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Pricing Products:

Pricing
Considerations &
Strategies
By
Dr. Kevin Lance Jones
11
Factors
Factors to
to Consider
Consider When
When
Setting
Setting Prices
Prices
Price is the Amount of Money Charged for a Product or
Service.

Internal
Internal Factors
Factors

Pricing
Pricing
Decisions
Decisions

External
External Factors
Factors

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Internal
Internal Factors
Factors Affecting
Affecting
Pricing
Pricing Decisions
Decisions

Marketing
Objectives

Marketing-Mix
Strategy

Costs

Organizational
Considerations

33
Marketing
Marketing Objectives
Objectives that
that Affect
Affect
Pricing
Pricing Decisions
Decisions

Survival
Survival
Low
LowPrices
PricestotoCover
CoverVariable
VariableCosts
Costsand
and
Some Fixed Costs to Stay in Business.
Some Fixed Costs to Stay in Business.
Current
CurrentProfit
ProfitMaximization
Maximization
Choose
Choosethe
thePrice
Pricethat
thatProduces
Producesthe
the
Marketing
Marketing Maximum
MaximumCurrent
CurrentProfit,
Profit,Cash
CashFlow
Flowor
orROI.
ROI.

Objectives
Objectives Market
MarketShare
ShareLeadership
Leadership
Low
Lowas
asPossible
PossiblePrices
Pricesto
toBecome
Become
the Market Share Leader.
the Market Share Leader.

Product
ProductQuality
QualityLeadership
Leadership
High
HighPrices
Pricesto
toCover
CoverHigher
Higher
Performance
Performance Quality andRR&&D.
Quality and D.

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Marketing
Marketing Mix
Mix Variables
Variables that
that Affect
Affect
Pricing
Pricing Decisions
Decisions
Companies Will Consider Price Along With All the Other
Marketing-Mix Elements When Developing the Marketing
Program. Price Must be Coordinated With:
Product
ProductDesign
Design

Marketing-Mix
Non-Price
Non-Price Strategy Distribution
Distribution
Factors
Factors

Promotion
Promotion

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Types
Types of
of Cost
Cost Factors
Factors that
that
Affect
Affect Pricing
Pricing Decisions
Decisions
Fixed Costs Variable Costs
(Overhead)
Costs that don’t Costs that do vary
vary with sales or directly with the
production levels. level of production.
Executive Salaries Raw materials
Rent

Total
Total Costs
Costs
Sum
Sumof
ofthe
theFixed
Fixedand
andVariable
VariableCosts
Costsfor
foraaGiven
Given
Level
Levelof
ofProduction
Production
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External
External Factors
Factors Affecting
Affecting Pricing
Pricing
Decisions
Decisions

Market and
Demand

Competitors’ Costs,
Prices, and Offers

Other External Factors


Economic Conditions
Reseller Needs
Government Actions
Social Concerns

77
Market
Market and
and Demand
Demand Factors
Factors that
that

Affect
Affect Pricing
Pricing Decisions
Decisions
Pure Competition
Pure
Pure Competition
Competition Monopolistic Competition
Monopolistic Competition
Many
ManyBuyers
BuyersandandSellers
SellersWho
Who Many
ManyBuyers
Buyersand
and Sellers
SellersWho
Who
Have
HaveLittle
LittleEffect
Effecton
onthe
thePrice.
Price. Trade
TradeOver
OveraaRange
Rangeof
of Prices.
Prices.

