Pricing Info from Market-Oriented Pricing: Strategies for Management, Michael Morris
and Gene Morris
Examples of Pricing Objectives:
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target return on investment
target market share
maximize long-run profit
maximize short-run profit
sales growth
stabilize the market
convey a particular image
desensitize customers to price
be the price leader
discourage entry by new competitors
speed exit of marginal firms
avoid government investigation and
control
 maintain loyalty and sales support of
middlemen
 avoid excessive demands from suppliers
 be regarded as fair by customers
 create interest and excitement for the
item
 use price of one product to sell other
products in line
 discourage others from lowering prices
 recover investment in product
development quickly
 encourage quick payment of accounts
receivable
 generate volume as to drive down costs
Types of Pricing Strategies
Cost Based:
 mark-up pricing – variable and fixed costs per unit are estimated, and a standard mark-up is added.
The mark-up is frequently either a percentage of sales or of costs.
 target return pricing – variable and fixed costs per unit are estimated. A rate of return is then taken
times the amount of capital invested in the product, and the result is divided by estimated sales. The
resulting return per unit is added to unit costs to arrive at a price.
Market-based:
 floor pricing – charging a price that just covers costs. Usually in order to maintain a presence in the
market given the competitive environment.
 penetration pricing – charging a price that is low relative to a) the average price of major competitors
and b) what customers are accustomed to paying
 parity pricing (going rate) – charging a price that is roughly equivalent to the average price charged
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by the major competition.
premium pricing (skimming) – the price charged is intended to be high relative to a) the average price
of major competitors and b) what customers are accustomed to paying
price leadership – usually involves a leading firm in the industry making fairly conservative price
moves, which are subsequently followed by other firms in the industry. This limits price wars and
leads to fairly stable market shares.
stay out pricing – the firm prices lower than demand conditions require, so as to discourage market
entry by new competitors.
bundle pricing – a set of products or services are combined and a lower single price is charged for the
bundle than would be the case if each item were sold separately.
value-based pricing (differentials) – different prices are set for different market segments based on the
value each segment receives from the product or service.
cross-benefit pricing – prices are set at or below costs for one product in a product line, but relatively
high for another item in the line which serves as a direct complement (e.g. certain brands of cameras
and film).
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Factors Favoring Penetration
Pricing
possibility of significant cost
reductions with volume
production
sizeable segments which highly
elastic demand
low barriers to competitive entry
low customer switching costs
ability to use price to convey
bargain image
ability to use low price of one
product to sell other products in
the line
Factors Favoring Parity Pricing
will entrenched competition or
presence of a price leader
desire to be regarded as “fair” by
distributors and customers
moderate barriers to competitive
entry
need exists to stabilize the market
product or service does not lend
itself to non-price differentiation
no differences in cost structures
among the various competitors
Factors Favoring Permium
Pricing
no cost savings from increased
production volume
sizeable segments with highly
inelastic demand
high barriers to competitive entry
high customer switching costs
ability to use price to convey
unique quality benefits or
exclusivity
clear-cut cost advantage which
competitors cannot duplicate
Key Managerial Questions to be Addressed in Developing a Pricing Structure
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Should a standard list price be charged for the product or service?
Should frequent or large customers be charged the same base price?
Can and should separate prices be charged for different aspects of the product or service?
How should the time of purchase affect the price charged to a customer?
To what extent should the price charged be varied to reflect the cost of doing business with a
particular customer?
Should customers who value the product more be charged a higher price than other customers?
What is the nature of any discounts to be offered the buyer?
When and where should title be taken by the buyer?
Is it realistic to offer a dual-rate structure, where the same customer has a choice between two pricing
options for the same product or service?
Should the price structure involve a rental or leasing option?
Ten Major Questions to Address Regarding Competitors before Making Pricing Decisions
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How do the market objectives of our leading competitors differ from our own objectives?
Are there meaningful differences between the pricing strategies of leading competitors and our own
strategy?
Which target markets are receiving priority from our competitors? Are these the same as ours?
What existing commitments do competitors have to production schedules for various products, to
customer groups, to distributors, or to suppliers?
How much unused production capacity do competitors have?
Do competitors differ significantly in terms of their financial solvency?
What are the differences in the production costs and overhead positions of our leading competitors?
How quickly can competitors react to any pricing moves on our part, given their organizational
structure, current product offerings, and their production techniques?
Are there differences in the depth and breadth of competitors product lines compared to our own?
Are their prices for any one item less flexible because of overall product line considerations?
What situational factors exist for competitors which have implications for their pricing behavior (e.g.
seasonality in a particular market, excess or obsolete inventory)?
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