1. Pricing Strategy and Management
CHAPTER 8

2. AFTER READING THIS CHAPTER YOU SHOULD BE ABLE TO:
Identify the factors that determine price.
Describe how price is an indicator of demand.
Explain the concept of price elasticity.
Estimate the profit impact from changes in price.

3. AFTER READING THIS CHAPTER YOU SHOULD BE ABLE TO:
Describe the pricing strategies available to a marketing manager.
Discuss how pricing is affected by competitive interactions.

4. PRICING DECISIONS
“Pricing is an art, a game played for marketing strategists, it is the moment of truth. All of marketing comes to focus in the pricing decision.”
Pricing decisions determine the types of customers and competitors a firm attracts
A single pricing error can effectively nullify all other marketing mix activities

5. PROFIT EQUATION
Price affects the quantity sold and hence profit because it directly affects both revenues and costs:
Profit =
Total Revenue
Total Costs –
Total Revenue
Unit Variable Costs
Unit Price
Fixed Costs +
Quantity Sold × –
Profit ( ) [ ] =
Total Costs

6. PRICING CONSIDERATIONS
CHAPTER 8: PRICING STRATEGY AND MANAGEMENT
PRICING CONSIDERATIONS

7. PRICING CONSIDERATIONS
Pricing Objectives
Be consistent with a firm’s overall marketing objectives
Objectives include:
Enhancing brand image
Providing customer value
Obtaining an adequate ROI or cash flow
Maintaining price stability in an industry or market

8. CONCEPTUAL ORIENTATION TO PRICING
Corporate Objectives
Regulatory Constraints
Competitive Factors
Initial Pricing Discretion
(Price Ceiling)
Direct Variable Costs
Demand Factors
Final Pricing Discretion
(Price Floor)
(Value to Buyers)
Source: Kent B. Monroe, Pricing: Making Profitable Decisions, 3rd ed. (Burr Ridge, IL; McGraw Hill/Irwin, 2003).

9. PRICING CONSIDERATIONS
Pricing Factors
Life-cycle stage of the offering—greater price discretion exists earlier than later in the life cycle
Profit margins of marketing channel members
The price differentials of a firm’s offerings to maintain perceived value differences among buyers

10. Price as an Indicator of Value
PRICING CONSIDERATIONS
Price as an Indicator of Value
Consumers pair price with the perceived benefits derived from an offering to determine value
Value is the ratio of perceived benefits to price:
Perceived Benefits
Value =
Price
This shows that for a given price, value increases as perceived benefits increase and vice versa

11. Value-Based versus Cost-Based Pricing

12. Price as an Indicator of Value
PRICING CONSIDERATIONS
Price as an Indicator of Value
Consumers determine value by judging the worth and desirability of an offering relative to substitutes that satisfy the same need
Comparing the costs and benefits of substitute items gives rise to a “reference value”
Pricing store brands more than 20 to 25 percent below manufacturers’ brands causes consumers to view the lower price as indicating lower quality

13. Price as an Indicator of Value
PRICING CONSIDERATIONS
Price as an Indicator of Value
For some offerings, price influences consumers’ perception of quality— and ultimately value
Price affects consumer perceptions of prestige: As the price for an item increases, the demand for it rises

14. Price Elasticity of Demand (E)
PRICING CONSIDERATIONS
Price Elasticity of Demand (E)
Measures how responsive consumer demand is to changes in an offering’s price
Is the ratio of the percentage change in quantity demanded relative to a percentage change in price =
Price Elasticity of Demand E
Percentage Change in Price
Percentage Change in Quantity Demanded

15. Price Elasticity of Demand (E)
PRICING CONSIDERATIONS
Price Elasticity of Demand (E)
Elastic Demand
The percentage change in quantity demanded is greater than the percentage change in price (E > 1)
A small price reduction will result in a large increase in the quantity purchased
As a result, total revenue will rise significantly

16. Price Elasticity of Demand (E)
PRICING CONSIDERATIONS
Price Elasticity of Demand (E)
Inelastic Demand
The percentage change in quantity demanded is less than the percentage change in price ( E < 1)
A small price reduction will result in a small increase in the quantity purchased
As a result, total revenue will rise very little

17. PRICING CONSIDERATIONS
Product-Line Pricing
Involves determining the:
Is the traffic builder designed to capture the attention of the hesitant or first-time buyer
Lowest-Priced Product Price
Highest-Priced Product & Price
Is typically positioned as the premium item in quality and features
Price Differentials for All Other Products in the Line
Should reflect differences in their perceived value of the products offered
Should get larger from less to more expensive items as one moves up the product line

18. Product Line Pricing

19. NEW-OFFERING PRICING STRATEGIES
Conceptual new-offering pricing strategies are:
Skimming Pricing Strategy
The price for a new offering is set very high initially and is typically reduced over time
Penetration Pricing Strategy
An offering is introduced at a low price
Intermediate Pricing Strategy
The price is set between the two extremes and is used in the vast majority of initial pricing decisions

20. Skimming Pricing Strategy
NEW-OFFERING PRICING STRATEGIES
Skimming Pricing Strategy
Is appropriate for a new offering if:
Demand is likely to be price inelastic
There are different price-market segments, of which one will pay a higher price for it
It can be protected by patent or copyright
Production or marketing costs are unknown
Production capacity is constrained
The firm wants to quickly recoup its investment or fund other projects
There is a realistic perceived value in it

21. Penetration Pricing Strategy
NEW-OFFERING PRICING STRATEGIES
Penetration Pricing Strategy
Is appropriate for a new offering if:
Demand is likely to be price elastic in the target market segments at which the product or service is aimed
It is neither unique nor protected by patent or copyright
Competitors are expected to quickly enter the market
There are no distinct and separate price-market segments
There is a possibility of large savings in production and marketing costs if a large sales volume can be generated
The firm’s major objective is to obtain a large market share

22. PRICE ADJUSTMENTS

23. PRICING STRATEGIES AND COMPETITIVE INTERACTION

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