Lecture 6
Principles of Marketing
Theocharis Katranis
Spring Semester 2013
Principles of Marketing
1
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Issues discussed in Previous
Lecture - Summary
1. Defined Product and Product Classification
2. Defined and Discussed Consumer and industrial Products
3. Discussed branding, Packaging, Labeling, and product
Support Services.
4. Discussed the Product mix Decisions.
5. Discussed the New Product Development Strategy and
Process as well as the Product Life-cycle Strategies.
Principles of Marketing
2
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Today’s Lecture
1. We will deal with Pricing Considerations and
Approaches
2. We will discuss the importance of understanding
customer value perceptions when setting prices
3. We will discuss the importance of company and
product costs in setting prices
4. Identify and define other important external and
internal factors affecting a firm’s pricing decisions.
Principles of Marketing
3
Theocharis Katranis, MBA,
Spring Semester 2013
Lecture 6
Pricing Products: Pricing
Considerations and
Approaches
What is Price?
Price is the amount of money charged for a product
or service, or the sum of the values that customers
exchange for the benefits of having or using the
product or service.
Principles of Marketing
4
Theocharis Katranis, MBA,
Spring Semester 2013
Lecture 6
Factors to Consider When
Setting Prices
1. Customer Perceptions of Value
2. Company and Product Costs
3. Other Internal and External Considerations
affecting Price Decisions
Principles of Marketing
5
Theocharis Katranis, MBA,
Spring Semester 2013
Lecture 6
Factors to Consider When
Setting Prices
1. Customer Perceptions of Value
The customer will decide whether a product’s
price is right.
Principles of Marketing
6
Theocharis Katranis, MBA,
Spring Semester 2013
Lecture 6
Factors to Consider When
Setting Prices
1. Customer Perceptions of Value
1.1 Value-bases Pricing
1.2 Good-value Pricing
1.3 Value-added Pricing
Principles of Marketing
7
Theocharis Katranis, MBA,
Spring Semester 2013
Lecture 6
Factors to Consider When
Setting Prices
1. Customer Perceptions of Value
1.1 Value-bases Pricing - Definition
It is the action of setting price based on
buyers’ perceptions of value rather than on
the seller’s costs.
Principles of Marketing
8
Theocharis Katranis, MBA,
Spring Semester 2013
Lecture 6
Factors to Consider When
Setting Prices
1. Customer Perceptions of Value
1.2 Good-value Pricing - Definition
It is the action of offering just the right
combination of quality and good service at a
fair price.
Principles of Marketing
9
Theocharis Katranis, MBA,
Spring Semester 2013
Lecture 6
Factors to Consider When
Setting Prices
1. Customer Perceptions of Value
1.3 Value-added Pricing - Definition
It is the action of attaching value-added
features and services to differentiate a
company’s offers and charging higher prices.
Principles of Marketing
10
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Factors to Consider When
Setting Prices
2. Company and Product Costs
2.1 Cost-based Pricing
2.2 Cost-Plus Pricing
2.3 Break-even Pricing
Principles of Marketing
11
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Factors to Consider When
Setting Prices
2. Company and Product Costs
2.1 Cost-based Pricing - Definition
It is the action of setting prices based on the costs
for producing, distributing, and selling the product
plus a fair rate of return for effort and risk.
Principles of Marketing
12
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Company and Product Costs
Types of Costs
1. Fixed Costs - (also known as overheads)
2. Variable Costs
Principles of Marketing
13
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Company and Product Costs
Types of Costs
1. Fixed Costs - Definition
They are the costs that do not vary with
production or sales level.
Principles of Marketing
14
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Company and Product Costs
Types of Costs
2. Variable Costs
They are the costs that vary directly with the
level of production.
Principles of Marketing
15
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Company and Product Costs
Types of Costs
Total Costs = Fixed Costs + Variable Costs
Total Costs is the sum of the Fixed and
Variable costs for any given level of
production.
