structure of the market, level of market concentration
and the existence of competitive advantage.
 The channel environment, legal environment,
consumer pricing regulations and the
international setting are also key issues in the
determination of price.
 Demand—the price of the product should not
exceed what the market will bear. Put another
way, the price of the product and service exceed
the value of its benefit to the buyer.
 Competition/market structure---companies
must take cognizance of these factors before
coming out with any price because this is the rock
on which many company fonder.
Social/legal aspects-legal and social consideration
are also inputs to successful pricing decisions.
They should be regarded as they can impact
positively or negatively on the company’s
operations.

Distribution/trade - Since most company market

their product via middlemen in the channel of
distribution, management must consider how this
will affect pricing decisions. For example, do we
set price with the final consumer in mind? Or do
we set price with the distributor in mind?
INTERNAL FACTORS AFFECTING PRICING
DECISION:
 Marketing Objectives.
 Marketing Mix-Strategy.
 Costs.
 Organizational Considerations.
1) MARKETING OBJECTIVES
 Competition is very hard.
 Survival: Low Prices to Cover Variable Costs and
Some Fixed Costs to Stay in Business (To less
price to continue).
 CURRENT PROFIT MAXIMIZATION:
 Choose the Price that Produces the Maximum
Current Profit, Cash Flow or ROI (Earn the profit
in a shortcut.
 MARKETSHARE LEADERSHIP:
 Low as possible prices to become the market share leader
(you want to be the highest share of the market.
 PRODUCT QUALITY LEADERSHIP:
 High prices to cover higher performance quality (high
price – high quality)
2) MARKETING MIX-STRATEGY:
 Pricing must be carefully coordinated with the other
marketing mix elements.
 Target costing is often used to support product positioning
strategies based on price.
 Non price positioning can also be used.
 Product design & quality.
 Promotion
 Distribution.
 These are all price related.
3) COST:
Those Factors which determines what your cost is.
 TOTAL COSTS: sum of the fixed and variable
costs for a given level of production.
 FIXED COST: It remains constant. Costs that
don’t vary with sales or production levels.
E.g: Executive Salaries, Rent
 VARIABLE COST: It varies in total cost of
production.
 Costs that do vary directly with the level of
production.
E.g: Raw materials
4) ORGANIZATION CONSIDERATION
 LEVEL OF PRODUCTION: Increasing productivity and
decreasing the cost.

GENERAL PRICING STRATEGIES AND

APPROACHES
1. COST BASED PRICING:
 First Design Product.
 Then How much cost it would take to produce the product.
 Then determined its price.
 Include a profit percentage with product cost
Mark-up pricing
Include a profit percentage with product cost
Example
Wild Blue Preserves makes 15 different jams
and jellies. They set up a small shop in a local
mall to sell their products alongside other
prepared foods. A jar of wild blueberry jelly
costs $1.50 per 250 ml jar to produce. The mark-
up pricing percentage Wild Blue Preserves plans
to use is 100 percent. The jar of jam will cost
$3.00 in the shop.
Disadvantages of cost based pricing
 Before you select a cost based pricing option, you should
consider the disadvantages.
 There are two important reasons why cost based pricing
doesn't work for some businesses.
1. Cost based pricing doesn't consider how customer
demand affects price. Demand for a product will directly
affect how much people will pay.
2. Competition is not included in cost-based pricing
methods.
• Competition should affect how you price your product.
The idea of simply adding a profit level or percentage to
a product price will only work in industries with limited
competition.
2. VALUE BASED PRICING:
 What customer value and preferred.
 Consider its value.
 According to the value we set the price.
 Use price to support product image
 Set price to increase product sales
 Design a price range to attract many consumer
groups
 Price a bundle of products to reduce inventory or
to excite customers
 Knowing your customer ensures you take a market focus
with your business.
 You need to find out how your customer feels about various
product prices and what they would do if the price changed.
 Customers change their buying habits according to product
price.
 Think about your target customer and try to answer the
following questions:
o Does your customer assume price indicates product quality?
o Will customers think they are getting their money's worth
from your product?
o Do your customers care more about prestige than product
price?
o What are target customers prepared to pay for your product?
Disadvantages of customer based pricing
 Before you implement a customer based pricing
method, note the following disadvantages. If you
are too focused on the customer, you may:
 Ignore production costs
 Forget about the competition
 There are other factors which may affect your
pricing strategy.
 You need to decide how to set both wholesale
and retail prices for your product.
 Volume discounts and rebate much be
considered.
3. COMPETITION BASED PRICING:
 Price is the same as the competition
 Set price to increase customer base
 Seek larger market share through price
 The big advantage of competition based pricing
is that you are focused on your industry and
therefore your competition.
 Going Rate Pricing  Company sets prices
based on what competitors are charging.
 Sealed Bid Pricing  Company sets prices based
on what they think competitors will charge.
 Once you know what your competitors are doing, you can
better decide how you will manage your business.
 Understanding your competition will take some research.
Use the following questions to learn more about your
competition:
 How many competitors operate in my market?
 Are my competitors larger or smaller than me?
 Are my competitors close by or far away?
 Does my industry have barriers to entry such as legislation,
extremely expensive or specialized capital equipment or
unique ingredients? Is it difficult for new competitors to
enter the industry?
 What types and number of products do my competitors sell?
 Disadvantages of competition based pricing

