1. Chapter 8: Selecting an appropriate price level

2. Learning outcomes After this study unit, you should be able to:
Explain the various cost-based pricing methods;
Discuss profit-based pricing;
Highlight the various demand-based pricing methods;
Explain the new-product pricing strategies; and
Discuss the competition-based pricing methods.

3. Introduction
The appropriate prices level involves the setting of a basic selling price that will satisfy the consumer and also achieve the profitability objective of the organisation.

4. Cost-based pricing
Cost-based pricing involves setting prices based on the costs for producing, distributing, and selling a particular product plus a fair rate of return for the organisation’s effort and risk.
Cost-based pricing methods are the most widely used by marketers because:
They are simple to determine as costs are calculated and a certain margin or target return is added on.
Are less risky as they are based on a known factor.
Tends to be more stable as price are set based on factors internal to the organisation.

5. Cost-based pricing Cont…
5 cost-based pricing methods:
Cost-plus pricing (standard mark-up pricing)
The simplest pricing method which involves adding a standard mark-up to the cost of the product.
Convenient and easy to apply.
The marketer determines the unit costs for producing an item and adds a margin to meet a profit objective or desired return on sales.
Ignores demand and competitor prices.
Cost-plus percentage of cost pricing
Add a fixed percentage to the production or construction cost.
Often used to price one or few of a kind items.

6. Cost-based pricing Cont…
Cost-plus fixed fee pricing
Used to determine the final price of products or services provided marketers.
Usually highly technical, few of a kind products.
The supplier is reimbursed for all costs, regardless of what they turn out to be.
Price determination according to experience curve
Experience curve pricing means that over time, and as an organisation produces more units, it experience and learning leads to more efficiency.
The drop in average per-unit production cost that comes with accumulated production experience.

7. Cost-based pricing Cont…
Price determination according to breakeven analysis
Based in a breakeven analysis which aims to determine at which sales level the firm would cover its costs, given a specific price per unit and a desired sales level can be estimated if a specific profit target is added to the equation.
Breakeven is when the total revenue costs equals total costs.

8. Profit-based pricing 3 profit-based methods:
Marketer may decide to balance both revenues and costs to set price using profit-based pricing methods.
3 profit-based methods:
Target profit pricing
Simplest if variable and fixed cost and units sold can be accurately estimated.
Marketing firm may set an annual target of a specific rand value of profit.
Target return on sales pricing
Set typical prices that will give the company a profit that is specified percentage say 1% of the sales volume will be required to achieve the profit target.

9. Profit-based pricing Cont…
Rate-of-return pricing (ROI pricing)
Companies often set annual return-on-investment (ROI) pricing target .
Is a method of setting prices to achieve the predetermined target.
Brings the cost of capital tied up in producing and distributing the product into the pricing decision.

10. Demand-based pricing 7 demand-based methods:
Demand-based pricing looks outward from the production line and focuses on customers and their responsiveness to different price levels.
When demand is strong, the price of the product goes up and when the demand is weak, the price goes down.
7 demand-based methods:
Value-pricing method
Assigns a price to a product or service based upon its value to the customer in the use of the product.
Emphasis is to use non-price variables in the marketing strategy to build on perceived benefits or value in the customers’ mind.
Price is set to reflect the perceived value by the customer.

11. Demand-based pricing Cont…
Demand-backward pricing
Prices are set by determining what consumers are willing to pay for an item, and then deducting the costs to determine if the profit margin is adequate.
Prestige pricing
Give a product a higher price because customers make price-quality inferences about a product when they use price as an indicator of quality.
Odd-even pricing
Prices ending with an odd numbers so that it appears to be so much less e.g. R99.95.

12. Demand-based pricing Cont…
Price lining
Pricing policy that was established to help customers make merchandise comparisons.
Involves establishing a specified number of price points for each merchandise classification.
Provides the different ranges necessary to satisfy each segment.
Traditional pricing
Maintaining the retail price of a product at the same level over the long run.
Bundle pricing
Selling distinct multiple items offered together at a special price.

13. New-product strategies
In the product life cycle, if a product is in the introduction stage of its life cycle, products may be priced either high or low.
2 pricing strategies
Price skimming
Prices are usually set high to attract the least price sensitive market.
If the company wants to recover investment in the new product as quickly as possible or if there is only few potential competitors and the customers know little about the product.
Reduce prices at a later stage.

14. New-product strategies Cont…
Penetrating pricing
Set a low initial price to appeal to the mass market.
Company will use this if they can save production costs by manufacturing bigger quantity in order to break even or to achieve economies of scale.
Low prices make it difficult for competitors to enter the market.

15. Competition-based pricing Cont…
When a business sets prices based on the prices that competitors charge for similar products.
6 competitor based methods:
Going-rate pricing
Bases its prices mainly on competitors prices and pay less attention to their own costs or the demand of the product.
Above-market pricing
Use the prices of competitors as a point of departure and then determines a higher price.

16. Competition-based pricing Cont…
Below-market pricing
Use the prices of competitors as a point of departure and then determines a lower price.
Customary pricing
For products where traditional, standardised channel of distribution or other competitive forces dictate the price.
Maintaining the retail price of a product at the same level over long periods of time.
Loss-leader pricing
Companies use this when they conducting promotions.
Sell products at a lower price than it costs for a short period of time.

17. Competition-based pricing Cont…
Sealed-bid pricing
Used when organisations bid for jobs or when tenders are issued by government.
A marketing organisation basing prices on how it thinks competitors will price rather than on its own costs and demand.

18. Summary It is very crucial to set the right prices.
There are various pricing methods; namely cost-based pricing, demand-based pricing, new-product pricing and competition based pricing.