Principles of Marketing

Pricing
Understanding and Capturing
Customer Value
 What Is a Price?

Price
• The amount of money charged for a product or service
or
• The sum of all the values that customers exchange for
the benefits of having or using the product or service.

• Only element in the marketing mix that produces

revenue; all other elements represent costs.

• Most important elements that determines a firm’s

market share and profitability
Major Pricing Strategies

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Factors to be Consider When Setting Price
Value-based pricing uses the buyers’ perceptions of
value rather than the seller’s cost.

Cost-based pricing sets prices based on the costs

for producing, distributing, and selling the product
plus a fair rate of return for effort and risk.

Competition-based pricing is setting prices

based on competitors’ strategies, costs,
prices, and market offerings.
Value-based pricing is customer driven.
Cost-based pricing is product driven.
Price is set to match perceived value.
 Major Pricing Strategies
Customer Value-Based Pricing
Figure 10.2: Value-Based Pricing vs. Cost-Based Pricing

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 Major Pricing Strategies
Customer Value-Based Pricing
Value-added pricing attaches value-added
features and services to differentiate the
companies offers and thus their higher prices.

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 Major Pricing Strategies
Cost-Based Pricing

Fixed costs are the costs Variable costs vary

that do not vary with
production or sales level. directly with the
• Rent level of production.
• Heat • Raw materials
• Interest • Packaging
• Executive salaries

Total costs are the sum of the fixed and variable

costs for any given level of production.

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 Major Pricing Strategies
Cost-Based Pricing

Cost-plus pricing adds a standard markup to the cost of

the product.
• Benefits
• Sellers are certain about costs.
• Price competition is minimized.
• Buyers feel it is fair.
• Disadvantages
• Ignores demand and competitor prices

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 Major Pricing Strategies
Cost-Based Pricing
• Break Even Analysis
• Break Even Quantity
Break-even pricing
(target return
pricing) is setting
price to break
even on costs or
to make a target
return.

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 Pricing

External And Internal Factors Affecting

A Firm’s Pricing Decisions.

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Other Internal and External Considerations
Affecting Price Decisions

Overall Marketing Strategy, Objectives, and Mix

Target costing starts with an ideal selling price

based on consumer value considerations and
then targets costs that will ensure that the
price is met.

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Other Internal and External Considerations
Affecting Price Decisions

Organizational Considerations

• Who should set prices?

• Who can influence prices?

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Other Internal and External Considerations
Affecting Price Decisions

The Market and Demand

Before setting prices, the marketer must

understand the relationship between price
and demand for its products.

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Other Internal and External Considerations
Affecting Price Decisions
The Market and Demand

Pricing in Different Types of Markets

Pure competition
Monopolistic competition
Oligopolistic competition
Pure monopoly

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Other Internal and External Considerations
Affecting Price Decisions

The Market and Demand

Analyzing the Price–Demand Relationship

The demand curve shows the number of units the

market will buy in a given period at different prices
• Demand and price are inversely related.
• Higher price = lower demand

Copyright © 2016 Pearson Education, Inc. 10-31

Other Internal and External Considerations
Affecting Price Decisions

The Market and Demand

Price Elasticity of Demand

Copyright © 2016 Pearson Education, Inc. 10-32

Other Internal and External Considerations
Affecting Price Decisions
The Market and Demand
Price Elasticity of Demand

Price elasticity is a measure of the sensitivity of

demand to changes in price.

Inelastic demand is when demand hardly changes with

a small change in price.

Elastic demand is when demand changes greatly with a

small change in price.

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Other Internal and External Considerations
Affecting Price Decisions
The Economy and Other External Factors

Economic conditions

Reseller’s response to price

Government

Social concerns

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MAJOR STRATEGIES FOR PRICING NEW
PRODUCTS.

• Market-skimming pricing
• Market-penetration pricing

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 New Product Pricing Strategies
Market-skimming Pricing
Market-skimming pricing strategy sets high initial prices to
“skim” revenue layers from the market.
• Product quality and image must support the price.
• Buyers must want the product at the price.
• Competitors should not be able to enter the market
easily and undercut the high price.
• costs of producing a smaller volume cannot be so
high that they cancel the advantage of charging
more

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 New Product Pricing Strategies
Market-penetration Pricing

Market-penetration pricing involves setting

a low price for a new product in order to
attract a large number of buyers and a
large market share.