Pricing
Pricing in
in Different
Different Types
Types of
of Markets
Markets

Oligopolistic
Oligopolistic Competition
Competition Pure
Few Pure Monopoly
Monopoly
FewSellers
SellersWho
WhoAre
AreSensitive
Sensitiveto
toEach
Each Single
Other’s SingleSeller
Seller
Other’sPricing/
Pricing/Marketing
MarketingStrategies
Strategies

88
Price
Price Elasticity
Elasticity of
of Demand
Demand
A. Inelastic Demand -
Demand Hardly Changes With
a Small Change in Price.
Price

P2
P1

Q2 Q1
Quantity Demanded per Period
B. Elastic Demand -
Demand Changes Greatly With
a Small Change in Price.
Price

P’2
P’1

Q2 Q1
Quantity Demanded per Period
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Major
Major Considerations
Considerations in
in
Setting
Setting Prices
Prices
No No
Possible Consumer Possible
Profit at Product Perceptions Demand at
This Price Costs of Value This Price

Selling Profits High


Low Existing
Factory and through Price
Price Products
Promoting Volume

Competitors’ Price and


Other External &
Internal Factors

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10
What
What is is Cost-Plus
Cost-Plus Pricing
Pricing and
and Why
Why
is
is itit Popular?
Popular?
Adding a Standard Markup to the Cost of the Product.

Sellers
SellersAre
AreMore
More Minimizes
Minimizes
Certain
Certain About
About Price
Price
Costs
CostsThan
Than Competition
Competition
Demand
Demand

Perceived
Perceived
Fairness
Fairnesstoto
Both
BothBuyers
Buyers
and
and Sellers
Sellers

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11
Breakeven
Breakeven Analysis
Analysis or
or

Target Profit
TargetTries
Profit Pricing
Pricingthe Price at Which a Firm Will
to Determine
Break Even or Make a Target Profit
Cost in Dollars (millions)

Total Revenue

Target Profit
12 ($2 million)
10 Total Cost
8
6 Fixed Cost
4
2
0

200 400 600 800 1,000


Sales Volume in Units (thousands)

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Cost-Based
Cost-Based Vs.
Vs. Value-Based
Value-Based Pricing
Pricing
Cost-Based Pricing Value-Based Pricing

Product
Product Customer
Customer

Cost
Cost Value
Value

Price
Price Price
Price

Value
Value Cost
Cost

Customers
Customers Product
Product

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Competition-Based
Competition-Based Pricing
Pricing

Setting
Setting Prices
Prices

Going-Rate
Going-Rate
Company
CompanySets
SetsPrices
PricesBased
Basedon
onWhat
What
Competitors
CompetitorsAre
AreCharging.
Charging.

? Sealed-Bid
Sealed-Bid
? Company
CompanySets
What
SetsPrices
What They
PricesBased
TheyThink
Based on
ThinkCompetitors
Will
on
Competitors
WillCharge.
Charge.

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New-Product
New-Product Pricing
Pricing Strategies
Strategies
Price
Price -- Quality
Quality Strategies
Strategies
Price
Higher Lower

Higher
Premium Good-Value
Good-Value
Quality

Strategy Strategy
Strategy

Lower Overcharging
Overcharging Economy
Economy
Strategy
Strategy Strategy
Strategy

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15
Setting
Setting Initial
Initial Product
Product Prices
Prices

Market
Market Skimming
Skimming Market
Market Penetration
Penetration

> Setting a High Price > Setting a Low Price


for a New Product for a New Product in
to Skim Maximum Order to Attract a
Revenues from the Large Number of
Target Market. Buyers.
> Results in Fewer, > Results in a Larger
More Profitable Market Share.
Sales. > Wal-mart
> Intel’s $1,000 Chip

