Pricing Strategies

You dont sell through price. You sell the

price.

Setting the Price

6 Select Final Price
5

Price Method

3
2

Competitor
Analysis
Estimate
Costs

Determine
Demand
1 Pricing Objective

1.Pricing objectives
Survival
Maximum

current profit
Maximum market share
Maximum market skimming
Product-quality leadership

Determining Demand

Price sensitivity
Estimating demand
curves
Price Elasticity of
Demand

Customers are less price sensitive to low-cost items or items

they buy infrequentlyare less price sensitive (1) few or no
substitutes or competitors;
(2) slow to change buying habits;
(3) higher prices are justified
Firms estimate demand curves using: surveys, price
experiments, and statistical analysis.
Marketers need to know how responsive, or elastic, demand
is to a change in price.
Research findings show Price elasticity magnitudes were
higher for durable goods than for other goods, and higher for
products in the introduction/growth stages of the product life
cycle than in the mature/decline stages.

Estimating Costs

Types of costs

Fixed Costs
(overhead)

Variable Costs

Total Costs

 Fixed

costs, also known as overhead, are

costs that do not vary with production level or
sales revenue. Variable costs vary directly
with the level of production. Total costs consist
of the sum of the fixed and variable costs for
any given level of production. Average cost is
the cost per unit at that level of production; it
equals total costs divided by production.

Types of Costs
Fixed
FixedCosts
Costs
(Overhead)
(Overhead)

Variable
VariableCosts
Costs

Costs
Coststhat
thatdont
dont
vary
varywith
withsales
salesor
or
production
productionlevels.
levels.

Costs
Coststhat
thatdo
dovary
vary
directly
directlywith
withthe
the
level
levelof
ofproduction.
production.

Executive
ExecutiveSalaries
Salaries
Rent
Rent

Raw
Rawmaterials
materials

Total
Total Costs
Costs

Sum
Sumof
ofthe
theFixed
Fixedand
andVariable
VariableCosts
Costsfor
foraaGiven
Given
Level
Levelof
ofProduction
Production

Estimating Costs

Deman
d

Price
Ceiling

Price
Profit
Costs

Price Floor

Estimating Costs

Target Costing

Market research

Design engineers

 Costs

can also change as a result of a

concentrated effort by designers, engineers, and
purchasing agents to reduce them through target
costing. Market research establishes a new
products desired functions and the price at which
it will sell, given its appeal and competitors
prices. This price less desired profit margin leaves
the target cost the marketer must achieve

Selecting a Pricing Method

Pricing Methods
Markup
Target-return
PerceivedValue
Value
Going-rate
Auction-type

The Three Cs Model

for Price Setting

Low Price
No possible
profit at
this price

Costs

Competitors
prices and
prices of
substitutes

Customers High Price

assessment
No possible
of unique
demand at
product
this price
features

e
r
u
g
Fi 4.4
1

Three
Cs
Model
for
Price
Setting

High Price
(No possible
demand at this price)

Ceiling price
Customers assessment of unique
product features
Orienting point
Competitors prices and prices of
substitutes
Costs
Floor Price
Low Price
(No possible
profit at this price)

Markup Pricing

Variable cost per toaster

Fixed costs

$10

$300,000

Expected unit sales

50,000

In target-return pricing, the firm determines the price

that yields its target rate of return on investment.
Public utilities, which need to make a fair return on
investment, often use this method.

Value Pricing
EDLP
THOUSANDS OF

LOW
PRICES
EVERY DAY

Level
of
Qualit
y

throughout the store

P
1

C1

P C2
2

High

Pricing

Low

Value pricing is not just setting lower prices; it is a matter of

reengineering the companys operations to become a low-cost
producer without sacrificing quality. As shown in the graph, the
company reduces costs from C1 to C2, while maintaining the
same level of quality. Prices are reduced giving buyers greater
value.

Going-Rate Pricing

Commodities

Follow the
Leader

Auction Pricing

English
auction
(ascending
bids)

Dutch
auction
(descending
bids)

Sealed-bid
auction

Selecting the Final PriceImpact on

others

Bran
d
Quali
ty
Pricing
Policies

Gain-and-risk-

Adapting
the
Price
Geographic
Pricing
Price
Discounts
and
Allowances
Differentiated
Pricing

Promotional

Dealing with Price Changes

Raising
Prices

Cutting
Prices

Competitor

Some important pricing definitions

Utility: The attribute that

makes it capable of want
satisfaction
Value: The worth in terms
of other products
Price: The monetary
medium of exchange.

Value Example: Caterpillar

Tractor is $100,000 vs.
Market $90,000
$90,000 if equal
7,000 extra durable
6,000 reliability
5,000 service
2,000 warranty
$110,000 in benefits $10,000 discount!

Pricing Strategies

Penetration Pricing
Price

set to penetrate the market

Low price to secure high volumes
Typical in mass market products chocolate
bars, food stuffs, household goods, etc.
Suitable for products with long anticipated life
cycles
May be useful if launching into a new market

Examples: new-product pricing

Market-skimming

pricing
Market-penetration pricing

Market Skimming

Many are predicting a firesale in

laptops as supply exceeds
demand.
Copyright: iStock.com

High price, Low volumes

Skim the profit from the
market
Suitable for products that
have short life cycles or
which will face competition at
some point in the future (e.g.
after a patent runs out)
Examples include:
Playstation, jewellery, digital
technology, new DVDs, etc.

