Chapter 6
Pricing Decisions
Price
o The amount of money charged for a product,
or the sum of the values that consumers
exchange for the benefits of having/using the
product or service.
o Characteristics
• Only element to produce revenues
• Most flexible element
• Can be changed quickly
• Number one problem that challenges marketers
Factors Affecting Pricing
Decision
Factors Affecting Pricing Decision
➢Internal factors and External company factors
affect a company’s pricing decisions.
Internal factors
A.Marketing objective:
The firm’s objective determines the pricing
strategy.
o Examples of common objectives are survival, current profit
maximization, market share leadership, and product quality
leadership.
1. Survival
✓ Companies troubled by too much capacity, heavy
competition, or changing consumer wants set
survival as their objective.
Survival is a short-run objective; in the long run,
the firm must learn how to add value or face
extinction.
2. Current profit maximization
✓ They estimate the demand and costs associated with alternative
prices and choose the price that produces maximum current
profit, cash flows and rate of return on investment.
3. market-share leadership/market penetration
price
✓ They believe a higher sales volume will lead to lower unit costs
and higher long-run profit.
✓ They set the lowest price, assuming the market is price sensitive.
4. Product Quality leadership
✓ By producing quality products, then the firm leads
the market by charging high price.
B. Marketing mix strategy
✓ Price must be coordinated with product design, distribution and promotion decisions to
form a consistent and effective marketing program.
o Decisions made for other marketing-mix variables may
affect pricing decisions.
C. Cost
✓ Costs set the floor for the price a company can charge for its product.
✓ A company wants to charge a price that covers its costs for producing, distributing, and
promoting the product.
D. Organizational Considerations
o who within the organization, set prices.
o In small companies, it is decided by top management, rather than
by the marketing or sales departments.
o In large companies, pricing is typically handled by divisional or
product line managers
External Factors
✓External factors affecting pricing decisions
include:
1. the nature of market and demand
2. competition
3. other environmental elements (economy
govt
General Pricing Approaches
Product costs- set a floor for the price;
consumers’ perceptions of the product’s value set the
ceiling/upper limit.
✓There three pricing approaches:
1. Cost based approach
2. Customer value based approach
3. Competitor/ going pricing approach
General Pricing Approaches
1. Cost-Based Pricing:
a) Cost-Plus Pricing
• Adding a standard markup to cost
• Ignores demand and competition
• Is the easiest and most popular pricing method
• is often product driven.
o The company designs what it considers to be a good product,
adds up the costs of making the product, and sets a price that
covers costs plus a target profit.
Example
Variable costs: br. 20 Fixed costs: br. 500,000
Expected sales: 100,000 units Desired Sales Markup: 20%
Variable Cost + Fixed Costs/Unit Sales = Unit Cost
br. 20 + br. 500,000/100,000 = br. 25 per unit
Unit Cost/(1 – Desired Return on Sales) = Markup Price
br. 25 / (1 - .20) = br. 31.25
General Pricing Approaches (contd.)
b) Break-Even Analysis & Target Profit Pricing
o Break-even charts show total cost and total revenues at different
levels of unit volume.
o The intersection of the total revenue and total cost curves is the
break-even point.
o Companies wishing to make a profit must exceed the break-even unit
volume.
Revenues
1000 Target Profit Tk. 200,000
Thousands Taka
800 Total Costs
Break-even
600 point
400
Fixed Costs
200
0 10 20 30 40 Quantity To Be Sold To
Sales Volume in Thousands of Units Meet Target Profit
General Pricing Approaches (contd.)
2. Value-Based Pricing
o Uses buyers’ perceptions of value rather than seller’s
costs to set price.
✓ Is setting price by analyzing consumer needs and
value perceptions to match with consumers
perceived value.
✓ Primarily considered the perceived value of
customers to set price
✓ Companies use the non-price variables (heavy
advertising and promotion) to enhance the value of a
product in the minds of the buyers.
Summary of cost based and customer value based
pricing process
General Pricing Approaches (contd.)
3. Competition-Based Pricing
• Also called going-rate pricing
• Charging prices based on competitors price by
paying less attention to its own costs and demand.
• May price at the same level, above, or below the
competition
pricing strategies
1. New-Product Pricing Strategies
2. Product Mix Pricing Strategies
1. New-Product Pricing Strategies
a. market penetration pricing
✓The company is charging lowest prices in order
to attract large number of buyers.
✓Believe that a higher sales volume will lead to
lower unit costs and higher long-run profit
Conditions that makes this strategy effective
• Many segments of the market are price sensitive.
• a low initial price discourages competitors from
entering the market, and
• Unit production and marketing costs fall
dramatically as production volume increase.
b. market skimming
✓Charging high prices for technologically new
products to skim the market.
Conditions that makes this strategy effective
✓ A sufficient number of buyers have a high current
demand
✓ The unit costs of producing a small volume are not
so high
✓ The high initial price does not attract more
competitors to the market
✓ The high price communicates the image of a
superior product
Product-Mix Pricing Strategies
o Product line pricing
o Optional product pricing
o Captive product pricing
o By-product pricing
o Product bundle pricing
2. Product mix pricing strategy
A. Product Line Pricing-
✓ Setting price for products in the product line of
various products based on the difference between
cost of difference product, competitors price and
customer evaluation of different features
✓ Example, Samsung TV use product line pricing for
different models of TV
(b) Optional - product pricing
✓ A pricing strategy for optional or accessories
products along with the main product.
✓ Different options example, Refrigerator with special
ice maker.
C. Captive product pricing
✓Setting prices for products that must be
used along with the main product
✓Example, Gun and Bullets-
✓Camera with film
D. By- product pricing
✓ Extra products that manufactured with the
normal product and fix other price for extra
products
✓ Producers will seek little or no profit other than
the cost to cover storage and delivery.
✓ Example, Chemicals, Petroleum, Wood items
E) Product bundle pricing
✓ Setting a price for several combination of products
and offering the bundle at a reduced price
✓ combines several products at a reduced price
✓ Bundle pricing is less than the individual item
pricing.
1 bottle: $2.70 Bundled 2 bottles: $4.90
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