Dr. Vesselin Blagoev
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Cost
Pricing methods
Marketing
Competition
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Pricing objectives
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Target return
Profit oriented
Maximize profits
Sales oriented
Status quo oriented
EURO or unit sales growth
Growth in market share
Meeting competition
Non-price
3 competition

List Price -
Product:
Less:
Discounts
• Physical
• Service
( Quantity, Seasonal,
Cash, Temporary sales)
• Assurance of quality
Less: Allowances
• Repair facilities
• Packaging
(Trade-inns) equals
• Credit
Less: Rebate and coupon value
• Trading stamps
Place of delivery
Plus: Taxes
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Markup
Bait pricing
Average-cost pricing
Price lining
Price setting
Bundle pricing Complementary
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Break-even
Pont (BEP)
Psychological pricing
Perception price
Prestige pricing
Bid pricing
5

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 Fixed costs are those costs that remain unchanged no matter how much is produced (rent, depreciation, managers’ salaries, insurance, employees’ salaries)
 Variable costs – changing expenses, closely related to the output
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Cost-oriented pricing
The Markup is a money amount
(EUR, $, BGN), or percent, added to the cost of products to get the selling price
Example:
Cost 1 Euro + 0.50 Euro markup = 1.50 Euro
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 Average-cost pricing means adding a reasonable markup to the average cost of a product
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( Cost-oriented pricing)
Year 1
Direct costs (per unit) = 2
Fixed costs
Expected sales
Cost per unit
Direct costs
= 200,000
= 100,000
= 2
Fixed costs (200,000:100,000) = 2
Full costs = 4
Mark-up (10%)
Price (cost+mark-up)
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= 0.40
= 4.40
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( Cost-oriented pricing)
Year 2
Expected sales
Cost per unit
Direct costs
= 50,000
= 2
Fixed costs (200,000:50,000) = 4
Full costs = 6
Mark-up (10%)
Price (cost+mark-up)
= 0.60
= 6.60
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Cost-oriented pricing
 It leads to an increase in price as sales fall
 Sales estimates are made before the price is set – illogical procedure
 It focuses at the internal costs, rather than to the customers willingness to pay
 Overheads are difficult to estimate in a multi-products company
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 Average cost : the average cost for all products
 Marginal cost
: the cost to produce one more unit.
Example: 275 Euro is the cost to produce 9 units and 280 Euro – to produce 10 units. Then the marginal cost is the additional cost (5 Euro ) to produce 1 more unit.
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 Use of direct cost (or marginal cost).
This involves calculating only the costs for materials and labor + mark-up .
This price does not cover the full costs.
It is applied in some service businesses, such as hotels, airlines, where the product can not be stored
(the unused capacity means lost revenue).
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 Break-even point represents the quantity where the firm’s total cost will just equal its total revenue
Total fixed costs
BEP (units) =
Fixed cost contribution per unit
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Total revenue curve
50
25
100
75
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Loss area
Units of production (000)
Total cost curve
Profit area
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Let us take an example:
Let the price of product A = 1.2 Euro
Let the total fixed cost is 30,000 Euro.
Let the variable cost is 0.80 Euro. Then the fixed cost of that product is (1.2 – 0.8) = 0.4 Euro per unit.
BEP =
30,000 Euro
= 75,000 units
0.40 Euro
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Tertiary competitors
Secondary competitors
Immediate
Competitors
Technically
Similar product
Different products solving the same problem in similar way
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Different products solving or eliminating the problem in a different way
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 Going-rate pricing : the prices used by the competitors. No price differentiation (away from the marketing principles)
 Below the competition
 Above the competition
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Competitor-oriented pricing
 Bid pricing means offering a specific price for each possible job rather than setting a price that applies to all customers, i.e. building contractors.
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Competitor-oriented pricing
Expected profit = Profit x Probability of winning
Profit = Bidding price - Costs
Based on past experience about the pricing
(bidding) policy of the competitors
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Competitor-oriented pricing
Bid price
2000
2100
2200
2300
2400
2500
Profit
0
100
200
300
400
500
Probability
0.99
0.90
0.80
0.40
0.20
0.10
Expected
0
90
160
120
80
50
Which bid price do you recommend ?
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Competitor-oriented pricing
Bid price
2000
2100
2200
2300
2400
2500
Profit
0
100
200
300
400
500
Probability
0.99
0.90
0.80
0.40
0.20
0.10
Expected
0
90
160
120
80
50
The recommended bid price is EUR 2200 – based on the Expected Profit criterion
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Market factors
Costs
Marketing
Strategy
Explicability
Marketing
Orientated
Pricing
Value to customers
Competition
Effect on distributors/ retailers
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Price-quality relationship
Political
Factors
Negotiating margins
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
The customers have a “feeling” about the price levels and compare the tagprice with those levels.
 Setting a few price levels for a product line and then marking all items at these prices. For example, most watches are priced between 30 and 200 BGN. And the prices are 30, 70, 110, 150, 200.
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Value pricing means setting a fair price level for a marketing mix that really gives customers what they need.
Toyota is an example of a company which has different marketing mixes for different markets, each one offering more compared to the competing offerings.
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A tractor with a relatively very high price
USD 90,000 Competitors’ price
+ 7,000 for superior durability
+ 6,000 for superior reliability
+ 5,000 for superior after sale service
+ 2,000 for additional guarantee on parts
USD 110,000 a deserved price
- 10,000 discount
USD 100,000 our deserved list price
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Weight Characteristics
%
25 Durability
30 Reliability
30 Delivery terms
15 Quality of service
100%
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A
Pro ducts
B
40
33
50
45
40
33
25
35
41.65
32.65
24.9
C
20
33
25
20
30

