Pricing

Chapter 6
OBJECTIVES
Identify and explain the external and
internal factors affecting a firm's pricing
decisions.
Contrast the three general approaches
to setting prices.
Describe the major strategies for pricing
imitative and new products.
Explain how companies find a set of
prices that maximizes the profits from
the total product mix.
Discuss how companies adjust their
prices to take into account different
types of customers and situations.
Discuss the key issues related to
initiating and responding to price
What is Price?

Price Has Many Names

Rent Tuition Bribe

Fee Fare Salary
Rate Toll Wage
Commission Premium Interest
Assessment Retainer Tax
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.
Factors Affecting Price
Decisions
 Internal Factors Affecting
Pricing Decisions: Marketing
Objectives
Company must decide on its strategy for
the product
Survival
Low Prices Hoping to Increase
Demand.
Current Profit Maximization
Choose the Price that Produces
the Maximum Current Profit, Etc.
Marketing
Market Share Leadership
Objectives Low as Possible Prices to Become
the Market Share Leader.

Product Quality Leadership

High Prices to Cover Higher
Performance Quality and R&D.
 Four Seasons Hotel

Four Seasons uses

the product quality
leadership strategy.
It starts with very
high quality service,
then charges a price
to match.
http://www.fourseaso
ns.com
Internal Factors Affecting Pricing
Decisions: Marketing Mix Strategy

Customers Seek Products that Give Them the Best

Value in Terms of Benefits Received for the Price Paid.
Product Design

Nonprice
Price Distribution
Positions

Promotion
Factors to Consider When
Setting Price

Pricing must be
Internal carefully coordinated
Factors with the other
Marketing mix marketing mix
strategies elements
Target costing is often
used to support
product positioning
strategies based on
price
Nonprice positioning
can also be used
Factors to Consider When
Setting Price

Types of costs:
Internal Variable
Factors Fixed
Costs Total costs
How costs vary at
different production
levels will influence
price-setting
Experience (learning)
curve effects on price
Types of Cost Factors that
Affect Pricing Decisions

Fixed Costs Variable Costs

(Overhead)
Costs that dont Costs that do vary
vary with sales or directly with the
production levels level of production
Executive Salaries, Rent Raw materials

Total
Total Costs
Costs
Sum
Sum of
of the
the Fixed
Fixed and
and Variable
Variable Costs
Costs for
for Any
Any Given
Given
Level
Level of
of Production
Production
Pricing Decision Internal
Factors
Organizational
considerations.
Must decide who within
the organization should
set prices.
This will vary depending
on the size and type of
Who sets the price?
company.

Small companies: CEO

or top management
Large companies:
Divisional or product line
managers
Price negotiation is common
in industrial settings

Some industries have

pricing departments
 Other External Factors
Economic Conditions
Reseller Reactions
Government Actions
Social Concerns
Competitors Costs,
Prices, and Offers
Market and
Demand
Pricing Decisions
External Factors Affecting
Market and Demand Factors
Affecting Pricing Decisions
-Costs set the lower limit of prices
-The market and demand set the upper
limit
Pricing in Different Types of Markets

Pure
Pure Competition
Competition Pure
Pure Monopoly
Monopoly
Many
ManyBuyers
Buyersand
andSellers
Sellers Single
SingleSeller
Seller
Who
WhoHave
HaveLittle
Little
Effect
Effecton
onthe
thePrice
Price
Monopolistic
Monopolistic Oligopolistic
Oligopolistic
Competition
Competition Competition
Competition
Many
ManyBuyers
Buyersand Sellers Few
andSellers FewSellers
SellersWho
WhoAre
Are
Who
WhoTrade Overaa Sensitive
TradeOver Sensitiveto toEach
EachOthers
Others
Range
Rangeof
ofPrices
Prices Pricing/
Pricing/Marketing
Marketing
Strategies
Strategies
Demand and Elasticity

Demand.

