PRICING DECISIONS

“There are two fools in every market.

One charges a very high price and
another charges a very low price”
• Definition – 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. (Kotler
and Armstrong)
• Different terms are used to refer to price
depending on what's being paid for – rent,
fare, fee, interest, tuition, premium, salary,
bride price.
Factors to consider when setting price
• INTERNAL and EXTERNAL factors
• Internal factors
• 1. Marketing objectives – The overall strategy
for the product will affect price. The selected
target market and positioning matters. Eg a
product intended for an exclusive up market
will be priced highly. Other objectives include:
 - Survival
- Current profit maximization
- Market share objectives
- Product quality leadership
- Keep competitors from entering the market
2. Marketing mix strategy – Price decisions must
be coordinated with other elements of the
marketing mix. Eg The decision to position a
product on high performance quality means that
its price should be high.
• 3. Cost - This sets the floor for the price that
a company can charge. Price charged should
cover all costs and allow a fair return on
investment.
• 4. Organizational considerations – Who within
the organization sets prices?
• In small companies, prices are set by top
management.
• In large companies, price is set by divisional or
product line managers
• In industrial markets, sales people negotiate
with customers within certain price ranges.
• Some companies have a pricing department
that reports to the marketing dept or top
management.
5. Stage of the product in the PLC.
External factors
1.The market and demand – These set the
upper limit of prices.
Before setting prices, marketers must
understand the relationship between price
and demand for its product.
• The type of market affects pricing.
• - PERFECT COMPETITION : Many buyers and
sellers. There is a going price for the product.
• - MONOPOLISTIC COMPETION : Market has
many buyers and sellers who trade over a
range of prices. Products are differentiated, so
customers are willing to pay different prices
for similar products.
• - OLIGOPLISTIC COMPETITION : Market has
few sellers who are sensitive to each other’s
pricing.
• - PURE MONOPLY : There is only one seller in
the market. The non regulated monopoly is
free to set price that the market will bear. A
government monopoly may set price below
cost to make the product affordable.
• Or it may price to cover cost or to earn good
revenue.
• Consumer perception of price and value – This
also affects price. Consumers expect the price
to conform to the value they attach to the
product.
• Price elasticity of demand – The sensitivity of
demand to change in price.
• Demand may be elastic or inelastic .
• 2. Competitors – Their costs, prices, and
offers. How are they likely to react to the
company’s pricing moves?
• Use these as a starting point for pricing
• 3. Economic conditions – inflation, interest
rates, boom or recession. These affect the cost
of producing a product and consumer
perceptions of price and value.
• 4. Government regulations
• 5. Social concerns
 Pricing approaches
• Cost based pricing:
• a) Cost plus pricing – add a standard mark up
to the cost of the product.
• B) break even pricing – Set price to break
even on the costs of making and marketing a
product
• Competition based pricing – Pricing that
focuses on what competitors are doing.
• a) Going rate pricing - Base price largely on
competitors prices with minimum attention to
own costs or demand. Charge a price that is
same, more, or less than major competitors.
In Oligopoly markets, there is a price leader
that others follow.
• b) Sealed bid pricing – Price is based on what
the firm thinks competitors are quoting.
• Value based pricing – Setting price based on
buyers’ perceptions of value rather than on
the seller’s cost. The company sets its target
price based on customer perceptions of the
product value. These drive decisions about
product design and what costs can be
incurred. Thus pricing begins with analyzing
consumer needs and value perceptions, and
price is set to march the perceived value.
 Pricing strategies
A look at pricing strategies available to address
different situations.
New product pricing strategies
a) Pricing for a product that imitates existing
products – The product has to be positioned
against competing products in terms of quality
and price. There are 4 positioning strategies:
• - Premium pricing strategy : High quality
product with a high price.
• - Good value strategy : High quality product
sold at a lower price
• - Overcharging strategy : Overcharge the
product in relation to its quality
• - Economy strategy : Producing a low quality
product and charging a low price.
• b) Pricing for an innovative product – There
are two options.
• - Market skimming pricing
• - Market penetration pricing
• Product mix pricing strategies – When a
company has a wide range of products, the
pricing of individual products is done taking
into account other products in the mix.
• a) Product line pricing – Setting the price steps
between various products in a line, based on
cost differences between products, customer
evaluations of different features, and
competitors prices.
• b) Optional product pricing – Pricing of optional
or accessory products that are being sold along
with a main product. A decision has to be made
on which items to include in the base price and
which ones to offer as options.
• C) Captive product pricing – Setting a price for
products that must be used along with a main
product. A low price may be set for the main
product and a high markup set for the supplies.
• For services, there is two part pricing. Price is
broken into a fixed fee plus a variable usage
rate. The fixed fee should be low enough to
induce usage of the service and a profit can be
made on the variable fee.
• c) By product pricing – Setting price for by
products in order to make the main product’s
price more competitive
• Accept a price for the by product that covers
more than the cost of storage and delivery.
This allows you to reduce the main product’s
price and make it more competitive.
• e) product bundle pricing – Combining several
products and offering the bundle at a reduced
price. The bundling can promote the sales of
products that consumers might not otherwise
buy.
• Price adjustment strategies – Companies may
adjust the basic price to take into account
customer differences and changing situations
• a) Discount and allowance pricing : Adjust
price to reward customers for certain
responses. Includes, cash discount, quantity
discount, trade discount, seasonal discount,
trade in allowance, promotional allowance.
• b) Segmented pricing – Also called price
discrimination. Selling products or services at
two or more prices, even though the
difference in prices is not based on differences
in costs
• C) Psychological pricing – Setting prices to take
advantage of non logical reactions of
consumers to certain types of prices.
• Examples are odd pricing and prestige
pricing.
• d) Promotional pricing – Using price as
promotion tool. Temporarily reduce price
to increase sales. Examples include:
• * Loss leader pricing
• * Special event pricing
• * Special season pricing
• e) Geographical pricing – Deciding how to
price products for customers located in
different locations