1. Pricing Products: Pricing Considerations and Approaches
Chapter 10
Pricing Products:
Pricing Considerations and Approaches

2. Price
Price is the sum of all the values that consumers exchange for the benefits of having or using the product or service.
Price has been the major factor affecting buyer choice; nonprice factors have become increasingly important in buyer-choice behavior.
Price is the only element in the marketing mix that produces revenues; all others represent costs.

3. Factors Affecting Price Decisions ( Fig. 10.1)
External Factors
Nature of the market
and demand
Competition
Other environmental
factors (economy,
resellers, government)
Internal Factors
Marketing Objectives
Marketing Mix Strategy
Costs
Organizational
considerations
Pricing
Decisions

4. Internal Factors Affecting Pricing Decisions: Marketing Objectives
Survival
Low Prices to Cover Variable Costs and
Some Fixed Costs to Stay in Business.
Current Profit Maximization Choose the Price that Produces the Maximum Current Profit, Etc.
Marketing
Objectives
Market Share Leadership
Low as Possible Prices to Become
the Market Share Leader.
Product Quality Leadership
High Prices to Cover Higher
Performance Quality and R & D.

5. Internal Factors Affecting Pricing Decisions: Marketing Objectives
Other specific objectives include:
Set prices low to prevent competition from entering the market,
Prices might be reduced temporarily to create excitement or draw more customers.
Nonprofit and public organization may have other pricing objectives such as:
University aims for partial cost recovery,
Hospital may aim for full cost recovery,
Theater may price to fill maximum number of seats.

6. Internal Factors Affecting Pricing Decisions: Marketing Mix
Customers Seek Products that Give Them the Best
Value in Terms of Benefits Received for the Price Paid.
Product Design
Nonprice
Positions
Price
Distribution
Promotion

7. Types of Cost Factors that Affect Pricing Decisions
Fixed Costs
(Overhead)
Costs that don’t
vary with sales or
production levels.
Executive Salaries, Rent
Variable Costs
Costs that do vary
directly with the
level of production.
Raw materials
Total Costs
Sum of the Fixed and Variable Costs for a Given
Level of Production

8. Costs Considerations
Cost Per Unit at Different Levels of Production Per Period 1 2
Cost per unit 3
SRAC 4
LRAC
1,000
2,000
3,000
4,000
Quantity Produced per Day

9. Types of Cost Factors that Affect Pricing Decisions
As a firm gains experience in production, it learns how to do it better.
The experience curve (or the learning curve) indicates that average cost drops with accumulated production experience.
Strategy: company should price products low; sales increases; costs continue to decrease; and then lower prices further.
Risks are present with this strategy.

10. External Factors Affecting Pricing Decisions
Market and
Demand
External Factors Affecting Pricing Decisions
Competitors’ Costs,
Prices, and Offers
Other External Factors
Economic Conditions
Reseller Needs
Government Actions
Social Concerns

11. Market and Demand Factors Affecting Pricing Decisions
Pricing in Different Types of Markets
Pure Monopoly
Single Seller
Pure Competition
Many Buyers and Sellers
Who Have Little
Effect on the Price
Oligopolistic
Competition
Few Sellers Who Are
Sensitive to Each Other’s
Pricing/ Marketing
Strategies
Monopolistic
Competition
Many Buyers and Sellers
Who Trade Over a
Range of Prices

12. Demand Curves and Price Elasticity of Demand
A Demand Curve is a Curve that Shows the Number of Units the Market Will Buy in a Given Time Period at Different Prices that Might be Charged.
Price Elasticity Refers to How Responsive Demand Will be to a Change in Price.
Price Elasticity of Demand = % Change in Quantity Demanded
% Change in Price

13. Price Elasticity of Demand
A. Inelastic Demand -
Demand Hardly Changes With
a Small Change in Price.
Price P2 P1 Q2 Q1
Quantity Demanded per Period
B. Elastic Demand -
Demand Changes Greatly With
a Small Change in Price.
Price
P’2
P’1 Q2 Q1
Quantity Demanded per Period

14. Major Considerations in Setting Price (Fig. 10.5)

15. Cost-Based Pricing
Certainty About Costs
Factors
Situational
Unexpected
Attitudes of
Others
Ethical
Ignores Current Demand & Competition
Cost-Plus Pricing is an Approach That Adds a Standard Markup to the Cost of the Product.
Simplest Pricing Method
Pricing is Simplified
Price Competition Is Minimized
Much Fairer to Buyers & Sellers

16. Breakeven Analysis or Target Profit Pricing
Tries to Determine the Price at Which a Firm Will Break Even or Make a Certain Target Profit. 2 4 6 8 10 12
200
400
600
800
1,000
Total Revenue
Target Profit
($2 million)
Cost in Dollars (millions)
Total Cost
Fixed Cost
Sales Volume in Units (thousands)

17. Cost-Based Versus Value-Based Pricing (Fig. 10.7)
Product
Cost
Price
Value
Customers
Customer
Cost-Based Pricing
Value-Based Pricing

18. Discussion Connections
Pick two competing brands from a familiar product category (watches, perfume, etc) - one low priced and the other high priced.
Which, if either, offers the greatest value?
Does “value” mean the same thing as “low price”? How do these concepts differ?