The relationship
between price changes
and the number of units
sold.

Elasticity.

A way of measuring how

sensitive the market is
to price changes.
Inelastic minimal
change in demand
as price increases.
Elastic significant
drop in demand as
price increases.
Demand Curve
Price Elasticity of Demand

A. Inelastic Demand -
Demand Hardly Changes With
Price

a Small Change in Price.

P2
P1

Q2 Q1
Quantity Demanded per Period
B. Elastic Demand -
Demand Changes Greatly With
Price

P a Small Change in Price.

2

P1

Q2 Q1
Quantity Demanded per
Price Setting Considerations
General Pricing Approaches
Cost-based
approach.
Cost-plus
pricing.
Break-even
analysis.
Target profit
pricing.
Value-based
approach.
Consumer
perceptions of
value.
Competition-
based approach.
What
competitors are
charging.
Cost-Based Pricing

Certainty
About Costs
Unexpected
Situational Simples
Cost-Plus
Ethical
Factors t Pricing
Pricing is Pricing is an Method
Simplified Approach
That Adds a
Standard
Price
Competition Is
Markup to the Ignores
Minimized Cost of the
Others Current
Product Demand &
of
Attitudes
Fairer to Buyers Competitio
& Sellers n
Breakeven Analysis or Target Profit
Pricing (Fig. 10-4)

Tries to Determine the Price at Which a Firm

Will Break Even or Make a Certain Target
Profit.
Total
Cost in Dollars (millions)

12 Revenue
10 Target Profit
($2 million)
8
6 Total
Cost
4 Fixed Cost
2

200 400 600 800 1,000

Sales Volume in Units (thousands)
Competition-Based Pricing

Methods for
Setting Prices

Going-Rate
Company Sets Prices Based on
What
Competitors Are Charging
Sealed-Bid
?Company Sets Prices Based on
What They Think Competitors
? Will Charge
Cost-Based Versus Value-Based
Pricing (Fig. 10-5)
Discussion Question

Compare and contrast cost- What are situations that

based pricing and value- favor each pricing method?
based pricing.
New-Product Pricing
Strategies
Market-Skimming
Setting a High Price for a New Product
to Skim Maximum Revenues from the
Target Market.
Results in Fewer, But More Profitable
Sales.
I.e. Intel
Use Under These Conditions:
Products Quality and Image Must
Support Its Higher Price.
Costs Cant be so High that They Cancel
the Advantage of Charging More.
Competitors Shouldnt be Able to Enter
Market Easily and Undercut the High
Price.
 Pricing Strategy New Products
Skimming Pricing
Skim the
Price Sell at high cream pricing
price before
reducing to
involves selling
Initial
skimming
next price level at a high price
and repeat
price to those who
Second
are willing to
price pay before
aiming at more
Final
price
price-sensitive
consumers.

Quantity

Exhibit 17-5A
17-6
New-Product Pricing
Strategies
Market Penetration
Setting a Low Price for a New Product
in Order to Penetrate the Market
Quickly and Deeply.
Attract a Large Number of Buyers and
Win a Larger Market Share.
I.e. Dell
Use Under These Conditions:
Market Must be Highly Price-Sensitive so
a Low Price Produces More Market
Growth.
Production/Distribution Costs Must Fall as
Sales Volume Increases.
Must Keep Out Competition & Maintain Its
Low Price Position or Benefits May Only
be Temporary.
 Pricing Strategy New Products
Penetration Pricing

Price

Penetration Whole
market price
pricing involves
selling the
whole market at
one low price.

