Pricing Considerations,

Approaches and
Strategies

What is Price?
Price Has Many Names
Rent
Fee
Rate
Commission
Assessment

Tuition
Fare
Toll
Premium
Retainer

Bribe
Salary
Wage
Interest
Tax
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Definition
Price
The amount of money charged
for a product or service, or the
sum of the values that
consumers exchange for the
benefits of having or using the
product or service.
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Fixed vs. Dynamic

Pricing
Fixed pricing policy
One price for all buyers

Dynamic pricing
Different prices
Individual

customers

Situations

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What is Price?
Price and the Marketing Mix:
Only element to produce revenues
Most flexible element
Can be changed quickly

Price Competition
Common Pricing Mistakes
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Factors to Consider When

Setting Price
Customer
perceptions
of value

Price ceiling
No demand above this
price

Other internal & external

considerations
Marketing strategy, objectives,
and mix
Nature of the market & demand
Competitors strategies & prices

Product
costs

Price Floor
No profits
below this price

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Factors to Consider
When Setting Price
Customer Perceptions of Value
Value = price
Value = benefits of having or
using
the
product

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Value-based pricing

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Value-based pricing
Good-value pricing
Quality and good service at fair
price

Value-added pricing

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Factors to Consider
When Setting Price
Internal
Factors
Marketing
objectives

Marketing mix
strategies
Costs

Market positioning
influences pricing strategy
Other pricing objectives:

Survival
Current profit maximization
Market share leadership
Product quality leadership

Not-for-profit objectives:
Partial or full cost recovery
Social pricing

Organizational
considerations
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Factors to Consider
When Setting Price
Internal
Factors
Marketing
objectives

Marketing mix
strategies
Costs
Organizational
considerations

Pricing must be
carefully coordinated
with the other
marketing mix
elements
Target costing is often
used to support product
positioning strategies
based on price
Nonprice positioning
can also be used
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Factors to Consider
When Setting Price
Internal
Factors
Marketing

Types of costs:

Marketing mix
strategies
Costs

How costs vary at

different production
levels will influence
price setting
Experience (learning)
curve effects on price

objectives

Organizational
considerations

Variable
Fixed
Total costs

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Factors to Consider
When Setting Price
Internal
Factors
Marketing
objectives

Marketing mix
strategies
Costs
Organizational
considerations

Who sets the price?

Small companies: CEO
or top management
Large companies:
Divisional or product
line managers

Price negotiation is
common in industrial
settings
Some industries have
pricing departments
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Factors to Consider
When Setting Price
External
Factors
Nature of market

Types of markets

Competitors costs,
prices, and offers
Other
environmental
elements

Consumer perceptions
of price and value
Price-demand
relationship

Nature of market
and demand

Pure competition
Monopolistic competition
Oligopolistic competition
Pure monopoly

Demand curve
Price elasticity of demand
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Factors to Consider
When Setting Price
External
Factors
Nature of market

Nature of market
and demand

Competitors costs,
prices, and offers
Other
environmental
elements

Consider competitors costs,

prices, and possible
reactions when developing a
pricing strategy
Pricing strategy influences
the nature of competition
Low-price low-margin
strategies inhibit competition
High-price high-margin
strategies attract
competition

Benchmarking costs against

the competition is
recommended
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Factors to Consider
When Setting Price
External
Factors
Nature of market

Nature of market
and demand

Competitors costs,
prices, and offers
Other
environmental
elements

Economic conditions
Affect production costs
Affect buyer perceptions
of price and value

Reseller reactions to
prices must be
considered
Government may restrict
or limit pricing options
Social considerations may
be taken into account
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General Pricing
Approaches
Cost-Based Pricing: Cost-Plus
Pricing
Adding a standard markup to cost
Ignores demand and competition
Popular pricing technique because:
It simplifies the pricing process
Price competition may be minimized
It is perceived as more fair to both
buyers and sellers

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General Pricing
Approaches
Cost-Based Pricing Example
Variable costs: $20
Fixed costs: $ 500,000
Expected sales: 100,000 units Desired Sales Markup:
20%
Variable Cost + Fixed Costs/Unit Sales = Unit Cost
$20 + $500,000/100,000 = $25 per unit
Unit Cost/(1 Desired Return on Sales) = Markup Price
$25 / (1 - .20) = $31.25

