Price

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TOPIC OUTLINE
• What Is a Price?
• Major Pricing Strategies
• Considerations Affecting Price Decisions
• New-Product Pricing Strategies
• Product Mix Pricing Strategies
• Price Adjustment Strategies
• Price Changes

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PRICE

Price is the amount of money charged for a

product or a service or the sum of the values
that customers give up to gain the benefits of
having or using a product or service.

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PRICE

Price is the only element in the marketing

mix that produces revenue; all other
elements represent costs

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MAJOR PRICING STRATEGIES

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MAJOR PRICING STRATEGIES

•Customer Value-Based pricing

•Cost-Based Pricing

•Competition-Based Pricing

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MAJOR PRICING STRATEGIES
Customer Value-Based Pricing

Understanding how much value

consumers place on the benefits they
receive from the product and setting
a price that captures that value

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MAJOR PRICING STRATEGIES
Customer 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
- Cost-based pricing is product driven8
MAJOR PRICING STRATEGIES
Cost-Based Pricing
Setting prices based on the costs for
producing, distributing, and selling the
product plus a fair rate of return for
effort and risk.
Adds a standard markup to the cost of
the product.
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MAJOR PRICING STRATEGIES
Cost-Based Pricing

Types of costs

Fixed Variable Total

costs costs costs
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MAJOR PRICING STRATEGIES
Cost-Based Pricing
Fixed costs are the costs that do not
vary with production or sales level:
- Rent
- Interest
- Executive salaries
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MAJOR PRICING STRATEGIES
Cost-Based Pricing
Variable costs are the costs that vary
with the level of production:

- Packaging
- Raw materials
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MAJOR PRICING STRATEGIES
Cost-Based Pricing

Total costs are the sum of the fixed and

variable costs for any given level of
production.

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MAJOR PRICING STRATEGIES

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MAJOR PRICING STRATEGIES
Competition-Based Pricing
Setting prices based on competitors’
prices and market offerings.
Consumers will base their judgments of
a product’s value on the prices that
competitors charge for similar
products.
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CONSIDERATIONS IN SETTING PRICE
The Market and Demand
Before setting prices, the marketer
must understand the relationship
between price and demand for its
products

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CONSIDERATIONS IN SETTING PRICE
The Market and Demand
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
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CONSIDERATIONS IN SETTING PRICE
The Market and Demand

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CONSIDERATIONS IN SETTING PRICE
The Market and 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
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NEW PRODUCT PRICING STRATEGIES

•Market Skimming Pricing

•Market Penetration Pricing

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NEW PRODUCT PRICING

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
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NEW PRODUCT PRICING

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
• Low prices must keep competition out of the
market

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PRODUCT MIX PRICING STRATEGIES

Optional- Captive-
Product line
product product
pricing
pricing pricing

Product
By-product
bundle
pricing
pricing
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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
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PRODUCT MIX PRICING STRATEGIES

Captive-product pricing involves products that

must be used along with the main product

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. 25
PRODUCT MIX PRICING STRATEGIES

Product bundle pricing combines

products at a reduced price

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PRICE ADJUSTMENT STRATEGIES
Discount and
Segmented
allowance
pricing
pricing

Psychological Promotional
pricing pricing

Geographic Dynamic International

pricing pricing pricing
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PRICE ADJUSTMENT STRATEGIES

Discount and allowance pricing reduces prices

to reward customer responses such as paying
early or promoting the product
• Discounts
• Allowances

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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

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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

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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
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PRICE ADJUSTMENT STRATEGIES

Risks of promotional pricing

•Used too frequently, and copies by
competitors can create “deal-prone”
customers who will wait for promotions and
avoid buying at regular price
•Creates price wars
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PRICE ADJUSTMENT STRATEGIES

Geographical pricing is used for

customers in different parts of the
country or the world

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PRICE ADJUSTMENT STRATEGIES

Dynamic pricing is when prices are

adjusted continually to meet the
characteristics and needs of the individual
customer and situations

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PRICE ADJUSTMENT 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
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PRICE ADJUSTMENT STRATEGIES

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PRICE CHANGES
Buyer Reactions to Pricing Changes

Price increases Price cuts

• Product is “hot” • New models will
• Company is be available
greedy • Models are not
selling well
• Quality issues
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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?
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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
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PRICE CHANGES
Responding to price changes

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