Chapter 8

Prof. DR: Thamer Al-Bakri

By Aasem alsayed soliman

In this chapter
We will discuss:
buyer and seller perspectives on pricing
pricing objectives
the issue of price elasticity
strategies for setting profitable and
justifiable prices.

Introduction
Pricing decisions are important for several reasons:
1. Price is the only element of the marketing mix that leads to
revenue and profit.
2. Price typically has a direct connection with customer demand.
3. Pricing is the easiest element of the marketing program to
change.
4. Pricing is a major quality cue for customers.

The Sellers Perspective on Pricing
Cost Demand
Customer value Competitors prices
Four key issues
important in pricing
strategy
The Buyers Perspective on Pricing
From the buyers perspective, two key issues determine
pricing strategy for most firms:

( 1 ) Perceived Value=
Customer Benefits
Customer Costs


(2) price sensitivity
A Shift in the Balance of Power
Buyers have increased power over sellers when:
1-there is a large number of sellers in the market
2-there are many substitutes for the product
3-the economy is weak and fewer customers will part with
their money

Sellers have increased power over buyers when:
1-certain products are in short supply or in high demand
2-during good economic times when customers will spend
more money
The Relationship Between Price and
Revenue
When setting prices, many firms hold fast to these two general
pricing myths:
Myth No. 1: When business is good, a price cut will capture
greater market share.
Myth No. 2: When business is bad, a price cut will stimulate sales.

The relationship between price and revenue challenges these
assumptions and makes them a risky proposition for most firms.
Any price cut must be offset by an increase in sales volume
just to maintain the same level of revenue.

Key Issues in Pricing Strategy
1) pricing objectives
2) Supply and Demand
3) Firms Cost Structure
4) Competition and Industry Structure
5) Stage of the Product Life Cycle
Key Issues in Pricing Strategy- Pricing
Objectives


COMMON PRICING OBJECTIVES
Profit-
Oriented
Volume-
Oriented
Market
Demand
Market
Share
Status
Quo
Prestige
Competitive
Matching
Cash Flow
Key Issues in Pricing Strategy- Supply and
Demand
supply-side perspective: price goes up, demand goes down.
demand-side perspective : during periods of heavy customer demand,
prices tend to stay the same or even increase.

In some situations, customer expectations about price can be the driving
force in pricing strategy. allow marketers to set prices in accordance
with what the market will pay with little or no regard for their costs, the
competition, or other factors that typically affect pricing strategy.

Key Issues in Pricing Strategy- The Firms Cost
Structure
The firms costs in producing and marketing a product are an
important factor in setting prices.
The most popular way to associate costs and prices is through
breakeven pricing, where the firms fixed and variable costs are
considered
Breakeven in Units=
Total Fixed Costs
Unit Price Unit Variable Costs

Key Issues in Pricing Strategy- The Firms Cost
Structure -cont.
cost-plus pricing: the firm sets prices based on average
unit costs and its planned markup percentage:
Selling Price=
Average Unit Cost
1 Markup Percent

There are four basic competitive market structures:
1. Perfect Competition
2. Monopolistic Competition
3. Oligopoly
4. Monopoly
Competition and Industry Structure
Key Issues in Pricing Strategy- Stage of the
Product Life Cycle
Introduction: Price skimming, price penetration
Growth
Maturity
Decline
Pricing Service Products
Services pricing becomes more important and more difficult when:
1. Service quality is hard to detect prior to purchase.
2. The costs associated with providing the service are difficult to
determine.
3. Customers are unfamiliar with the service process.
4. Brand names are not well established.
5. Customers can perform the service themselves.
6. The service has poorly defined units of consumption.
7. Advertising within a service category is limited.
8. The total price of the service experience is difficult to state
beforehand.
Price Elasticity of Demand
pricing has intricate connections to issues such as demand,
competition, and customer expectations.
All of these issues come together in the concept of price
elasticity of demand.
Price elasticity is the most important overall consideration in
setting effective prices.
Price elasticity: relative impact on the demand for a product,
given specific increases or decreases in the price charged for that
product.
Price Elasticity of Demand=
Percentage Change in Quantity Demanded
Percentage Change in Price