 Psychological pricing means setting prices that have special appeals to target customers. Some scholars believe that there are whole ranges of prices that potential customers see as the same. Price cuts within the range do not increase the demand.
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Demand curve when Psychological pricing is appropriate
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Quantity
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 Prestige pricing is setting a rather high price to suggest high quality or high status
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 Lowering the prices will reposition the business/product, resulting in a failure to attract the target market
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A skimming price policy (skim the cream) is based on selling to the top of the market products at the highest possible price. It is applied by the market leaders only (image, high quality products, new products)
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 Lack of competition
 Product provides high value
 Customers have high ability to pay
 Consumer and bill payer are different
 High pressure to buy
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 Complementary product pricing is setting prices on several products as a group.
One of them can be priced very low so that the demand for the whole group will increase and
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 Bait pricing is setting some very low prices to attract customers, and trying to sell some more expensive models or brands once the customer is in the store
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 Odd-even pricing is setting prices that end in certain numbers, i.e. number 5, number 9 or 99.
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Low
Promotion
High
Price
Low
Slow penetration
Rapid penetration
High
Slow skimming
Rapid skimming
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 Used to speed new products into a market
 The plan is to raise the prices as soon as the introductory offer is over
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 Penetration pricing policy is based upon selling to the market at one low price. This is the case when the whole demand curve is fairly elastic.
It is very efficient when the economy of scale in production leads to a substantial reduction of the cost.
Some scholars call the penetration price ‘stay-out-price’.
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
Only feasible alternative
 Dominating competitors
 Make money later
 Make money elsewhere
 Experience effect (computers)
 Barrier to entry
 Predation – an attempt to put other companies out of business
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 Price discrimination is selling the same products to different buyers at different prices if it injures competition ->
Robinson-Patman Act (of 1936)
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 It refers to segmentation of the market and pricing differences, based on price elasticity characteristics of these segments
 Example: Dinner menu for 15 BGN is offered for 10 BGN from 6 to 7 p.m.
Time flexible and money sensitive customers will add sales. The variable cost has to be < 7
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Discounts are reductions from the list price given by a seller to buyers who either give up some marketing function or provide the function themselves
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Discounts
Quantity discounts
Cumulative quantity discounts
Seasonal discounts
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Offered to encourage customers to buy in larger amounts.
1-3 PCs at 350 EUR
4-6 PCs at 330 EUR
7+ PCs at 300 EUR
Apply to purchases over a given period of time
Encourage buyers to order in low seasons
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Discounts
Net 10 It means that the customer is given 10 days or 30 days to pay or Net 30
Cash discounts
2/10 net
30
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Encourage the buyers to pay their bills quickly. Usually the cash discount modifies the net terms.
Means that the buyer can take a 2% discount off the face value of the invoice if the invoice is paid within 10 days.
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Discounts
Trade
(functional)
A list price reduction given to the channel members for the job they are doing in the sales process discount
Sale price A temporary discount from the list price to encourage the customers for immediate buying
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Allowances – like discounts
– are given to channel members, customers or final users for doing something or accepting less of something
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Allowances
Advertising allowances
Price reductions given to firms in the channel to advertise or otherwise promote supplier’ products locally
To get shelf space for a product Stocking allowances
Push money
(prize money)
Trade-in
Called also PMs or spiffs – given to retailers to pass on the salesclerks for aggressively selling certain items
A price reduction given for used products when similar new products are bought
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The rebates are refunds paid to consumers after a purchase. Some car dealers offer rebates of USD 500 to
2500 to push the sales of slow-moving models.
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 F.O.B. price – Free On Board some vehicle at some place.
At the point of loading the title to the products passes to the Buyer.
Then the Buyer pays the freight and takes responsibility for damage in transit.
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 C.I.F.
(Cost Insurance and
Freight) : The title to the product remains with the Seller until the unloading of the product in the place of destination is done
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 Free custom office in Bourgas .
The product must be delivered to the specified place.
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 Zone pricing means making an average freight charge to all buyers within specific geographic areas. The Seller pays the actual freight charges and bills each customer for an average charge.
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 Dumping is pricing a product sold in a foreign market below the cost of producing it or at a price lower than in its domestic market
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Increase the price Cut the price
Value greater than price
Circumstances
Rising costs
Excess demand
Tactics
Value less than price
Excess supply
Harvest objective
Build objective
Price war unlikely
Stop competitors’ entry
Price fall Price jump
Staged price increases Staged price reduction
Escalator clauses (aver. Salary) Fighter brands (2 nd brand)
Price unbundling (training) Price bundling
Lower discounts Higher discounts
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