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

2. Road Map: Previewing the Concepts
Identify and explain the external and internal factors affecting a firm's pricing decisions.
Contrast the three general approaches to setting prices.
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.

3. Factors Affecting Price Decisions (Fig. 10-1)

4. Internal Factors Affecting Pricing Decisions: Marketing Objectives
Survival
Low Prices Hoping to Increase Demand.
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. Four Seasons Hotel
Four Seasons uses the product quality leadership strategy.
It starts with very high quality service, then charges a price to match.

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

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 Any Given
Level of Production

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

9. 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

10. Demand Curve (Fig. 10-2)

11. 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

12. Major Considerations in Setting Price (Fig. 10-3)

13. 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
Fairer to Buyers & Sellers

14. Breakeven Analysis or Target Profit Pricing (Fig. 10-4)
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)

15. Cost-Based Versus Value-Based Pricing (Fig. 10-5)

16. Discussion Question
After examining Figure 10-5, compare and contrast cost-based pricing and value-based pricing.
What are situations that favor each pricing method?
Companies set prices by selecting a general pricing approach that includes one or more of the following three sets of factors. Notice that this question focuses on the first two of these factors. Each is summarized below for your convenience.
The simplest pricing method is cost-plus pricing--adding a standard markup to the cost of the product. This is common in construction, among professionals (such as doctors and lawyers), or companies dealing with the government (aerospace companies). Does using standard markups to set prices make sense? Generally, no. Any pricing method that ignores demand and competitor prices is not likely to lead to the best price. Still, however, this method remains popular because sellers are more certain about costs than about demand, prices within an industry seem to be standard (as in the medical field), and many feel that cost-plus pricing is fairer to both buyers and sellers. A variation of the above cost-oriented approach is break-even pricing (or a variation called target profit pricing) where the firm tries to determine the price at which it will break even or make a target profit it is seeking. See Figure 10-5 for additional details.
An increasing number of companies are basing their prices on the product’s perceived value. Value-based pricing uses buyers’ perceptions of value, not the seller’s cost, as the key to pricing. Value-based pricing means that the marketer cannot design a product and marketing program and then set price. Price is considered along with the other marketing-mix variables before the marketing program is set. A company using value-based pricing must find out what value buyers assign to different competitive offers. However, measuring perceived value can be difficult. For more information on value pricing see Figure 10-5 and Marketing at Work 10-2.

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

18. New-Product Pricing Strategies
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.
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.
I.e. Intel

19. 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.
I.e. Dell

20. Interactive Student Assignments
Form students into groups of three to five. Which pricing strategy--market skimming or market penetration--does each of the following companies use?
McDonald’s,
Sony (television and other home electronics),
Bic Corporation (pens, lighters, shavers, and related products), and
IBM (personal computers).
(a) McDonald’s generally introduces a new product with promotional pricing in order to induce trial. Eventually McDonald’s ends the promotion and sells the product at its higher regular price.
(b) Sony uses a skimming strategy in the sense that it tries to attract the cream of the TV-buying market to its high-priced, high-quality products. It tends to maintain its high prices, rather than follow a strategy of lowering its prices over time to skim successive market segments.
(c) BIC Corp. consistently uses penetration pricing to build markets and gain large shares. For example in its effort to find a new market to supplement its core businesses of pens and disposable razors, BIC introduced a line of fragrances in Europe and the U.S.-- at only $4 for a quarter-ounce spray bottle.
(d) IBM is normally a high-priced seller in the information-processing industry, and its price cuts generally appear to be in response to competitors’ actions or unexpectedly low sales rather than part of a planned market-expansion strategy.

21. 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.

22. 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.

23. 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.
I.e. sawdust, Zoo Doo
Product-Bundling
Combining several products and offering the bundle at a reduced price.
I.e. theater season tickets.

24. Discount and Allowance Pricing

25. Segmented Pricing

26. 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.
Retail $100.00
Cost $3.00

27. Promotional Pricing Loss Leaders Special-Event Pricing
Cash Rebates
Low-Interest Financing
Longer Warranties
Free Maintenance
Discounts
Loss Leaders
Temporarily Pricing Products Below List Price Through:

28. Other Price Adjustment Strategies
Geographical Pricing
Pricing products for customers
located in different parts of
the country or world.
i.e. FOB-Origin, Uniform-
Delivered, Zone, Basing-
Point, & Freight-Absorption.
Adjusting prices for customers
in different counties.
Price Depends on Costs,
Consumers, Economic
Conditions, Competitive
Situations, & Other Factors.
International Pricing

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

30. 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 Mostly React When:
Current Models Are Not Selling Well
Company is in Financial Trouble
Quality Has Been Reduced
Price May Come Down Further

31. Assessing/Responding to Competitor’s Price Changes (Fig. 10-6)

32. Public Policy Issues in Pricing (Fig. 10-7)

33. Rest Stop: Reviewing the Concepts
Identify and explain the external and internal factors affecting a firm's pricing decisions.
Contrast the three general approaches to setting prices.
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.