MKTG 101- Principles of Marketing

4Ps of Marketing Mix - Price

Prepared by:
Pro. SEYED ALI FALLAHCHAY

Introduction
Marketing is defined as:
The management process responsible for
identifying,
anticipating
and
satisfying
customer requirements profitability.
The key words in the definition in relation to
the Pricing Policy are:
Customer Requirements.
Profitability

The prices a company sets for its product and

services must strike a balance between
Customer requirements and profitability.
Gaining acceptance with the target customers
and making a profit for the organization.

Pricing Strategy
The first thing which we must define, is what
is meant by price. Price is defined as :
The amount in money for which something
is offered for sale.
Price is a monetary value charged by an
organization for the sale of its products.

Pricing Strategy
A Pricing Strategy is defined as:
A plan which determines the best (at the time of
making) pricing decision.
The planning of prices, including the setting of
discounts, in considering items such as the price
of competitive products, manufacturing and
distribution

costs,

the

firms

growth

and

profitability, customer wants, and the elasticity

of demand.

Pricing Strategy
Factors when setting prices we must
consider:
Whether to discount or not.
The price that the competition charges.
The cost of providing the product or service.
The companys market position e.g. is it a
market leader.
The type and nature of demand e.g. if an
increase or decrease in price will effect
amounts purchased.
The market segments we are seeking to attract.

Pricing Strategy
It must be remembered, that price is a key
element in the marketing mix because , for a
profit motivated company, it relates directly
to the total revenue, and ultimately the
profit of the business.
Profits Total Revenues Total Costs
OR
Profits (Prices Quantities sold) Total
Costs

The Key Determinants for Pricing Strategy

The key determinants of pricing decisions are:

Organizational and Marketing objectives
Pricing objectives
Costs
Other marketing mix variables
Legal and regulatory issues
Competition
Buyers perceptions
Consideration of intermediaries (Retailers,
Wholesalers)

General Pricing Approaches

There are Six general pricing approaches:
1. mark-up pricing (Cost-plus pricing) - is to have a

fixed mark-up on the cost of the product to set the

price, ex: retail stores
2. value-based pricing (demand-based pricing) is

setting price based on buyers' perceptions of value

independent of cost, ex: louis vuitton and rolex
(nobody ever questioned how much it costs to make
a rolex cost, price is not in relation to cost. people
base it on how many people have it, brand name)

3. value pricing: is offering the right

combination of quality and good service at a
fair price, ex: value meal menu
4. competition-based pricing: is to set
price by following of the industry leader ex:
breakfast cereal (ex: kelloggs)
5. Penetration pricing: Penetration pricing
is used to enter to a new market. It should
be lower than competitors' prices

6. Pricing skimming : High prices are used

when a new product is introduced into a
market, partly because it has a novelty
factor, and because of the high development
costs. High prices could be charged because a
product is high quality. One last use of it is to
improve the brand image of a product, since
people usually associate high price with good
products. (ex: New model of Iphone)

Pricing Strategies
Quantity and trade discounts
Cash discounts
Freight costs
Flexible pricing
Price lining
Leader pricing

Quantity and Trade Discount

Quantity discounts:
Deduction from a sellers list price that are
offered to encourage customers to buy in bulk .

Trade discounts:
Reductions from the list price offered to buyers
in payment for marketing functions that they
will perform.

Cash Discounts
A deduction granted to buyers for paying by
cash or within a specified time.
They

are

usually

calculated

on

net

amount due after deducting trade and

quantity discounts from the base price.

Freight Costs
Freight costs must be considered in pricing.
A producer can require the buyer to pay all
freight costs (FOB factory pricing), or a
producer

can

absorb

all

freight

costs

(uniform delivered pricing). Alternatively,

the two parties can share the freight costs
(freight absorption).

Flexible Price Strategy

With

flexible

price

strategy,

similar

customers may each pay a different price

when buying similar quantities of a product.

Price Lining
Involves selecting a limited number of prices
at which a business will sell related products.
A shoe shop which will sell several styles of
shoes at $69.95 and another group at $89.95.

Leader Pricing
Temporary cutting of prices on a few items
to attract customers.
Gotta GO Flights

Activity Question
You own a fast food restaurant chain and are
considering selling your product at below
cost price for a short period of time.
Why would you do this?

Answer
This is known as a tactical price reduction
and may be introduced for a short period of
time, even if it does not cover all costs.
To

temporarily

match

the

competitors

prices
To generate substantial cash flow
To increase market share

Competition
Companies who are selling products and
services in competitive markets try to win
customers over from rival companies.
This is achieved in one of two ways:
PRICE COMPETITION
NON PRICE COMPETITION
PRICE COMPETITION:
This involved offering the product or service
at a lower price than that of its competitors
products or service.

NON PRICE COMPETITION:

This involves the company trying to increase
market share of its product or service by
Leaving the price of its product or
service unchanged but by persuading the
target customers of the superiority or
advantages associated with it.

Whether a firm uses price competition or non

price competition, depends on state of the
market.
In a very competitive market place, the firm

is more likely to have to resort to intense price

competition

to

sell

their

products

and

services.
In an non-competitive market there is a

little to be gained from price competition

and firms tend to concentrate much more
on non price competition .

Competition
It is always important for a firm to predict
what the competition may do if prices are
changed.
Example:
You are in change of pricing of hotel rooms in
a large group in a highly competitive market.
You are considering a tactical price reduction
in an attempt to gain market share. What
may the competition do to respond?

They could respond to your tactical price

reduction in a number of ways:
Do nothing (highly unlikely).
Reduce their prices to the same level as
yours (or even lower!).
Try

and

stress

their

advantages

superiority in the market place.

and

Their reaction will depend on

The position they are in particularly in
relation to cost structure and market power.
It is important, however, that you predict the
likely

outcome

of

your

temporary

price

reduction.
If the competition is very responsive, it may
do little to your overall long term market
position.
Merely generate some extra short tem cash flow.

Legal and Regulatory Issues

The marketer is often restricted in the setting
of prices by legal and regulatory issues.
Government intervention. Price controls.

Legal

restrictions

on

price

collusion
the Commerce Act 1986
Consumer Legislation
Fair Trading Act 1986

fixing

and

The Different Methods of Pricing

The way in which prices are derived,
depends on the companys pricing
policy.

PRICING POLICY
A pricing policy is a guiding philosophy or

course of action designed to influence and

determine pricing decisions.
Once the company has decided on a pricing

policy,

it

must

then

choose

pricing

method.
A pricing method is a mechanical procedure
for setting prices on regular basis.

PRICING METHOD
Cost Orientated Pricing
Demand Orientated Pricing
Competition Orientated Pricing

Cost Oriented Pricing

This is where the price of a product or service is
calculated and a margin applied to derive a
selling price.
This is the simplest method of pricing and is
often used by companies for calculating prices.
It has the disadvantage of not taking into
account the economic

aspects of supply and

demand and often does not relate to pricing

objectives.

Demand Oriented Pricing

This is demand allows for high prices when
the demand is high and lower prices when
the demand is low, regardless of the cost of
product or services.
Demand oriented pricing allows a firm to
make higher profits as long as the buyers
value the products above the cost price.

Competition Oriented Pricing

The firm fixes the prices of the products
and services in relation to the competitors
prices.
This has the advantage of giving the firm
the

opportunity

market share.

to

increase

sales

or