Quantity

Exhibit 17-5B
17-7
Interactive Student
Assignments
Form students into
groups of three to
five. Which pricing
strategy--market
skimming or market
penetration--does
each of the
following companies
use?
McDonalds,
Sony (television and
other home
electronics),
Bic Corporation
(pens, lighters,
shavers, and related
products), and
IBM (personal
Product Mix-Pricing Strategies:
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,
and
Competitors prices.
Product Mix-Pricing Strategies

Optional-Product
Pricing optional or
accessory products
sold with the main
product. i.e camera
bag.
Captive-Product
Pricing products that
must be used with
the main product. i.e.
film replacement
cartridges for Gillette
Product Mix
Pricing Strategies

By-Product
Pricing
Pricing of
low-value
by-products
to get rid of
them and make
the main
products price
more
competitive.
i.e sawdust and
Product Mix
Pricing Strategies

Product Bundle
Pricing
Pricing bundles of
products sold
together
Combining several
products and
offering the bundle
at a reduced price.
Common in fast food
industry
Price Adjustment Strategies

Strategies
Discount /
allowance
Segmented
Psychological
Promotional
Geographical
International
Discount and Allowance
Pricing
A d ju s t in g B a s ic P r ic e to R e w a r d C u s to m e rs
F o r C e rta in R e s p o n s e s

C a s h D is c o u n t S e a s o n a l D is c o u n t

Q u a n tity D is c o u n t F u n c tio n a l D is c o u n t

-T r a d e -in A llo w a n c e -P r o m o tio n a l A llo w a n c e

Segmented Pricing

S e llin g P r o d u c ts A t 2 o r M o r e P r ic e s E v e n
T h o u g h T h e r e is N o D iff e r e n c e in C o s t

C u s to m e r - S e g m e n t L o c a tio n P r ic in g

P ro d u c t - F o rm T im e P r ic in g
Psychological Pricing

Considers the psychology

of prices and not simply
the economics.
Customers use price less
when they can judge
quality of a product.
Price becomes an
Valu
e $2 important quality signal
Sale 2.0 when customers cant
0
$14 judge quality; price is
.99
used to say something
about a product.
 Discounts
Discounts
Free
Free Merchandise
Merchandise
Longer
Longer Warranties
Warranties
Through: Low-Interest
Low-InterestFinancing
Financing
Short-Term Sales
to Increase Cash
Cash Rebates
Rebates
Below List Price
Pricing Products Special-Event
Special-Event Pricing
Pricing
Temporarily
Loss
Loss Leaders
Leaders
Promotional Pricing
Other Price Adjustment
Strategies

Pricing products for

Geographical Pricing customers
located in different parts of
the country or world.
i.e. FOB-Origin, Uniform-
Delivered, Zone, Basing-
Point, & Freight-Absorption.
International Pricing
Adjusting prices for
customers
in different counties.
Price Depends on Costs,
Consumers, Economic
Conditions, Competitive
Situations, & Other Factors.
Initiating Price Changes

Price Cuts Price Increases

Why? Why?
Excess Capacity Cost Inflation
Falling Market Overdemand:
Share Company Cant
Dominate Market Supply All
Through Lower Customers Needs
Costs
 Price
Price May
May Come
Come
Down
Down Further
Further
Quality
Quality Has
Has Been
Been
Reduced
Reduced
Buyers
Buyers are
are Well
Well Company
Company is is in
in
Informed
Informed Financial
Financial Trouble
Trouble
Current
Current Models
Models Are
Are
Product
Product is
is Uniform
Uniform Not
Not Selling
Selling Well
Well
Number Being
Being Replaced
Replaced by
by
Number of
of Firms
Firms is
is Newer
Small
Small
When: Newer Models
Models
As:
Competitors Mostly React Price Cuts Are Seen by Buyers
Reactions to Price Changes
Looking Back
Identify and explain the external and
internal factors affecting a firm's pricing
decisions.
Contrast the three general approaches
to setting prices.
Describe the major strategies for pricing
imitative and new products.
Explain how companies find a set of
prices that maximizes the profits from
the total product mix.
Discuss how companies adjust their
prices to take into account different
types of customers and situations.
Discuss the key issues related to
initiating and responding to price