Principles of Marketing
16
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Company and Product Costs
2.2 Cost-Plus Pricing - Definition
It is the action of adding a standard
markup to the cost of the product.
Principles of Marketing
17
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Company and Product Costs
2.2 Cost-Plus Pricing - Example
Principles of Marketing
18
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Company and Product Costs
2.3 Break-even Pricing - Definition
It is the action of setting price to break even on
the costs of making and marketing a product,
or setting price to make a target profit.
Break-Even Volume =
Principles of Marketing
19
Fixed Cost
Price – Variable Cost
Theocharis Katranis, MBA
=
$300,000
= $30,00
$20 - $10
Spring Semester 2013
Lecture 6
Company and Product Costs
2.3 Break-even Pricing - Chart
Principles of Marketing
20
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Other Internal and External
Considerations Affecting
Price Decisions
1. Overall Marketing Strategy,
Objectives, and Mix
2. Organizational Considerations
3. The Market and Demand
4. Competitors’ Strategies and Prices
5. Other External Factors
Principles of Marketing
21
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Other Internal and External
Considerations Affecting Price
Decisions
1. Overall Marketing Strategy, Objectives, and Mix
A company can:
1. Set Prices to attract New customers or to profitably retain existing ones.
2. Set Low Prices to prevent competition from entering the market or set
prices at competitors’ levels to stabilize the market.
3. Set Prices to keep the loyalty and support to resellers or to avoid
government intervention.
4. Temporarily reduce prices to create excitement for a Brand.
5. Price one product to help the sales of other products in the company’s line.
Principles of Marketing
22
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Other Internal and External
Considerations Affecting
Price Decisions
2. Organizational Considerations
Management must decide who within the
organization should set Prices.
Principles of Marketing
23
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Other Internal and External
Considerations Affecting
Price Decisions
2. Organizational Considerations
Pricing Decisions can be made by:
1. Top Management
2. Marketing or Sales Departments
3. Divisional or Product Line Managers
4. Pricing Departments – (Large Companies i.e. airlines)
Principles of Marketing
24
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Other Internal and External
Considerations Affecting
Price Decisions
3. The Market and Demand
It is very important for the marketers to
understand the relationship between price and
demand for the company’s product BEFORE
deciding which pricing strategy to follow.
Principles of Marketing
25
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Other Internal and External
Considerations Affecting
Price Decisions
4. Competitors’ Strategies and Prices
In setting its prices, a company must consider
competitors’ costs, competitors’ prices, and
competitors’ market offerings.
Principles of Marketing
26
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Other Internal and External
Considerations Affecting
Price Decisions
5. Other External Factors
5.1 Economic Conditions (boom/recession/inflation)
5.2 The Government
5.3 Social Concerns
Principles of Marketing
27
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
New-Product
Pricing Strategies
Pricing Strategies usually change as the
product passes through its life cycle.
Principles of Marketing
28
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
New-Product
Pricing Strategies
Companies choose between TWO strategies:
1. Market-skimming Pricing
2. Market-penetration Pricing
Principles of Marketing
29
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
New-Product
Pricing Strategies
1. Market-skimming Pricing
Definition:
It is the action of setting a high price for a new
product to skim maximum revenues layer by
layer from the segments willing to pay the high
price; the company makes fewer but more
profitable sales.
Principles of Marketing
30
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
New-Product
Pricing Strategies
2. Market-penetration Pricing
Definition:
It is the action of setting a low price for a new
product in order to attract a large number of
buyers and a large market share.
Principles of Marketing
31
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Product Mix Pricing
Strategies
Pricing is difficult because the various products
have related demand and costs and face different
degrees of competition.
Principles of Marketing
32
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Product Mix Pricing
Strategies
1. Product Line Pricing
2. Optional-Product Pricing
3. Captive-Product Pricing
4. By-Product Pricing
5. Product Bundle Pricing
Principles of Marketing
33
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Product Mix Pricing
Strategies
1. Product Line Pricing - Definition
It is the action of setting price steps
between various products in a product line
based on cost differences between the
products, customer evaluations of different
features, and competitors’ prices.
