Chapter six

Pricing Products

1
 Meaning and significance of pricing
• Price is the sum of all the values that consumers 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 other elements represent costs.
• Price is also one of the most flexible elements of the marketing
mix.

2
 Pricing Objectives
A company can pursue any of five major objectives through pricing:
• ➤Survival
• ➤ Maximum current profit
• ➤ Maximum market share: This is appropriate when
• (1) the market is highly price sensitive, so a low price stimulates market growth;
• (2) production and distribution costs fall with accumulated production experience; and
• (3) a low price discourages competition.
• ➤ Maximum market skimming: conditions:
• (1) A sufficient number of buyers have a high current demand;
• (2) the unit costs of producing a small volume are not so high that they cancel the advantage of
charging what the traffic will bear;
• (3) the high initial price does not attract more competitors to the market; and
• (4) the high price communicates the image of a superior product.
• ➤ Product-quality leadership: premium products at premium prices.

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4
Marketing Objectives that Affect
Pricing Decisions
Survival
Survival
Low
LowPrices
Pricesto
toCover
CoverVariable
VariableCosts
Costsand
and
Some Fixed Costs to Stay in Business.
Some Fixed Costs to Stay in Business.

Current
Current Profit
Profit Maximization
Maximization
Choose
Choosethe
thePrice
Pricethat
thatProduces
Producesthe
the
Marketing
Marketing Maximum
MaximumCurrent
CurrentProfit,
Profit,Cash
CashFlow
Flowor
orROI.
ROI.

Objectives
Objectives Market
Market Share
Share Leadership
Leadership
Low
LowasasPossible
PossiblePrices
Pricesto
toBecome
Become
the
theMarket
MarketShare
ShareLeader.
Leader.

Product
Product Quality
Quality Leadership
Leadership
High
HighPrices
Pricesto
toCover
CoverHigher
Higher
Performance Quality
Performance Quality

5
Marketing
Marketing Mix
Mix Variables
Variables that
that Affect
Affect Pricing
Pricing
Decisions
Decisions
Product
Product Design
Design
and
and Quality
Quality

Marketing-Mix
Non-Price
Non-Price
Factors Strategy Distribution
Distribution
Factors

Promotion
Promotion

6
Types of Cost Factors that Affect Pricing
Decisions

Total
TotalCosts
Costs
Sum
Sumof
ofthe
theFixed
Fixedand
andVariable
VariableCosts
Costsfor
foraaGiven
Given
Level
Levelof
ofProduction
Production

Variable
VariableCosts
Costs
Fixed
FixedCosts
Costs Costs
(Overhead) Costs that dovary
that do vary
(Overhead) directly with the
directly with the
Costs
Coststhat
thatdon’t
don’t level
vary levelof
ofproduction.
production.
varywith
withsales
salesor
or
production
productionlevels.
levels. Raw
Executive Rawmaterials
materials
ExecutiveSalaries
Salaries
Rent
Rent

7
 Organizational consideration
• Management must decide who within the organization
should set prices.
• In small companies the top management may be involved in
setting prices for products while in the case of large
companies this may be the responsibility area of divisional
or product manager.
• In any case the organizational set up by itself has implication
upon the pricing aspect.

8
External
External Factors
Factors Affecting
Affecting Pricing
Pricing
Decisions
Decisions

Market and
Demand

Competitors’ Costs,
Prices, and Offers
Other External Factors
Economic Conditions
Reseller Needs
Government Actions
Social Concerns

9
 The Market and Demand
• As costs set the lower limit of prices, the market and demand
set the upper limit.
• Before setting prices, the marketer must understand the
relationship between price and demand for its product.
• Pricing in Different Types of Markets
• The sellers pricing freedom varies with different types of
markets. Economists recognize four types of market each
presenting a different pricing challenge.

10
The Market and Demand Factors that Affect Pricing
Decisions

Pure
PureCompetition
Competition Monopolistic
MonopolisticCompetition
Competition
Many
ManyBuyers
Buyersand andSellers
SellersWho
Who Many
ManyBuyers
Buyersand
andSellers
SellersTrading
Trading
Have
HaveLittle
Littleeffect
effecton
onthe
thePrice.
Price. Over
OveraaRange
Rangeof ofPrices.
Prices.

Different
Different Types
Types of
of Markets
Markets

Oligopolistic
OligopolisticCompetition
Competition Pure
PureMonopoly
Monopoly
Few
FewSellers
SellersEach
EachSensitive
Sensitiveto
toOther’s
Other’s Single
SingleSeller
Seller
Pricing/
Pricing/Marketing
MarketingStrategies
Strategies

11
 Competitors cost, prices, and offers

• In setting its prices the company must also

consider competitors costs and process, and
possible competitor reactions to the company’s
own pricing moves.
• The company pricing strategy may affect the
nature of the competition it faces.

12
 Other external Factors
• When Setting Prices, the company must also consider a
number of other factors in its external environment,
Economic conditions such as Boom or recession, inflation
and Interest rates affect pricing decisions because they
affect both the costs of producing a product and
consumer perception of the product’s price and value.