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Product
Product Mix
Mix Pricing
Pricing Strategies
Strategies
Product
Product Line
Line Pricing
Pricing
Setting
SettingPrice
PriceSteps
Steps
Between
Between Product
ProductLine
LineItems
Items
i.e.
i.e. Lawnmowers
Lawnmowersat at $299
$299&& $399
$399
Optional-Product
Optional-Product Pricing
Pricing
Pricing
Pricing Optional
Optionalor
orAccessory
AccessoryProducts
Products
Sold
Sold With
WithThe
TheMain
MainProduct
Product
i.e.
i.e.Car
CarOptions
Optionssuch
suchas
asaaCD
CD player
player
Product
Product Captive-Product
Captive-Product Pricing
Pricing
Mix Pricing
Pricing Products
ProductsThat
That Must
Must Be
Be
Mix Used
UsedAlong
Along With
With The
TheMain
MainProduct
Product
Pricing
Pricing i.e.
i.e.Razor
RazorBlades,
Blades,Film,
Film,Software
Software
Strategies
Strategies By-Product
By-Product Pricing
Pricing
Pricing
Pricing Low-Value
Low-ValueBy-Products
By-ProductsToTo
Get
Get Rid
Ridof
ofThem
Them
i.e.
i.e. From
FromChemicals,
Chemicals,Lumber
LumberMills,
Mills,Zoos
Zoos
Product-Bundle
Product-Bundle Pricing
Pricing
Bundles
BundlesOfOfProducts
ProductsSold
Sold
Together
Togetherat
ataaReduced
Reduced Price
Price
i.e.
i.e.Season
Season Tickets,
Tickets,Computer
ComputerMakers
Makers
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Price-Adjustment
Price-Adjustment Strategies
Strategies
Price
Price Adjustment
Adjustment Strategies
Strategies

Discount
Discount &
& Allowance
Allowance Segmented
Segmented
Reducing
ReducingPrices
Pricestoto Reward
Reward Adjusting
AdjustingPrices
Pricesto
to Allow
Allow
Customer
CustomerResponses
Responses such
suchas
as for
forDifferences
Differencesin
inCustomers,
Customers,
Paying
PayingEarly
Earlyor
or Promoting
Promoting Products,
Products,and
and Locations.
Locations.
the
theProduct.
Product.

Cash
Cash Discount
Discount Customer
Customer

Quantity
QuantityDiscount
Discount Product-Form
Product-Form

Functional
FunctionalDiscount
Discount Location
Location

Seasonal
SeasonalDiscount
Discount Time
Time

Trade-In
Trade-In Allowance
Allowance Promotional
Promotional Allowance
Allowance
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Price-Adjustment
Price-Adjustment Strategies
Strategies

• Adjusting Prices for


Psychological Pricing Psychological Effect.
• Price Used as a Quality
Indicator.
• Reference Prices i.e.
Clothing.

• Temporarily Reducing Prices


Promotional Pricing to Increase Short-Run Sales.
• i.e. Loss Leaders, for
Special-Events, Cash Rebates

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Price-Adjustment
Price-Adjustment Strategies
Strategies

• Adjusting Prices to Account

for the Geographical Location


Geographical Pricing of Customers.
• i.e. FOB-Origin, Uniform-
Delivered, Zone Pricing, etc.

• Adjusting Prices for


International Pricing International Markets.
• Price Depends on Costs,
Consumers, Economic
Conditions & Other Factors.

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Initiating
Initiating and
and Responding
Responding to
to
Price
Price Changes
Changes
Competitor
Reactions Initiating
to Price Cuts
Price Changes

Price
Changes

Buyer Reactions Initiating


to Price
Price Increases
Changes

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Assessing
Assessing && Responding
Responding to
to
Competitor
Competitor Price
Price Changes
Changes
No
Has
HasCompetitor
CompetitorCut
Cut
Price? Hold
HoldCurrent
CurrentPrice;
Price;
Price?
Continue
ContinuetotoMonitor
Monitor
Competitor’s
Competitor’sPrice.
Price.
Yes

Will No
WillLower
LowerPrice
Price
Negatively
NegativelyAffect
AffectOur
Our
Market
MarketShare
Share&& Profits?
Profits?
Reduce
ReducePrice
Price
Yes
No Raise
RaisePerceived
Perceived
Quality
Quality
Can/
Can/Should
Should Effective
Effective
Action Yes
Action be
beTaken?
Taken? Improve
ImproveQuality
Quality
&& Increase
IncreasePrice
Price
Launch
LaunchLow-Price
Low-Price
“Fighting
“FightingBrand”
Brand”2222
Public
Public Policy
Policy and
and Pricing
Pricing
Public Policy on Pricing Centers on Three Potentially
Damaging Pricing Practices.

Price
Price
Fixing
Fixing

Price
Price
Discrimination
Discrimination

Deceptive
Deceptive
Pricing
Pricing
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