Chapter Outline

A. What is a Price?
B. Major Pricing Strategies
C. Other internal and external considerations
affecting price decisions
D. New-Product Pricing Strategies
E. Product mix Pricing Strategies
F. Price Adjustment Strategies
G. Price Changes

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 A. What is a Price?

• Price is the amount of money charged for a

product or service.
• Price determines a firm’s market share and
profitability
• Price is the only element in the marketing mix
that produces revenue.
• Price is one of the most flexible marketing
mix elements. Prices can be changed
quickly.
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Figure 9.1 - Considerations in
Setting Price

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 B. Major Pricing Strategies

3 major pricing strategies:

a) Customer Value-Based Pricing
b) Cost-Based Pricing
c) Competition-Based Pricing

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 a. Customer Value-Based Pricing

• Customer value-based pricing uses the

buyers’ perceptions of value rather than seller’s
cost. Price is set to match perceived value.

• 2 types of value-based pricing:

1. Good-value pricing
2. Value-added pricing

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 1.Good-Value pricing

• Good-value pricing is offering the right

combination of quality and good service at
a fair price.

• There are 2 types:

–Everyday low pricing (EDLP)
–High-low pricing

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 2.Customer Value-Based Pricing

• Value-added pricing is the strategy of

attaching value-added features and services
to differentiate a company’s offers while
charging higher prices.

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 b. Cost-Based Pricing

• 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.
• Types of costs:
– Fixed costs
– Variable costs
– Total costs

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 Cost-Based Pricing

• Cost-plus pricing (or markup pricing) is

adding a standard markup to the cost of the
product.
• Break-even pricing (or target return pricing) –
The firm tries to determine the price at which
it will break even or make the target return it
is seeking.

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Figure 9.3 - Break-Even Chart for Determining
Target Return Price and Break-Even Volume

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 c. Competition-Based Pricing

• Competition-based pricing involves setting

prices based on competitors’ strategies, costs,
prices and market offerings.
• No matter what price it charges – high, low or in-
between – the company must be certain to give
customers superior value for that price.

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 C. Internal and External Considerations
Affecting Price Decisions
• Internal factors
• Overall marketing strategy, objectives, and mix
• Organizational considerations

• External factors
• Market and demand
• Economy
• Impact on other parties in its environment

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 Internal and External Considerations
Affecting Price Decisions
Overall Marketing Strategy, Objectives and Mix
• Pricing plays an important role in helping to
accomplish company objectives at many levels.
• Price decisions must be coordinated with product
design, distribution and promotion decisions to
form a consistent and effective integrated marketing
mix program.

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 Internal and External Considerations
Affecting Price Decisions

Organizational Considerations
• Management decides who should set prices.
• Varies depending on the size and type of
company
– Small companies - Top management
– Large companies - Divisional or product managers
– Industries with price as the key factor - Pricing
departments or sales force
•.
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 Internal and External Considerations
Affecting Price Decisions
The Market and Demand:
Pricing in different types of markets:
• Pure competition – The market consists of many
buyers and sellers trading in a uniform commodity.
No single buyer or seller has much effect on the going
market price.

• Monopolistic competition – The market consists of

many buyers and sellers who trade over a range of
prices rather than a single market price.
• A range of prices occurs because sellers can
differentiate their offers to buyers.
 Internal and External Considerations
Affecting Price Decisions

• Oligopolistic competition – The market

consists of only a few large sellers. Each seller
is alert and responsive to competitors’ pricing
strategies and marketing moves.

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 Internal and External Considerations
Affecting Price Decisions

• Pure monopoly – The market is dominated by

one seller. The seller may be a government
monopoly, a private regulated monopoly or a
private unregulated monopoly. Price is
determine by the company itself.

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 Internal and External Considerations
Affecting Price Decisions

Price Elasticity of Demand

• Price elasticity – How responsive demand will
be to a change in price.
• Inelastic demand - If demand hardly changes
with a small change in price.
• Elastic demand – If demand change greatly
with a small change in price.

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 Internal and External Considerations
Affecting Price Decisions
The Economy
• 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.

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 Internal and External Considerations
Affecting Price Decisions

Other External Factors

• Company must consider several other factors
in its external environment when setting
prices.
– Resellers
– Government
– Social concerns

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D. New Product Pricing Strategies
Market-skimming pricing (price skimming)

• Setting a high price to skim maximum revenues from

the segments willing to pay the high price
• Company makes fewer but more profitable sales
• Product’s quality and image must support

Market-penetration pricing

• Setting a low price to attract a large number of buyers

and a large market share
• The market must be highly price sensitive

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E. Product Mix Pricing Strategies

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F. Price Adjustment Strategies

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 Price Adjustment Strategies

Discount and Allowance Pricing

Discounts include:
• Cash discount, a price reduction to buyers who pay
their bills promptly.
• Quantity discount is a price reduction to buyers who
buy large volumes.
• Functional discount (also called a trade discount) is
offered by the seller to trade-channel members who
perform certain functions, storing & selling.