Unitary demand Elastic demand Inelastic demand
number that equals 1 or is
very close to 1
number greater than 1 number less than 1
the changes in price and
demand offset, so total
revenue remains the same
change in price will produce
a change in demand and
total revenue
an increase or decrease in
price does not significantly
affect the quantity
demanded
Price Elasticity of Demand- cont.
Price Elasticity of Demand- cont.
Pricing Strategies
A firms base pricing strategy establishes the initial price and sets the
range of possible price movements throughout the products life cycle.
The initial price is critical, not only for initial success, but also for
maintaining the potential for profit over the long term.

Base Pricing Strategies:
1. Market Introduction Pricing
2. Prestige Pricing
3. Value-Based Pricing (EDLP)
4. Competitive Matching
5. Nonprice Strategies
Pricing Strategies:
Market Introduction Pricing
The two most common introduction approaches:
price skimming: intentionally set a high price relative to the
competition, thereby skimming the profits off the top of the
market.
Price skimming is designed to recover the high R&D and
marketing expenses associated with developing a new
product.

penetration pricing: to maximize sales, gain widespread market
acceptance, and capture a large market share quickly by setting a
relatively low initial price.
Pricing Strategies:
Prestige Pricing
Firms using prestige pricing set their prices at the top end of all
competing products in a category.
This is done to promote an image of exclusivity and
superior quality.

Prestige pricing is a viable approach in situations where it is hard
to objectively judge the true value of a product.
In these instances, a higher price may indicate a higher-
quality product.
Pricing Strategies:
Value-Based Pricing (EDLP)
Firms that use a value-based pricing approach set reasonably low prices
but still offer high-quality products and adequate customer services.
Retailing has widely embraced this approach.
The goal of value-based pricing is to set a reasonable price for the level
of quality offered.
Value-based pricing naturally draws customers because they have
confidence in the value of the products they buy.
Customers also like the approach because it requires less effort to find
good prices on the products they want and need.
Pricing Strategies:
Competitive Matching
In many industries, particularly oligopolies, pricing strategy
focuses on matching competitors prices and price changes.
Two competitive factors largely drive this strategy:
1. Firms that offer commodity-type products (e.g., airlines, oil,
steel) have a very difficult time finding any real or perceived
basis for product differentiation.
2. Some industries are so highly competitive that competitive price
matching becomes a means of survival. (e.g., automobile
industry )
Pricing Strategies:
Nonprice Strategies
building a marketing program around factors other than price is an
important strategic pricing decision.
Nonprice strategies are most effective when:
1. The product can be successfully differentiated.
2. Customers see the differentiating characteristics as being
important.
3. Competitors cannot emulate the differentiating characteristics.
4. The market is generally not sensitive to price.
Adjusting Prices in Consumer Markets
In addition to a base pricing strategy, firms also use other
techniques to adjust or fine-tune prices.
Four of the most common techniques:
1. promotional discounting.
2. reference pricing.
3. oddeven pricing.
4. price bundling.
Adjusting Prices in Consumer Markets-
promotional discounting
The hallmark of promotional discounting is a sale.
-All customers love a sale and that is precisely the main
benefit of promotional discounting.
Drawback: Customers become so accustomed to sales
and promotions that they will postpone purchases until
retailers discount prices.

Adjusting Prices in Consumer Markets-
Reference Pricing
Firms use reference pricing when they compare the actual selling
price to an internal (expectation, recall from memory) or
external (displayed in the environment) reference price.
A common use of reference pricing occurs when sale prices are
compared to regular prices. A $50 value for only $19.99 ,
Regularly $399, Now $349.
Adjusting Prices in Consumer Markets- Odd
Even Pricing
A couple of factors drive the prevalence of odd prices over even
pricing:
1-Demand curves are not straight lines, the elasticity of a products
demand will change significantly at various price points.
The move from $45.95 to $49.95 may result in very
little drop in demand. When the price hits $50.00,
just 5 cents more, the drop in demand may be sizable.

