Chapter 7
Pricing Policies
Prepared by
Bùi Ngọc Tuấn Anh (PhD)
Understanding Pricing
• Definition of Price
– Price is the amount of money charged for a product or service,
or the sum of all the values that customers exchange for the
benefits of having or using the product or service.
– It's not just a number but a reflection of the value a product or
service offers.
• Importance of Pricing
– Effective pricing can capture a portion of the value created for
customers.
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Factors influencing pricing decisions
Customer Company Competitor
perceptions of
value costs strategies
Internal External Market and
factors factors demand
Organizational
considerations
Factors influencing pricing decisions
• Customer perceptions of value
– Customer perceptions of a product's value set the ceiling for its
price.
– If customers believe the price is too high for the value they
receive, they won't buy.
– Effective pricing starts with understanding how customers
perceive the value they receive from the product or service.
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Factors influencing pricing decisions
• Company costs
– Product costs set the floor for a product’s price. Pricing below
costs can harm profits. It's essential to know both fixed and
variable costs.
– Fixed costs (overhead) are costs that do not vary with
production or sales levels.
– Variable costs are costs that change directly with the level of
production.
– Total costs are the sum of fixed and variable costs.
Factors influencing pricing decisions
• Competitor Strategies
• Market and demand: The seller's pricing freedom varies
with different types of markets. Understanding the price-
demand relationship and price elasticity is essential.
• Organizational considerations: Management must decide
who is responsible for setting prices within the
organization.
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Factors influencing pricing decisions
Internal factors
• These include the company's overall marketing strategy,
objectives, and marketing mix.
• Pricing must align with broader marketing goals.
External factors
• These include the nature of the market and demand, economic
conditions, and other environmental factors.
• Factors such as the economy, resellers, the government and
social concerns, should be taken into consideration when
making pricing decisions.
Major pricing strategies
• Customer value-based pricing
– Setting prices based on how much value consumers place on
the benefits they receive from the product. This method aligns
price with perceived customer value.
– Good-value pricing offers a combination of quality and service
at a fair price.
– Value-added pricing attaches value-added features and
services to differentiate offerings.
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Major pricing strategies
• Cost-Based Pricing:
– Setting prices based on the costs of production, distribution,
and selling, plus a fair rate of return.
• Cost-plus pricing (markup pricing) involves adding a
standard markup to the cost of the product.
• Break-even pricing sets prices to cover costs and achieve
a target return.
Major pricing strategies
• Competition-based pricing: setting prices based on what
competitors are charging.
– Going-rate pricing uses the prevailing market price.
– Competitive pricing considers competitors' prices when setting
a company’s price.
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New-Product Pricing Strategies
• Two Broad Strategies
– Market skimming pricing – set a high initial price
– Market penetration pricing – set a low initial price
Product mix pricing strategies
Product line pricing Optional-product pricing
• Setting prices across an • Pricing optional or
entire product line to accessory products sold
establish perceived quality with the main product.
differences. Companies must decide
which items to include in the
base price and which to
offer as options.
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Product mix pricing strategies
Captive-product By-product Product bundle
pricing pricing pricing
• Pricing • Pricing low- • Pricing bundles
products that value by- of products sold
must be used products to together at a
with the main make money reduced price.
product. from or dispose
of them.
Price Adjustment Strategies
• Companies adjust basic prices to account for various
customer differences and changing situations.
• Discount and allowance pricing
• Segmented pricing
• Psychological pricing
• Dynamic pricing
• International pricing
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Price adjustment strategies
• Discount and allowance pricing: reducing prices to reward
customer responses such as volume purchases or paying
early.
– Includes cash discounts, quantity discounts, functional
discounts, and seasonal discounts.
• Segmented pricing: adjusting prices to accommodate
differences in customers, products, times, or locations.
• Psychological pricing: adjusting prices for psychological
effect, not just economics.
– Includes using reference prices, odd pricing and even pricing.
Price Adjustment Strategies
• Psychological pricing occurs when sellers consider the
psychology of prices and not simply the economics.
– Reference prices are prices that buyers carry in their minds and
refer to when looking at a given product.
– Noting current prices
– Remembering past prices
– Assessing the buying situations
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Price adjustment strategies
• Promotional pricing: temporarily reducing prices to spur
short-run sales.
– May involve special event pricing or loss leaders.
• Geographical pricing: adjusting prices to account for the
geographic location of customers.
– Includes uniform-delivered pricing and zone pricing.
Price adjustment strategies
• Dynamic and personalized pricing
– Adjusting prices continually to meet the characteristics and
needs of individual customers and situations.
– This reverses the fixed-price trend and is facilitated by digital
technologies.
• International pricing
– Adjusting prices for international markets, considering local
conditions and costs.
• Prices in other countries may need to be adjusted
depending on local conditions.
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Initiating and responding to price changes
• Initiating price cuts
– Companies may cut prices due to excess capacity, increased
competition, or economic recession.
• Initiating price increases
– Companies may increase prices due to cost inflation or
increased demand.
• Responding to competitors' price changes
– Companies must analyze and anticipate competitor reactions to
their price changes and respond accordingly.
Public policy and Pricing
• Legal and ethical considerations
• Price fixing: an agreement among competitors to raise,
lower, or stabilize prices, which is illegal.
• Predatory pricing: selling products below cost to drive out
competitors, which is illegal in many countries.
• Price discrimination: selling the same product or service
to different customers at different prices.
• Deceptive pricing: using misleading or fraudulent prices
and pricing tactics.
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Key takeaways
• Pricing is not just about covering costs; it's a strategic
Pricing is strategic tool for creating and capturing customer value.
• Pricing is a dynamic process that requires continuous
Dynamic process monitoring and adjustments.
• Pricing decisions should be consistent with the firm’s
Holistic approach marketing strategy and with its target markets and
brand positions.
Customer-centric • Effective pricing begins with a deep understanding of
approach customer value perceptions.
• Pricing is a key element of the company's overall value
Value proposition proposition.
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