While competition based pricing offers

advantages, you need to consider the following
disadvantages.

 You may ignore your own production costs if you

focus too closely on the prices set by competitors.
 More time is needed to conduct and update
market research.
 Competitors can easily mimic whatever price you
select.
Tips for Successful Pricing
 Good product prices are important to any
successful business.

 Pricing takes creativity, time, research, good

recordkeeping and flexibility.

 You need to balance the costs of producing a

product with competition and the perceptions of
your target customer to select the right product
price.
 Follow the following tips to ensure greater
pricing success.
1. Be creative
Think of new ways to sell more to existing
customers or to attract new customer groups.
2. Listen to your customer
Make a point of noting customer comments in a
journal or file. Review them periodically to glean
new ideas.
3. Do your homework
Keep good notes of how you arrived at a price so
you can make similar assumptions in the future.
4. Boost your records
Good recordkeeping will help you to set a price
and to track the performance of your pricing.
5. Cover the basics
The three basics of pricing involve product cost,
competition and customers. Blend pricing
methods to ensure the three basics are in balance.

6. Be flexible
Constantly review both internal and external
factors and calculate how a price change would
affect the new situation
 In general, price is the process of determining what a
company will receive in exchange for its products.
 Pricing factors are manufacturing cost, market place,
competition, market condition and quality of product.
What a price should do
A well chosen price should do three things:
 Achieve the financial goals of the company (e.g.,
profitability)
 Fit the realities of the marketplace (Will customers buy
at that price?)
 Support a product's positioning and be consistent with
the other variables in the marketing mix
 From the marketers’ point of view, an efficient
price is a price that is very close to the maximum
that customers are prepared to pay.

 In economic terms, it is a price that shifts most of

the consumer surplus to the producer.

 A good pricing strategy would be the one which

could balance between the price floor (the price
below which the organization ends up in losses)
and the price ceiling (the price beyond which the
organization experiences a no demand situation).
Pricing Objectives
 Many pricing objectives are available for careful
consideration.
 Revenue maximization—seeks to maximize revenue
from the sale of products without regard to profit.
 This objective can be useful when introducing a new
product into the market with the goals of growing
market share and establishing long-term customer base.

 Quality leadership—used to signal product quality to

the consumer by placing prices on products that convey
their quality.
 Quantity maximization—seeks to maximize the number
of items sold.
 This objective may be chosen if you have an underlying
goal of taking advantage of economies of scale that may be
realized in the production or sales arenas.
 Status quo—seeks to keep your product prices in line with
the same or similar products offered by your competitors to
avoid starting a price war or to maintain a stable level of
profit generated from a particular product.
 Survival—put into place in situations where a business
needs to price at a level that will just allow it to stay in
business and cover essential costs.
 To help society— You might keep the price lower than
"what the market will bear" in order to make essential
products available to the consumers.
Types of Pricing Strategies
 The most important element of an effective market strategy
is the ability to maximize and protect the price of the
product.
 Price is the final measure of customer value and
competitive advantage.
 Strategic Pricing clarifies the relationship between market
segmentation and price, and delivers the tools your
organization needs to stay focused on value as you
determine break-even, define price elasticity, and analyze
tradeoffs between features and price points.
 Using strategic pricing tools yields a better positioning
approach.
 Strategic Pricing will help you determine the appropriate
price to capture the value you provide to your customers:.
1. Competitive pricing—pricing your product(s) based on
the prices your competitors have on the same product(s).
2. Multiple pricing—seeks to get customers to purchase a
product in greater quantities by offering a slight discount
on the greater quantity.
3. Optional product pricing—used to attempt to get
customers to spend a little extra on the product by
purchasing options or extra features.
4. Penetration pricing—used to gain entry into a new
market.
 The objective for employing penetration pricing is to
attract and grow market share. Once desired levels for
these objectives are reached, product prices are typically
increased.
5. Premium pricing—employed when the product you are
selling is unique and of very high quality, but you only
expect to sell a small amount.
6. Product bundle pricing—used to group several items
together for sale. This is a useful pricing strategy for
complementary, overstock, or older products.