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 Price Adjustment Strategies

• Seasonal discount is a price reduction to buyers who

buy merchandise or services out of season.

Allowances are a reduction from the list price.

Allowances include:
• Trade-in allowances are price reductions given for
turning in an old item when buying a new one,
common in automobile industry.
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 Price Adjustment Strategies

• Promotional allowances are payments or

price reductions to reward dealers for
participating in advertising and sales
support programs.

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 Price Adjustment Strategies

Segmented Pricing
• Occurs when the company sells a product or
service at two or more prices, even though
the difference in prices is not based on
differences in costs.
• 1) Customer-segment pricing: different
customers pay different prices for the
same product or service, like admission fee
for adults and senior.
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 Price Adjustment Strategies

• 2) Product-form pricing: Different versions of

the product are priced differently but not
according to differences in their costs.
• 3) Location pricing: A company charges
different prices for different locations, even
though the cost of offering each location is
the same, like theaters/concert seat price.
• 4) Time pricing: A firm varies its price by the
season, the month, the day, and even the
hour, common used by hotels/ restaurant.
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 Price Adjustment Strategies

Psychological Pricing
• Occurs when sellers consider the
psychology of prices and not simply the
economics.
• Reference prices - prices that buyers carry
in their minds and refer to when looking at
a given product, like remembering past
experience.

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 Price Adjustment Strategies

Promotional Pricing
• Occurs when companies temporarily price
their products below list price and
sometimes even below cost to create
buying excitement and urgency.
• Discounts: A reduction from normal prices
to increase sales and reduce inventories.
• Special-event pricing: Pricing differently in
certain seasons to draw more customers.
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 Price Adjustment Strategies

• Cash rebates: Consumers who buy the product

from dealers within a specified time; the
manufacturer sends the rebate directly to the
customer, longer warranty and free
maintenance also can reduce consumers price.

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Promotional pricing negative effects
• Promotional pricing can have adverse effects.
1. Price promotions can create “deal-
prone” customers who wait until brands
go on sale before buying them.
2. Constantly reduced prices can
erode/damage a brand’s value in the
eyes of customers.
3. Promotional pricing can lead to industry
price wars.

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 Price Adjustment Strategies

Geographical Pricing
• Geographical Pricing involves deciding how to
price its products for customers located in different
parts of the country or world.
• FOB-origin pricing (goods are placed free on board
a carrier, at that point the title and responsibility
pass to the customer.)
• Uniform-delivered pricing (charges the same price
plus freight to all customers, regardless of their
location.)
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 Price Adjustment Strategies

• Zone pricing (customers within a given zone pay a

single total price; the more distant the zone, the higher
the price.)
• Basing-point pricing (seller selects a city as a “basing
point” and charges customers the freight cost from
that city to the customer location, regardless which
city the goods are actually shipped.)
• Freight-absorption pricing (the seller absorbs all or
part of the charges in order to get the desired
business.)

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 Price Adjustment Strategies
Dynamic Pricing
• Is adjusting prices continually to meet the
characteristics and needs of individual
customers and situations.
• Dynamic pricing is especially prevalent
online.

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 Price Adjustment Strategies
• Advantages of dynamic pricing:
1. Internet sellers can mine their databases to gauge a
specific shopper’s desires, measure his or her means
and instantaneously tailor products to fit that shopper’s
behavior and price products accordingly.
2. Internet buyers benefit from the Web and dynamic
pricing. A wealth of price comparison sites offer instant
product and price comparisons from thousands of
vendors.
3. Buyers can also negotiate prices at online auction
sites and exchanges.
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 International Pricing
Price decisions of international companies
• Set a uniform worldwide price
• Adjust prices to reflect local market conditions and cost
considerations

Prices charged depend on many factors

• Economic conditions
• Competitive situations
• Laws and regulations
• Nature of the wholesaling and retailing system
• Consumer perceptions and preferences
• Company’s marketing objectives
• Costs of selling in another country

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 G. Price Changes
• Initiating price cuts (excess capacity, falling
demand & desire to dominate market).
• Initiating price increases (cost inflation & over
demand).
• Buyer reactions to price changes (customers
don’t always view price changes in a
straightforward or rational way).
• Competitor reactions to price changes (React
when number of firms involved is small, product
is uniform, and buyers are well informed).
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 Looking Ahead to Chapter 10
Marketing Channels:
Delivering Customer Value