CHAPTER 7

PRICING STRATEGY
 Product: is a good or Price: is the amount of
service that satisfies the money customers
wants of a company’s must pay to obtain
target market. the product.

PRODUCT Marketing PRICE

Mix (4Ps)

Promotion: is defined as Place: includes

the activities that company activities
communicate the merits that make a
PROMOTION PLACE product available
of the product and
persuade target to target
customers to buy it. consumers.
4Ps (seller’s mind-set) (buyer’s mind-set) 4Cs

Customers are buying value

Businesses sell products and solutions to problems
PRODUCT CUSTOMER VALUE

Customer refers to the total

Price costs of obtaining, using,
and disposing of a product
PRICE CUSTOMER COSTS

Activities that make a product

Easy to buying
available to target consumers.
PLACE CONVENIENCE

Consumers want two-way

Eg. 30 second
communication and
commercials on
relationships with
television and/or radio
businesses
PROMOTION COMMUNICATION
  The importance of Pricing

 What is a Price?

 Pricing strategies

 Other Internal and External

CONTENTS Considerations Affecting Price Decisions

 New-Product Pricing Strategies

 Product Mix Pricing Strategies

 Price-Adjustment Strategies

 Price Changes
1. The importance of Pricing
THE IMPORTANCE OF PRICING

 Historically, price has been the major factor affecting buyer choice. In
recent decades, nonprice factors have gained increasing importance.
However, price still remains one of the most important elements that
determines a firm’s market share and profitability.
 Price is the only element in the marketing mix that produces revenue; all
other elements represent costs. Price is also one of the most flexible
marketing mix elements.
1. The importance of Pricing
HOW MUCH SHOULD YOU CHARGE FOR YOUR PRODUCT?
An old Russian proverb says:
“There are two fools in every market - one asks too little,
another asks too much.”
 Charging too little wins the sale but makes little profit. Furthermore, it attracts the
wrong customers - those who will switch to save a dime. It also attracts competitors
who will match or exceed the price cut. And it cheapens the customer’s view of the
product.
 Charging too much may lose both the sale and the customer. Peter Drucker adds
another concern: “The worship of premium prices always creates a market for a
competitor.”
2. What is a Price?

In the narrowest sense, price is the amount of money

charged for a product or a service.

More broadly, price is the sum of all the values that customers give
up to gain the benefits of having or using a product or service.
3. Pricing strategies
THREE MAJOR PRICING STRATEGIES
Good-Value Pricing
CUSTOMER VALUE-BASED PRICING
Value-Added Pricing

Cost-Plus Pricing (or Markup Pricing)

COST-BASED PRICING Break-even Pricing

(or Target Return Pricing)

COMPETITATION-BASED PRICING
3. Pricing strategies
THREE MAJOR PRICING STRATEGIES

CUSTOMER
COST-BASED COMPETITATION-BASED
VALUE-BASED
PRICING PRICING
PRICING
3. Pricing strategies
 Setting price based on buyers’ perceptions of value rather than on
the seller’s cost.

For example:
A Steinway piano - any Steinway piano -
costs a lot ($40,000 to $165,000). But to
those who own one, a Steinway is a
great value: Steinway makes very high
CUSTOMER quality pianos; handcrafting each
VALUE-BASED Steinway requires up to one full year.
PRICING
3. Pricing strategies

Good-Value Pricing Value-Added Pricing

CUSTOMER
VALUE-BASED
PRICING
 3. Pricing strategies
CUSTOMER VALUE-BASED PRICING

 Offering the right combination of quality and good service at a fair price.
For example:
 To meet tougher economic times and more frugal consumer
spending habits, fast-food restaurants such as Taco Bell and
McDonald’s offer value meals and dollar menu items.
 Armani offers the less-expensive, more-casual Armani Exchange
Good-Value
fashion line.
Pricing  And every car company now offers small, inexpensive models
better suited to the strapped consumer’s budget.
3. Pricing strategies

CUSTOMER Good-Value Pricing Value-Added Pricing

VALUE-BASED
PRICING
 3. Pricing strategies
CUSTOMER VALUE-BASED PRICING

 Attaching value-added features and services to differentiate a

company’s offers and charging higher prices.

For example:
When re-branding their hotels, Southern Sun realized they could give their
Value-Added customers a positive experience not buy lowering prices but by adding
Pricing value to the services they provide.
 3. Pricing strategies
CUSTOMER VALUE-BASED PRICING

“If consumers thought the best deal was simply a question of

money saved, we’d all be shopping in one big discount store.
Customers want value and are willing to pay for it. Savvy
marketers price their products accordingly.”
Value-Added (says one pricing expert)
Pricing
3. Pricing strategies
THREE MAJOR PRICING STRATEGIES

CUSTOMER
COST-BASED COMPETITATION-BASED
VALUE-BASED
PRICING PRICING
PRICING
3. Pricing strategies

 Setting prices based on the costs for producing, distributing, and

selling the product plus a fair rate of return for effort and risk.