7. Product line pricing—used when a range of products or

services complement each other and can be packaged
together to reflect increasing value.
8. Skim pricing—similar to premium pricing, calling for a
high price to be placed on the product you are selling.
9. Psychological Pricing—this approach is used
when the marketer wants the consumer to respond
on an emotional, rather than rational basis. For
example, ‘Price point perspective of ' 99 cents
instead of one birr.
10. Promotional Pricing- Pricing to promote a
product is a very common application. There are
many examples of promotional pricing including
approaches such as BOGOF (Buy One Get One
Free).
11. Geographical Pricing- Geographical pricing is
evident where there are variations in price in
different parts of the world.
 BREAK EVEN OR TARGET PROFIT PRICING
 Tries to determine the price which a firm will break
even or make a target profit.
Total Revenue = Total Cost
Total Revenue = Fixed Cost + Variable Cost
Q.P = F.C + QVc
QP-QVc = F.C
F.C = Q (P-Vc)
Q = F.C/ (P-Vc): This is the formula of Break Even.
 The point which will meet the two points.
 Area above break even is the profit.
 Area below the break even is the cost
The process of setting the price involves the
following steps:
Step 1: Selecting the Pricing Objective
Step 2: Determining Demand

Step 3: Estimating Costs

Step 4: Analyzing Competitors' Costs, Prices, and
Offers

Step 5: Selecting a Pricing Method

Step 6: Selecting Final Price
 General Objectives of Pricing
 Profit Oriented
 To achieve a target return:
 To maximize profit
 Sales oriented
 To increase sales volume
 To maintain or increase market share
 Status quo-oriented
– To stabilize prices
– To meet competition
 Pricing Strategy
 Factors to consider when setting prices

Internal Factors: External Factors:

Pricing
Marketing objectives Nature of the market
decisions
and demand
Marketing-mix strategy
Competition
Costs
Other environmental
Organizational
factors (economy,
considerations
resellers, government
 Major considerations in setting price

Low Price High Price

No Competitors’ No
Product Consumer
possible prices and other possible
costs perceptions
profit at external and demand at
of value
this price internal factors this price
 Pricing Strategies/Approaches
 Companies set prices by selecting a general pricing approach
 Cost-based approach
• Cost-plus pricing
• Breakeven analysis or Target profit
 Value-based approach
• Value based pricing
 Competition based approach
• Going-rate
• Sealed-bid pricing
 Other approaches
• Uniform Delivered Pricing
• Zone delivered Pricing
• Odd Pricing
 Cost based Vs value based pricing

Cost-based pricing

Product Cost Price Value Customer

s

Value-based pricing

Customers Value Price Cost Product

 Other Pricing Approaches
 Uniform Delivery Pricing: The same delivered price is
quoted to all buyers regardless of their locations.
 Usually used when freight cost is small part of the
seller’s total cost
 When free delivery is believed to add value to
customers
 Zone Delivered pricing: divides the market into limited
number of broad geographic zones and setting uniform
delivered prices for each zone.
 Odd pricing: setting price at uneven (odd) amounts, such
as 19.95
 New Product pricing/Market Entry Strategy
 Market Skimming Pricing: Setting a relatively high
initial price for a new product.
 To recover research and development costs as quickly
as possible
 Provides the firm with flexibility- becomes easier to
lower prices

 Market Penetration Pricing: relatively low initial pricing

 To penetrate the mass market immediately
 Generate substantial sales volume and large market
share
 To discourage other firms from introducing competing
products
THANK YOU
FOR YOUR
ATTENTION.