Chapter 9
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Objectives
Understanding the factors that affect the
pricing strategies
 Learn the major strategies and approaches
for pricing.
 Know about the New-Product Pricing
Strategies
 Learn how companies adjust their prices to
take into account different types of
customers and situations.

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What Is Price
Price Has Many Names
●
●
●
●
●
Rent
Fee
Rate
Commission
Assessment
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●
Tuition
● Fare
● Toll
● Premium
● Retainer
 Bribe
 Salary
 Wage
 Interest
 Tax
3
What Is Price?

Definition:
“The amount of money charged for a product or
service. More broadly price is the sum of the
values that consumers exchange for the
benefits of having or using the product or
service.”
Value
Price
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The consumer
perception of tangible
and intangible benefits
4
What Is Price?

Price and the Marketing Mix:
 Only element to produce revenues
 Most flexible element
 Can be changed quickly

Common Pricing Mistakes
 Reducing prices too quickly to get sales
 Pricing based on costs, not customer value
 Not taking the rest of the marketing mix into account.
As part of company’s overall value proposition,
price plays a key role in creating customer
value and building customer relationship
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Factors To Consider When Setting
Price
Customer
perception
of value
Price ceiling
No demand above
this price
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Other internal and
external consideration
____________
Marketing strategy,
objectives and mix
Nature of the market and
demand
Competitors’ strategies
and price
Product
cost
Price floor
No profits below this
price
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General Pricing
Approaches
Buyer-Based
pricing
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Cost-Based
Pricing
Value-Based
Pricing
Cost-Plus
Pricing
Competition-Based
Pricing
Breakeven Analysis
And
Target Profit Pricing
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Value-based Pricing Versus Costbased Pricing
Cost-based Pricing
Product
Cost
Price
Value
Customer
cost
Product
value-based Pricing
customer
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value
price
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Value-based Pricing Versus Costbased Pricing
Cost-based Pricing
Product
Cost
Price
Value
Customer
value-based Pricing
customer
value
price
cost
Product
Idea
generation
Concept
testing
Marketing
strategy
Business
analysis
Product
development
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General Pricing Approaches

Buyer-Based pricing - Value-Based Pricing:
 Uses buyers’ perceptions of value rather than seller’s costs
to set price.
 Measuring perceived value can be difficult.
 Good-Value Pricing: offering just the right combination of
quality and good service at a fair price
○ Introducing less-expensive versions (value menus)
○ Redesigning existing brands for less price (more quality for
the same, or the same quality for less)
 Value-Added Pricing: attaching value-added features and
services to differentiate a marketing offer and support
higher price, rather than cutting price to match
competitions.
o Shifting the focus from price to value
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General Pricing Approaches

Buyer-Based pricing - Competition-Based Pricing:
 Going-rate pricing: is setting the price based largely
on following competitors’ price rather then on company
cost or demand.
○ May price at the same level, above, or below the
competition (different fast-food chains)
 Sealed-Bid Pricing: setting price based on how the
firm thinks competitors will price rather than on its own
cost or demand
○ Used when company bids for jobs.
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General Pricing Approaches

Cost-Based Pricing: Types of Cost
Fixed cost
(F.C.)
(overhead)
are costs that
do not vary
with
production or
sales level
Example:
salaries, rent
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Variable
cost (V.C.)
Total cost
(T.C.)
vary directly
with the level
of production
Example: raw
material
The sum of
the fixed and
variable cost
for any given
level of
production
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General Pricing Approaches

Cost-Based Pricing: Cost-Plus Pricing
Adding standard MARKUP to the cost of the product
Markup pricing:
Calculating all the costs associated with a product and then determining a
markup percentage to cover the costs and expected profits.
Example:
Variable costs: $20
Fixed costs: $ 500,000
Expected sales: 100,000 units Desired Sales Markup: 20%
Variable Cost + Fixed Costs/Unit Sales = Unit Cost
$20 + $500,000/100,000 = $25 per unit
Unit Cost/(1 – Desired Return on Sales) = Markup Price
$25 / (1 - .20) = $31.25
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General Pricing Approaches

Cost-Based Pricing: Cost-Plus Pricing
 Ignores demand and competition
 Popular pricing technique because:
○ It simplifies the pricing process
○ Price competition may be minimized
○ It is perceived as more fair to both buyers and
sellers
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General Pricing Approaches

