Chapter 10
 What is Price?
 Narrowly defined: price is the amount of money charged for a product or service
 Broadly defined: price is the total value that customers exchange for the benefits of
having or using the product or service
 Major Pricing Strategies
 Customer value-based pricing
 Setting prices based on buyers’ perceptions of value rather than the seller’s cost
 Price is considered along with the other marketing mix variables before the marketing
program is set
 Customer needs and value perceptions are assessed
 Target price is based on value perception
 Cost-based pricing
 Setting prices based on production, distribution, and selling costs at a fair rate of return
 Types of costs based pricing
 Cost-plus pricing (mark-up pricing): adding a standard markup to the cost of the
product
 Break-even pricing
 Target return pricing
 Competition-based pricing
 Setting prices based on competitors’ prices, strategies, costs, and market offerings
 Assumes consumers value a product by competitors prices for similar products
 Factors Affecting Price Decisions
 Internal factors
 Overall marketing strategy, objectives, and marketing mix
 Organization considerations-who within the organization should set prices
 External factors
 The market and demand
 Analyzing the price/demand relationship
 The economy
 Recession, etc.
 Other environmental factors
 Resellers reaction to price
 Government reaction
 Four Types of Markets
 Pure Competition
 Infinite buyers and sellers
 Zero entry and exit barriers
 Perfect knowledge
 Zero transaction costs
 Profit maximization
 Homogenous products
 Monopolistic Competition
 Many buyers and sellers
 A few entry and exit barriers
 Producers have a control over the price
 Consumers perceive non price differences among the competitors’ products.
 Oligopolistic
 a few firms in the market, producing either homogenous product or producing product
which are close but not perfect substitutes of each other
 Pure Monopoly
 A market in which one company has control over the entire market for a product
 New-Product Pricing
 Market Skimming
 Setting a high price for a new product to “skim” revenue layer-by-layer from segments
willing to pay the high price
 Fewer sales but more profitable sales
 Used when:
 Product’s quality and image support a high price
 Costs of low volume don’t cancel the benefit of a higher price
 Competitors cant easily enter the market and undercut price
 Market Penetration
 Setting a low initial price in order to “penetrate” the market quickly and deeply
 Can attract a large number of buyers quickly and win a large market share
 Used when:
 Market is price-sensitive; low price produces market growth
 Costs fall as sales volume increases
 Competition can be kept out of the market with low pricing
 Product Mix Pricing
 Product-line pricing
 Setting price steps between various products in a line based on cost differences,
customer evaluations and competitors’ prices
 Original-product pricing
 Pricing optional or accessory products sold with the main product
 Captive-product pricing
 Pricing products that must be uses with the main product
 By-product pricing:
 Selling by-products to make a main product’s price more attractive
 Product bundle pricing
 Combining several products and offerings the bundle at a lower price
 Price Adjustment Strategies
 Discount and allowance pricing
 Cash discounts
 Quantity discounts
 Seasonal discounts
 Allowances for trade-ins
 Promotional allowances
 Segmented pricing
 Selling a product or service at two or more prices; where the difference in prices is not
based on differences in costs
 Types: customer-segment, product-form, location-based pricing, time-based pricing
 Psychological pricing
 Considers the psychology of prices and not simply the economics
 The price is used to say something about the product
 Promotional pricing
 Discounts, special-event pricing, cash rebates, low-interest financing, longer
warranties, free maintenance
 Dynamic pricing
 Adjusting prices continually to meet the characteristics and needs of individual
customers and situations
 International pricing
 Adjusting prices for international markets considering many factors such as economic
factors, regulations, costs associated, etc.
 Price Changes
 Price cuts may be initiated due to:
 Excess capacity
 Falling demand in face of strong competitive price or a weakened economy
 Drive to dominate market through lower costs
 Price increases may be initiates due to:
 Cost inflation
 Over demand
 Marketers should avoid price gouging (selling at a price much higher than the reasonable
price)
 Reactions to Price Changes
 Buyers don’t always react to price changes in a clear way
 A company must consider competitor reactions to price changes
 Possible competitor reactions:
 Reduce price to match competitor
 Raise the perceived value of its offer
 Improve quality and increase price
 Launch a new low price brand