Ch 10 -0 Copyright © 2011 Pearson Education
Principles of Marketing,
Arab World Edition
Philip Kotler, Gary Armstrong, Anwar Habib, Ahmed
Tolba
Presentation prepared by Annelie Moukaddem Baalbaki
CHAPTER TEN
Pricing
Lecturer: Insert your name here
Ch 10 -1 Copyright © 2011 Pearson Education
Chapter Learning Outcomes
Topic Outline
10.1 What Is a Price?
10.2 Customer Perceptions of Value
10.3 Company and Product Costs
10.4 Other Internal and External Considerations Affecting
Price Decisions
10.5 New Product Pricing strategies
10.6 Product Mix Pricing Strategies
10.7 Price-Adjustment Strategies
10.8 Price Changes
Ch 10 -2 Copyright © 2011 Pearson Education
What Is a Price?
Price
• Price is the amount of money charged for a product or
service. It is the sum of all the values that consumers give
up in order to gain the benefits of having or using a
product or service.
• Price is the only element in the marketing mix that
produces revenue; all other elements represent costs.
Ch 10 -3 Copyright © 2011 Pearson Education
Factors to Consider When Setting Prices
Ch 10 -4 Copyright © 2011 Pearson Education
Customer Perceptions of Value
Customer oriented prices involves understanding how much
value consumers place on the benefits they receive from the
product and setting a price that captures that value.
Ch 10 -5 Copyright © 2011 Pearson Education
Customer Perceptions of Value
Value –Based Pricing
Value-based pricing uses the buyers’ perceptions of value,
not the sellers cost, as the key to pricing. Price is considered
before the marketing program is set.
• Value-based pricing is customer driven
- Good-Value Pricing
- Value-Added Pricing
• Cost-based pricing is product driven
Ch 10 -6 Copyright © 2011 Pearson Education
Customer Perceptions of Value
Ch 10 -7 Copyright © 2011 Pearson Education
Customer Perceptions of Value
Value-Based Pricing
Good-value pricing offers the right combination of quality
and good service to fair price.
Existing brands are being redesigned to offer more quality for
a given price or the same quality for less price.
Ch 10 -8 Copyright © 2011 Pearson Education
Customer Perceptions of Value
Value-Based Pricing: Good-Value Pricing
Everyday low pricing (EDLP) involves charging a constant
everyday low price with few or no temporary price discounts.
High-low pricing involves charging higher prices on an
everyday basis but running frequent promotions to lower
prices temporarily on selected items.
Ch 10 -9 Copyright © 2011 Pearson Education
Customer Perceptions of Value
Value-Based Pricing: Value-Added Pricing
Value-added pricing attaches value-added features and
services to differentiate offers, support higher prices, and build
pricing power.
Pricing power is the ability to escape price competition and to
justify higher prices and margins without losing market share.
Ch 10 - Copyright © 2011 Pearson Education
10
Company and Product Costs
Cost-Based Pricing
Cost-based pricing involves setting prices based on the costs
for producing, distributing, and selling the product plus a fair
rate of return for its effort and risk.
Cost-based pricing adds a standard markup to the cost of
the product.
Ch 10 -11 Copyright © 2011 Pearson Education
Company and Product Costs
Types of costs
Variable
Fixed costs Total costs
costs
Ch 10 -12 Copyright © 2011 Pearson Education
Company and Product Costs
Types of costs
Fixed costs are the costs that do not vary with production or
sales level.
• Rent
• Heat
• Interest
• Executive salaries
Ch 10 -13 Copyright © 2011 Pearson Education
Company and Product Costs
Types of Costs
Variable costs are the costs that vary with the level of
production.
• Packaging
• Raw materials
Total costs are the sum of the fixed and variable costs for any
given level of production.
Average cost is the cost associated with a given level
of output.
Ch 10 -14 Copyright © 2011 Pearson Education
Company and Product Costs
Ch 10 -15 Copyright © 2011 Pearson Education
Company and Product Costs
Costs as a Function of Production Experience
Experience or learning curve is when average cost falls as
production increases because fixed costs are spread over
more units.
Ch 10 -16 Copyright © 2011 Pearson Education
Company and Product Costs
Costs as a Function of Production Experience
Company and Product Costs
Cost-Plus Pricing
Cost-plus pricing adds a standard markup to the cost of the
product Benefits.
• Sellers are certain about costs
• Prices are similar in industry and price competition is
minimized
• Consumers feel it is fair
Disadvantages
• Ignores demand and competitor prices
Ch 10 -18 Copyright © 2011 Pearson Education
Company and Product Costs
Break-Even Analysis and Target Profit Pricing
Break-even pricing is the price at which total costs are equal
to total revenue and there is no profit.
Target profit pricing is the price at which the firm will break
even or make the profit it’s seeking.
Ch 10 -19 Copyright © 2011 Pearson Education
Company and Product Costs
Ch 10 -20 Copyright © 2011 Pearson Education
Other Internal and External Considerations
Affecting Price Decisions
Considerations
Customer perceptions of value set the upper limit for prices,
and costs set the lower limit.