Principles of Marketing
34
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Product Mix Pricing
Strategies
2. Optional-Product Pricing - Definition
It is the action of pricing optional or accessory
products along with the main product i.e. buy a
car and optional GPS or buy a refrigerator and
optional ice maker.
Principles of Marketing
35
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Product Mix Pricing
Strategies
3. Captive-Product Pricing - Definition
It is the action of setting a price for products
that must be used along with a main product,
such as blades for a razor and film for a
camera.
Principles of Marketing
36
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Product Mix Pricing
Strategies
4. By-Product Pricing - Definition
It is the action of setting a price for by-products in order to
make the main product’s price more competitive i.e. Salt
from desalination or feathers from poultry processing.
Note: A by-product is a secondary or incidental product
deriving from a manufacturing process, a chemical reaction
or a biochemical pathway and is not the primary product or
service being produced!
Principles of Marketing
37
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Product Mix Pricing
Strategies
5. Product Bundle Pricing - Definition
It is the action of combining several products and
offering the bundle at a reduced price I.e. burger
with fries and soft drink at a “combo” price OR
Hotel Package with air ticket, accommodation,
meals and entertainment.
Principles of Marketing
38
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Price-Adjustment
Strategies
1. Discount and Allowance Pricing
2. Segmented Pricing
3. Psychological Pricing
4. Promotional Pricing
5. Geographical Pricing
6. Dynamic Pricing
7. International Pricing
Principles of Marketing
39
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Price-Adjustment
Strategies
1. Discount and Allowance Pricing
Discount is a straight reduction in price on
purchases during a stated period of time.
Allowance is the promotional money paid by
manufacturers to retailers in return for an agreement to
feature the manufacturer’s products is some way i.e.
turning in an old item when buying a new one – Turning
in an old car and buy a new one.
Principles of Marketing
40
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Price-Adjustment
Strategies
2. Segmented Pricing
It is the action of selling a product or service at two or
more prices, where the difference in prices is not based on
differences in costs i.e. Museum tickets to students Vs
citizens, Customer-segment pricing / Evian water from
local supermarket Vs Evian water in Sport Centres,
Product-form pricing / Theatre front seats Vs Back seats,
Location pricing / Winter Air tickets Vs Summer Air
tickets, time pricing.
Principles of Marketing
41
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Price-Adjustment
Strategies
3. Psychological Pricing
It is the action of setting a pricing approach that considers
the psychology of prices and not simply the economics;
the price is used to say something about the product i.e. a
$100 bottle of perfume may contain only $3 worth of
scent but some people are willing to pay the $100 because
this price indicates something special.
Also another aspect of psychological pricing is Reference
prices I.e. the prices the buyers carry in their minds and
refer to when they look at a given product.
Principles of Marketing
42
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Price-Adjustment
Strategies
4. Promotional Pricing
It is the action of temporarily pricing
products below the list price, and sometimes
even below cost, to increase short-run sales.
Principles of Marketing
43
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Price-Adjustment
Strategies
5. Geographical Pricing
It is the action of setting prices for customers
located in different parts of the country or
world.
Principles of Marketing
44
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Price-Adjustment
Strategies
5. Geographical Pricing - Strategies
5.1 FOB – Origin Pricing
5.2 Uniform-delivered Pricing
5.3 Zone Pricing
5.4 Basing-point Pricing
5.5 Freight-absorption Pricing
Principles of Marketing
45
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Price-Adjustment
Strategies
5. Geographical Pricing - Strategies
5.1 FOB – Origin Pricing - Definition
It is a geographical pricing strategy in which
goods are placed free on board a carrier; the
customer pays the freight from the factory to
the destination
Principles of Marketing
46
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Price-Adjustment
Strategies
5. Geographical Pricing - Strategies
5.2 Uniform-delivered Pricing - Definition
It is a geographical pricing strategy in which
the company charges the same price plus
freight to all customers, regardless of their
location.
