Pricing
What Is a Price?
• Narrow Definition: The amount of money
charged or paid for a product or service.
• Broad Definition: The sum of all values
consumers exchange for the product or service.
Price has many names:
• Fee
• Tuition • Dues
• Fare
• Interest
• Toll
• Donation
• Taxes
• Wage
• Salary
The Importance of Pricing Decisions
Price is the only P which represents revenue rather than an
expense.
Pricing and the Marketing Mix
Price and Product
Price and Place
Price and Promotion
Price communicates the value proposition of the product.
Pricing Important
• 1% increase in volume = 3.3% increase in profit
• 1% increase in price = 11.1% increase in profit
• Improvements in price typically have 3-4 times the effect
on profit as proportionate increases in volume.
Steps in Setting Price
Select the price objective
Determine demand
Estimate costs
Analyze competitor price mix
Select pricing method
Select final price
Step 1—Determining Pricing Objectives
• What is your purpose in setting a price.
• Do you want to increase sales volume or sales revenue.
• Establish a prestigious image.
• Increase your market share and market position.
Answering these questions will help you keep your prices in line
with other marketing decisions.
Pricing Objectives
• Survival
• Profit Maximization
• Target Return on Investment (ROI)
• Market Share Goals
• Status Quo Pricing
Step 2—Determine Demand
• Employ market research techniques to estimate consumer
demand.
• The key to pricing goods and services is to set prices at the level
consumers expect to pay.
• In many cases, those prices are directly related to demand.
Estimating Demand
• Demand refers to customers’ desire for products
• How much of a product do consumers want?
• How will this change as the price goes up or down?
• Identify demand for an entire product category in markets the
company serves
• Predict what the company’s market share is likely to be
Price Elasticity
• The price elasticity of demand is the percentage change in the
quantity demanded of a good or service divided by the percentage
change in the price.
price elasticity of demand = %change in quantity demanded %change in price
• 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.
Market Demand Curve: This curve illustrates the quantities of apple juice
demanded at each price ay all consumers in the market.
Price of a Quantity
bottle of demanded per
Apple week
Juice
$3
Price per bottle (in dollars)
$2
$0.75 800
$2
Demand
$1.00 650
Curve
$1
$1.25 500
$1
$1.50 350
$0
50 200 350 500 650 800
$1.75 200
Bottles of Apple Juice per
week
$2.00 50
Step-3 Estimate cost
• Since the main reason for being in business is to make a profit, give careful
consideration to the costs involved in making or acquiring the goods or
services you will offer for sale.
• Determine whether and how you can reduce costs without affecting the
quality or image of your product.
Types of Costs
• Variable costs - per-unit costs of production that will fluctuate
depending on how many units or individual products a firm
produces
• Fixed costs - do not vary with the number of units produced.
Costs remain the same regardless of amount produced.
• Total costs = variable costs plus fixed costs
Step-4 Analyze competitor price
• Investigate your competitors to see what prices they are charging
for similar goods and services.
• Study the market leader. What is the range of prices from the
ceiling price to the price floor?
• Will you price your goods lower than, equal to, or higher than
your competitors'?
Pricing
Strategies
New-Product Pricing Strategies
Product Mix Pricing Strategies
Price Adjustment Strategies
New-Product Pricing Strategies
Two Broad Strategies
• Market skimming pricing – set a high initial price
Ex- Sony, Philips ,IPhone
• Market penetration pricing – set a low initial price
• Ex Reliance Jio
Product-Mix Pricing Strategies
The firm looks for a set of prices that maximizes the profits on the total
product mix.
Five product mix pricing situations
• Product line pricing – the products in the product line
• Optional product pricing – optional or accessory products
• Captive product pricing - complementary products
• Product bundle pricing – several products
11-
18
Product-Mix Pricing Strategies
Product line pricing takes into account the cost difference between
products in the line, customer evaluation of their features, and
competitors’ prices. – the price differences represent the perceived
quality differences.
Normal Hair Anti-dandruff Hair Fall Defense Oily Hair
$3.90 $4.90 $4.90 $3.90
Product-Mix Pricing Strategies
Optional product pricing takes into account optional or accessory products
along with the main product. – Decide which items to include in the base
price and which to offer as options
New car with sports rims
New car with ordinary rims $60,000
$59,000
Product Mix Pricing Strategies
• Captive-product pricing involves products that must be used along
with the main product
• Captive product pricing is twofold core product and the captive
product.