Companies must consider internal and external factors when
setting prices.
Ch 10 -21 Copyright © 2011 Pearson Education
Other Internal and External Considerations
Affecting Price Decisions
Overall Marketing Strategy, Objectives, and Mix
Target costing starts with an ideal selling price based on
consumer value considerations and then targets costs that
will ensure that the price is met.
Ch 10 -22 Copyright © 2011 Pearson Education
Other Internal and External Considerations
Affecting Price Decisions
Organizational considerations
Organizational considerations include:
• Who should set the price
• Who can influence the prices
Ch 10 -23 Copyright © 2011 Pearson Education
Other Internal and External Considerations
Affecting Price Decisions
The Market and Demand
Before setting prices, the marketer must understand the
relationship between price and demand for its products.
• Pricing in Different Types of Markets
• Analyzing the Price-Demand Relationship
• Price Elasticity of Demand
Ch 10 -24 Copyright © 2011 Pearson Education
Other Internal and External Considerations
Affecting Price Decisions
Pricing in Different Types of Markets
Pure competition
Monopolistic competition
Oligopolistic competition
Pure monopoly
Ch 10 -25 Copyright © 2011 Pearson Education
Other Internal and External Considerations
Affecting Price Decisions
Analyzing the Price-Demand Relationship
The demand curve shows the number of units the market will
buy in a given period at different prices.
• Normally, demand and price are inversely related
• Higher price = lower demand
• For prestige (luxury) goods, higher price can equal higher
demand when consumers perceive higher prices as higher
quality
Ch 10 -26 Copyright © 2011 Pearson Education
Other Internal and External Considerations
Affecting Price Decisions
Price Elasticity of Demand
Ch 10 -27 Copyright © 2011 Pearson Education
Other Internal and External Considerations
Affecting Price Decisions
Price Elasticity of Demand
Price elasticity of demand illustrates the response of
demand to a change in price.
Inelastic demand occurs when demand hardly changes when
there is a small change in price.
Elastic demand occurs when demand changes greatly for a
small change in price.
Price elasticity of demand = % change in quantity demand
% change in price
Ch 10 -28 Copyright © 2011 Pearson Education
Other Internal and External Considerations
Competitor's Strategies
Competitors’ Strategies and Prices
• Comparison of offering in terms of customer value
• Strength of competitors
• Competition pricing strategies
• Customer price sensitivity
Ch 10 -29 Copyright © 2011 Pearson Education
Other Internal and External Consideration
Affecting Price Decisions
Other External Factors
Economic conditions
Reseller’s response to price
Government
Social concerns
Ch 10 -30 Copyright © 2011 Pearson Education
New-Product Pricing Strategies
1. Market Skimming Pricing
2. Market Penetration Pricing
Ch 10 -31 Copyright © 2011 Pearson Education
New-Product Pricing Strategies
Market-skimming pricing is a strategy with high initial
prices to “skim” revenue layers from the market.
• Product quality and image must support the price
• Buyers must want the product at the price
• Costs of producing the product in small volume should not
cancel the advantage of higher prices
• Competitors should not be able to enter the market easily
Ch 10 -32 Copyright © 2011 Pearson Education
New-Product Pricing Strategies
Market-penetration pricing sets a low initial price in order to
penetrate the market quickly and deeply to attract a large
number of buyers quickly to gain market share.
• Price sensitive market
• Inverse relationship of production and distribution cost to
sales growth
• Low prices must keep competition out of the market
Ch 10 -33 Copyright © 2011 Pearson Education
Product Mix Pricing Strategies
Optional- Captive-
Product line
product product
pricing
pricing pricing
By-product Product
pricing bundle pricing
Ch 10 -34 Copyright © 2011 Pearson Education
Product Mix Pricing Strategies
Product line pricing takes into account the cost differences
between products in the line, customer evaluation of their
features, and competitors’ prices.
Optional-product pricing takes into account optional or
accessory products along with the main product.
Ch 10 -35 Copyright © 2011 Pearson Education
Product Mix Pricing Strategies
Captive-product pricing involves products that must be used
along with the main product.
For Services, it is called Two-part pricing.
• Fixed fee
• Variable usage fee
Ch 10 -36 Copyright © 2011 Pearson Education
Price Mix Pricing Strategies
By-product pricing refers to products with little or no value
produced as a result of the main product. Producers will seek
little or no profit other than the cost to cover storage and
delivery.
Product bundle pricing combines several products at a
reduced price.
Ch 10 -37 Copyright © 2011 Pearson Education
Price-Adjustment Strategies
Discount and
Segmented Psychological
allowance
pricing pricing
pricing
Promotional Geographic Dynamic
pricing pricing pricing
International
pricing
Ch 10 -38 Copyright © 2011 Pearson Education
Price-Adjustment Strategies
Discount and allowance pricing reduces prices to reward
customer responses such as paying early or promoting the
product.
