Pricing Lecture Strategies

LECTURE 8b
Pricing Strategy
1
GBUS 207: PRINCIPLES OF MARKETING
Presentation Outline
What Is a Price?
New Product Pricing Strategies
Product Mix Pricing Strategies
Price Adjustment Strategies
Price Changes
2
What Is a Price?
Price:- the amount of money charged for a product or service,
or the sum of the values that customers exchange for the
benefits of having or using the product or service. (Kotler &
Armstrong)
***
- one of the most important determinants of a firms market
share and profitability.
- only marketing mix element that produces revenue and not
costs.
- also one of the most flexible elements
- customer perceptions of the products value determine the
ceiling for prices whilst product costs set the floor for prices.
Price charged should fall between these two parameters.
3
What Is a Price?
Factors to consider when setting prices include: customer
perceptions of value, company and product costs as well as
other internal & external factors.
Customer Perceptions of Value

- advocates for setting prices based on buyers perceptions of value rather
than on the sellers cost = Value-Based Pricing
Fig. 1
Set target Design product

Assess customer price to match Determine
to deliver
needs and value customer costs that can
desired value
perceptions perceived be incurred
at target price
value
4
What Is a Price?
Two types of Value-based pricing:
a) good-value pricing offering just the right combination of quality and
good service at a fair price eg. Everyday low prices (EDLP)
b) value-added pricing attaching value-added features and services to
differentiate a companys offers and charging higher
Company and Product Costs

- setting prices based on costs for producing, distributing, and selling the
product plus a fair rate of return for effort and risk = Cost-Based Pricing
Fig 2.
Convince
Design a Determine Set price Buyers of
good product product costs based on cost products
value
5
What Is a Price?
Types of Costs:
a) Fixed costs (overheads) costs that do not vary with production or
sales level eg. Rent,
b) Variable costs costs that vary directly with the level of production.eg.
Raw materials,
Total costs = sum of fixed costs and variable costs for any given level of
production.
*Note that if it costs a company more than competitors to produce and

sell its product, the company will need to charge a higher price or make
less profit which could potentially put it at a competitive disadvantage all
things being equal.
Costs vary with different levels of production and production experience

(experience curve or learning curve).
6
What Is a Price?
Cost-Based Pricing
a) Cost-Plus Pricing- adding a standard markup to the cost of the product
b) Break-Even Pricing or Target Profit Pricing setting price to break
even on the costs of making and marketing a product, or setting price to make
a target profit.
Other Internal & External Considerations Affecting Pricing Decisions

Internal factors include: the firms overall marketing strategy, objectives &
marketing mix and other organizational considerations i.e.
who makes the pricing decision.
External factors include: the nature of the market & demand, competitors
strategies &prices, and other environmental factors.
7
What Is a Price?
Internal factors
Overall marketing strategy
- firms pricing strategy is largely determined by its decisions on market
positioning
Objectives
- does the company want to attract new customers, profitably retain existing
ones
- does it want to increase barriers to entry or match competition
Marketing Mix
- decisions on price must be coordinated with product design, distribution and
promotional decisions.
8
What Is a Price?
External factors
The Market and Demand
- Pricing in Different Types of Markets i.e. pure competition, monopolistic
competition, oligopolistic competition and pure monopoly.
- Analyzing the Price-Demand Relationship i.e. demand curve
- Price Elasticity of Demand i.e. responsiveness of demand to price changes
Competitors Strategies and Prices

- how does the companys product compare with competitors offerings in
terms of customer value?
- how strong are current competitors and what are their current pricing
strategies?
- how does the competitive landscape influence customer price sensitivity?
Other External Factors

