UNIT III
Pricing
What Is a Price?
Answer question “What is a price?” and discuss the
1 importance of pricing in today’s fast-changing
environment.
Major Pricing Strategies
Identify the three major pricing strategies and discuss
the importance of understanding customer-value
2
perceptions, company costs, and competitor strategies
when setting prices.
Other Internal and External Considerations
Affecting Price Decisions
3 Identify and define the other important external and
internal factors affecting a firm’s pricing decisions
What is a Price?
In the narrowest sense, price is the amount of money
charged for a product or a service.
More broadly, price is the sum of all the values that
customers give up 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.
Steps in Setting Price
Select the price objective
Determine demand
Estimate costs
Analyze competitor price mix
Select pricing method
Select final price
Step 1: Selecting the Pricing Objective
Survival
Maximum current profit
Maximum market share
Maximum market skimming
Product-quality leadership
Step 2: Determining Demand
Price Sensitivity
Estimating
Demand Curves
Price Elasticity
of Demand
Step 3: Estimating Costs
Types of Costs
Accumulated
Production
Activity-Based
Cost Accounting
Target Costing
Step 5: Selecting a Pricing Method
Step 6: Selecting the Final Price
Impact of other marketing activities
Company pricing policies
Gain-and-risk sharing pricing
Impact of price on other parties
Pricing Strategies
The price the company charges will fall somewhere
between one that is too low to produce a profit and
one that is too high to produce any demand.
Customer Value-Based Pricing
Customer value-based pricing uses buyers’ perceptions
of value as the key to pricing.
The company first assesses customer needs and value
perceptions.
It then sets its target price based on customer perceptions
of value.
The targeted value and price drive decisions about what
costs can be incurred and the resulting product design.
Good-Value Pricing
In response, many companies have changed their pricing
approaches to bring them in line with changing economic
conditions and consumer price perceptions.
More and more, marketers have adopted good-value
pricing strategies ─ offering the right combination of
quality and good service at a fair price.
Value-Added Pricing
Many companies adopt value-added pricing
strategies.
Rather than cutting prices to match competitors,
they attach value-added features and services to
differentiate their offers and thus support their
higher prices.
Cost-Based Pricing
Cost-Based pricing involves setting prices based
on the costs of producing, distributing, and
selling the product plus a fair rate of return for its
effort and risk.
A company’s costs may be an important element
in its pricing strategy.
Types of Costs
The sum of the fixed and
variable costs for any
given level of production.
Costs that do not vary
with production or sales
level.
Fixed costs
Variable costs Total costs
(over-head)
Costs that vary directly with
the level of production.
Cost-Plus Pricing
The simplest pricing method is cost-plus pricing (or
markup pricing) ─ adding a standard markup to the cost
of the product.Variable cost $10
Fixed costs $300,000
Expected unit sales 50,000
Then the manufacturer’s cost per toaster is given by the following:
fixed costs $300,000
unit cost = variable Cost + = $10+ = $16
unit sales 50,000
Now suppose the manufacturer wants to earn a 20 percent
Markup on sales. The manufacturer’s markup price is given by the
following:
unit cost $16
markup price = = =$20
(1−desired reture on sales) 1−0.2
Competition-Based Pricing
Competition-based pricing involves setting
prices based on competitors’ strategies, costs,
prices, and market offerings.
Consumers will base their judgments of a
product’s value on the prices that competitors
charge for similar products.
Other Internal and External
Considerations Affecting Price Decisions
Internal factors affecting pricing include the
company’s overall marketing strategy, objectives,
and marketing mix, as well as other
organizational considerations.
External factors include the nature of the market
and demand and other environmental factors.
Organizational Considerations
Top management sets the pricing objectives and policies,
and it often approves the prices proposed by lower level
management or salespeople.
In industries in which pricing is a key factor, companies
often have pricing departments to set the best prices or
help others set them.
These departments report to the marketing department or
top management.
Others who have an influence on pricing include sales
managers, production managers, finance managers, and
accountants.
Price-Adaptation Strategies
Geographical Pricing
Discounts/Allowances
Promotional Pricing
Differentiated Pricing
Price-Adaptation Strategies
Countertrade Discounts/ Allowances
Barter Cash discount
Compensation deal Quantity discount
Buyback arrangement Functional discount
Offset Seasonal discount
Allowance
The Market and Demand
In this section, we take a deeper look at the price-
demand relationship and how it caries for
different types of markets.
We then discuss methods for analyzing the price-
demand relationship.
Pricing in Different Types of Markets
Economists recognize four types of markets, each presenting a different
pricing challenge.
Four types of market
Pure
monopoly
Pure
competitio
n
Oligopolistic
competition Monopolistic
competition
Analyzing the Price-Demand Relationship
Demand curve is a curve that shows the number
of units the market will buy in a given time
period, at different prices that might be charged.
Price Elasticity of Demand
Price Elasticity is a measure of the sensitivity of
demand to changes in price.
It is given by the following formula:
%change in quantity demanded
price elasticity of demand =
%change in price
• If demand is elastic rather than inelastic, sellers will
consider lowering their prices.
• A lower price will produce more total revenue.
• 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.
The Economy
Economic conditions can have a strong impact on the
firm’s pricing strategies.
Economic factors such as a boom or recession, inflation,
and interest rates affect pricing decisions because they
affect consumer spending, consumer perceptions of the
product’s price and value, and the company’s costs of
producing and selling a product.
Other External Factors
Resellers react to various prices
Government
Social Concerns
The End