• Examples of Captive products are razor blade cartridges ,
• Gillette once you bought the razor, you are committed to buying
replacement cartridges at $25 an eight pack.
• The Ink Cartridge used in printers are generally priced higher as
compared to printer itself.
Product-Mix Pricing Strategies
Product bundle pricing combines several products and offer the bundle at a
reduced price.
Price bundling can promote the sales of products.
For example : Mc Donald fast food restaurants bundle a burger , fries and a soft
drink at a combo price.
Amazon makes great use of bundle pricing.
Price Adjustment Strategies
Companies adjust basic prices to account for various customer differences and
changing situations.
• Discount and allowance pricing. Ex: cash discount for paying promptly.
• Segmented pricing. Ex: Airlines, hotels and restaurants
• Psychological pricing. Ex: 99 & 999
• Promotional pricing. Ex: Special Event pricing, Cash rebates, Low interest
finance
• International pricing
Step-5 Selecting a Pricing Method
• Pricing method can be seen as the process of ascertaining the value
of a product or service at which manufacturer is willingly to sell.
• Markup pricing
• Target Return Pricing
• Perceived Pricing
• Ongoing pricing
Markup Price
Refers to a pricing method in which the fixed amount or the percentage of
cost of the product is added to product’s price to get the selling price of
the product
Target-return
Target-return-Helps in achieving the required rate of return on
investment done for a product. In other words, the price of a
product is fixed on the basis of expected profit.
Perceived-Value
• Perceived value pricing is that value which customers are willing to pay for a
particular product or service based on their perception about the product.
• Perceived value pricing is not based on the cost of the product, but it is the
value which the customer thinks that he/she is deriving from consuming a
product or a service.
Going Rate Method
Implies a method in which an organization sets the price of a product
according to the prevailing price trends in the market.
Step-6 Select final price
• After you have evaluated all the foregoing factors, apply the pricing
techniques that match your strategy and set an initial price.
• Be prepared to monitor that price and evaluate its effectiveness as
conditions in the market change
Internal Factors Affecting Pricing Decisions
• Marketing Mix Strategy:
• Price must be coordinated with the other three P’s (Product, Promotion and
Place) to form a consistent and effective marketing program.
External Factors Affecting Pricing Decisions
• The Market and Demand:
• Costs set price floors; demand sets price ceilings.
• Supply and Demand Curves
• Pricing in different types of markets:
• Pure competition
• Monopolistic competition
• Oligopolistic competition
• Pure monopoly
.
External Factors Affecting Pricing Decisions
• Competition’s Prices Affect Our Price
– What are our competitors charging? How and Why?
– Will our pricing attract, restrict, or drive out competitors?
– How does our value compare to the competition’s?
– How strong/permanent are current competitors?
– How does competition influence price sensitivity?
– Avoiding price wars
External Factors Affecting Pricing Decisions
• Other External Factors
– Economy
• Inflation
• Purchasing Power
• Business Cycle (Boom, Recession, Depression)
• Counter-cyclical products
Price-Adjustment Strategies
Discount and
Segmented pricing
allowance pricing
Psychological pricing Promotional pricing
Discount and allowance pricing
reduces prices to reward customer responses such as paying early or
promoting the product
• Discounts
• Allowances
Price Discounts and Allowances
Quantity discount: The more you buy, the cheaper it becomes--
cumulative and non-cumulative.
Trade discounts” functional”: Reductions from list for functions
performed-- storage, promotion.
Cash discount: A deduction granted to buyers for paying their
bills within a specified period of time, (after first deducting trade
and quantity discounts from the base price)
Price-Adjustment Strategies
Functional discount: discount offered by a manufacturer to
trade-channel members if they will perform certain functions.
Seasonal discount: a price reduction to those who buy out of
season.
Allowance: an extra payment designed to gain reseller
participation in special programs.
a) Trade in allowances: are price reductions given for turning in
an old item when buying a new one ( Automobiles industry)
b) Promotional allowances: are payments or price reductions to
reward dealer for participating in advertising and sales
support program
Price-Adjustment Strategies
Segmented pricing is used when a company sells
a product at two or more prices even though
the difference is not based on cost
Segmented Pricing
• Customer segment pricing: different customers pay different prices for the
same product or service .
