A Global Perspective

Philip Kotler
Gary Armstrong
Swee Hoon Ang
10 Siew Meng Leong
Chin Tiong Tan
Pricing Products: Oliver Yau Hon-Ming

Understanding and PowerPoint slides adapted by

Peggy Su

Capturing Customer
Value

Copyright © 2009 Pearson Education South Asia Pte Ltd 10-1

Learning Objectives
After studying this chapter, you should be able to:
1. Answer the question “What is price?” and discuss the
importance of pricing in today’s fast-changing
environment
2. Discuss the importance of understanding customer
value perceptions when setting prices
3. Discuss the importance of company and product
costs in setting prices
4. Identify and define the other important internal and
external factors affecting a firm’s pricing decisions

Copyright © 2009 Pearson Education South Asia Pte Ltd 10-2

Chapter Outline
1. What Is Price?
2. Factors to Consider When Setting Prices

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What is Price?
• Price is the amount of money charged for a
product or service.
• The sum of all the values that consumers give up
in order to gain the benefits of having or using a
product or service.
• Price is the only element in the marketing mix
that produces revenue; all other elements
represent costs.
• Pricing: No matter what the state of the
economy, companies should sell value, not
price
Copyright © 2009 Pearson Education South Asia Pte Ltd 10-4
Major pricing strategies:
Customer Value-Based Pricing:
Customer Perception of Value
• Effective customer-oriented pricing involves
understanding how much value consumers place
on the benefits they receive from the product and
setting a price that captures that value.

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Consideration in setting price

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 Major Pricing Strategies

Customer Value-based pricing

•Value-based pricing uses the buyers’ perception
of value, not the seller’s cost, as the key to pricing.
Price is considered before the marketing program
is set.
• Value-based pricing is customer-driven.
• Cost-based pricing is product-driven.

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 Major Pricing Strategies

Valued-based pricing vs Cost-based pricing

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 Major Pricing Strategies
• Good-value pricing offers the right combination
of quality and good service to fair price.
• Existing brands are being redesigned to offer
more quality for a given price or the same quality
for less price.

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 Major Pricing Strategies
Good-value pricing
•Everyday low pricing (EDLP) involves charging
a constant everyday low price with few or no
temporary price discounts.
•High-low pricing involves charging higher prices
on an everyday basis but running frequent
promotions to lower prices temporarily on selected
items.

Copyright © 2009 Pearson Education South Asia Pte Ltd 10-10

 Major Pricing Strategies
Value-added pricing
• Value-added pricing attaches value-added
features and services to differentiate offers,
support higher prices, and build pricing power.
• Pricing power is the ability to escape price
competition and to justify higher prices and
margins without losing market share.

Copyright © 2009 Pearson Education South Asia Pte Ltd 10-11

 Major Pricing Strategies

Company and Product Costs

• Cost-based pricing involves setting prices
based on the costs for producing, distributing,
and selling the product plus a fair rate of return
for its effort and risk.

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 Major Pricing Strategies

Cost-based pricing
• Types of costs
• Fixed costs
• Variable costs
• Total costs

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 Major Pricing Strategies

Cost-based pricing
• Fixed costs are the costs that do not vary
with production or sales level.
• Rent
• Utilities
• Interest
• Executive salaries

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 Major Pricing Strategies

Cost-based pricing
• Variable costs are the costs that vary with
the level of production.
• Packaging
• Raw materials

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 Major Pricing Strategies

Cost-based pricing
• Total costs are the sum of the fixed and
variable costs for any given level of
production.
• Average cost is the cost associated with a
given level of output.

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 Major Pricing Strategies
Cost-based pricing
• Cost at different levels of Production:
Management needs to know how its cost
varies with different levels of production.

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 Major Pricing Strategies
Cost-based pricing
• Experience or learning curve The drop in
the average per-unit production cost that
comes with accumulated production
experience.

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 Major Pricing Strategies
Cost-based pricing
The Experience curve (learning curve)

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 Major Pricing Strategies
Cost-Plus pricing
• Cost-plus pricing (or markup pricing) adds
a standard markup to the cost of the product.

Unit Cost
Markup Price 
(1 - Desired Return on Sales)

Copyright © 2009 Pearson Education South Asia Pte Ltd 10-20

 Major Pricing Strategies
Cost-Plus pricing
• Example:
A toaster manufacturer has:
Variables cost: $10
Fixed cost: $300.000
Expected unit sales: 50.000
Calculate markup price if the manufacturer
wants to earn 20% markup on sales?

Copyright © 2009 Pearson Education South Asia Pte Ltd 10-21

Copyright © 2009 Pearson Education South Asia Pte Ltd 10-22
 Major Pricing Strategies
Cost-Plus pricing
Does cost-plus make sense?
• Concern cost, and ignoring demand lead to
simplifying pricing.
• Price become similar, no competition
• Sellers earn fair returns but can’t take
advantage of buyers when buyers’ demand
becomes great

Copyright © 2009 Pearson Education South Asia Pte Ltd 10-23

 Major Pricing Strategies
Break-Even Analysis and Target Profit Pricing
• Break-even pricing (Target return pricing) is
the price at which total costs are equal to total
revenue and there is no profit.
• Target profit pricing is the price at which the
firm will break even or make the profit it is
seeking.

