Priciples of Marketing

by Philip Kotler and Gary Armstrong

Chapter 1
General Pricing Method

Pricing Theory and Practice ( MKT 221)

PEARSON
What is a Price?
 In the narrowest sense, price is the amount of money
charged for a product or a service.(From the view point of
seller)
 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.(From the view point of customer)
 Price is the only element in the marketing mix that
produces revenue; all other elements represent costs.
Only price can earn profit.
Concepts of Price, Cost, Profit & Revenue
(Relations)

Price = Cost + Profit

(Fixed Cost + Variable Cost)+Profit
Profit= Price – Cost
Revenue= Price * Volume of Sale
Net Profit= Total Income – Total Cost
{(Price*Volume of Sale)-(Fixed Cost + Variable Cost)}
 Importance of Pricing
Pricing: Pricing is the process of determining what a company will
receive in exchange of it’s product or service. It is a method that
adopted by a company to sets it’s selling price.
Importance of Pricing
 Price is the only marketing mix tool that produce revenue.
 Price is the most flexible element of marketing mix tools.
 Pricing is the number one problem faced by a marketing
executive.
 According to expert, 1% rise in price caused 12.5% rise in profit
for most organization.
 1% fall in price caused 4% decrease in profit for most
organization.
 Price is the only marketing mix tool that can earn profit.
 Some others terms used to mean ‘Price’
Alternative Terms What is purchased
Price Most goods
Tuition Collage course, education
Rent Use of place to live or se of equipment for period of
time
Interest Use of money
Fee Professionals service: for lawyers, doctors, consultants
Premium Insurance
Fare Transportation: air, taxi, bus
Toll Use of road, bridge or long distance phone rate

Salary Work of manager

Wages Work of hourly workers
Commission Sales effort
Q. Identify and define the external and internal factors
affecting a firm’s pricing decision.
Internal Factors
 Pricing Objective
 Product Cost
 Marketing Mix Strategies
 Organizational Considerations
External Considerations
 Competitors costs, price and offers
 Nature of market and demand
 Other environmental elements (Economic condition, Social consideration,
Government and legal regulations)
 Marketing / Pricing method used
 Pricing Procedure

Step 1: Select Pricing Objectives

Step 2: Determine Demand

Step 3: Estimate Cost

Step 4: Analyze Competition

Step 5: Select Pricing Method

Step 6: Select Final Price

Figure: Pricing Procedure

(Reference: Marketing Management:Philip Kotler,Chapter 14)
 Pricing Procedure

Step 1: Select Pricing Objectives

 Survival
 Maximize current profit
 Maximize current market share
 Market skimming
 Product quality leadership
 Partial cost recovery (Non-profit organization) & social
marketing
 Pricing Procedure
Step 2: Determine Demand
Price Sensitivity:
 Pricing Procedure
 Understand the factor that affect the price sensitivity:
1. Condition under which customers are less price sensitive (Inelastic Demand)
 Products are more distinguished
 Buyers are less aware of substitute
 Buyers cannot easily compare the quality of substitute
 The expenditure is a lower part of buyers income
 The expenditure is small compare to the total cost
 Part of the cost is born by another party
 The product is used with asset previously bought
 The product is assumed to have more quality, prestige or
exclusiveness
 Buyer cannot store the product
 Pricing Procedure

Step 2: Determine Demand

Price Sensitivity:

Understand the factor that affect the price sensitivity:

2. Condition under which demand is less elastic (Elastic Demand)
 There are few or no substitute
 Buyer do not readily notice the higher price
 Buyers are slow to change their buying habits and search for
lower price
 Buyers think higher price are justified
 Pricing Procedure
Step 2: Determine Demand
3. Understand Price Elasticity of Demand:
Price elasticity of demand measures the change in the quantity demanded
relative to a change in price for a goods or services.
% Change in Quantity Demanded
Price elasticity of demand = % Change in Price

When, Elasticity > 1 = Elastic Demand

And When, Elasticity < 1 = Inelastic Demand

Example: When gas prices increases by 50% then gas purchases fall by 25%. So
we can calculate that, the price elasticity of gasoline is;
PED = -25% / 50%
= -0.50%
Price Elasticity of Demand

 Price Elasticity is a measure of the sensitivity of

demand to changes in price.
 It is given by the following formula:
%change in quantity demanded
price elasticity of demand =
%change in price

• If demand is elastic rather than inelastic, sellers will

consider lowering their prices.
• A lower price will produce more total revenue.
• Marketers need to work harder than ever to differentiate
their offerings when a dozen competitors are selling
virtually the same product at a comparable or lower price.
 Pricing Procedure
Step 3: Estimate Cost
• Types of cost and level of production
a. Fixed cost
b. Variable cost
c. Total cost
• Accumulated production leads to cost reduction via experience curve
• Differentiated marketing offers create different cost level
Step 4: Analyze Competition
• Firm must analyze competition with respect to
a. Costs
b. Price
c. Quality
d. Possible price reactions
Types of Costs
The sum of the fixed and
variable costs for any
given level of production.
Costs that do not vary
with production or sales
level.