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 Product Mix Pricing Strategies

Optional Captive
Product line
product product
pricing
pricing pricing

By-product Product
pricing bundle pricing

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 Product Mix Pricing Strategies
Product Line and Optional Product Pricing
Product line pricing takes into account the cost
differences between products in the line, customer
evaluations of their features, and competitors’ prices.

Optional product pricing takes into account optional or

accessory products along with the main product.
E.g Car buyers offers with GPS navigation

Captive product pricing sets prices of products that

must be used along with the main product.
E.g Cartridge with Printer

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 Product Mix Pricing Strategies
By-product and Product Bundle Pricing
By-product pricing
sets a price for by-products in order to make the main product’s price
more competitive. —turning trash into cash.  

Product bundle pricing combines several products at a reduced price.

Restaurants bundle a burger, fries, and a soft drink at a “combo” 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
 Pricing Strategies

Price Adjustment Strategies

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 Price Adjustment Strategies

Discount and Segmented

allowance pricing pricing

Psychological Promotional
pricing pricing

Geographic Dynamic International

pricing pricing pricing

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 Price Adjustment Strategies
Discount and Allowance Pricing
Discount and allowance pricing reduces prices to
reward customer responses such as making
volume purchases, paying early, or promoting
the product.
Discounts include cash discounts for paying promptly,
quantity discounts for buying in large volume, or
functional (trade) discounts for selling, storing,
distribution, and record keeping.

Allowances include trade-in allowances for turning in old

items when buying new ones and promotional allowances
to reward dealers for participating in advertising or sales
support programs. 11-17
 Price Adjustment Strategies
Segmented Pricing
Segmented pricing
involves selling a
product or service
at two or more
prices, where the
difference in prices
is not based on
differences in costs.

Adjustment in basic prices to allow for differences in

customers, products, and locations
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 Price Adjustment Strategies
Segmented Pricing
Customer-segment pricing : different customers pay different
prices for the same product or service.
Half fee for Senior Citizens Railway

Product-form pricing: different versions of the

product are priced differently but not according to
differences in their costs. Colddrinks in bottle and can
Location-based pricing: a company charges different
prices for different locations, even though the cost of
offering each location is the same.
Time-based pricing: varies its price by the season, the
month, the day, and even the hour 11-19
 Price Adjustment Strategies

Segmented Pricing

For segmented pricing to be effective:

• Market must be segmentable
• Segments must show different degrees of demand
• Costs of segmenting cannot exceed the extra revenue

• Must be legal

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 Price Adjustment Strategies
Psychological Pricing
Psychological pricing considers the psychology of prices
and not simply the economics; the price is used to say
something about the product.
Rs. 999
consumers usually perceive higher-priced products as
having higher quality.

Who’s the better Doctor, one who charges 02k per visit or
one who charges 5K per visit?

Reference prices are prices that buyers carry in their

minds and refer to when they look at a given product.
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 Price Adjustment Strategies
Promotional Pricing
Promotional pricing is
temporarily pricing products
below the list price, and
sometimes even below cost, to
increase short-run sales.

BUY ONE GET ONE FREE

 Price Adjustment Strategies
Geographical Pricing

Geographical pricing is used for customers in different

parts of the country or the world.
• FOB-origin pricing
• Uniform-delivered pricing
• Zone pricing
• Basing-point pricing
• Freight-absorption pricing

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 Price Adjustment Strategies
Geographical Pricing
• FOB-origin (free on board) pricing is a geographical
pricing strategy in which goods are placed free on
board a carrier; the customer pays the freight from
the factory to the destination.
high-cost firm to distant customers

Uniform-delivered pricing is a geographical pricing

strategy in which the company charges the same
price plus freight to all customers, regardless of
their location.

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 Price Adjustment Strategies
Geographical Pricing

Zone pricing is a strategy in which the company sets up two or

more zones where customers within a given zone pay the
same price.
Karachi and Lahore may pay the same total price even if…

Basing-point pricing means that a seller selects a given

city as a “basing point” and charges all customers the
freight cost from that city to the customer.

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 Price Adjustment Strategies
Geographical Pricing

Freight-absorption pricing is a strategy in which

the seller absorbs all or part of the freight
charges in order to get the desired business.
 Price Adjustment Strategies
Dynamic and Internet Pricing

Dynamic pricing involves

adjusting prices continually
to meet the characteristics
and needs of individual
customers and situations.
 Price Adjustment Strategies
International Pricing

International pricing sets

prices in a specific
country based on many
factors.
• Economic conditions
• Competitive situations
• Laws and regulations
• Wholesaling and retail
systems

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