19. Competition-Based Pricing
Setting Prices
Competition-Based Pricing
Going-Rate
Company Sets Prices Based on What
Competitors Are Charging.
Sealed-Bid
Company Sets Prices Based on
What They Think Competitors
Will Charge. ? ?

20. Review of Concept Connections
Identify and define the internal factors affecting a firm's pricing decisions.
Identify and define the external factors affecting pricing.
Contrast the three general approaches to setting prices.

21. Pricing Products: Pricing Considerations and Strategies
Chapter 11
Pricing Products:
Pricing Considerations and Strategies

22. New Product Pricing Strategies
Market Skimming
Setting a High Price for a New Product to “Skim” Maximum Revenues from the Target Market.
Results in Fewer, But More Profitable Sales.
Use Under These Conditions:
Product’s Quality and Image Must Support Its Higher Price.
Costs Can’t be so High that They Cancel the Advantage of Charging More.
Competitors Shouldn’t be Able to Enter Market Easily and Undercut the High Price.

23. New Product Pricing Strategies
Use Under These Conditions:
Market Must be Highly Price-Sensitive so a Low Price Produces More Market Growth.
Production/ Distribution Costs Must Fall as Sales Volume Increases.
Must Keep Out Competition & Maintain Its Low Price Position or Benefits May Only be Temporary.
Market Penetration
Setting a Low Price for a New Product in Order to “Penetrate” the Market Quickly and Deeply.
Attract a Large Number of Buyers and Win a Larger Market Share.

24. Product Mix-Pricing Strategies: Product Line Pricing
Involves setting price steps between various products in a product line based on:
Cost differences between products,
Customer evaluations of different features, and
competitors’ prices.

25. Product Mix- Pricing Strategies
Optional-Product
Pricing optional or accessory products sold with the main product. i.e camera bag.
Captive-Product
Pricing products that must be used with the main product. i.e. film.

26. Product Mix- Pricing Strategies
By-Product
Pricing low-value by-products to get rid of them and make the main product’s price more competitive.
Product-Bundling
Combining several products and offering the bundle at a reduced price.
i.e. theater season tickets.

27. Discount and Allowance Pricing

28. Segmented Pricing

29. Psychological Pricing
Considers the psychology of prices and not simply the economics.
Customers use price less when they can judge quality of a product.
Price becomes an important quality signal when customers can’t judge quality; price is used to say something about a product.
Value $22.00
Sale $14.99

30. Promotional Pricing Loss Leaders Special-Event Pricing
Cash Rebates
Low-Interest Financing
Longer Warranties
Free Merchandise
Discounts
Loss Leaders
Temporarily Pricing Products Below List Price to Increase Short-Term Sales Through:

31. Discussion Connections
Many other industries have created “deal-prone” consumers through the heavy use of promotional pricing - fast foods, airlines, tires, furniture, and others.
Pick a company in one of these industries and suggest ways that it might deal with this problem.
How does the concept of value relate to promotional pricing? Does promotional pricing add to or detract from customer value?

32. Other Price Adjustment Strategies
Geographical Pricing
Adjusting Prices to Account
for the Geographical Location
of Customers.
i.e. FOB-Origin, Uniform-
Delivery, Zone Pricing, Basing
Point, & Freight-Absorption.
Adjusting Prices for
International Markets.
Price Depends on Costs,
Consumers, Economic
Conditions, Competitive
Situations & Other Factors.
International Pricing

33. Initiating Price Changes
Price Increases
Price Cuts
Why?
Excess Capacity
Falling Market Share
Dominate Market Through Lower Costs
Why?
Cost Inflation
Overdemand: Company Can’t Supply All Customer’s Needs

34. Reactions to Price Changes
Being Replaced by Newer Models
Price Cuts Are Seen by Buyers As:
Number of Firms is Small
Product is Uniform
Buyers are Well Informed
Competitors Reactions When:
Current Models Are Not Selling Well
Company is in Financial Trouble
Quality Has Been Reduced
Price Comes Down Further

35. Assessing/Responding to Competitor’s Price Changes (Fig. 11.1)

36. Public Policy Issues in Pricing (Fig. 11.2)
Manufacturer A
Price-fixing
Predatory pricing
Manufacturer B
Retailer 1
Price-fixing
Predatory Pricing
Retailer 2
Retail price
maintenance.
Discriminatory
Pricing
Deceptive
Pricing
Consumers
Deceptive
Pricing

37. Public Policy Issues in Pricing
Pricing Within Channel Levels
Price
Fixing
Predatory
Pricing
Both Are Prohibited by Law

38. Pricing Across Channel Levels
Price
Discrimination
Ensure Sellers
Offers the
Same Price
Terms to a
Given Level
Of Trade
Resale Price
Maintenance
Manufacturer
Can’t Require
Dealers to
Charge a
Specified Retail
Price for Its
Product
Deceptive
Pricing
Occurs When a
Seller States
Prices or Prices
Savings that
Available
To Consumers

39. Review of Concept Connections
Describe the major strategies for pricing imitative and new products.
Explain how companies find a set of prices that maximizes the profits from the total product mix.
Discuss how companies adjust their prices to take into account different types of customers and situations.
Discuss the key issues related to initiating and responding to price changes.