CHAPTER 10

Pricing Strategy
and
Management
Presented to: Dr. Ibtesam Kwina

Presentation
team

Samir Al Emad El Muhammad Shad i Ab d El

Deep Garhi Fat Salam
Pricing Decision:
Pricing Decision:
• Philip Kotler define “ Price is the amount of Money charged for a product or service”
• pricing is the most crucial decision functions of marketing manager.
• pricing is an art, a game played for high stakes; for the marketing strategies; it is the
moment of truth, all of marketing comes to focus in pricing decision.
• Pricing is the only revenue generating element among the 4 Ps of the marketing
mix(Product, price, promotion and Place), the others are cost centers, However the other
3 Ps will contribute to enable increases in the price to drive greater revenues and profits.
What a price should do??
A well-chosen price should do three things:
1. Achieve the financial goals of the Company(i.e.
profitability).
2. Fit the realities of the marketplace(will the customers buy
at that price).
3. Support product’s market positioning and be consistent
with the other variables of the market mix.
Pricing, Revenue and cost
• price is a direct determinant of profits (or losses).
Total Total
Profit = Revenue – Costs

Total Total
Revenue Costs

Profit = ( Unit
Price ×
Quantity
Sold ) [ – Fixed
Costs + (
Unit
Variable
Costs
Quantity
× Sold )]

• price simultaneously influences both revenues and costs.

Pricing Objectives
Pricing objectives are selected according to your business's mission statement and plans,
and to be consistent with a firm’s overall marketing objectives.
Objectives include:
1. Revenue maximization: if your business goals to become market share leader and
establishing long-term customer base.
2. Quantity maximization: if you have a goal of taking advantage of economies of scale.
3. Quality leadership: If your business mission is to be a leader in your industry.
4. Survival: a short-term goal , to stay in business and cover essential costs the goal of
making a profit is set aside for the goal of survival.
Once a pricing objective has been chosen, a pricing strategy that meets the pricing
objective must also be selected.
Pricing Factors
Demand Factors (Value to Buyers)

(Price Ceiling)

Competitive Factors

Final Initial
Pricing Pricing
Discretion Corporate Objectives Discretion

Regulatory Constraints

Direct Variable Costs

(Price Floor)
Pricing Factors
• Demand for product or service sets the price ceiling.
• Costs, particularly variable costs, determine the price floor.
• Consumer value perceptions and price sensitivity determines the maximum
price that can be charged.
• The price must at least cover unit variable costs; otherwise, a loss will result for
each offering sold
• Government regulations, such as prohibiting predatory pricing
• Price is also affected by the government through enactment of legislation to
arrest the inflationary trend in prices of certain commodities.
Pricing Factors
• The life-cycle stage of the product or service is one factor, greater price
discretion exists earlier in the life cycle than later.
• The financial goals set by the organization, such as getting a reasonable rate of
return.
• The distribution Channels Policy: The nature of distribution channels used, and
discounts which should be allowed to distributors and the distribution
expenses.
• Competitors: How competitors price and sell their products will have a
tremendous effect on a firm’s pricing decisions.
Price as an Indicator of Value
 Customers set their value expectations based on how
much they pay, they pay more, they expect more value.
 Customers often pair price with the perceived benefits
derived from a product or service.
 Value can be defined as:
Perceived Benefits
Value =
Price
 Value is not just price, but linked to performance and
meeting the expectation of customers.
Price as an Indicator
of Value
• For some products, price alone influences
Customer perception and ultimate value.
• Most of customers beliefs that “The higher
the price , the higher the quality.
• Price also affects customers perceptions of
prestige so that as price increase Customers
demand for the item may actually rise.
Price as an Indicator of Value
• Consumer value assessments are often comparative.
• Consumer comparison the costs and benefits of
substitute items gives rise to a “reference value”.
• Retailers have found that they should not price their
store brands more than 20 to 25 percent below
manufacture’s brands, When they do, consumers often
view the lower price as signaling lower quality
Price Elasticity of
Demand (E)
 Elasticity . . .
 … is a measure of how much buyers and
sellers respond to changes in market
conditions
 … allows us to analyze supply and demand
with greater precision.
 Price Elasticity of Demand
 Price elasticity of
demand is the percentage
change in quantity
demanded given a
percent change in the
price.
 It is a measure of how
much the quantity
demanded of a good
responds to a change in
the price of that good.
Computing the Price Elasticity of Demand

The price elasticity of demand is computed as the

percentage change in the quantity demanded divided by
the percentage change in price.

