Chapter 10

Pricing Products:
Pricing Considerations and
Approaches

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.

More Factors to Consider when

Setting Prices
Stage
of the PLC

Price

Marketing
Objectives
Survival
ST Profit Max
Market Share
Quality Leadership

Psychological
Aspects
Reference Price
Price/Perceived Quality
Price points

Decision
Maker
Industry
Conditio
Threatns
of new

entrants
Market power
Substitutes
Capacity
Government
Social Concerns

Internal Factors Affecting Pricing

Decisions: Marketing Objectives

Marketing
Objectives

Survival
Low Prices to Cover Variable Costs
and
SomeProfit
Fixed Costs
to Stay in
Current
Maximization
Business.
Choose the Price
that Produces the
Maximum Current Profit, Etc.

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.

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.

Internal Factors Affecting Pricing

Decisions: Marketing Mix
Product Design

Nonprice
Positions

Price

Promotion

Distribution

Types of Cost Factors that

Affect Pricing Decisions
Fixed Costs
(Overhead)

Variable Costs

Costs that dont

vary with sales or
production levels.

Costs that do vary

directly with the
level of production.

Executive Salaries, Rent

Raw materials

Total
Total Costs
Costs
Sum
Sum of
of the
the Fixed
Fixed and
and Variable
Variable Costs
Costs for
for aa Given
Given
Level
Level of
of Production
Production

Costs Considerations

2,000

SRAC

4,000

3,000

1,000

Cost per unit

Cost Per Unit at Different Levels of Production Per

Period

Quantity Produced per Day

LRAC

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.

External Factors Affecting

Pricing Decisions
Market and
Demand
Competitors Costs,
Prices, and Offers
Other External Factors
Competitor Costs
This ad by LCI International accuses its competitors of using
unfair practices in pricing, hiding fees incurred by rounding up.
Why is LCI focusing on
this practice?
Hidden fees, defined as
cramming by the
FCC, are the number
one source of billing
complaints among
long-distance
customers.

Economic Conditions
Reseller Needs
Government Actions
Social Concerns

Market and Demand Factors

Affecting Pricing Decisions
Pricing in Different Types of Markets
Pure
Pure Competition
Competition

Many
ManyBuyers
Buyersand
andSellers
Sellers
Who
WhoHave
HaveLittle
Little
Effect
Effecton
onthe
thePrice
Price

Monopolistic
Monopolistic
Competition
Competition

Pure
Pure Monopoly
Monopoly
Single
SingleSeller
Seller

Oligopolistic
Oligopolistic
Competition
Competition

Many
FewSellers
SellersWho
WhoAre
Are
ManyBuyers
Buyersand
andSellers
Sellers Few
Who
Sensitiveto
toEach
EachOthers
Others
WhoTrade
TradeOver
Overaa Sensitive
Pricing/
Range
Pricing/Marketing
Marketing
Rangeof
ofPrices
Prices
Strategies
Strategies

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

Price

Price Elasticity of Demand

A. Inelastic Demand Demand Hardly Changes With
a Small Change in Price.

P2
P1

Price

Q2 Q1

Quantity Demanded per Period

B. Elastic Demand Demand Changes Greatly With
a Small Change in Price.
P
2

P1
Q2

Quantity Demanded per

Q1

Cost-Based Pricing
Certainty
About Costs

Price
Competition Is
Minimized
Much Fairer to
Buyers & Sellers

Unexpected
Situational
Factors

Pricing is
Simplified

Cost-Plus
Ethical
Pricing is an
Approach
That Adds a
Standard
Markup
to the
Attitudes
Costofof the
Others
Product.

Simples
t Pricing
Method

Ignores
Current
Demand &
Competitio
n

Dollars (millions)

Break-even Chart for

Total revenue
Determining Target Price

T34

Target profit
$2 million
Total cost

12
10
8

Fixed cost

6
4
2
0
200

400

600

800

1,000

Sales volume in units (thousands)

Cost-Based Versus Value-Based

Pricing (Fig. 10.7)
Cost-Based Pricing
Product
Product

Value-Based
Pricing
Customer
Customer

Cost
Cost

Value
Value

Price
Price

Price
Price

Value
Value

Cost
Cost

Customers
Customers

Product
Product

Competition-Based Pricing
Setting Prices

Going-Rate
Company Sets Prices Based on What
Competitors Are Charging.

Sealed-Bid

Sets Prices Based on

? Company
What They Think Competitors
?
Will Charge
.

Chapter 11
Pricing Products:
Pricing Considerations and Strategies

Steps in Price Planning

1. Develop Pricing Objectives
2. Estimate Demand
3. Determine Costs
4. Evaluate the Pricing Environment
5. Choose a Pricing Strategy
6. Develop Pricing Tactics

New
New Product
Product Pricing
Pricing
Strategies
Strategies
Market
Market Skimming
Skimming

Market
Market Penetration
Penetration

> Setting a High

Price for a New
Product to
Maximize
Revenues from
the Target Market.

> Setting a Low Price

> Results in Fewer,

More Profitable
Sales.

for a New Product

in Order to Attract
a Large Number of
Buyers.

> Results in a Larger

Market Share.