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 Break-even chart for determining Target Return
Price and Break-Even Volume

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Copyright © 2009 Pearson Education South Asia Pte Ltd 10-26
 Major Pricing Strategies

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 Major Pricing Strategies
Competition-Based Pricing involves setting
prices based on competitors’ strategies, cost,
prices, and market offering.
Company should ask these questions:
1.How does the company’s market offering
compare with competitor’ offering in terms of
customer value?
2.How strong are current competitors, and what
are their current pricing strategies?

Copyright © 2009 Pearson Education South Asia Pte Ltd 10-28

Other Internal and External
Considerations Affecting Price Decisions

• Customer perceptions of value set the upper limit

for prices, and costs set the lower limit.
• Companies must consider internal and external
factors when setting prices.

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 Other Internal and External
Considerations Affecting Price Decisions

• Internal factors
• Company marketing strategy, objectives, and
marketing mix as well as organizational
considerations

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 Other Internal and External
Considerations Affecting Price Decisions

Overall Marketing Strategy, Objectives and Mix

• Pricing objectives include:
• Survival
• Profit maximization
• Market share leadership
• Customer retention and relationship building
• Attracting new customers
• Opposing competitive threats
• Increasing customer excitement
Copyright © 2009 Pearson Education South Asia Pte Ltd 10-31
 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

Overall Marketing Strategy, Objectives and Mix

• Non-price strategies differentiate the
marketing offer to make it worth a higher
price.

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 Other Internal and External
Considerations Affecting Price Decisions

Organizational Considerations
• Organizational considerations include
• Who should set the price
• Who can influence prices

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 Other Internal and External
Considerations Affecting Price Decisions

The market and demand

• The market and demand
• Types of markets
• Analyzing the price-demand relationship
• Competitors’ strategies and prices
• Other environmental factors

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 Other Internal and External
Considerations Affecting Price Decisions
The market and demand
Pricing in different types of markets:

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Other Internal and External
Considerations Affecting Price Decisions
Pricing in different types of markets:
• Pure competition is a market with many buyers
and sellers trading uniform commodities where
no single buyer or seller has much effect on
market price.
• Monopolistic competition is a market with
many buyers and sellers who trade over a
range of prices rather than a single market
price with differentiated offers.

Copyright © 2009 Pearson Education South Asia Pte Ltd 10-37

Other Internal and External
Considerations Affecting Price Decisions
Types of Markets
• Oligopolistic competition is a market with few
sellers because it is difficult for sellers to enter
who are highly sensitive to each other’s pricing
and marketing strategies.
• Pure monopoly is a market with only one seller.
In a regulated monopoly, the government
permits a price that will yield a fair return. In
a non-regulated monopoly, companies are
free to set a market price.
Copyright © 2009 Pearson Education South Asia Pte Ltd 10-38
Other Internal and External
Considerations Affecting Price Decisions
Analyzing the Price-Demand Relationship
• Before setting prices, the marketer must
understand the relationship between price
and demand for its products.

Copyright © 2009 Pearson Education South Asia Pte Ltd 10-39

Other Internal and External
Considerations Affecting Price Decisions
Analyzing the Price-Demand Relationship
• The demand curve shows the number of units
the market will buy in a given period at different
prices.
• Normally, demand and price are inversely related.
• Higher price = lower demand
• For prestige (luxury) goods, higher price can equal
higher demand when consumers perceive higher
prices as higher quality.

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 • The demand curve

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Other Internal and External
Considerations Affecting Price Decisions
Price Elasticity of Demand
• Price elasticity of demand illustrates the
response of demand to a change in price.
• Inelastic demand occurs when demand
hardly changes when there is a small change
in price.
• Elastic demand occurs when demand
changes greatly for a small change in
price.
Copyright © 2009 Pearson Education South Asia Pte Ltd 10-42
Other Internal and External
Considerations Affecting Price Decisions
Price Elasticity of Demand

% change in quantity demanded

Price elasticity of demand 
% change in price
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Other Internal and External
Considerations Affecting Price Decisions
Price Elasticity of Demand
• Factors affecting price elasticity of demand
• Unique product
• Quality
• Prestige
• Substitute products
• Cost relative to income

Copyright © 2009 Pearson Education South Asia Pte Ltd 10-44

Other Internal and External
Considerations Affecting Price Decisions
Competitors’ Strategies and Prices
• Factors to consider:
• Comparison of offering in terms of customer
value
• Strength of competitors
• Competition pricing strategies
• Customer price sensitivity

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Other Internal and External
Considerations Affecting Price Decisions
• Other external factors
• Economic conditions
• Resellers’ response to price
• Government
• Social concerns

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Discussion tasks

https://www.youtube.com/watch?v=KYqvqScg_j8
1.How do you think about the way marketers pricing?
2.List any other factors that marketers can depend on
in order to set an attractive price?

Copyright © 2009 Pearson Education South Asia Pte Ltd 10-47