Marketing Essentials
n Chapter 26 Pricing Strategies
Section 26.1 Pricing Concepts
Chapter 26 n Pricing Strategies
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SECTION 26.1
Pricing Concepts
What You'll Learn
 The three basic pricing concepts involving
cost, demand, and competition
 The concepts of pricing forward vs. pricing
backward
 The idea of one-price policy vs. a flexibleprice policy
 The two polar pricing policies for introducing
a new product
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SECTION 26.1
Pricing Concepts
Why It's Important
After deciding on pricing goals, marketers
must establish pricing strategies that are
compatible with the rest of the marketing
mix. Understanding the various options
helps businesses effectively execute the
difficult task of pricing products.
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SECTION 26.1
Pricing Concepts
Key Terms
 markup
 cost-plus pricing
 one-price policy
 flexible-price policy
 skimming pricing
 penetration pricing
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SECTION 26.1
Pricing Concepts
Basic Pricing Concepts
There are three basic pricing concepts that
you will want to consider in determining the
price for any given product:
 cost-oriented pricing
 demand-oriented pricing
 competition-oriented pricing
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SECTION 26.1
Pricing Concepts
Cost-Oriented Pricing
In cost-oriented pricing, marketers first
calculate the costs of acquiring or making a
product and their expenses of doing
business; then they add their projected
profit margin to these figures to arrive at a
price. Two common methods are:
 markup pricing
 cost-plus pricing
Slide 1 of 2
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SECTION 26.1
Pricing Concepts
Cost-Oriented Pricing
Markup pricing is used primarily by
wholesalers and retailers who are involved
in acquiring goods for resale. The markup
must cover the business’s expenses.
Price = cost + markup (as percentage)
Cost-plus pricing is used by
manufacturers and service companies.
Price = all costs + all expenses (fixed
and variable) + desired profit
Slide 2 of 2
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SECTION 26.1
Pricing Concepts
Cost-Plus Pricing
Suburban Research Consultants
Questionnaire Design and
Printing
Postage
Labor (40 hours at $30)
$3,500
400
1,200
Refreshments
100
Expenses
350
Profit
950
Final Price to customer
$6,500
Cost-plus pricing breaks
a price down into its
component parts. How
might you relabel these
entries shown here to
show the similarity
between markup pricing
and cost-plus pricing?
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SECTION 26.1
Pricing Concepts
Demand-Oriented Pricing
Marketers who use demand-oriented pricing
attempt to determine what consumers are
willing to pay for given goods and services.
Demand-oriented pricing is effective when:
 there are few substitutes for an item
 there is demand inelasticity
Chapter 26 n Pricing Strategies
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SECTION 26.1
Pricing Concepts
Competition-Oriented Pricing
Marketers who study their competitors to
determine the prices of their products are using
competition-oriented pricing. These
marketers may elect to take one of three
actions:
 price above the competition
 price below the competition
 price in line with the competition
(going-rate pricing)
Chapter 26 n Pricing Strategies
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SECTION 26.1
Pricing Concepts
Combining Pricing Considerations
Most marketers use all three pricing policies to
determine prices.
 Cost-oriented pricing helps determine the
price floor (lowest selling price) for a
product.
 Demand-oriented pricing helps determine
a price range for the product.
 Competition-oriented pricing ensures that
the final price is in line with the company’s
pricing policies.
Chapter 26 n Pricing Strategies
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SECTION 26.1
Pricing Concepts
Pricing Backward from Retail Price
Estimated retail price
Retailer's markup
(40% of retail )
Wholesaler's price to retailer
Wholesaler's markup
(30% of wholesale)
Manufacturer's price to wholesaler
(must cover costs, expenses, and profit)
$50
- $20
$30
- $9
$21
To arrive at a wholesale
price, a manufacturer can
subtract all markups for
channel members from the
suggested retail price.
What problem would the
above manufacturer have if
its costs and expenses
totaled $22? What might the
manufacturer have to do?
Chapter 26 n Pricing Strategies
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SECTION 26.1
Pricing Concepts
Pricing Forward from Manufacturer’s Cost
Cost of producing item
$15.75
Manufacturer's expenses and profit
(25% of cost)
+
Manufacturer's price to wholesaler
Wholesaler's markup
(42.9% of cost)
$21.00
+
Wholesaler's price to retailer
Retailer's markup
(66.67% of cost)
Retailer's price to consumer
$5.25
$9.00
$30.00
+
$20.00
$50.00
Adding markups to cost
is another way
manufacturers can price
their goods. Suppose in
the example given here
market research had
shown that consumers
would pay as much as
$60 for the item. What
would the manufacturer's
options be?
Chapter 26 n Pricing Strategies
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SECTION 26.1
Pricing Concepts
Pricing Policies and Product Life Cycle
A basic pricing decision every business must
make is to choose between a one-price policy
and a flexible-price policy.
 A one-price policy is one in which all
customers are charged the same price for
the goods and services offered for sale.
 A flexible-price policy permits
customers to bargain for merchandise.
Chapter 26 n Pricing Strategies
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SECTION 26.1
Pricing Concepts
Product Life Cycle
Pricing plays an important role in the product
life cycle. In this sequence of events,
products move through four stages:
 introduction
 growth
 maturity
 decline
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SECTION 26.1
Pricing Concepts
New Product Introduction
A business may elect to price a new product
above, in-line, or below its competitors.
When a going-rate strategy is not used,
two polar methods may be used:
 skimming pricing
 penetration pricing
Slide 1 of 3
Chapter 26 n Pricing Strategies
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SECTION 26.1
Pricing Concepts
New Product Introduction
Skimming pricing is a pricing policy that sets a
very high price for a new product to capitalize
on the initial high demand for a new product.
 Advantages: High profit margin; may
cover research and development costs.
 Disadvantages: Cost must eventually be
lowered; attracts competition; if price is too
high no one buys.
Slide 2 of 3
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SECTION 26.1
Pricing Concepts
New Product Introduction
Penetration pricing sets the initial price for
a product very low to encourage as many
people as possible to buy the product.
Advantages: Quick market penetration;
can capture a large market; blocks
competition.
Disadvantages: Low demand leads to
big losses.
Slide 3 of 3
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SECTION 26.1
Pricing Concepts
Other Product States
Pricing during subsequent periods in a
product's life cycle will be determined by
which pricing method was originally used—
skimming or penetration. At each phase of the
life cycle, pricing strategies will work to extend
the product's life cycle.
Chapter 26 n Pricing Strategies
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26.1 ASSESSMENT
Reviewing Key Terms and Concepts
1. Name the two most common methods of
cost-oriented pricing.
2. Explain how cost-oriented, demandoriented, and competition-oriented pricing
concepts can be combined to determine
price.
3. What two methods may manufacturers use
when considering the price to charge
wholesalers and retailers? How do they
differ?
Slide 1 of 2
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26.1 ASSESSMENT
Reviewing Key Terms and Concepts
4. What is the difference between a oneprice policy and a flexible-price policy?
5. Name and explain two polar pricing
methods that may be used when a new
product is introduced into the market.
Slide 2 of 2
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26.1 ASSESSMENT
Thinking Critically
Would you use skimming pricing or
penetration pricing to introduce a new cookie
called Coconut Surprise? Why?
Chapter 26 n Pricing Strategies
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Marketing Essentials
End of Section 26.1
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