Principles of Marketing
47
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Price-Adjustment
Strategies
5. Geographical Pricing - Strategies
5.3 Zone Pricing
It is a geographical pricing strategy in which
the company sets up two or more zones. All
customers within a zone pay the same total
price; the more distant the zone, the higher the
price.
Principles of Marketing
48
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Price-Adjustment
Strategies
5. Geographical Pricing - Strategies
5.4 Basing-point Pricing
It a geographical pricing strategy in which the
seller designates some city as a basing point
and charges all customers the freight cost from
that city to the customer.
Principles of Marketing
49
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Price-Adjustment
Strategies
5. Geographical Pricing - Strategies
5.5 Freight-absorption Pricing
It is a geographical pricing strategy in which
the seller absorbs all or part of the freight
charges in order to get the desired business.
Principles of Marketing
50
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Price-Adjustment
Strategies
6. Dynamic Pricing
It is the action of adjusting prices continually to
meet the characteristics and needs of individual
customers and situations.
Principles of Marketing
51
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Price-Adjustment
Strategies
7. International Pricing
Some companies may decide to set a uniform
worldwide price but ...
A company must always take into consideration the factors
affecting its decision on pricing issues i.e. Economic
conditions / competitive situation / laws and regulations /
development of the wholesale and retailing system /
consumers’ perception and preferences
Principles of Marketing
52
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Price Changes
1. Initiating Price Changes
2. Responding to Price Changes
Principles of Marketing
53
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Price Changes
1. Initiating Price Changes
1.1 Initiating Price Cuts
1.2 Initiating Price Increases
1.3 Buyer Reactions to Prices Changes
1.4 Competitor Reactions to Prices Changes
Principles of Marketing
54
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Price Changes
1. Initiating Price Changes
1.1 Initiating Price Cuts
Reasons can be Excess Capacity /
Strong competition /
Principles of Marketing
55
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Price Changes
1. Initiating Price Changes
1.2 Initiating Price Increases
Reason can be the over demand for a
specific product
Principles of Marketing
56
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Price Changes
1. Initiating Price Changes
1.3 Buyer Reactions to Prices Changes
Companies must always take into consideration the
reaction of their product buyers when deciding to
increase of decrease the prices of their products I.e. for
an increase in the price of a product customers may
think that the company is getting greedy / for a decrease
in the price of a product, customers may think of
cheaper raw materials henceforth low quality product.
Principles of Marketing
57
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Price Changes
1. Initiating Price Changes
1.4 Competitor Reactions to Prices Changes
Companies must also take into consideration the
reaction of their competitors. An increase in the price of
their products may increase sales of competitors
products and henceforth losing of market share / A
decrease in the price of their products may attract more
competitors in the market
Principles of Marketing
58
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Principles of Marketing
59
Assessing and Responding to
Competitor Price Changes
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Public Policy and Pricing
In many countries, companies are not free to
charge whatever prices they wish due to
legislation.
Manufacturers cannot tell to sellers the price to
sell. They can only give them a recommend
price. Sellers will decide what is best to do.
Principles of Marketing
60
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Summary - Lecture 6
1. Defined Product and Product Classification
2. Defined and Discussed Consumer and industrial Products
3. Discussed branding, Packaging, Labeling, and product
Support Services.
4. Discussed the Product mix Decisions.
5. Discussed the New Product Development Strategy and
Process as well as the Product Life-cycle Strategies.
Principles of Marketing
61
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Summary - Lecture 6
6. Described the major strategies for pricing initiative and
new products.
7. Explained how companies find a set of prices that
maximizes the profits from the total product mix.
8. Discussed how companies adjust their prices to take
into account different types of customers and situations.
9. Discussed the key issues related to initiating and
responding to price changes.
Principles of Marketing
62
Theocharis Katranis, MBA
Spring Semester 2013
Lecture 6
Chapters 10 and 11
END of Lecture 6
Thank you for your attention
Principles of Marketing
63
Theocharis Katranis, MBA
Spring Semester 2013