Chapter Seven

Marketing Mix Strategy II: Pricing

 Pricing:
Understanding and
Capturing Customer Value
Topic Outline
• Major Pricing Strategies
• Internal and External Considerations
Affecting Price Decisions
• New Product Pricing Strategies
• Product Mix Pricing Strategies
• Price Adjustments Strategies
 What Is a Price?
Price is the amount of money charged for a
product or service. It is the sum of all the
values that consumers give up in order to
gain the benefits of having or using a
product or service.

Price is the only element in the marketing

mix that produces revenue; all other
elements represent costs
LO1: Major Pricing Strategies
Understanding how
much value
consumers place on
the benefits they
receive from the
product and setting a
price that captures
that value
 Major Pricing Strategies

Value-based pricing
Customer
based pricing
Cost-based pricing

Competitor
based pricing
 Major Pricing Strategies

Value-based pricing uses the buyers’

perceptions of value, not the seller's
cost, as the key to pricing. Price is
considered before the marketing
program is set.
• Value-based pricing is customer
driven
• Cost-based pricing is product driven
Major Pricing Strategies
Customer Based Pricing
 Major Pricing Strategies

Value-Based Pricing

1. Good-value pricing
offers the right combination of quality and
good service at a fair price
 Major Pricing Strategies

2. Everyday low pricing (EDLP) charging a

constant everyday low price with few or
no temporary price discounts
 Major Pricing Strategies

3. High-low pricing charging higher prices on

an everyday basis but running frequent
promotions to lower prices temporarily on
selected items
 Major Pricing Strategies
Cost-Based Pricing

Cost-based pricing setting prices based on

the costs for producing, distributing, and
selling the product plus a fair rate of
return for effort and risk
Cost-based pricing adds a standard markup to
the cost of the product
 Major Pricing Strategies

Fixed costs are the costs that do

not vary with production or sales
level
– Rent
– Heat
– Interest
– Executive salaries
 Major Pricing Strategies

Variable costs are the costs that vary with

the level of production
– Packaging
– Raw materials

Total costs are the sum of the fixed and

variable costs for any given level of
production
Major Pricing Strategies
1. Cost-Plus Pricing
• Cost-plus pricing adds a standard
markup to the cost of the product
• Benefits
– Sellers are certain about costs
– Prices are similar in industry and price
competition is minimized
– Buyers feel it is fair
• Disadvantages
– Ignores demand and competitor prices
 Major Pricing Strategies
2. Break-Even Analysis and Target Profit Pricing

Break-even pricing is the price at

which total costs are equal to total
revenue and there is no profit

Target return pricing is the price at

which the firm will break even or
make the profit it’s seeking
 Major Pricing Strategies

Competition-based pricing
• Setting prices based on competitors’
strategies, costs, prices, and market
offerings.
• Consumers will base their judgments
of a product’s value on the prices
that competitors charge for similar
products.
LO2: Internal and External Considerations
Affecting Price Decisions

Target costing starts with an ideal

selling price based on consumer
value considerations and then
targets costs that will ensure that
the price is met
 Internal and External Considerations
Affecting Price Decisions

Organizational considerations include:

• Who should set the price
• Who can influence the prices
 Internal and External Considerations
Affecting Price Decisions
The Market and Demand
• Before setting prices, the
marketer must understand
the relationship between
price and demand for its
products
Internal and External Consideration
Affecting Price Decisions

Competition
Pure competition
Monopolistic competition
Oligopolistic competition
Pure monopoly
READING ASSIGNMENT
 Internal and External Considerations
Affecting Price Decisions

Price elasticity of demand illustrates the response of

demand to a change in price

Inelastic demand occurs when demand hardly changes

when there is a small change in price
Elastic demand occurs when demand changes greatly for
a small change in price

Price elasticity of demand =

% change in quantity demand
% change in price
 Other Internal and External
Consideration Affecting Price
Decisions
Economic conditions

Reseller’s response to
price

Government

Social concerns
 LO3: New-Product Pricing
Strategies
1. Market-skimming pricing is a strategy with high
initial prices to “skim” revenue layers from the
market
• Product quality and image must support the price
• Buyers must want the product at the price
• Costs of producing the product in small volume
should not cancel the advantage of higher prices
• Competitors should not be able to enter the market
easily
2. Market-penetration pricing sets a low initial
price in order to penetrate the market quickly
and deeply to attract a large number of buyers
quickly to gain market share
• Price sensitive market
• Inverse relationship of production and
distribution cost to sales growth
• Low prices must keep competition out of the
market
LO4: Product Mix Pricing Strategies

Optional- Captive-
Product
product product
line pricing
pricing pricing

Product
By-product
bundle
pricing
pricing
 Product Mix Pricing Strategies

Product line pricing takes into account the

cost differences between products in the
line, customer evaluation of their features,
and competitors’ prices (e.g., Dutch Lady
Milk, Nike Shoes, Adidas Sport Attire)
Optional-product pricing takes into account
optional or accessory products along with
the main product (e.g., refrigerator that
comes up with an optional icemaker)
Captive-product pricing involves products that
must be used along with the main product
(e.g., toner cartridges for printers)
By-product pricing refers to products with little
or no value produced as a result of the main
product. Producers will seek little or no profit
other than the cost to cover storage and
delivery. (e.g., In producing processed meats,
chemicals, or oil there are often by-products,
which – if they had to be disposed of – would
make the main product uncompetitive)
Product bundle pricing combines several
products at a reduced price (e.g., Mc Donald,
KFC)
LO5: Price-Adjustment Strategies

Discount and
Segmented
allowance
pricing
pricing

Psychological Promotional
pricing pricing

Geographic Dynamic International

pricing pricing pricing
 Price-Adjustment Strategies

Discount and allowance pricing reduces

prices to reward customer responses such
as paying early or promoting the product
• Discounts
• Allowances
Price-Adjustment Strategies

Segmented pricing is used

when a company sells a
product at two or more
prices even though the
difference is not based
on cost
 Price-Adjustment Strategies

Psychological pricing occurs when sellers

consider the psychology of prices and not
simply the economics
 Price-Adjustment Strategies
Promotional pricing is when prices are
temporarily priced below list price or cost to
increase demand
• Loss leaders
• Special event pricing
• Cash rebates
• Low-interest financing
• Longer warrantees
• Free maintenance
 Price-Adjustment Strategies
Geographical pricing is used for customers in
different parts of the country or the world
• FOB-origin pricing
• Uniformed-delivered pricing
• Zone pricing
• Basing-point pricing
• Freight-absorption pricing
 Price-Adjustment Strategies

• FOB-origin (free on board) pricing means

that the goods are delivered to the carrier
and the title and responsibility passes to
the customer
• Uniformed-delivered pricing means the
company charges the same price plus
freight to all customers, regardless of
location
 Price-Adjustment Strategies

• Zone pricing means that the company sets

up two or more zones where customers
within a given zone pay a single total price
• Basing-point pricing means that a seller
selects a given city as a “basing point” and
charges all customers the freight cost
associated from that city to the customer
location, regardless of the city from which
the goods are actually shipped
 Price-Adjustment Strategies

• Freight-absorption pricing means the

seller absorbs all or part of the actual
freight charge as an incentive to attract
business in competitive markets
 Price-Adjustment Strategies

Dynamic pricing is when

prices are adjusted
continually to meet the
characteristics and
needs of the individual
customer and situations
(e.g., Tailor-made
clothing)
 Price-Adjustment Strategies
International pricing is when prices are set in a
specific country based on country-specific factors
• Economic conditions
• Competitive conditions
• Laws and regulations
• Infrastructure
• Company marketing
objective