CHAPTER TEN
Pricing
Lecturer: Ashik Abdullah
Ch 10 -0 Copyright © 2011 Pearson Education
Chapter Learning Outcomes
Topic Outline
10.1 What Is a Price?
10.2 Customer Perceptions of Value
10.3 Company and Product Costs
10.4 Other Internal and External Considerations Affecting
Price Decisions
10.5 New Product Pricing strategies
10.6 Product Mix Pricing Strategies
10.7 Price-Adjustment Strategies
10.8 Price Changes
Ch 10 -1 Copyright © 2011 Pearson Education
What Is a Price?
Price
• Price is the amount of money charged for a product or
service. It is the sum of all the values that consumers give
up in order to gain the benefits of having or using a
product or service.
• Price is the only element in the marketing mix that
produces revenue; all other elements represent costs.
Ch 10 -2 Copyright © 2011 Pearson Education
Factors to Consider When Setting Prices
Ch 10 -3 Copyright © 2011 Pearson Education
Customer Perceptions of Value
Customer oriented prices involves understanding how
much value consumers place on the benefits they receive
from the product and setting a price that captures that value.
Ch 10 -4 Copyright © 2011 Pearson Education
Customer Perceptions of Value
Value –Based Pricing
Value-based pricing uses the buyers’ perceptions of value,
not the sellers cost, as the key to pricing.
• Value-based pricing is customer driven
• Cost-based pricing is product driven
Ch 10 -5 Copyright © 2011 Pearson Education
Customer Perceptions of Value
Ch 10 -6 Copyright © 2011 Pearson Education
Customer Perceptions of Value
Value-Based Pricing
Good-value pricing offers the right combination of quality
and good service to fair price.
Existing brands are being redesigned to offer more quality for
a given price or the same quality for less price.
Ch 10 -7 Copyright © 2011 Pearson Education
Customer Perceptions of Value
Value-Based Pricing: Good-Value Pricing
Everyday low pricing (EDLP) involves charging a constant
everyday low price with few or no temporary price discounts.
High-low pricing involves charging higher prices on an
everyday basis but running frequent promotions to lower
prices temporarily on selected items.
Ch 10 -8 Copyright © 2011 Pearson Education
Customer Perceptions of Value
Value-Based Pricing: Value-Added Pricing
Value-added pricing attaches value-added features and
services to differentiate offers, support higher prices, and build
pricing power.
Pricing power is the ability to escape price competition and to
justify higher prices and margins without losing market share.
Ch 10 -9 Copyright © 2011 Pearson Education
Company and Product Costs
Cost-Based Pricing
Cost-based pricing involves setting prices based on the costs
for producing, distributing, and selling the product plus a fair
rate of return for its effort and risk.
Cost-based pricing adds a standard markup to the cost of
the product.
Ch 10 -10 Copyright © 2011 Pearson Education
Other Internal and External Considerations
Affecting Price Decisions
Analyzing the Price-Demand Relationship
The demand curve shows the number of units the market will
buy in a given period at different prices.
• Normally, demand and price are inversely related
• Higher price = lower demand
• For prestige (luxury) goods, higher price can equal higher
demand when consumers perceive higher prices as higher
quality
Ch 10 -11 Copyright © 2011 Pearson Education
Other Internal and External Consideration
Affecting Price Decisions
Other External Factors
Economic conditions
Government
Social concerns
Ch 10 -12 Copyright © 2011 Pearson Education
New-Product Pricing Strategies
1. Market Skimming Pricing
2. Market Penetration Pricing
Ch 10 -13 Copyright © 2011 Pearson Education
New-Product Pricing Strategies
Market-skimming pricing is a strategy with high initial
prices to “skim” revenue layers from the market.
• Product quality and image must support the price
• Buyers must want the product at the price
• Competitors should not be able to enter the market easily
Ch 10 -14 Copyright © 2011 Pearson Education
New-Product Pricing Strategies
Market-penetration pricing sets a low initial price in order to
penetrate the market quickly and deeply to attract a large
number of buyers quickly to gain market share.
• Price sensitive market
• Low prices must keep competition out of the market
Ch 10 -15 Copyright © 2011 Pearson Education
Price-Adjustment Strategies
Discount and Segmented
allowance pricing pricing
Promotional pricing International pricing
Ch 10 -16 Copyright © 2011 Pearson Education
Price-Adjustment Strategies
Discount and allowance pricing reduces prices to reward
customer responses such as paying early or promoting the
product.
• Discounts: cash, quantity, seasonal
• Trade in allowance
• Promotional allowance
Ch 10 -17 Copyright © 2011 Pearson Education
Price-Adjustment Strategies
Segmented pricing is used when a company sells a product
at two or more prices even though the difference is not based
on cost.
• Customer
• Product form
• Location.
•time
Ch 10 -18 Copyright © 2011 Pearson Education
Price-Adjustment Strategies
For Segmented Pricing to be effective:
• Market must be segmentable
• Segments must show different degrees of demand
• Must be legal
Ch 10 -19 Copyright © 2011 Pearson Education
Price-Adjustment Strategies
Psychological Pricing
• Adjusting Prices for Psychological Effect
• Price Used as a Quality Indicator
• Reference price- prices that buyers carry in their minds and
refer to when they look at a given product
Price-Adjustment Strategies
Promotional pricing is when prices are temporarily priced
below list price or cost to increase demand.
Ch 10 -21 Copyright © 2011 Pearson Education
Price-Adjustment Strategies
Risks of promotional pricing
• If it is used too frequently and copied by competitors, it can
create “deal-prone” customers who will wait for promotions
and avoid buying at regular price
• Creates price wars
Ch 10 -22 Copyright © 2011 Pearson Education
Geographical pricing
• FOB-origin
• Uniform-delivered pricing
• Zone pricing
• Basing point pricing
• Freight-absorption pricing
Price-Adjustment Strategies
Pricing Strategies
International pricing is when prices are set in a specific
country based on country-specific factors.
• Economic conditions
• Competitive conditions
• Laws and regulations
• Infrastructure
• Company marketing objective
Ch 10 -24 Copyright © 2011 Pearson Education
Product Line Pricing
Setting Price Steps Between Product Line Items
i.e. $299, $399
Product Optional-Product Pricing
Mix Pricing Optional or Accessory Products
Sold With The Main Product
Pricing i.e. Car Options
Strategies
Captive-Product Pricing
Pricing Products That Must Be Used
With The Main Product
i.e. Razor Blades, Film, Software
By-Product Pricing
Pricing Low-Value By-Products To Get Rid
of Them
i.e. Lumber Mills, sugar mills, container etc.
Product-Bundle Pricing
Pricing Bundles Of Products Sold Together
i.e. Season Tickets, Computer Makers
26 © Pearson Education 2011
Initiating and Responding to Price
Changes
Competitor
Reactions
Initiating
to
Price Price Cuts
Changes
Price
Changes
Buyer
Reactions Initiating
to Price
Price Increases
Changes
Price-Adjustment Strategies
Has Competitor Cut Hold Current Price;
No
Price? Continue to Monitor
Competitor’s Price.
Will Lower Price
Negatively Affect Our No
Market Share & Profits?
Reduce Price
Raise Perceived
No
Can/ Should Effective Quality
Action be Taken? Yes Improve Quality
& Increase Price
Launch Low-Price
“Fighting Brand”