Value Pricing

Price set in accordance

with customer
perceptions about the
value of the
product/service
Examples include
status
products/exclusive
products

Companies may be able to set prices

according to perceived value.
Copyright: iStock.com

Loss Leader
Goods/services

deliberately sold below cost to

encourage sales elsewhere
Typical in supermarkets, e.g. at Christmas, selling
bottles of gin at 3 in the hope that people will be
attracted to the store and buy other things
Purchases of other items more than covers loss
on item sold
e.g. Free mobile phone when taking on contract
package

Psychological Pricing
Used

to play on consumer perceptions

Classic example - 9.99 instead of 10.99!
Links with value pricing high value goods
priced according to what consumers THINK
should be the price

Going Rate (Price Leadership)

In case of price leader, rivals have difficulty in

competing on price too high and they lose market
share, too low and the price leader would match price
and force smaller rival out of market
May follow pricing leads of rivals especially where
those rivals have a clear dominance of market share
Where competition is limited, going rate pricing may
be applicable banks, petrol, supermarkets, electrical
goods find very similar prices in all outlets

Tender Pricing

Many contracts awarded on a tender basis

Firm (or firms) submit their price for carrying out the
work
Purchaser then chooses which represents best value
Mostly done in secret

Price Discrimination

Prices for rail travel differ for the same

journey at different times of the day
Copyright: iStock.com

Charging a different
price for the same
good/service in different
markets
Requires each market
to be impenetrable
Requires different price
elasticity of demand in
each market

Destroyer/Predatory Pricing
Deliberate

price cutting or offer of free

gifts/products to force rivals (normally
smaller and weaker) out of business or
prevent new entrants
Anti-competitive and illegal if it can be
proved

Market-skimming pricing
Setting

a high price for a new product to skim

maximum revenues layer by layer from the
segments willing to pay the high price: the
company makes fewer but more profitable
sales.

Absorption/Full Cost Pricing

Full

Cost Pricing attempting to set price to

cover both fixed and variable costs
Absorption Cost Pricing Price set to absorb
some of the fixed costs of production

Marginal Cost Pricing

Marginal cost the cost of producing ONE extra or

ONE fewer item of production
MC pricing allows flexibility
Particularly relevant in transport where fixed costs may
be relatively high
Allows variable pricing structure e.g. on a flight from
London to New York providing the cost of the extra
passenger is covered, the price could be varied a good
deal to attract customers and fill the aircraft

Marginal Cost Pricing

Example:

Aircraft flying from Bristol to Edinburgh Total Cost (including

normal profit) = 15,000 of which 13,000 is fixed cost*
Number of seats = 160, average price = 93.75
MC of each passenger = 2000/160 = 12.50
If flight not full, better to offer passengers chance of flying at
12.50 and fill the seat than not fill it at all!
*All figures are estimates only

Target Pricing
Setting

price to target a specified profit level

Estimates of the cost and potential revenue at
different prices, and thus the break-even have
to be made, to determine the mark-up
Mark-up = Profit/Cost x 100

Cost-Plus Pricing
Calculation

of the average cost (AC) plus a

mark up
AC = Total Cost/Output

Influence of Elasticity
Any

pricing decision must be mindful of the

impact of price elasticity
The degree of price elasticity impacts on the
level of sales and hence revenue
Elasticity focuses on proportionate (percentage)
changes
PED = % Change in Quantity demanded/%
Change in Price

The conditions:
1.
2.

3.
4.

A sufficient number of buyers have a high current

demand;
The unit costs of producing a small volume are not so
high that they cancel the advantage of charging what
the traffic will bear;
The high initial price does not attract more
competitors to market;
The high price communicates the image of a superior
product.

Market-penetration pricing
Setting

a low price for a new product in order to

attract a large number of buyers and a large
market share.

The conditions:
1.
2.
3.

The market is highly price sensitive,and a low

price stimulates market growth;
Production and distribution costs fall with
accumulated production experience;
A low price discourages actual and potential
competition.

Price sensitivity

Examples: product mix pricing

Product

line pricing
Optional-product pricing
Captive-product pricing
By-product pricing
Cash rebates
Low-interest,longer warranties,free
maintenance

2.pricing-adjustment strategies
Discount

and allowance pricing

Segmented pricing
Psychological pricing
Promotional pricing
Geographical pricing

Discount and allowance pricing

Cash

discount
Quantity discount
Functional discount
Seasonal discount
allowance

Discriminatory Pricing
Customer Segment
Product-form
Location
Time

Psychological Pricing

A
32 oz.

$2.19

Most

Attractive?

Better

Value?

Psychological

$1.99

26 oz.
Assume Equal Quality

reason to
price this way?

Geographical pricing
FOB-origin

pricing
Uniform-delivered pricing
Zone pricing
Basing-point pricing
Freight-absorption pricing

Promotional Pricing
Loss-leader

pricing
Special-event pricing
Cash rebates
Low-interest financing
Longer payment terms
Warranties & service contracts
Psychological discounting

3. Pricing changing
Initiating

price cuts
Initiating price increases

Discussion
Please

explain the reasons for price cuts.

Please explain the reasons for price increases.
Please describe the advantage and
disadvantage of price cuts and increases.

The reasons for price cuts

Excess

capacity
Price competition

The reasons for price increases

Cost

inflation
overdemand

Reactions to price changes

Customers

reactions
Competitors reactions

Responding to competitors price

changes
Maintain

price
Maintain price and add value
Reduce price
Increase price and improve quality
Launch a low-price fighter line

Price-Reaction Program for Meeting a

Competitors Price Cut
Has competitor
cut his price?
Yes

No
No

No

Hold our price

at present level;
continue to watch
competitors
price

Is the price
Is it likely to be
How much has
likely to
permanent Yes his price been
significantly Yes aprice
cut?
cut?
hurt our sales?
By less than 2%
Include a
cents-off coupon
for the next
purchase

By 2-4%
Drop price by
half of the
competitors
price cut

By more than 4%
Drop price to
competitors
price

Assignment:
Read

page P411---P415
Question 2, interactive marketing
applications ,P423