2-Customers perceive that the seller did everything possible to get
the price as fine (and thus as low) as he or she possibly could.
Adjusting Prices in Consumer Markets- Price
Bundling
This approach brings together two or more complementary
products for a single price.
Slow-moving items can be bundled with hot sellers to expand the
scope of the product offering, build value, and manage inventory.
Bundling is an attractive strategy in the banking, travel,
insurance, communication, computer, and automobile markets
because these customers desire convenience and fewer hassles.
Adjusting Prices in Business Markets
Here are a number of pricing techniques unique to business
markets, including these:
1. Trade Discounts
2. Discounts and Allowances
3. Geographic Pricing
4. Transfer Pricing
5. Barter and Countertrade
Adjusting Prices in Business Markets- Trade
Discounts
Manufacturers will reduce prices for certain
intermediaries in the supply chain based on the functions
that the intermediary performs.
Adjusting Prices in Business Markets-
Discounts and Allowances
business buyers also receive other price breaks, including
discounts for cash, quantity or bulk discounts, seasonal
discounts, or trade allowances for participation in
advertising or sales support programs.
Adjusting Prices in Business Markets-
Geographic Pricing
Selling firms often quote prices in terms of reductions or
increases based on transportation costs or the actual
physical distance between the seller and the buyer. The
most common examples of geographic pricing are
uniform delivered pricing (same price for all buyers
regardless of transportation expenses) and zone pricing
(different prices based on transportation to predefined
geographic zones).
Adjusting Prices in Business Markets-
Transfer Pricing
Transfer pricing occurs when one unit in an organization
sells products to another unit.
Adjusting Prices in Business Markets-Barter
and Countertrade
Barter involves the direct exchange of goods or services between
two firms or nations.
Countertrade refers to agreements based on partial payments in
both cash and products, or to agreements between firms or
nations to buy goods and services from each other.
Fixed Versus Dynamic Pricing
Although relatively new to consumer markets, dynamic pricing has long
been a staple of business markets.
The Internet has played a large role in fostering the dynamic pricing
approach to buying everything, including airline tickets, hotel rooms,
and cars.
Internet dynamic pricing approach is simple: Use an online auction
strategy to bring buyers and sellers together in a competitive bidding
process.
Auction strategies allow firms to lower marketing and transaction costs,
find new buyers or markets, and reduce unwanted inventory.
Fixed Versus Dynamic Pricing cont.
In a dynamic pricing situation, there are three pricing
levels that both the buyer and the seller must
understand and plan for:
1. Opening position
2. Aspiration price
3. The limit
Fixed Versus Dynamic Pricing cont.
opening position: each side will put on the table as a
starting point.
For example, in a deal for 500 cases of 20-pound paper, a
salesperson might open with a price of $23.50 per case.
The buyer might counter with his or her opening position
of $17.50 per case.

Fixed Versus Dynamic Pricing cont.
Aspiration price: the number that each side will use to distinguish
between a successful negotiation and an unsuccessful negotiation.
For the salesperson, this price might be $20.25 per case, whereas
for the buyer it might be $20.00 per case.
If the two reach an agreement at a price higher than $20.25, the
salesperson will be happy. If they reach an agreement at a price
below $20.00, the buyer will be happy.
Fixed Versus Dynamic Pricing cont.
the limit: the least favorable price either side will agree to during
the negotiation.
For example, the salespersons limit might be $18.50, whereas the
buyers limit might be $20.50.
A deal for 500 cases of 20-pound paper
example
Pricing level Salesperson Buyer
Opening position $23.50 $17.50
Aspiration price
$20.25
If < $20.25 will be
happy
$20.00
if > $20.00 will be
happy
The limit $18.50 $20.50
Q & A
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