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General Pricing
Approaches
Cost-Based Pricing: Break-Even
Analysis and Target Profit Pricing
Break-even charts show total cost and
total revenues at different levels of unit
volume.
The intersection of the total revenue and
total cost curves is the break-even point.
Companies wishing to make a profit must
exceed the break-even unit volume.
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General Pricing
Approaches
Break-Even Analysis and Target Profit Pricing
Revenues
1000
Thousands
of Dollars

Target Profit $200,000

800

Total Costs

Break-even
point

600
400

Fixed Costs

200
0

10

20

30

40

Sales Volume in Thousands of Units

Quantity To Be Sold To
Meet Target Profit
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General Pricing
Approaches
Value-Based Pricing:
Uses buyers perceptions of value rather
than sellers costs to set price.
Measuring perceived value can be
difficult.
Consumer attitudes toward price and
quality have shifted during the last
decade.
Introduction

of less expensive versions of

established brands has become common.

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General Pricing
Approaches
Value-Based Pricing:
Business-to-business firms seek to
retain pricing power

Value-added strategies can help

Value pricing at the retail level

Everyday low pricing (EDLP) vs. highlow pricing

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General Pricing
Approaches
Competition-Based Pricing:
Also called going-rate pricing
May price at the same level, above,
or below the competition
Bidding for jobs is another variation
of competition-based pricing

Sealed bid pricing

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New-Product
Pricing Strategies
Market-Skimming Pricing
Setting a high price for a new product to
skim maximum revenues layer by layer
from segments willing to pay the high
price.

Market-Penetration Pricing
Setting a low price for a new product in
order to attract a large number of buyers
and a large market share.
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Product Mix
Pricing Strategies
Product Line Pricing
Setting price steps between product
line items.

Price points

Optional-Product Pricing
Pricing optional or accessory
products sold with the main product
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Product Mix
Pricing Strategies
Captive-Product Pricing
Pricing products that must be used
with the main product

High margins are often set for supplies

Services: two-part pricing strategy

Fixed fee plus a variable usage rate

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Product Mix
Pricing Strategies
By-Product Pricing
Pricing low-value by-products to
get rid of them

Product Bundle Pricing

Pricing bundles of products sold
together
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Price Adjustment
Strategies
Strategies
Discount /
allowance
Segmented
Psychological
Promotional
Geographical
International

Types of discounts
Cash discount
Quantity discount
Functional (trade)
discount
Seasonal discount

Allowances
Trade-in allowances
Promotional allowances

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Price Adjustment
Strategies
Strategies
Discount /
allowance
Segmented
Psychological
Promotional
Geographical
International

Types of segmented
pricing strategies:

Customer-segment
Product-form pricing
Location pricing
Time pricing

Also called revenue or

yield management
Certain conditions must
exist for segmented
pricing to be effective
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Price Adjustment
Strategies
Conditions Necessary for
Segmented Pricing Effectiveness
Market is
segmentable
Lower priced
segments are not able
to resell
Competitors can not
undersell segments
charging higher prices

Pricing must be legal

Costs of segmentation
can not exceed revenues
earned
Segmented pricing must
reflect real differences in
customers perceived
value
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Price Adjustment
Strategies
Strategies
Discount /
allowance
Segmented
Psychological
Promotional
Geographical
International

The price is used to say

something about the
product.
Price-quality relationship
Reference prices
Differences as small as five
cents can be important
Numeric digits may have
symbolic and visual
qualities that
psychologically influence
the buyer

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Price Adjustment
Strategies
Strategies
Discount /
allowance
Segmented
Psychological
Promotional
Geographical
International

Temporarily pricing
products below the list
price or even below cost
Loss leaders
Special-event pricing
Cash rebates
Low-interest financing,
longer warranties, free
maintenance

Promotional pricing can

have adverse effects
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Price Adjustment
Strategies
Promotional Pricing Problems
Easily copied by
competitors
Creates deal-prone
consumers
May erode brands
value

Not a legitimate
substitute for effective
strategic planning
Frequent use leads to
industry price wars
which benefit few firms
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Price Adjustment
Strategies
Strategies
Discount /
allowance
Segmented
Psychological
Promotional
Geographical
International

Types of geographic
pricing strategies:
FOB-origin pricing
Uniform-delivered
pricing
Zone pricing
Basing-point pricing
Freight-absorption
pricing
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Price Adjustment
Strategies
Strategies
Discount /
allowance
Segmented
Psychological
Promotional
Geographical
International

Prices charged in a
specific country
depend on many
factors

Economic conditions
Competitive situation
Laws / regulations
Distribution system
Consumer perceptions
Cost considerations
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