Marketing Department

Principles of Marketing

CHAPTER 8
PRICE DECISIONS
 Learning Objectives
2

 Understand the importance of pricing,

 How to know to consider factors that affects pricing decisions and
dig into some major pricing strategies such as: new product pricing
strategies; product mix pricing strategies; price adjustment
strategies and price changes.
 Pricing:
Understanding and
Capturing Customer Value

Topic Outline
What Is a Price?
Major Pricing Strategies
Other Internal and External
Considerations Affecting Price
Decisions
Price strategies
 What Is a 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.
 What Is a Price?

Price is the only element in the marketing mix

that produces revenue; all other elements
represent costs.
Discussion Question
How does a company like KFC price their products?
Major Pricing Strategies

Considerations in setting price

Con
 Major Pricing Strategies
Customer Value-Based Pricing

Understanding how much

value consumers place
on the benefits they
receive from the product
and setting a price that
captures that value
 Major Pricing Strategies

Customer Value-Based Pricing

Value-based pricing uses the buyers’ perceptions
of value, not the sellers cost, as the key to
pricing. Price is considered before the
marketing program is set.
 Value-based pricing is customer driven
 Cost-based pricing is product driven
 Major Pricing Strategies

Customer Value-Based Pricing

 Major Pricing Strategies

Customer Value-Based Pricing

Good-value pricing
offers the right combination of quality
and good service at a fair price
 Major Pricing Strategies

Customer Value-Based Pricing

Everyday low pricing (EDLP) charging
a constant everyday low price with
few or no temporary price discounts
 Major Pricing Strategies
Customer Value-Based Pricing

High-low pricing charging higher prices on an

everyday basis but running frequent promotions to
lower prices temporarily on selected items
 Major Pricing Strategies
Customer Value-Based Pricing

Value-added pricing attaches value-added features and

services to differentiate offers, support higher prices, and
build pricing power
Major Pricing Strategies

Considerations in setting price

Con
 Major Pricing Strategies

Cost-Based Pricing
Cost-based pricing setting prices based on the costs for producing,
distributing, and selling the product plus a fair rate of return for
effort and risk
 Major Pricing Strategies

Cost-Based Pricing
Cost-based pricing adds a standard markup to the cost of the
product
Major Pricing Strategies
Cost-Based Pricing

Types of costs
Fixed Variabl Total
costs e costs costs
 Major Pricing Strategies
Cost-Based Pricing

Fixed costs are the costs that do not

vary with production or sales level
 Rent
 Heat
 Interest

 Executive salaries
 Major Pricing Strategies

Cost-Based Pricing
Variable costs are the costs that vary with the level of production
 Packaging

 Raw materials
 Major Pricing Strategies

Cost-Based Pricing
Total costs are the sum of the fixed and variable costs for any given
level of production
 Major Pricing Strategies

Costs as a Function of Production Experience

 Major Pricing Strategies
Costs as a Function of Production Experience
Experience or learning curve is when average cost falls as
production increases because fixed costs are spread over
more units
 Major Pricing Strategies
Cost-Plus Pricing
Cost-plus pricing adds a standard markup to the
cost of the product
Benefits
Sellers are certain about costs
 Prices are similar in industry and price competition

is minimized
 Buyers feel it is fair

Disadvantages
 Ignores demand and competitor prices
 Major Pricing Strategies
Break-Even Analysis and Target Profit Pricing

Break-even pricing is the price at which total

costs are equal to total revenue and there
is no profit

Target profit pricing is the price at which the

firm will break even or make the profit it’s
seeking
 Major Pricing Strategies

Break-Even Analysis and Target Profit Pricing

Considerations in Setting Price
 Major Pricing Strategies
Competition-based pricing
Setting prices based on competitors’
strategies, costs, prices, and market
offerings.
Consumers will base their judgments of a
product’s value on the prices that
competitors charge for similar products.
 Other Internal and External Considerations Affecting Price
Decisions

Organizational considerations include:

Who should set the price
Who can influence the prices
Other Internal and External Considerations Affecting Price Decisions

The Market and Demand

Before setting prices,
the marketer must
understand the
relationship between
price and demand for
its products
 Other Internal and External
Consideration Affecting Price Decisions
Competition

Pure competition
Monopolistic
competition
Oligopolistic
competition
Pure monopoly
 Other Internal and External Considerations Affecting Price Decisions

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
 Other Internal and External
Considerations Affecting Price
Decisions
 Other Internal and External Considerations
Affecting Price Decisions

Price elasticity of demand illustrates the response of

demand to a change in price
Inelastic demand occurs when demand hardly changes
when there is a small change in price
Elastic demand occurs when demand changes greatly for
a small change in price
 Other Internal and External
Considerations Affecting Price Decisions

