Pricing Considerations
and Approaches
Chapter 11
Objectives
• Understand the internal factors
affecting a firm’s pricing decisions.
• Understand the external factors
affecting pricing decisions, including
the impact of consumer perceptions of
price and value.
• Be able to contrast the three general
approaches to setting prices.
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Case Study
[Link]
• “Buyer-driven • Most deals relate to
commerce” concept travel or time
offers lower prices to sensitive / perishable
consumers and the services
ability to sell excess • Not all ventures have
inventory to sellers been profitable
• 13.5 million user • Some customers find it
customer base difficult to commit to
• Tremendous growth purchase prior to
learning details 11 - 3
What is Price?
Price Has Many Names
• Rent • Tuition • Bribe
• Fee • Fare • Salary
• Rate • Toll • Wage
• Commission
• Premium • Interest
• Assessment
• Retainer • Tax
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Definition
• Price
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.
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What is Price?
• Dynamic Pricing on the Web allows
SELLERS to:
Charge lower prices, reap higher margins.
Monitor customer behavior and tailor offers.
Change prices on the fly to adjust for changes
in demand or costs.
Negotiate prices in online auctions and
exchanges.
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What is Price?
• Dynamic Pricing on the Web allows
BUYERS to:
Get instant price comparisons from
thousands of vendors.
Find and negotiate lower prices.
Negotiate prices in online auctions and
exchanges.
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What is Price?
• Price and the Marketing Mix:
Only element to produce revenues
Most flexible element
Can be changed quickly
• Price Competition
• Common Pricing Mistakes
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Factors to Consider When
Setting Price
Internal • Market positioning
influences pricing strategy
Factors • Other pricing objectives:
• Marketing objectives
Survival
• Marketing mix Current profit maximization
strategies Market share leadership
Product quality leadership
• Costs
• Not-for-profit objectives:
• Organizational Partial or full cost recovery
considerations Social pricing
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Factors to Consider When
Setting Price
Internal • Pricing must be carefully
Factors coordinated with the other
marketing mix elements
• Marketing objectives
• Target costing is often used
• Marketing mix to support product
strategies positioning strategies based
• Costs on price
• Nonprice positioning can
• Organizational
also be used
considerations
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Factors to Consider When
Setting Price
Internal • Types of costs:
Factors
Variable
Fixed
• Marketing objectives
Total costs
• Marketing mix • How costs vary at different
strategies production levels will
• Costs influence price setting
• Experience (learning) curve
• Organizational
effects on price
considerations
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Factors to Consider When
Setting Price
Internal • Who sets the price?
Small companies: CEO or
Factors top management
• Marketing objectives Large companies: Divisional
• Marketing mix or product line managers
strategies • Price negotiation is
common in industrial
• Costs settings
• Organizational • Some industries have
considerations pricing departments
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Factors to Consider When
Setting Price
External • Types of markets
Pure competition
Factors Monopolistic competition
• Nature of market and Oligopolistic competition
demand Pure monopoly
• Competitors’ costs, • Consumer perceptions of
prices, and offers price and value
• Price-demand relationship
• Other environmental Demand curve
elements Price elasticity of demand
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Factors to Consider When
Setting Price
• Consider competitors’ costs,
External prices, and possible reactions
when developing a pricing
Factors strategy
• Nature of market and • Pricing strategy influences the
demand nature of competition
Low-price low-margin strategies
• Competitors’ costs, inhibit competition
prices, and offers High-price high-margin
strategies attract competition
• Other environmental • Benchmarking costs against the
elements competition is recommended
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Factors to Consider When
Setting Price
External • Economic conditions
Factors Affect production costs
Affect buyer perceptions of
• Nature of market and price and value
demand • Reseller reactions to prices
• Competitors’ costs, must be considered
prices, and offers • Government may restrict or
limit pricing options
• Other environmental
• Social considerations may be
elements
taken into account
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General Pricing
Approaches
• Cost-Based Pricing: Cost-Plus Pricing
Adding a standard markup to cost
Ignores demand and competition
Popular pricing technique because:
It simplifies the pricing process
Price competition may be minimized
It is perceived as more fair to both buyers and
sellers
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General Pricing
Approaches
Cost-Based Pricing Example
Variable costs: $20 Fixed costs: $ 500,000
Expected sales: 100,000 units Desired Sales Markup: 20%
Variable Cost + Fixed Costs/Unit Sales = Unit Cost
$20 + $500,000/100,000 = $25 per unit
Unit Cost/(1 – Desired Return on Sales) = Markup Price
$25 / (1 - .20) = $31.25
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General Pricing
Approaches
• Cost-Based Pricing: Break-Even Analysis
and Target Profit Pricing
Break-even charts show total cost and total
revenues at different levels of unit volume.
The intersection of the total revenue and total
cost curves is the break-even point.
Companies wishing to make a profit must
exceed the break-even unit volume.
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General Pricing
Approaches
Break-Even Analysis and Target Profit Pricing
Revenues
1000 Target Profit $200,000
Thousands 800 Total Costs
of Dollars Break-even
600 point
400
Fixed Costs
200
0 10 20 30 40 Quantity To Be Sold To
Sales Volume in Thousands of Units Meet Target Profit
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General Pricing
Approaches
• Value-Based Pricing:
Uses buyers’ perceptions of value rather than
seller’s costs to set price.
Measuring perceived value can be difficult.
Consumer attitudes toward price and quality
have shifted during the last decade.
Introduction of less expensive versions of
established brands has become common.
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General Pricing
Approaches
• Value-Based Pricing:
Business-to-business firms seek to retain
pricing power
Value-added strategies can help
Value pricing at the retail level
Everyday low pricing (EDLP) vs. high-low
pricing
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General Pricing
Approaches
• Competition-Based Pricing:
Also called going-rate pricing
May price at the same level, above, or below
the competition
Bidding for jobs is another variation of
competition-based pricing
Sealed bid pricing
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