For example:
It costs more to make a “handcrafted” Steinway piano than a
Yamaha production model. But the higher costs result in higher
quality, justifying that eyepopping $72,000 price.
COST-BASED
PRICING
3. Pricing strategies

Types of costs

Fixed Variable Total

costs costs costs
COST-BASED
PRICING
3. Pricing strategies
Types of costs
 FIXED COSTS (OVERHEAD)
Costs that do not vary with production or sales level: Rent, Heat,
Interest, Executive salaries.

 VARIABLE COSTS
Costs that vary directly with the level of production: Packaging,
Raw materials.
COST-BASED
 TOTAL COSTS
PRICING The sum of the fixed and variable costs for any given level of
production.
 3. Pricing strategies
Costs as a Function of Production Experience

Experience curve (learning curve)

The drop in the average per-unit production cost that comes
with accumulated production experience.
COST-BASED
PRICING
 3. Pricing strategies
Costs as a Function of Production Experience

 The average cost of producing the

first 100,000 calculators is $10 per
calculator.
 When the company has produced
the first 200,000 calculators, the
average cost has fallen to $8.50.
 After its accumulated production
COST-BASED
experience doubles again to
PRICING 400,000, the average cost is $7.
3. Pricing strategies
THREE MAJOR PRICING STRATEGIES

Cost-Plus Pricing Break-even Pricing

COST-BASED
(or Markup Pricing) (or Target Return Pricing)
PRICING
3. Pricing strategies
COST-BASED PRICING

Adding a standard markup to the cost of the product.

For example:

Cost-Plus Pricing
(or Markup Pricing)
3. Pricing strategies
THREE MAJOR PRICING STRATEGIES

Cost-Plus Pricing Break-even Pricing

COST-BASED
(or Markup Pricing) (or Target Return Pricing)
PRICING
 3. Pricing strategies
 Setting price to break even on the costs of
COST-BASED PRICING
making and marketing a product or setting price
to make a target return.
For example:
The breakeven price of a house would be the sale price the
owner would need to get to cover the home's purchase
price, interest paid on the mortgage, hazard insurance,
property taxes, maintenance, improvements, closing costs
Break-even Pricing
and real estate sales commission. At this price, the
(or Target Return Pricing) homeowner would not see any profit, but also would not
lose any money.
3. Pricing strategies
THREE MAJOR PRICING STRATEGIES

CUSTOMER
COST-BASED COMPETITATION-BASED
VALUE-BASED
PRICING PRICING
PRICING
 3. Pricing strategies
 Setting prices based on competitors’ strategies, prices, costs,
and market offerings.

For example:
Walmart is selling a face wash for $3.99. NuMart, who is
looking to sell this product in the same area, also prices
their product at $3.99 in order to capture market share.
COMPETITATION-BASED They will not receive higher profits per unit than
PRICING Walmart with this pricing strategy, and will have to
engage in marketing tactics to engage customers,
since the price itself is not an incentive.
4. Other Internal and External Considerations
Affecting Price Decisions

 Overall Marketing Strategy, Objectives, and Mix

 Organizational Considerations

The Market and Demand

 The Economy

 Other External Factors

4. Other Internal and External Considerations
Affecting Price Decisions

 The Market and Demand:

 Pricing in Different Types of Markets

 Price Elasticity of Demand

 PRICING IN DIFFERENT TYPES OF MARKETS
 Many buyers and sellers trading in a uniform commodity, such as
PURE
wheat, copper, or financial securities.
COMPETITION
 Do not spend much time on marketing strategy.

 Many buyers and sellers who trade over a range of prices rather than
MONOPOLISTIC a single market price.
COMPETITION  Less affected by competitors’ pricing strategies
(many competitors).

OLIGOPOLISTIC  A few sellers who are highly sensitive to each other’s pricing and
COMPETITION marketing strategies.

PURE  One seller, such as a power company

MONOPOLY  Pricing is handled differently in each case.
 4. Other Internal and External Considerations
Affecting Price Decisions

PRICE ELASTICITY OF DEMAND

 Price elasticity: A measure of the sensitivity of demand to changes in price.

