Strategic MATKETING PROBLEMS BY KERN AND PETRSON ( 12 THE ED )
PRESENTED BY : FARUK HASANSPAHIC - ALA-EDDIN ELMILADI
Chapter 8 : Pricing Strategy & Management
Contents :
1. Pricing Considerations
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Price as an Indicator of Value.
Price Elasticity of Demand.
Product-Line Pricing.
Estimating the Profit Impact from Price Changes.
2. Pricing Strategies
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Full-Cost Pricing.
Variable-Cost Pricing.
New-Offering Pricing Strategies.
Pricing and Competitive Interaction.
The Importance of Price
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Price is a direct determinant of profits (or losses).
Price indirectly affects costs (through quantity sold).
Price determines the type of customer and competition the organization will attract.
Price affects the image of the brand.
A pricing error can nullify all other marketing mix activities.
Relationship between Price and Profits
Profit = Total Revenue – Total Cost
Total Revenue = Price per Unit x Quantity Sold
Total Cost = Fixed Cost + Variable Cost
Pricing considerations :
Pricing Objectives have to be consistent with an organization’s overall marketing objectives
Examples of Pricing Objectives:
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Maximization of profits
Enhancing product or brand image
Improving customer value
Obtaining an adequate return on investment or cash flow
Maintaining price stability
Conceptual Orientation to Pricing
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Demand sets the price ceiling
Direct (variable) costs set the price floor
Factors narrowing pricing discretion:
 Government regulations;
 Price of competitive offerings;
 Organizational objectives and policies.
Other factors affecting the pricing decision :
 Life-cycle stage of product or service;
 Effect of pricing decisions on profit margins of marketing channel members;
 Prices of other products and services provided by the organization.
Price as an Indicator of Value
Value can be defined as the ratio of perceived benefits to price:
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Price affects perception of quality.
Price affects consumer perceptions of prestige.
Consumer value assessments are often comparative – worth and desirability of a
product relative to substitutes that satisfy the same need (e.g., Splenda vs. Sugar)
Consumer’s comparison of costs and benefits of substitute items gives rise to a
“reference value”
Price Elasticity of Demand
 Price Elasticity of Demand is a concept used to characterize the nature of the pricequantity relationship.
 The coefficient of price elasticity, E, is a measure of the relative responsiveness of the
quantity of a product demanded to a change in the price of that product
Where E is the coefficient of elasticity
 If the % change in quantity demanded is greater than the % change in price, demand is
said to be elastic – E is greater than 1.
 If the % change in quantity demanded is less than the % change in price, demand is said
to be inelastic – E is less than 1.
Factors that Influence Price Elasticity of Demand
 The more substitutes a product or service has the greater it’s price elasticity .
 The more uses a product or service has the greater it’s price elasticity .
 The higher the ratio of the price of the product or service to the income of the buyer the
greater the price elasticity .
Product-Line Pricing
Product-line pricing involves determining
1- The lowest product price.
2- The highest priced product and price .
3- Price differentials for all other products in the line.
PRICING STRATEGIES
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Full-cost price strategies – consider both variable and fixed costs.
Variable-cost price strategies – consider only variable costs, not total costs.
 Markup pricing : Fixed amount added to the total cost of the product.
 Break-even pricing : Per-unit fixed costs + per-unit variable costs .
 Rate-of-return pricing : Set to obtain a desired ROI .
Markup Pricing :
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Selling price is determined by adding a fixed amount, usually a percentage, to the (total)
cost of the product.
Most commonly used pricing method (e.g., groceries and clothing).
Simple, flexible, controllable.
Example: If a product costs $4.60 to produce and selling price is $6.35, the market on
cost is 38% and markup on price is 28%.
Breakeven Pricing
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Equals the per-unit fixed costs plus the per-unit variable costs.
Useful tool for determining the minimum price at which a product must be sold to cover
fixed and variable costs.
Often used by non-profit organizations, or by profit-making organizations that may have
a short-term breakeven objective.
Rate-of-Return Pricing
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Price is set so as to obtain a pre-specified rate of return on investment (capital) for the
organization
Assumes a linear demand function and insensitivity of buyers to price
Most commonly used by large firms and public utilities whose return rates are closely
watched or regulated by government agencies or commissions
Variable-Cost Pricing
Represents the minimum selling price at which the product or service can be marketed in the
short run. It is often used to:
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Stimulate demand (lower fares for seniors)
Can increase revenues, and hence, lead to economies of scale, lower unit costs, and
higher profits
 Shift demand (weeknight calling plans)
Away from peak load times to smooth it out over extended time periods.
New-Offering Pricing Strategies
1. Skimming Pricing Strategy (Gillette Mach3)
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price initially set very high and reduced over time
2. Penetration Pricing Strategy (Nintendo)
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price is initially set low to gain a foothold in the market
3. Intermediate Pricing Strategy
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between the two extremes; most prevalent
When to Use Skimming Pricing Strategy :
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Demand likely to be price inelastic;
Different price-market segments, appealing to buyers with a higher acceptable price;
Offering is unique enough to be protected from competition;
Production or marketing costs are unknown;
Capacity constraint exists;
Organization wants to generate funds quickly;
Realistic perceived value of the product exists.
When to Use Penetration Pricing Strategy :
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Demand likely to be price elastic;
Offering is not unique enough to be protected from competition;
Competitors expected to enter market quickly;
No distinct price-market segments;
Possibility of cost savings with large volume of sales;
Organization’s major objective is to obtain a large market share.
Intermediate Pricing Strategy :
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Falls between skimming and penetration;
Most prevalent in practice;
More likely to be used in majority of pricing decisions.
Pricing and Competitive Interaction
Competitive Interaction refers to the sequential action and reaction of rival companies in
setting and changing prices for their offering(s) and assessing likely outcomes, such as sales, unit
volume, and profit for each company and an entire market.
Advice for managers to avoid nearsightedness of not looking beyond the initial pricing decision:
1- Managers are advised to focus less on short-term outcomes and attend more to longerterm consequences of actions
2- Managers are advised to step into the shoes of rival managers or companies and answer a
number of questions…
 What are competitors’ goals and objectives? How are they different from our goals and
objectives?
 What assumptions has the competitor made about itself, our company and offerings,
and the marketplace? Are these assumptions different from ours?
 What strengths does the competitor believe it has and what are its weaknesses? What
might the competitor believe our strengths and weaknesses to be?
Price War
A Price War involves successive price cutting by competitors to increase or maintain their
unit sales or market share.
Price War Happens when:
 Managers lower price to improve market share, unit sales, and profit
 Competitors match the lower price Expected share, sales, and profit gain from
initial price cut are lost .
To avoid a price war, managers should consider price cutting only when:
 The company has a cost or technological advantage over its competitors
 Primary demand for a product class will grow if prices are lowered
 The price cut is confined to specific products or customers and not across-theboard.
Industry Characteristics and the Risk of Price Wars