Cost-Based Pricing: Break-Even Analysis and
Target Profit Pricing
Setting a price to break even on the costs of making and marketing a
product; or setting price to make a target profit.
Revenues
1000
Thousands
of Dollars
Target Profit $200,000
800
Total Costs
Break-even
point
600
Variable cost
400
Fixed Costs
200
0
10
20
30
40
Sales Volume in Thousands of Units
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Quantity To Be Sold To
Meet Target Profit
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Break-even point calculation
The Break-even point (zero profit)
BEP (Units)
= Total Fixed Cost
Price - Variable costs
BEP (Dollars) = Fixed Costs
Contribution Margin Ratio
= Fixed Costs
(Price–Variable costs)/ V. costs
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General Pricing Approaches

Cost-Based Pricing: Break-Even Analysis and
Target Profit Pricing
 Break-even charts show total cost and total revenues at
different levels of unit volume.
 The intersection of the total revenue and total cost curves
is the break-even point.
 The higher the price the less number of units the company
will need to sell to break even
 This method does not take the price-demand relationship
into account.
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Factors to Consider When Setting
Price
Internal Factors
 Overall Marketing Strategy, Objectives And
Mix
• Market positioning influences pricing strategy
•Pricing must be carefully coordinated with the
other marketing mix elements
Price
=
Money + …..
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Value
=
Client Perception,
service, experience
- Segmentation
- Targeting
- Positioning
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Factors to Consider When Setting
Price

Pricing objectives:
●
Profit-oriented
o To achieve a target return, or to maximise profits.
●
Sales-oriented
o To increase sales volume, or to maintain or increase market
share.
●
Status-quo oriented
o To stabilise prices, or to meet competition.
●
Customer retention
o Relationship building, attract new customers, and profitably
retain existing ones
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New-Product Pricing Strategies

Market-Skimming Pricing
 Setting a high price for a new product to skim
maximum revenues layer by layer from segments
willing to pay the high price.
 Normally used to introduce new products to the
market that attract the innovator market.
 The product quality and image must support its
higher price
 Competitors should not be able to enter the market
easily.
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New-Product Pricing Strategies

Market-Penetration Pricing
 Setting a low price for a new product in order to
attract a large number of buyers and a large
market share.
 Usually to reach mass markets and discourage
competition.
 The market should be highly price sensitive
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Price Adjustment Strategies
Strategies

Types of discounts
 Cash discount
Discount / allowance
 Segmented
 Psychological
 Promotional
 Geographical
 International

 Quantity discount
 Functional (trade) discount
 Seasonal discount

Allowances
 Trade-in allowances
 Promotional allowances
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Price Adjustment Strategies
Strategies
Discount / allowance
 Segmented
 Psychological
 Promotional
 Geographical
 International

 Customer-segment (museum)

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Types of segmented pricing
strategies:
 Product-form pricing (top
models)
 Location pricing (theaters)
 Time pricing (seasonal)

Certain conditions must exist
for segmented pricing to be
effective
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Price Adjustment Strategies

Conditions Necessary for Segmented
Pricing Effectiveness
 Market must be segmentable
 Segments must show different demand
 Pricing must be legal
 Costs of segmentation can not exceed revenues
earned
 Segmented pricing must reflect real differences
in customers’ perceived value
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Price Adjustment Strategies
Strategies
Discount / allowance
 Segmented
 Psychological
 Promotional
 Geographical
 International

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
The price is used to say
something about the
product.
 Price-quality relationship
 Reference prices
 Differences as small as
five cents can be important
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Price Adjustment Strategies
Strategies
Discount / allowance
 Segmented
 Psychological
 Promotional
 Geographical
 International

 Loss leaders

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Temporarily charge low price
or even below cost
 Special-event pricing
 Low-interest financing, longer
warranties, free maintenance

Promotional pricing can have
adverse effects
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Price Adjustment Strategies

Promotional Pricing Problems
 Easily copied by competitors
 Creates deal-prone consumers
 May grind down brand’s value
 Not a legitimate substitute for effective
strategic planning
 Frequent use leads to industry price wars
which benefit few firms
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Price Adjustment Strategies
Strategies
Discount / allowance
 Segmented
 Psychological
 Promotional
 Geographical
 International


Types of geographic
pricing strategies:
 FOB-origin pricing (free on
board) – factory price +
freight Uniform-delivered pricing
 Zone pricing
 Basing-point pricing
 Freight-absorption pricing
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Price Adjustment Strategies
Strategies
Discount / allowance
 Segmented
 Psychological
 Promotional
 Geographical
 International


Prices charged in a specific
country depend on many
factors
 Economic conditions
 Competitive situation
 Laws / regulations
 Distribution system
 Consumer perceptions
 Corporate marketing objectives
 Cost considerations
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