A price is the amount of money charged for a product or a service, the sum of the values that customers

exchange for the benefits of having or using the product or service. Price is the only element in the marketing
mix that produces revenue, all others are costs. Setting the right price is one of the most complex tasks. Good
pricing starts with customers and their perception of the value of the product.

Customer value-based pricing: setting price based on buyer’s perceptions of value rather than on the
seller’s cost. The value customers attach to a product might be difficult to measure, so the company must
work hard to establish estimates. There are two other types of value-based pricing: good-value pricing and
value-added pricing. Good-value pricing means offering the right combination of quality and good service at
a fair price. Value-added pricing means attaching value-added features and services to differentiate a
company’s offers and charging higher prices.

Cost-based pricing means setting prices based on the cost for producing, distributing and selling the product
plus a fair rate of return for effort and risk. There are two forms of costs: fixed costs (overhead) are costs
that do not vary with production or sales level. Variable costs are costs that vary directly with the level of
production. Total costs are the sum of the fixed and variable costs for any given level of production.

The experience curve (learning curve) is the drop in the average per-unit production costs that comes with
accumulated production experience. Put more simply: as workers become more experienced, they become
more efficient and costs drop.

The simplest pricing method is cost-plus pricing or mark-up pricing: it means adding a standard mark-up to
the cost of the product. However, this method ignores demand and competitors prices and is therefore
unlikely to lead to the best price. Break-even pricing (target return pricing) means setting the price to break
even on the costs of making and marketing a product or setting price to make a target return. The break-even
volume is the amount of units that need to be sold to break even. Competition-based pricing means setting
prices based on competitor’s strategies, prices, costs and market offerings.

Beyond customer value perceptions, costs and competitor prices, the firm must also think of other factors.
Price is only one element of the marketing mix and the overall marketing strategy must be determined
first. Target costing is pricing that starts with an ideal selling price and then targets costs that ensure the
price is met. Good pricing is based on an understanding of the relationship between price and demand for the
product.

Pricing can differ in different types of markets. In pure competition markets, there are numerous buyers and
sellers that all have little effect on the price. In monopolistic competition, there are many buyers and sellers
who trade over multiple prices. In an oligopolistic competition market, there are few sellers who are highly
sensitive to each other’s pricing strategies. In a pure monopoly, the company is the only seller and can set any
price it desires.
The demand curve is a curve that shows the number of units the market will buy in a given time period, at
different prices that might be charged. The price elasticity is a measure of sensitivity of demand to changes
in price.

Pricing strategies can be challenging. There are two broad strategies. Market-skimming pricing (price
skimming) means setting a high price for a new product to skim maximum revenues layer by layer from the
segments willing to pay the high price, the company makes fewer but more profitable sales. Market-
penetration pricing means setting a low price for a new product to attract a large number of buyers and a
large market share.

There are five product mix pricing situations.

1. Product line pricing: setting the price steps between various products in a product line based on cost
differences between the products, customer evaluations of different features and competitor’s prices.

2. Optional product pricing: the pricing of optional or accessory products along with a main product.

3. Captive product pricing: setting a price for products that must be used along with a main product.

4. By-product pricing: setting a price for by-products to make the main product’s price more competitive.

5. Product bundle pricing: combining several products and offering the bundle at a reduced price.

There are also seven price adjustment strategies that can be used.

1. Discount: a straight reduction in price on purchases during a stated period of time or of larger
quantities. Allowance is promotional money paid by manufacturers to retailers in return for an agreement to
feature the manufacturer’s products in some way.

2. Segmented pricing: selling a product or service at two or more prices, where the difference in prices is
not based on costs. Customer-segment pricing involves different types of customers paying different
pricing. Product-form pricing involves different prices for different versions of the same product. Location-
based pricing involves different prices for different locations, while time-based pricing involves different
prices for different moments in time.

3. Psychological pricing: pricing that considers the psychology of prices, not simply the economics, the
price says something about the product. Reference prices are prices that buyers carry in their minds and
refer to when they look at a given product.

4. Promotional pricing: temporarily pricing products below the list price, and sometimes even below cost,
to increase short-run sales.
5. Geographical pricing: setting prices for customers located in different parts of the country or world.
This can be FOB-origin pricing: a geographical pricing strategy in which goods are placed free on board a
carrier, the customer pays the freight from the factory to the destination. Uniform-delivered pricing: a
geographical pricing strategy in which the company charges the same price plus freight to all customers,
regardless of their location. Zone pricing: the company sets up two or more zones. All customers within a
zone pay the same total price, the more distant the zone, the higher the price. Base-point pricing: a pricing
strategy in which the seller designates some city as a base point and charges all customers the freight cost
from that city to the customer. Freight-absorption pricing is a strategy in which the seller absorbs all or
part of the freight charges to get the desired business.

6. Dynamic pricing means adjusting pricing continually to meet the characteristics and needs of individual
customers and situations.

7. International pricing: charging different pricing for customers in different countries.

After setting prices, there are often situations in which companies need to change their prices. Sometimes, the
company finds it desirable to initiate price cuts, for instance when demand is falling, or price increases to
improve profits. Consumers can react differently to changes in prices, as well as competitors. When
competitors change prices first, the firm has to respond. There are as many as four responses, namely: the
firm can reduce its price, maintain its price but raise the perceived value of the product, improve the quality
and increase the price or launch a low-price fighter brand to compete with the price change.

There is legislation surrounding price fixing (talking to competitors to set prices), which is illegal. Predatory
pricing (selling below costs to punish competitor) is also prohibited. Many countries also try to prevent unfair
price discrimination and deceptive pricing.