 The price elasticity of demand is given by the following formula:
 PRICE ELASTICITY OF DEMAND

Price elasticity of demand < 1 Demand is inelastic

Price elasticity of demand > 1 Demand is elastic

Price elasticity of demand = 1 Demand is unit elastic

For example, Suppose demand falls by 10 percent when a seller raises its price
by 2 percent. The price elasticity of demand is therefore -5 and demand is
elastic.
5. New-product Pricing Strategies
MARKET-SKIMMING
PRICING MARKET-PENETRATION
(PRICE SKIMMING) PRICING
Setting a high price for a Setting a low price for a
new product to skim new product to attract a
maximum revenues layer large number of buyers
by layer from the and a large market share.
segments willing to pay
the high price; the
company makes fewer
but more profitable sales.
 5. New-product Pricing Strategies

Conditions
 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
MARKET-SKIMMING cancel the advantage of higher prices.
PRICING
(PRICE SKIMMING)  Competitors should not be able to enter the market easily.
 5. New-product Pricing Strategies

 For example:
When Apple first introduced the iPhone, its initial price was as
much as $599 per phone. Six months later, Apple dropped the
price to $399 for an 8GB model and $499 for the 16GB model to
attract new buyers. Within a year, it dropped prices again to $199
MARKET-SKIMMING
and $299. In this way, Apple skimmed the maximum amount of
PRICING
(PRICE SKIMMING) revenue from the various segments of the market.
 5. New-product Pricing Strategies

 Price sensitive market.

 Inverse relationship of production and distribution cost to
sales growth.
 Low prices must keep competition out of the market.
MARKET-PENETRATION
PRICING
 5. New-product Pricing Strategies

 For example:
The giant Swedish retailer IKEA used penetration pricing to
boost its success in the Chinese market.

MARKET-PENETRATION
PRICING
 6. Product Mix Pricing Strategies

PRODUCT LINE OPTIONAL PRODUCT CAPTIVE PRODUCT BY-PRODUCT PRODUCT BUNDLE

PRICING PRICING PRICING PRICING PRICING
Setting prices Pricing optional or Pricing products Pricing low- Pricing bundles
across an entire accessory products that must be used value by- of products sold
product line sold with the main with the main products to together
product product get rid of them
7. Price-Adjustment Strategies

Discount and Segmented Psychological

allowance pricing pricing pricing

Promotional Geographic Dynamic International

pricing pricing pricing pricing
Price-Adjustment Strategies
8. Price Changes

PRICE CUTS occur due to: PRICE INCREASES from:

 Excess capacity.
 Falling demand (strong price
 Cost inflation
competition or a weakened
 Increased demand
economy).
 To dominate the market through  Lack of supply
lower costs.
 The hope of gaining market share.
8. Price Changes

Buyer Reactions to Pricing Changes

PRICE CUTS PRICE INCREASES

 New models will be available

 Product is “hot”
 Models are not selling well
 Company greed
 Quality issues
 8. Price Changes
Responding to Price Changes
Questions Solutions
 Why did the competitor change
 Reduce price to match competition
the price?
 Is the price cut permanent or  Maintain price but raise the perceived
temporary? value through communications
 What is the effect on market share  Improve quality and increase price
and profits?
 Launch a lower-price “fighting” brand
 Will competitors respond?
What do you need to
remember?
 Product: is a good or Price: is the amount of
service that satisfies the money customers
wants of a company’s must pay to obtain
target market. the product.

PRODUCT Marketing PRICE

Mix (4Ps)

Promotion: is defined as Place: includes

the activities that company activities
communicate the merits that make a
PROMOTION PLACE product available
of the product and
persuade target to target
customers to buy it. consumers.
Pricing strategies

THREE MAJOR PRICING STRATEGIES

Good-Value Pricing
CUSTOMER VALUE-BASED PRICING
Value-Added Pricing

Cost-Plus Pricing (or Markup Pricing)

COST-BASED PRICING Break-even Pricing

(or Target Return Pricing)

COMPETITATION-BASED PRICING
Other Internal and External Considerations
Affecting Price Decisions

 Overall Marketing Strategy, Objectives, and Mix

 Organizational Considerations

The Market and Demand

 The Economy

 Other External Factors

New-product Pricing Strategies

MARKET-SKIMMING
PRICING MARKET-PENETRATION
(PRICE SKIMMING) PRICING
Setting a high price for a Setting a low price for a
new product to skim new product to attract a
maximum revenues layer large number of buyers
by layer from the and a large market share.
segments willing to pay
the high price; the
company makes fewer
but more profitable sales.
 Product Mix Pricing Strategies

PRODUCT LINE OPTIONAL PRODUCT CAPTIVE PRODUCT BY-PRODUCT PRODUCT BUNDLE

PRICING PRICING PRICING PRICING PRICING
Setting prices Pricing optional or Pricing products Pricing low- Pricing bundles
across an entire accessory products that must be used value by- of products sold
product line sold with the main with the main products to together
product product get rid of them
Price-Adjustment Strategies