Price Elasticity = Percentage Change in Qd

Of Demand Percentage Change in Price

Computing the Price Elasticity of Demand

Percentage change in quatity demanded

Price elasticity of demand 
Percentage change in price
Example: If the price of an ice cream cone increases
from $2.00 to $2.20 and the amount you buy falls from
10 to 8 cones then your elasticity of demand would be
calculated as:
(10  8 )
100
10 20 percent
 2
( 2.20  2.00 )
100 10 percent
2.00
 Ranges of Elasticity
Inelastic Demand
 Percentage change in price is greater than percentage
change in quantity demand.
 Price elasticity of demand is less than one.
 Difficult to substitute away from good.

Elastic Demand
 Percentage change in quantity demand is greater than
percentage change in price.
 Price elasticity of demand is greater than one.
 Easy to substitute away from good.
 Factors affecting elasticity
 Necessity = inelastic v luxury = elastic
 Substitute available = elastic v no substitute
available = inelastic
 Alternative uses = elastic
 Durable = elastic v non durable = inelastic
 Reactions Change Spending
Patterns
Substitution Effect: Consumers react to
increase in price by consuming less of the
good & more of other goods.
Substitute- product that is interchangeable in
use with another product. An increase in
price of substitute increases demand for other
substitutes.
 Cross Price Elasticity of Demand
 Elasticity measure that looks at the impact a
change in the price of one good has on the
demand of another good.
 % change in demand Q1/% change in price of
Q2.
 Positive-Substitutes(e.g. if price of Pepsi goes up
the demand for Coca will increase)
 Negative-Complements. (e.g. if price of gas goes
up demand for tires may come down)
 Break-Even Analysis
 Technique used to examine the relationship
between cost and price and to determine what
sales volume must be reached at a given price
at which company will completely cover its
total costs
 Sales – Variable Costs = Contribution
 Losses < BE point < Profits
 Angle of incidence, Margin of Safety
 BE sales in units = Total Fixed Costs /
Contribution per unit
ESTIMATING THE PROFIT IMPACT
FROM PRICE CHANGES
ESTIMATING THE PROFIT IMPACT
FROM PRICE CHANGES
 Pricing strategies
Pricing have two types of strategies approach :

Technical pricing Conceptual pricing

Full cost pricing Skimming

strategy Pricing Strategy

penetration
Variable cost Pricing Strategy
pricing strategy
Intermediate
pricing strategy
 Pricing strategies
1- Full Cost pricing strategy
- Consider the total cost in pricing (fixed cost and variable cost ) , it takes one of
three forms :
Rate-of-
Markup Break-even
return pricing
pricing
pricing
the price is determined Price is set so as to obtain a the break-even price
simply by adding a prespecified rate of return equals the per-unit
fixed amount to the cost on investment (capital) for fixed costs plus the
of a product, which is the organization. per-unit variable costs
usually expressed as a
percentage of the total
product cost/price
 Pricing strategies

Total Unit Cost

Unit Selling
Mark-up Price =
( 1– Desired
Market-up )
Unit Selling
=
$16 = $20
Mark-up Price
( 1 0.20 )
–
 Pricing strategies
Mark-up is expressed as a percentage of the cost or selling price:
Unit
Per Unit
Mark-up:
Selling – Cost
Price $6.35 – $4.60
Percentage = = = 38%
of the Cost Per Unit
$4.60
Cost

Unit
Per Unit
Mark-up:
Selling
– Cost
Price $6.35 – $4.60
Percentage = = = 28%
of the Price Unit $6.35
Selling
Price
 Pricing strategiesEGIES

Rate-of-Return Pricing

Price is set based on a specified rate of ROI:

Profit
Total
Revenues – Total
Cost ( Price
× Quantity
) ( Cost
– Unit
× Quantity
)
ROI = = =
Investment Investment Investment

Solving ( ROI × Investment ) +( Unit

Cost × Quantity
)
for Price: Price
=
Quantity

Price
=
(0.15 × $80,000 ) +($0.175 ×20,000)
= $0.78
20,000
 Pricing strategies

2- Variable-Cost Price Strategies

 Also known as contribution pricing

 Used when a firm operates under capacity and
fixed costs are a great proportion of total costs
 Assumptions:
• Short-term, the relevant costs are variable, not total
• Variable unit cost represents the minimum selling price
• Any price above this minimum contributes to fixed costs
and profit
 Pricing strategies

