Pricing Strategies
What is a Price? Barter?
Price is the money or other
consideration (including other goods
and services) exchanged for the
ownership or use of a good or service.
Barter is the practice of exchanging
goods and services for other goods and
services rather than money.
Value and Value Pricing
• Value can be defined as the ratio of
perceived benefits to price or:
value = perceived benefits/price
• Value-pricing is the practice of
simultaneously increasing product
and service benefits and
maintaining or decreasing price.
The Profit Equation
=
Total revenue – Total cost
Total revenue =
Unit price  Quantity sold
Total cost
Fixed cost + Variable cost
Profit
=
Steps in Setting Price
1a. Pricing Constraints Identified
Pricing constraints are factors that limit the
latitude of prices a firm may set.
• demand for the product class, product, and
brand
• newness of the product: stage in the product life
cycle
• cost of producing and marketing the product
• competitor prices
• type of competitive markets
–
–
–
–
pure monopoly
oligopoly
monopolistic competition
pure competition
1b. Pricing Objectives
Expectations that specify the role of price in
an organization’s marketing and strategic
plans are pricing objectives:
1. Profit
4. Unit Volume
2. Sales
5. Survival
3. Market Share
6. Social Responsibility
2. Estimate Demand
A demand curve shows a maximum
number of products consumers will
demand/buy at a given price.
Economists stress three key factors in
estimating demand:
1. Consumer tastes
2. Price and availability of other
products
3. Consumer income
2b. Fundamental Revenue
Concepts
• Total revenue (TR)
– Is the total money received from the sale of a product, or
Unit Price  Quantity Sold
• Average revenue (AR)
– Is the average amount of money received for selling one
unit of the product, or
Total Revenue/Quantity = Unit Price
• Marginal revenue (MR)
– Is the change in total revenue obtained by selling one
additional unit, or
The Slope of the Total Revenue Curve
Price Elasticity of Demand Defined
Price Elasticity of Demand is the percentage change in
quantity demanded (QD) relative to a percentage change in
price (P) and can be expressed as follows:
E = % change in QD
% change in P
Elastic Demand = % change in QD > % change in P
Inelastic Demand = % change in QD < % change in P
Unitary Demand = % change in QD = % change in P
3. Fundamental cost concepts
• Total cost (TC)
– Is the total expense incurred by a firm in producing
and marketing the product, and is the sum of the
fixed
cost and variable.
• Fixed cost (FC)
– Is the sum of the expenses of the firm that are stable
and do not change with the quantity of product that
is produced and sold .
• Variable cost (VC)
– Is the sum of the expenses of the firm that vary
directly with the quantity of product that is
produced and sold.
3b.Calculating a Break-Even
Point
Quantity
Sold (Q)
Total
Price per Revenue (TR)
Bushel (P)
(P x Q)
0
$2
1,000
$
Unit
Variable
Cost (UVC)
0
1
2
2,000
2,000
2
3,000
Total
Variable
Fixed
Cost (TVC) Cost
(UVC x Q) (FC)
$
Total
Cost (TC)
Profit
(FC+VC) (TR-TC)
0
$2,000
$2,000
-$2,000
1
1,000
2,000
3,000
-1,000
4,000
1
2,000
2,000
4,000
0
2
6,000
1
3,000
2,000
5,000
1,000
4,000
2
8,000
1
4,000
2,000
6,000
2,000
5,000
2
10,000
1
5,000
2,000
7,000
3,000
6,000
2
12,000
1
6,000
2,000
8,000
4,000
4. Select an approximate
price level
a) Demand-Oriented Pricing
Approaches
•
•
•
•
•
•
•
•
Skimming pricing.
Penetration Pricing.
Prestige Pricing.
Price Lining.
Odd-Even Pricing.
Target Pricing.
Bundle Pricing.
Yield Management Pricing.
b) Cost-Oriented Pricing
Approaches
• Standard markup pricing.
• Cost-plus pricing.
• Experience curve pricing.
c) Profit-Oriented Pricing
Approaches
• target profit pricing
• target return-on-sales pricing
• target return-on-investment pricing
d) Competition-Oriented
Pricing Approaches
• customary pricing.
• above-, at-, or below- market pricing
• loss leader pricing.
5. Set the List or Quoted
Price
• One-Price Policy: setting the same price
for similar customers who buy the same
product and quantities under the same
circumstances.
• Flexible-Price Policy: offering the same
product and quantities to similar
customers but at different prices.
(buying a house)
5. Set the List or Quoted
Price
• Company effects
• Customer effects
• Competitive effects
6. Special Adjustments to
List or Quoted Price
Special adjustments
to list or quoted price
Discounts
Quantity
cumulative
non cumulative
Cash
Allowances
Trade-in
Promotional
Geographical
adjustments
Legal and Regulatory aspects of
Pricing
Price Fixing
Price Discrimination
Deceptive Pricing
Predatory Pricing
Delivered Pricing
Deceptive Pricing
Bait and switch
Bargains conditional on other purchases
Comparable value comparisons
Comparisons with suggested prices
Former price comparisons
“It is not the cost of the
materials that determines
the product value, but rather
the customers perception of
value”
Greaves, 1995