PRICING

WEEK7
 PRICING

Pricing
- Factors influencing pricing strategies
- Traditional pricing methods (Cost based,
Value based & Competition based)
- New product pricing (Market skimming&
Market penetration)
- Product mix pricing
- Price adjustment strategies
 PRICING

• 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 .
• Price is the only element in the marketing mix
that produces revenue; all other elements
represent costs.
PRICING
 Factors affecting pricing decisions
(1) Marketing objectives :
• Before setting price, the company must decide on its
strategy for the product (market positioning).
• Other general objectives include:
-Survival: A company may set prices low to prevent
competition from entering the market
-Profit maximization: the firm may estimate what
demand and costs will be at different prices and choose
the price that will produce maximum current profit
 Factors affecting pricing decisions

-Market share leadership: To become a market

share leader, the firm sets prices as low as
possible .
-Product quality leadership
• This normally calls for charging a high price to
cover higher performance quality and the
high cost of Research and production (R&D) .
 Factors affecting pricing decisions

(2) Marketing mix strategy :

• Price is one of the marketing mix tools that a
company uses to achieve its marketing
objectives .
• Price decisions must be coordinated with
product design , distribution , and promotion
decisions to form a consistent and effective
marketing program .
 Factors affecting pricing decisions

(3) Costs :
• Costs set the floor for the price that the
company can charge .
• The company wants to charge a price that
both covers all its costs for producing
,distributing and selling the product and
delivers a fair rate of return for its effort and
risk .
 Factors affecting pricing decisions

3 Types of Costs :
• Fixed costs: costs that do not vary with
production or sales level .
• Variable costs: costs that vary directly with
the level of production .
• Total costs : The sum of the fixed costs and
variable costs for a given level of production
 Factors affecting pricing decisions

(4) The market and demand

• Whereas costs set the lower limit of prices,
the market and demand set the upper limit
(ceiling).
• Buyers balance the price of a product against
the benefits of owning it .
 Factors affecting pricing decisions

(5) Competitors’ costs and prices .

• In setting its prices, the company must
consider competitors’ prices and competitor
reactions to the company’s own pricing moves
(6) Other external factors :
Economic conditions
Government factor
Social concerns
 Pricing Approaches – Cost based

• Cost plus pricing : It is adding a standard

mark-up to the cost of the product . It is the
simplest pricing method . This method is fair
to both buyers and sellers .
 Pricing Approaches – Cost based

• Cost plus pricing : It is adding a standard

mark-up to the cost of the product . It is the
simplest pricing method . This method is fair
to both buyers and sellers .
 Pricing Approaches – value based

• Value- added pricing - Value added pricing

uses buyers’ perceptions of value , not the
seller’s costs as the key to pricing. Rather than
matching completion, companies add quality, services and other features
to differentiate themselves and support their high price
 Value based vs Cost based

• Value- based pricing . Value based pricing

uses buyers’ perceptions of value , not the
seller’s costs as the key to pricing .
 Pricing Approaches – Competition based

Competition based pricing :

• It is going –rate pricing, in which a firm bases
its price largely on competitor’s prices , with
less attention paid to its own costs or to
demand .
• The firm might charge the same as ,more than
,or less than its major competitors .
 New Product Pricing Strategies
Conditions for market skimming
i. The product’s quality and image must
support its high price .
ii. the costs of producing a smaller volume
cannot be so high that they cancel the
advantage of charging more .
iii. Competitors should not be able to enter the
market easily and undercut the high price
iv. Enough buyers must want the product at
that high price .
 New Product Pricing Strategies
Conditions for market penetration
i. The market must be highly price sensitive so that a
low price produces more market growth
ii. Production and distribution costs must fall as sales
volume increases .
iii. The low price must help keep out the competition,
and the penetration -price must maintain its low-
price position otherwise, the price advantage may
be only temporary
 Product Mix Pricing Strategies

• The strategy for setting a product’s price often

has to be changed when the product is part of
a product mix .
Product mix - also known as product assortment or product portfolio, refers
to the complete set of products and/or services offered by a firm. A product
mix consists of product lines, which are associated items that consumers tend
to use together or think of as similar products or services.
 Product Mix Pricing Strategies

The strategy for setting a product’s price often

has to be changed when the product is part of a
product mix .
 Product Mix Pricing Strategies

• Product line pricing - Setting the price steps

between various products in a product line
based on cost differences between the
products, customer evaluations of different
features and competitors’ prices
 Product Mix Pricing Strategies

• Optional-product pricing - Offering to price

optional or accessory products along with
their main product
• Captive-product pricing - Setting a price for
products that must be used along with a main
product, such as blades for a razor and film for
a camera .
 Product Mix Pricing Strategies

• By-product pricing - Setting a price for

byproducts in order to make the main
product’s price more competitive .
• Product bundle pricing - Combining several
products and offering the bundle at a reduced
price . Price bundling can promote the sales of
products consumers might not otherwise buy ,
but the combined price must be low enough
to get them to buy the bundle .
 Price Adjustment Strategies
1. Discount and allowance pricing –
• Most companies adjust their basic price to
reward customers for certain responses such as
early payments of bills, volume purchases and
offseason buying.
• Discounts - A straight reduction in price on purchases during a
stated period of time such as cash discount , quantity discount
,trade discount and seasonal discount .
• Allowance - Promotional money paid by manufacturers to
retailers in return for an agreement to feature the
manufacturer’s products in some way . Trade in and
promotional allowances.
 Price Adjustment Strategies

2. Segmented pricing
• Selling a product or service at two or more
prices , where the difference in price is not
based on differences in costs – but rather on
customer segments
- Based on a customer segment ie students, senior citizens,
gender
- Location based pricing ie Gaborone prices vs Jwaneng prices
- Time based pricing ie end of day pricing for pies to avoid
losses
 Price Adjustment Strategies
3. Psychological pricing
• A pricing approach that considers the psychology of
prices and not simply the economics ; the price is used
to say something about the product.
• High prices to assume better quality, low prices
assuming lower quality.
- Another aspect of psychological pricing is reference
prices—prices that buyers carry in their minds and
refer to when looking at a given product
- ONLY P9.95
 Price Adjustment Strategies

4. Promotional pricing
• Temporarily pricing products below the list
price and sometimes even below cost to
increase short-run sales . This can be applied :
- Special events i.e. opening specials
- Limited time offers
 Price Adjustment Strategies

5. International pricing
• Companies that market their products
internationally must decide what prices to
charge in different countries in which they
operate , in order to reflect local market
conditions .