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 Principles of Marketing
(BS931111)

Price Part 1
Pricing and Pricing Process

AJ. Narissara PALUSUK

Adapted from Kotler, P. and Armstrong, G.16th ed.
Principles of Marketing. Pearson Education.
Pricing and Pricing Process
01 What is price?

02 Factors affecting pricing decision

03 Major pricing strategies

04 Price in different types of market

05 Pricing process

06 Pricing changes

07 Public policy and pricing

 Price
Price is only element in the marketing
mix that produces revenue.
The amount of money charged
for a product or service.
Price is one of the most flexible
Price

marketing mix elements.

The sum of the values that customers

Pricing is the number-one problem
exchange for the benefits of having or
facing many marketing executives,
using the product or service.
and many companies do not handle
.
pricing well.
 Factors affecting pricing decision
The pricing decisions for a product are affected by internal and external factors;
Internal factors (controllable factors):
• Product
• Cost (e.g. production cost, promotional cost)
• The predetermined objectives
• Image of the brand/company
• Product life cycle (PLC) etc.
External factors (uncontrollable factors):
• Customers/Consumers
• Channel intermediaries
• Competition
• Government control
• Economic conditions etc.
 Major Pricing Strategies (3Cs)

1. Customer Value-based Pricing

2. Cost-based Pricing
3. Competition-based Pricing
Major Pricing Strategies
 1. Customer Value-based Pricing

Customer Value-based Pricing:

• Value-based pricing is mainly based on the buyers’

perceptions of product value which is not only the sellers’
cost concern
• Price is considered before the marketing program settings.

❖ Customer value-based pricing types:

• 1.1 Good-value pricing
• 1.2 Value-added pricing
 1. Customer Value-based Pricing
1.1 Good-value Pricing:

• Offering the right combination of quality of goods and service at

the fair price.
❖ Good-value pricing types:
• Everyday low pricing (EDLP) involves a constant everyday
low price setting with regular discounts. eg. Wal-Mart, Tesco,
Makro etc.
• High-low pricing involves everyday high price basis, offering
temporal discount promotions on selected items.
Good-value Pricing
 1. Customer Value-based Pricing
1.2 Value-added Pricing:

• Attaching value-added products and services to differentiate a

company’s offerings and to charge a higher price.

❖ Value-added methods:
• Product improvement (e.g. quality/package improvement etc.)
• Effective market and supportive system providing
• Brand image improvement
• Staff performance improvement etc.
Value-added Pricing
 2. Cost-based Pricing
Cost-based Pricing:
• Price setting is based on cost of production, distribution,
promotion and other related cost. Price is calculated based on
cost plus a fair rate of return, considering effort and risk.
❖ Types of costs:
• Fixed costs (FC/TFC) costs that do not vary with
production or sales level
• Variable costs (VC/TVC) costs that vary directly with
the level of production.
• Total costs (TC = TFC + TVC) the sum of the fixed
cost and variable costs for any given level of production.
 2. Cost-based Pricing
Cost-based Pricing Settings:
• 2.1 Cost at different levels of production
• Cost behavior in fixed-size plant
• Cost behavior over different-size plants
• 2.2 Cost as a function of production experience
• The more experience a business has in production, the lower cost
occurs.
• Experience curve refers to a diagrammatic representation of the inverse
relationship between the total value-added costs of a product and the
company experience in manufacturing and marketing.
• 2.3 Cost-plus pricing/Markup pricing is a markup pricing from the cost of
product
• 2.4 Break-even pricing/Target profit pricing is a price setting at a break
even point or at an expected return requirement
 2. Cost-based Pricing
2.1 Costs at different levels of production
 2. Cost-based Pricing
2.2 Costs as a function of production experience
 2. Cost-based Pricing
2.3 Cost-plus pricing/Markup pricing

Unit cost = Total Variable cost + Total Fixed costs

Total unit sales

Markup price = Unit cost

1- Desired return on sales

 2. Cost-based Pricing
2.3 Cost-plus pricing/Markup pricing
Example: KKBS company has the following costs and expected sales:

Variable cost/unit 10 baht/unit

Total fixed costs 300,000 baht
Expected unit sales 50,000 units
Wants to earn a 20% markup on sales

Unit cost = Variable cost + Fixed costs = 10 + 300,000 = 16 baht/unit

Unit sales Unit sales 50,000

Markup price = Unit cost = 16 = 20 baht/unit

1- Desired return on sales 1- 0.2
 2. Cost-based Pricing
2.4 Break-even pricing/Target profit pricing
1. TR = P x Q
2. TC = TFC + TVC = TFC + VQ
At the break – even point;
TR = TC
PQ = TFC + TVC
= TFC + VQ
PQ – VQ = TFC
Q = TFC
P-V
 3. Competition-based Pricing
Competition-based Pricing:
• Price setting is based on competitors’ strategies, prices, costs, and
market offerings
• Consumers tend to judge value of a product based on competitors’
price of a similar product.
 Price in Different Types of Markets

• The price setting varies in different types of market.

• Economists recognize four types of markets that each market has
a different pricing setting.

• Pure competition
• Monopolistic competition
• Oligopolistic competition
• Pure monopoly
 Price in Different Types of Market
1) Pure competition

• Many buyers and sellers sell uniform

commodity/homogeneous products e.g. agricultural products.
• No single buyer/seller has much effect on the going market
price. So, all firms are price takers.
• Market share has no influence on prices.
• Marketing research, product development, pricing, advertising,
and sales promotion play a little/no role in the market. So,
sellers in this market do not put much effort on marketing
strategies.
• Perfect knowledge
• Barriers to entry are low.
 Price in Different Types of Markets
2) Monopolistic competition

• Many buyers and sellers trade over a range of prices rather

than a single market price
• Differentiated products/offers are served to different
customer segments.
• Product variations
• Heavy expenditure on advertisements
and other selling costs
• Barriers to entry are low.
 Price in Different Types of Markets
3) Oligopolistic competition

• Only a few large sellers dominate the market and have

power to control the price of the product.
• Firms are interdependent, so that each seller is alert and
responsive to competitors’ pricing strategies and marketing
moves
• Homogeneous or differentiated products are offered to a
market
• Firms often compete on non-price competition.
• Some barriers to entry a market e.g. brand loyalty, economies
of scale etc.
 Price in Different Types of Markets
4) Pure monopoly

• The market is dominated by one seller who offers a particular

commodity (no close substitutes). So, the firm itself is an
industry.
• The firm can influence the price of a product and can be
recognised as a “price maker”. Pricing is handled differently in
each case.
• Barriers to the new entrants.
• e.g. infrastructure
 Pricing Process
1. Situation Analysis
2. Pricing Objective Selection
3. Demand Determination
4. Cost estimation
5. Analysis of Competitors’ Costs, Prices and Offers
6. Pricing Method Selection
7. Pricing Policies and Strategies
8. Final Price Selection
 Pricing Process
1. Situation Analysis
• Factors Influencing Pricing Analysis
• Internal Factors (Controllable factors)
- Organizational goals & objectives
- Cost
- Product offerings
- Other marketing programs etc.
• External factors (Uncontrollable factors)
- Political Price elasticity of demand - Environment
- Economics - Laws and regulations
- Social - Customers
- Technology - etc.
 Pricing Process
2. Pricing objective selection

Objectives Aims
1) Total Revenue - Increase revenue
- Increase cash flow
2) Profit - Achieve target of ROI
- Maximize profit
- Keep a going concern
3) Sales or Sales quantity - Increase sales growth
- Maintain market share
- Increase market share
- Survival
 Pricing Process
2. Pricing objective selection

Objectives Aims
4) Competition - Meet competition
- Avoid competition
- Undercut competition
5) Social - Behave ethically
- Maintain employment rate
6) Image - Improve company image
- Improve product image
2. Pricing objective selection