Fixed
costs Variable Total
(over- costs costs
head)

Costs that vary directly with

the level of production.
 Pricing Procedure

Step 5: Select Pricing Method

• Pricing Strategy should reflect the 3 Cs’ of pricing
I. Cost-based Pricing
a. Markup pricing / Cost-plus Pricing
b. Target profit pricing / Break-even pricing
II. Customer-based Pricing / Value-based Pricing
a. Good value pricing / Perceived value pricing
b. Value added Pricing / Value Pricing
III. Competition-based Pricing
a. Going rate pricing
b. Auction-type pricing
 Pricing Procedure
Step 5: Select Pricing Method
The price the company charges will fall somewhere between
one that is too low to produce a profit and one that is too
high to produce any demand.

Fig: Three Cs Model for Price Setting

 Pricing Procedure
Step 6: Select Final Price
Additional factors to consider,
 Psychological pricing
 Gain and risk pricing
 Influences of other marketing mix variables
 Company Pricing policies
 Impact of price on other parties
 General Pricing Approaches
(Markup Pricing/Cost-plus Pricing)
(Target Profit Pricing and Break-even Analysis)

Exercise: Montex company produce gel pen for customer.

Variable cost per unit (tk.) 10.
Fixed cost (tk.) 3,00,000
Expected unit sales 50,000 units
From the above information find out:
i) Per unit production cost.
ii) If co. wants to make 20% profit on sales then what will
be the selling price?
iii) If co. wants to make 2lac tk profit then how much units
they should be produced?
Solution:
Here Given,
Variable Cost= tk. 10 per unit
Fixed cost= tk 3,00,000
Expected Sales= 50,000 unit
(i) So, per unit manufacturing cost or Production cost will be,
=Variable cost + Fixed cost/Unit sales
= 10+3,00,000/50,000
= 16 tk
So, per unit production/manufacturing cost= 16tk
So, Total Cost= 50,000*16= 8,00,000tk
(ii) Now, if company wants to make 20% profit then,
Per unit mark-up price or selling price will be,
=Unit cost / (1- Desired return on sales)
= 16 / (1- 0.2)
= 20 tk
Break-even Volume= Fixed Cost / (Selling Cost-Variable Cost)
= 3,00,000 / (20-10)
=30,000 unit
If co. wants to make 2,00,000tk profit then they should produce,
Production= (Fixed Cost+Target Profit) / (Selling Price-Variable Cost)
= (3,00,000+2,00,000) / (20-10)
= 50,000 unit
So, Total Selling price will be= 50,000*20
= 10,00,000 tk
 Advantages of cost based pricing
1. Cost-based pricing is the easiest pricing method
2. It can determine an ideal markup for pricing
3. It identifies the cost of selling a product and leaves enough margin to make a
profit.
4. There is a base price that the product cannot go under to be profitable called
the floor price which is determined by fixed costs to the business.
5. It is good for products and services that can be bought and sold in bulk.
6. It will consider hourly services in most cases.
7. The major competitive advantage is cost based pricing is price. If the
business can make the product for less than their competitors, they can price
it lower and do more in bulk sales
8. Cost based pricing works well for longer companies as they can better
withstand the race to the bottom.
 Disadvantages of cost based pricing

1. Cost based pricing doesn’t consider how customer demand

affects price.
2. Competitors is not included in cost based pricing method.
 Advantages of Value based pricing / Customer Based
Pricing

1. It focuses on how much value the product or service will add to the
customer.
2. It requires deeper analysis of customer.
3. It emphasizes benefits.
4. It says ‘Here’s how these tools will help you’.
5. It requires an understanding of what those customers want and need, and the
ability to provide that for them.
Disadvantages of Value based pricing / Customer Based Pricing
1. It ignores production cost
2. It forgets about the competition
 Advantages of competition based pricing

1. It’s fairly simple

2. It’s low risk
3. It can be accurate
Disadvantages of competition based pricing
1. It leads to large missed opportunities.
2. It’s done by everyone, which create pricing group think.
3. It can lead to tunnel vision and a race to the bottom.
Difference between cost based pricing and value based pricing
SN Cost based pricing Value based pricing

1. Easiest pricing method Market research is needed

2. It depends on cost It depends on customer perceived value(CVP)

3. Sub-optimal profit Optimal profit

4. Considered fair Can be considered unfair

5. Difficult to determine cost Complicated to administer

6. It emphasizes features It emphasizes benefits

7. It focuses on the companies It focuses on the customers when determining price

situation when determining price
8. When a company uses cost based When a company uses the value based pricing, it sets it’s
pricing, prices become the price pricing in a range determined by what customers are
floor and the price ceiling willing to pay.

9. It says, ‘ here’s a bunch of tools It says, ‘ here’s how these tools will help you’.
may be they can help you
The End