13
 General pricing approach:
Cost plus pricing
Break- even or target profit pricing
Value based pricing
Competition based pricing

14
 Cost-Plus Pricing

Adding a Standard Markup to the Cost of the

Product

Sellers
SellersAre
Are More
More Minimizes
Minimizes
Certain
CertainAbout
About Price
Price
Costs
Costs Than
Than Competition
Competition
Demand
Demand
Perceived
Perceived
Fairness
Fairness to
to
Both
Both Buyers
Buyers
and
and Sellers
Sellers
15
 Breakeven Analysis or Target Profit Pricing
•Tries to Determine the Price at Which a Firm Will Break Even or Make
a Target Profit
Cost in Dollars (thousands)

1,200 Total Revenue

1,000 Target Profit

800 ($200,000)
Total Cost
600
400 Fixed Cost
200

10 20 30 40 50
Sales Volume in Units (thousands)

16
 Value-Based Pricing
Cost-Based Pricing Value-Based Pricing

Product
Product Customer
Customer

Cost
Cost Value
Value

Price
Price Price
Price

Value
Value Cost
Cost

Customers
Customers Product
Product
17
 Competition-Based Pricing

Setting
Setting Prices
Prices

Going-Rate
Going-Rate
Company
CompanySets
SetsPrices
PricesBased
BasedononWhat
What
Competitors
CompetitorsAre
AreCharging.
Charging.

?
Company
Sealed-Bid
Sealed-Bid
CompanySets
SetsPrices
PricesBased
Basedonon
?What
WhatThey
TheyThink
ThinkCompetitors
Will
Competitors
WillCharge.
Charge.
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19
New Product Pricing Strategies

Market
Market Skimming
Skimming Market
Market Penetration
Penetration

> Setting a High Price > Setting a Low Price for

for a New Product to a New Product in Order
Maximize Revenues to Attract a Large
from the Target Number of Buyers.
Market. > Results in a Larger
> Results in Fewer, More Market Share.
Profitable Sales.

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21
 Price Adjustment Strategies

• Discount and allowance pricing

• Segmented pricing

• Psychological pricing

• Promotional pricing

• Geographical pricing

• Dynamic pricing

• International pricing

9-22
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 Price –Adjustment Strategies
2.Segmented pricing –is used when a company sells a product at two or
more price even though the difference is not based on cost
3. Psychological pricing – occurs when seller consider the psychology of
prices and not simply economics
• used to play on consumer perceptions
• classic example Rs. 999 instead of Rs. 1000
• Links with value pricing –high value goods priced according to what consumers think should
be the price.
4.Promotional pricing – is when prices are temporarily priced below list
price or cost to increase demand
5. Geographical pricing – is used for customers in different parts of the
country or the world
6. Dynamic pricing – is when prices are not adjusted continuously to meet
the characteristics and needs of the individual customers & situations
7. International pricing – is when prices are set in a specific country based
on country specific factors

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 Segmented Pricing

• Selling a product or service at two or more prices,

where the difference in prices is not based on
differences in costs.

• Types:
1. Customer-segment
2. Product-form
3. Location pricing
4. Time pricing
9-26
 Psychological Pricing
• Considers the psychology of prices and not simply the
economics.
• Consumers usually perceive higher-priced products as having
higher quality.
• Consumers use price less when they can judge the quality of a
product by examining it or recalling experiences.

9-27
 Dynamic Pricing
• Adjusting prices continually to meet the characteristics and needs of
individual customers and situations.

9-28
Geographical Pricing

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 Promotional Pricing
• Loss leader pricing – store sells selective goods below cost to stimulate
additional store traffic
• Special event pricing – set for product, product range or service for a
limited time frame and event
• Supplier or retailer set an anniversary and advertise special discount
• Special customer pricing- sellers offer special pricing for certain
customers
• Low interest financing – instead of cutting its price, the company can offer
customers low interest financing
• Cash rebates – auto companies and other consumer companies offer cash
rebates to encourage purchase of the manufacturers’ products within a
specified period of time.
• Rebate can help clear inventories without cutting the stated list price
• Longer warranties – to promote sales by adding a free or low cost warranty

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 International Pricing
• Price depends on many factors, including:
• Economic conditions
• Competitive situations
• Laws and regulations
• Development of the wholesaling and retailing system
• Consumer perceptions and preferences
• Costs

9-31
 Product Mix Pricing Strategies

• Product line pricing

• Optional-product pricing

• Captive-product pricing

• By-product pricing

• Product bundle pricing

9-32
 Product-Line Pricing
• Involves setting price steps between various products in a
product line based on:
• Cost differences between products
• Customer evaluations of different features
• Competitors’ prices

9-33
Optional- and Captive-Product Pricing
• Optional-Product
• Pricing optional or accessory products sold with the main
product (e.g., ice maker with the refrigerator).
• Captive-Product
• Pricing products that must be used with the main product
(e.g., replacement cartridges for Gillette razors).

9-34
 By-Product and Product Bundle Pricing
Strategies

• By-Product Pricing
• Pricing low-value by-products to get rid of them (e.g., animal manure from
zoo).

• Product Bundle Pricing

• Pricing bundles of products sold together (software, monitor, PC, and
printer).

9-35
 y ou
a n k
Th

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