Meet competition Avoid competition

Undercut competition
2. Pricing objective
selection (Image)
 Pricing Process
3. Demand determination
• Survey of buyers’ intentions
• Comparison of sales force opinions
• Expert opinions
• Market test method
• Time series analysis
• Analyzing market types
• Analyzing the Price-demand relationship
• Price setting reflects a different level of demand.
• Price elasticity of demand (PED or Ed) is a measurement of the
change in consumption of a product in relation to a change in its price.
 Pricing Process
3. Demand determination (Price-demand relationship)

Low Price Elasticity of Demand High Price Elasticity of Demand

 Pricing Process
4. Cost estimation
• Economy of scale
• Experience/learning curve
• Automation

5. Analysis of competitors’ costs, prices and offers

• Competitors’ costs
• Competitors’ prices
• Competitors’ products
• Competitors’ strategies
• Research of customer perceived value
 Pricing Process
6. Pricing method selection
❑ Cost-based pricing:
• Average Cost (AC) Pricing
• Average Variable Cost (AVC) Pricing
• Marginal Cost (MC) Pricing
• Cost plus Pricing by Middleman
• Break Even Point Analysis
❑ Demand and supply-based pricing:
• Economics’ price
• Set price at MC = MR (Maximize profit)
 Pricing Process
6. Pricing method selection
❑ Market-based pricing:
• Pricing to meet competition
• Similar products - High competition
• Few sellers - Customers have more price information
• Pricing below competition level
• Low mark up, high volume
• Pricing above competition level
• Differentiated products and positive brand image
 Pricing Process
7. Pricing Policies and strategies
• New product pricing - The level of prices policy
• Product mix pricing - International pricing
• Discrimination pricing - Price lining policy
• Psychological pricing - Mark down
• Promotional pricing - Unit pricing
• Geographical pricing
• One price and variable price
• Declining pricing
 Pricing Process

8. Final price selection

• Psychological pricing
• The influence of other marketing mix elements on price
• Company pricing policies
• Impact of price on other parties
 Price Changes
➢ After developing their pricing structures and strategies, companies often
face situations in which they must initiate price changes or respond to
price changes by competitors.
➢ Initiating price changes
➢ Initiating price cuts: several situations may lead companies to c
onsider cutting their prices;
➢ Excess capacity
➢ Falling demand
➢ Boost sales and market share
➢ Dominate the market through lower costs
➢ Products are not selling well
➢ New products will be available
➢ Quality issues
 Price Changes

➢ Initiating price increase: a successful price increase can greatly i

mprove profits.
➢ Factors affecting price increases:
➢ Cost inflation
➢ Over demand
➢ Lack of supply
➢ Higher costs
➢ Product is hot
 Price Changes
➢ Responding to price changes
 Public policies and pricing
➢ The level of price policy
➢ Pricing at the market
➢ Similar products
➢ Customers know the price well
➢ Oligopoly market
➢ Pricing below the market
➢ Increase market share
➢ Worth for money
➢ Low product quality
➢ High price elasticity
➢ Prevent from new players
➢ Pricing above the market
➢ High cost
➢ Improve positive brand image (prestige goods)
➢ Make a good relationship with middlemen by setting the high price
for covering all discounts as offer to distributors.
 Public policies and pricing
➢ One price and variable price:
➢ One price policy: a strategy in which the seller offers the same price t
o every customer. The price does not vary according to payment me
thod or promotional offers.
➢ Single price policy; the company offers all its goods at one price. e
.g., 60bht for everything at Daiso.
➢ It is different from one price policy.

➢ Variable price policy: a policy of adjusting prices to different customers,

depending on their relative purchasing power or bargaining ability.
 Public policies and pricing
➢ Price Lining Policy :
➢ Setting of prices by a seller in accordance with certain price points b
elieved to be attractive to buyers.
➢ Mark down policy
➢ Wrong price setting at the first time
➢ Low sales quantity of some product items
➢ Select low product quality to sell
➢ Market promotion to encourage sales growth
➢ High competition
➢ Damaged products
➢ Obsolete products

➢ Unit pricing policy: displaying the price of grocery

items for a certain unit of measurement in addition to
the items’ selling price.
Any question?
Two Columns Text
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