For ex. Museums charge a lower admission for students .
• Location pricing: company charges different prices for different locations
• Time pricing : a firm varies it prices by the season , the month , the day and
even the hour
Price-Adjustment Strategies
To be effective:
• Market must be segmentable
• Segments must show different degrees of demand
• Watching the market cannot exceed the extra revenue obtained from the price
difference
• Must be legal
Price-Adjustment Strategies
• Psychological pricing occurs when sellers consider the psychology of
prices and not simply the economics” the price is used to say something
about the product”
• Reference prices are prices that buyers carry in their minds and refer to
when looking at a given product
• Noting current prices
• Remembering past prices
• Assessing the buying situations
• For example : a company could display its product next to more
expensive ones in order to imply that it belongs in the same class
Price-Adjustment Strategies
Pricing Strategies
Promotional pricing is when prices are temporarily priced below list
price or cost to increase demand
• Loss leaders
• Special event pricing
• Cash rebates
• Low-interest financing
• Longer warrantees
• Free maintenance
Price-Adjustment strategies
Promotional Pricing
• Loss-leader pricing: supermarkets and department stores often drop the price on
well known brands to stimulate additional store traffic
• Special-event pricing: sellers well establish special pricing in certain seasons to draw
in more customers
• Cash rebates: companies offer cash rebates to encourage purchase of the
manufacturers products within a specified time period
• Low-interest financing: the company can offer customers low-interest financing
Price-Adjustment strategies
• Longer payment terms: sellers especially mortgage banks and auto companies
stretch loans over longer periods and thus lower the monthly payment
• Warranties and service contracts: companies can promote sales by adding a free or
low cost warranty or service contract
Price-Adjustment Strategies
Risks of promotional pricing
• Used too frequently, and copies by competitors can create “deal-prone”
customers who will wait for promotions and avoid buying at regular price
• Creates price wars
Price-Adjustment Strategies
Geographical pricing is used for customers in different parts of the country or the
world
• FOB pricing
• Uniformed-delivery pricing
• Zone pricing
• Basing-point pricing
• Freight-absorption pricing
Price-Adjustment Strategies
• FOB (free on board) pricing means that the goods are delivered to the carrier
and the title and responsibility passes to the customer
• Uniformed-delivery pricing means the company charges the same price plus
freight to all customers, regardless of location
Price Adjustment Strategies
• Zone pricing means that the company sets up two or more zones where
customers within a given zone pay a single total price
• Basing-point pricing means that a seller selects a given city as a “basing
point” and charges all customers the freight cost associated from that city
to the customer location, regardless of the city from which the goods are
actually shipped
• Freight-absorption pricing means the seller absorbs all or part of the
actual freight charge as an incentive to attract business in competitive
markets
Price-Adjustment Strategies
Dynamic pricing is when prices are adjusted
continually to meet the characteristics and
needs of the individual customer and
situations
Ex. Alaska airlines creates unique
prices and advertisements for
people as they surf the web
Price-Adjustment Strategies
International pricing is when prices are set in a specific country
based on country-specific factors
• Economic conditions
• Competitive conditions
• Laws and regulations
• Infrastructure
• Company marketing
objective
International pricing
• For example : Boeing sells its jetliners at about the same price
everywhere, whether in the United states , Europe or the third world
• A pair of Levi’s selling for $30 in Canada might go for $ 63 in Tokyo and $
88 in Paris
Price Changes
Price cuts occur due to:
• Excess capacity
• Increased market share
Price increase from:
• Cost inflation
• Increased demand
• Lack of supply
Price Changes
Price increases Price cuts
•Product is “hot” •New models will be
that means better available
•Models are not selling
made well
•Company is greedy •Quality issues
Price Changes
Questions
• Why did the competitor change the price?
• Is the price cut permanent or temporary?
• What is the effect on market share and profits?
• Will competitors respond?
Price Changes
Solutions
• Reduce price to match competition
• Maintain price but raise the perceived value through communications
• Improve quality and increase price
• Launch a lower-price “fighting” brand
Responding to Price Changes
Price Changes