- economic conditions, resellers reactions, government and social concerns 9
New-Product Pricing Strategies
1. Market-Skimming Pricing
- setting a high price for a new product to skim maximum revenues layer
by layer from the segments willing to pay the high price; the company
makes fewer but more profitable sales e.g. Sony HDTV intro
Conditions for success:
Products quality and image must support its higher price and demand
must be adequate at that price.
The costs of producing a smaller volume must not cancel the benefit of
charging more.
Sufficient barriers to entry must be in place.
2. Market-Penetration Pricing
- setting a low price for a new product in order to attract a large no. of
buyers and a large market share.
Conditions for success:
Market must be highly price sensitive (low price = more market growth)
Production and distribution costs must fall as sales volume increases.
Sufficient barriers to entry and ability to maintain low-price position.
10
The firm looks for a set of prices that maximizes profits on the total product mix.
1. Product line pricing:
Setting prices across an entire product line based on cost differences between the
products, customer evaluations of diff. features and competitors prices.
2. Optional-product pricing:
Pricing optional or accessory products sold with the main product eg. cell phone
cases
3. Captive-product pricing or two-part pricing (services):
Pricing products that must be used with the main product eg. blades for razor,
printer cartridges, etc
4. By-product pricing:
Pricing low-value by-products to get rid of or make money on them so that the
main product can be more competitive. eg. Blue skies fruit drink
5. Product bundle pricing:
Pricing bundles of products sold together eg. Tour packages
11
Price-Adjustment Strategies
At some point firms usually adjust their basic prices to account for various
customer differences and changing situations.
1. Discount & allowance pricing:
Reducing prices to reward customers responses such as paying early or
promoting the product eg. Cash or quantity
2. Segmented pricing or yield / revenue management:
Adjusting prices to allow for differences in customers, products or locations
and not costs. Forms Customer-segment: Product form pricing: location
based
3. Psychological pricing:
Adjusting prices for psychological effect and not just economics eg. Reference
pricing in department stores, prices ending in 9, SALE signs, price-matching
guarantees.
12
4. Promotional pricing:
Temporarily reducing prices to increase short-run sales
5. Geographical pricing:
Adjusting prices to account for the geographical location of customers
eg. FOB origin, uniform-delivered, zone, basing-point, freight-absorption,
6. Dynamic pricing:
Adjusting prices continually to meet the characteristics and needs of
individual customers and situations
7. International pricing:
Adjusting prices for international markets
13
Price Changes
Companies are faced with situations in which they must either initiate price
changes or respond to price changes by competitors. Note that in both cases,
the organization must anticipate possible buyer and competitor reactions.
Initiating Price Changes

Initiating Price Cuts
Initiating Price Increases
Buyer Reactions to Price Changes
Competitor Reactions to Price Changes
Responding to Price Changes
Why did the competitor change their price? Is the price change temporary or
permanent? What will happen to the companys market share and profits if it
does not react? Are other competitors going to respond? What is the firms
own situation & strategy? What will be the possible customer reactions to price
changes? 14
Price Changes
Fig. 3 Assessing and Responding to Competitor Price Changes

Hold current price;
Has competitor cut No continue to monitor
price? competitors price
Yes
Will lower price

negatively affect our No
market share and profits? Reduce price
Yes
Raise perceived value
No
Can/should effective
action be taken?j Improve quality and
increase price
Yes Launch low-price
fighting brand
15
TRIALS
1. Companies bringing out a new product can choose
between two broad strategies: market-skimming
pricing and market-penetration pricing. Distinguish
between the two.
2. Discuss the importance of consumer perceptions of

value and costs to setting prices.
3. Identify four (4) of the product mix pricing strategies.

Describe each of them using appropriate examples.
4. Manufacturers can use by-product pricing to achieve

competitive advantage for their main products. Explain
briefly,0 with relevant example, how this can be done?
16

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LECTURE 8b

Customer Perceptions of Value

Set target Design product

Company and Product Costs

*Note that if it costs a company more than competitors to produce and

Costs vary with different levels of production and production experience

Other Internal & External Considerations Affecting Pricing Decisions

Competitors Strategies and Prices

Other External Factors

Initiating Price Changes

Fig. 3 Assessing and Responding to Competitor Price Changes

Will lower price

2. Discuss the importance of consumer perceptions of

3. Identify four (4) of the product mix pricing strategies.

4. Manufacturers can use by-product pricing to achieve

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