• Discounts: cash, quantity, functional, seasonal
Ch 10 -39 Copyright © 2011 Pearson Education
Price-Adjustment Strategies
Segmented pricing is used when a company sells a product
at two or more prices even though the difference is not based
on cost.
• Customer
• Product form
• Location
Ch 10 -40 Copyright © 2011 Pearson Education
Price-Adjustment Strategies
For Segmented Pricing to be effective:
• Market must be segmentable
• Segments must show different degrees of demand
• Watching the market cannot exceed the extra revenue
obtained from the price difference
• Must be legal
Ch 10 -41 Copyright © 2011 Pearson Education
Price-Adjustment Strategies
Psychological pricing occurs when sellers consider the
psychology of prices and not simply the economics.
Reference prices are prices that buyers carry in their minds
and refer to when looking at a given product.
• Noting current prices
• Remembering past prices
• Assessing the buying situations
Ch 10 -42 Copyright © 2011 Pearson Education
Price-Adjustment Strategies
Promotional pricing is when prices are temporarily priced
below list price or cost to increase demand.
• Loss leaders
• Special event pricing
• Cash rebates
• Low-interest financing
• Longer warrantees
• Free maintenance
Ch 10 -43 Copyright © 2011 Pearson Education
Price-Adjustment Strategies
Risks of promotional pricing
• If it is used too frequently and copied by competitors, it can
create “deal-prone” customers who will wait for promotions
and avoid buying at regular price
• Creates price wars
Ch 10 -44 Copyright © 2011 Pearson Education
Price-Adjustment Strategies
Geographic Pricing
Geographical pricing is used for customers in different parts
of the country or the world.
• FOB-origin pricing
• Uniformed-delivered pricing
• Zone pricing
• Freight-absorption pricing
Ch 10 -45 Copyright © 2011 Pearson Education
Price-Adjustment Strategies
Geographic Pricing
FOB-origin (free on board) pricing means that the goods
are delivered to the carrier and the title and responsibility
passes to the customer.
Uniform-delivered pricing means the company charges the
same price plus freight to all customers, regardless of
location.
Ch 10 -46 Copyright © 2011 Pearson Education
Price-Adjustment Strategies
Geographic Pricing
Zone pricing means that the company sets up two or more
zones where customers within a given zone pay a single total
price.
Basing-point pricing means the seller designates some city
as a basing point and charges all customers the freight cost
from that city to the customer.
Freight-absorption pricing means the seller absorbs all or
part of the actual freight charge as an incentive to attract
business in competitive markets.
Ch 10 -47 Copyright © 2011 Pearson Education
Price-Adjustment Strategies
Dynamic Pricing
Dynamic pricing is when prices are adjusted continually to
meet the characteristics and needs of the individual customer
and situations.
Ch 10 -48 Copyright © 2011 Pearson Education
Price-Adjustment Strategies
Pricing Strategies
International pricing is when prices are set in a specific
country based on country-specific factors.
• Economic conditions
• Competitive conditions
• Laws and regulations
• Infrastructure
• Company marketing objective
Ch 10 -49 Copyright © 2011 Pearson Education
Price Changes
Initiating Pricing Changes
Price cuts occur due to:
• Excess capacity
• Increased market share
Price increase from:
• Cost inflation
• Increased demand
• Lack of supply
Ch 10 -50 Copyright © 2011 Pearson Education
Price Changes
Buyer Reactions to Pricing Changes
• Product is “hot”
Price increases
• Company greed
• New models will be available
Price cuts • Models are not selling well
• Quality issues
Ch 10 -51 Copyright © 2011 Pearson Education
Price Changes
Competitor Reactions to Pricing Changes
Competitors usually react when:
• The number of firms involved is small
• The product is uniform
• The buyers are well informed about products and prices
Ch 10 -52 Copyright © 2011 Pearson Education
Price Changes
Responding to Price Changes
Questions
• Why did the competitor change the price?
• Is the price cut permanent or temporary?
• What is the effect on market share and profits?
• Will competitors respond?
Ch 10 -53 Copyright © 2011 Pearson Education
Price Changes
Responding to Price Changes
Solutions
• Reduce price to match competition
• Maintain price but raise the perceived value through
communications
• Improve quality and increase price
• Launch a lower-price “fighting” brand
Ch 10 -54 Copyright © 2011 Pearson Education
Price Changes
Ch 10 -55 Copyright © 2011 Pearson Education
This work is protected by local and international copyright laws and is provided solely for
the use of instructors in teaching their courses and assessing student learning.
Dissemination or sale of any part of this work (including on the World Wide Web) will
destroy the integrity of the work and is not permitted. The work and materials from this site
should never be made available to students except by instructors using the accompanying
text in their classes. All recipients of this work are expected to abide by these restrictions
and to honor the intended pedagogical purposes and the needs of other instructors who rely
on these materials.
Ch 10 -56 Copyright © 2011 Pearson Education