Price elasticity of demand =

% change in quantity demand
% change in price
 Other Internal and External
Consideration Affecting Price Decisions

Economic conditions

Reseller’s response
to price

Government

Social concerns
New-Product Pricing Strategies
Pricing Strategies

Market-skimming
pricing
Market- penetration
pricing
 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
Costs of producing the product in small volume should
not cancel the advantage of higher prices
Competitors should not be able to enter the market
easily
 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
Inverse relationship of production and
distribution cost to sales growth
Low prices must keep competition out of the
market
 Product Mix Pricing Strategies

Product Optional- Captive-

line product product
pricing pricing pricing

By- Product
product bundle
pricing pricing
 Product Mix Pricing Strategies

Product line pricing takes into account the

cost differences between products in the
line, customer evaluation of their features,
and competitors’ prices
Optional-product pricing takes into account
optional or accessory products along with
the main product
 Product Mix Pricing Strategies

Captive-product pricing
involves products that
must be used along
with the main product
 Price Mix Pricing Strategies

By-product pricing refers to products with little or no value

produced as a result of the main product. Producers will seek
little or no profit other than the cost to cover storage and
delivery.
 Price Mix Pricing Strategies

Product bundle pricing combines several

products at a reduced price
 Price-Adjustment Strategies
Discount
Segment
and Psychologic
ed
allowance al pricing
pricing
pricing

Promotiona Geographic Dynamic

l pricing pricing pricing

Internationa
l pricing
 Discount and allowance pricing
Most companies adjust their basic price to reward customers
for certain responses, such as early payment of bills, volume
purchases, and off-season buying.
The many forms of discounts include:
 A cash discount

 A quantity discount

 A functional discount

 A seasonal discount

Allowances are another type of reduction from list price.

 Trade-in allowances

 Promotional allowances
 Segmented pricing
In segmented pricing, the company sells a product or
service at two or more prices, even though the difference
in prices is not based on differences in costs.
 Customer-segment pricing

 Product form pricing

 Location pricing

 Time pricing
 Price-Adjustment Strategies
Segmented Pricing

To be effective:
Market must be segmentable
Segments must show different degrees of demand
Watching the market cannot exceed the extra
revenue obtained from the price difference
Must be legal
 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
 Price-Adjustment Strategies
Promotional pricing is when prices are
temporarily priced below list price or cost to
increase demand
Special event pricing
Loss leaders
Cash rebates
Low-interest financing
Longer warrantees
Free maintenance
 Price-Adjustment Strategies
Risks of promotional pricing
Used too frequently, and copies by competitors can
create “deal-prone” customers who will wait for
promotions and avoid buying at regular price
Creates price wars
 Price-Adjustment Strategies
Geographical pricing is used for customers in
different parts of the country or the world
FOB-origin pricing
Uniformed-delivered pricing
Zone pricing
Basing-point pricing
Freight-absorption pricing
 Price-Adjustment Strategies

 FOB-origin (free on board) pricing means that

the goods are delivered to the carrier and the title
and responsibility passes to the customer
 Uniformed-delivered pricing means the company
charges the same price plus freight to all
customers, regardless of location
 Price-Adjustment Strategies

 Zone pricing means that the company sets up

two or more zones where customers within a
given zone pay a single total price
 Basing-point pricing means that a seller
selects a given city as a “basing point” and
charges all customers the freight cost
associated from that city to the customer
location, regardless of the city from which the
goods are actually shipped
 Price-Adjustment Strategies

 Freight-absorption pricing means the seller absorbs all or part of the actual
freight charge as an incentive to attract business in competitive markets
 Price-Adjustment Strategies

Dynamic pricing is when

prices are adjusted
continually to meet the
characteristics and needs of
the individual customer and
situations
 Price-Adjustment 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
 Price Changes
Initiating Pricing Changes

Price cuts occur due

to:
• Excess capacity
• Increased market share

Price increase from:

• Cost inflation
• Increased demand
• Lack of supply
 Price Changes
Buyer Reactions to Pricing Changes

Price
Price cuts
increases
• Product is • New models
“hot” will be
• Company available
greed • Models are
not selling
well
• Quality issues
 Price Changes
Responding to Price Changes

Questions
 Why did the competitor change the price?
 Is the price cut permanent or temporary?
 What is the effect on market share and profits?
 Will competitors respond?
 Price Changes
Responding to Price Changes

Solutions
 Reduce price to match competition
 Maintain price but raise the perceived value through
communications
 Improve quality and increase price
 Launch a lower-price “fighting” brand
 Price Changes

Responding to Price Changes

 Conclusions
63

This chapter reviewed some main points:

 The importance of pricing
 Factors that affects pricing decisions
 Major pricing strategies such as: new product pricing strategies;
product mix pricing strategies; price adjustment strategies and price
changes