Variable-Cost Price Strategies

A form of demand-oriented pricing that either:

Since variable cost prices are lower

Stimulates
Demand
than full-cost prices, the assumption
is that they will increase demand

Shifts Shifts demand from one time period to

Demand another
 Pricing strategies

Variable-Cost Price Strategies

Stimulate Demand

 Leads to:
• Increased revenues • Lower unit costs
• Economies of scale • Greater profits

 Makes sense because:

• Fixed costs incurred whether or not an offering is sold
• The incremental variable costs of serving one more
customer are minimal
 Pricing strategies

Variable-Cost Price Strategies

Shift Demand

 Encourage customers to switch behavior from

peak demand times to even it out
over a longer time period

 May use different price schedules to shift

behavior
 NEW-OFFERING PRICING STRATEGIES
Conceptual new-offering pricing strategies are:

The price for a new offering is

Skimming Pricing
set very high initially and is
Strategy
typically reduced over time

Penetration Pricing An offering is introduced at a

Strategy low price

The price is set between the two

Intermediate
extremes and is used in the vast
Pricing Strategy
majority of initial pricing decisions
 NEW-OFFERING PRICING STRATEGIES
Skimming Pricing Strategy
Electronic items provide many great examples such as Apple that commonly uses prices
skimming
When can we adopt Skimming strategy?
 Your market is not (yet) crowded with competitors
 You are launching an innovative product..
 Consumers in your target market are willing to pay a
higher price.
 Your demand curve is inelastic.
Challenges in Skimming strategy
 Difficulty justifying initial high price
 Difficulty entering a crowded market
 Attracting competitors who offer similiar products at a lower price
 Alienating early adopters who see others purchasing a product at a lower price than they
paid
 Being seen by consumers as pricing products unethically
 Creating a higher customer churn rate
 NEW-OFFERING PRICING STRATEGIES

• When IKEA first opened in China the stores were

very popular, but customers didn’t spend much

• So, IKEA slashed its prices in China by as much as

60%-70% below the equivalent prices in other
IKEA markets.

• Resulted IKEA quickly captured a large market

share of the Chinese home furnishings market
 NEW-OFFERING PRICING STRATEGIES
When can we adopt Penetration strategy?
 It is a low price strategy, so demand in this market must be highly price-sensitive (elastic)
 Increase in sales and market share need to generate lower unit costs (Economies of
Scale)
 Prices need to be kept low to deter competition using similar strategy

Challenges in Penetration strategy

• The low initial price can create an expectation of permanently low prices amongst
customers who switch
• Penetration pricing may simply attract customers who are looking for bargain, rather that
customers who will become loyal to the business and its brand
• The strategy is likely to results in retaliation from established competitors who will try to
maintain their market share.
 Pricing Strategies and Competitive Interaction

Competitive interaction refers to the sequential action and

reaction of rival companies in:

 Setting and changing prices for their offering(s)

 Assessing likely outcomes, such as sales, unit volume, and profit for each
company and an entire market
Marketers rarely look beyond an initial pricing decision to consider:

 Competitor countermoves
 Their own subsequent moves
 The outcomes of these maneuvers
 Pricing And Competitive Interaction:
Looking Beyond The Initial Decision

Remedy #1: Remedy #2:

Long-Term Focus Competitor Focus

 Answer these questions to avoid misjudgments

 Competitive interactions are rarely confined
about prices set or changed by competitors:
to one period—an action followed by a
reaction
 1. What are competitors’ goals and objectives?
The consequences of actions and reactions
are not always immediately observable 2. How are they different from our goals and objectives?
 3. What differing assumptions do we and each
Marketers are advised to “look forward and competitor make about our companies, offerings, and
reason backward” by envisioning patterns the market?
of: 4. What strengths and weaknesses does each
• Future pricing moves competitor believe it has and we have?
• Competitor countermoves
• Likely outcomes  Misreading the situation can result in price wars!
 Pricing And Competitive Interaction:
Price War

Involves successive price cutting by competitors to increase or

maintain their unit sales or market share
 Marketers should consider price cutting only when one or
more conditions exist:

1. The firm has a cost or technological advantage over its competitors

2. Primary demand for a product class will grow if prices are lowered
3. The price cut is confined to specific products or customers and not across-
the-board