New Product Pricing Strategies

Market Skimming
Skimming
Market
Setting
SettingaaHigh
HighPrice
Pricefor
foraa

NewProduct
Productto
toSkim
Skim
New
MaximumRevenues
Revenuesfrom
from
Maximum
theTarget
TargetMarket.
Market.
the
Results
Resultsin
inFewer,
Fewer,But
But

MoreProfitable
ProfitableSales.
Sales.
More

Use Under These

Conditions:
Products Quality and Image
Must Support Its Higher
Price.
Costs Cant be so High that
They Cancel the Advantage of
Charging More.
Competitors Shouldnt be
Able to Enter Market Easily
and Undercut the High Price.

New Product Pricing Strategies

Use Under These
Conditions:
Market Must be Highly PriceSensitive 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
Penetration
Market
Setting
SettingaaLow
LowPrice
Pricefor
foraa

NewProduct
Productin
inOrder
Orderto
to
New
Penetratethe
theMarket
Market
Penetrate
Quicklyand
andDeeply.
Deeply.
Quickly
Attract
AttractaaLarge
LargeNumber
Numberof
of

Buyersand
andWin
WinaaLarger
Larger
Buyers
MarketShare.
Share.
Market

Product
Product Mix
Mix Pricing
Pricing Strategies
Strategies
Product
Product Line
Line Pricing
Pricing

Setting
SettingPrice
PriceSteps
StepsBetween
BetweenProduct
ProductLine
LineItems
Items
i.e.
i.e.$299,
$299,$399
$399

Optional-Product
Optional-Product Pricing
Pricing

Product
Product
Mix
Mix
Pricing
Pricing
Strategies
Strategies

Pricing
PricingOptional
Optionalor
orAccessory
AccessoryProducts
Products
Sold
SoldWith
WithThe
TheMain
MainProduct
Product
i.e.
i.e.Car
CarOptions
Options

Captive-Product
Captive-Product Pricing
Pricing

Pricing
PricingProducts
ProductsThat
ThatMust
MustBe
BeUsed
Used
With
WithThe
TheMain
MainProduct
Product
i.e.
i.e.Razor
RazorBlades,
Blades,Film,
Film,Software
Software

By-Product
By-Product Pricing
Pricing

Pricing
PricingLow-Value
Low-ValueBy-Products
By-ProductsTo
ToGet
GetRid
Rid
of
ofThem
Them
i.e.
i.e. Lumber
LumberMills,
Mills,Zoos
Zoos

Product-Bundle
Product-Bundle Pricing
Pricing

Pricing
PricingBundles
BundlesOf
OfProducts
ProductsSold
SoldTogether
Together
i.e.
i.e.Season
SeasonTickets,
Tickets,Computer
ComputerMakers
Makers

Price-Adjustment
Price-Adjustment Strategies
Strategies
Price
Price Adjustment
Adjustment Strategies
Strategies
Discount
Discount &&Allowance
Allowance

Reducing
ReducingPrices
Pricesto
toReward
Reward
Customer
CustomerResponses
Responsessuch
suchas
as
Paying
PayingEarly
Earlyor
orPromoting
Promoting
the
theProduct.
Product.

Segmented
Segmented

Adjusting
AdjustingPrices
Pricesto
toAllow
Allow
for
forDifferences
Differencesin
inCustomers,
Customers,
Products,
Products,or
orLocations.
Locations.

Cash
CashDiscount
Discount

Customer
Customer

Quantity
QuantityDiscount
Discount

Product
ProductForm
Form

Functional
FunctionalDiscount
Discount

Location
Location

Seasonal
SeasonalDiscount
Discount

Time
Time

Trade-In
Trade-InAllowance
Allowance

Price-Adjustment
Price-Adjustment Strategies
Strategies
Psychological Pricing

Adjusting Prices for Psychological

Effect.
Price Used as a Quality Indicator.

Promotional Pricing

Temporarily Reducing Prices to

Increase Short-Run Sales.
i.e. Loss Leaders, Special-Events

Geographical Pricing

International Pricing

Adjusting Prices to Account for the

Geographic Location of Customers.
i.e. FOB-Origin, Uniform-Delivered,
Zone Pricing, Basing-Point, &
Freight-Absorption.
Adjusting Prices for International
Markets.
Price Depends on Costs, Consumers,
Economic Conditions & Other Factors.

Reactions to Price Changes

Price Cuts Are Seen by BuyersCompetitors Reactions When:
As:
Number
of
Firms
is
Number
of
Firms
is
Being
Replaced
by
Being Replaced by
Small
Small
Newer
Models
Newer Models
Current
Current Models
Models Are
Are
Not
Not Selling
Selling Well
Well

Product
Product is
is Uniform
Uniform

Company
Company is
is in
in
Financial
Financial Trouble
Trouble

Buyers
Buyers are
are Well
Well
Informed
Informed

Quality
Quality Has
Has Been
Been
Reduced
Reduced
Price
Price Comes
Comes Down
Down
Further
Further

Price-Adjustment
Price-Adjustment Strategies
Strategies
Has
HasCompetitor
CompetitorCut
Cut
Price?
Price?

No

Will
WillLower
LowerPrice
Price
Negatively
NegativelyAffect
AffectOur
Our
Market
Share
&
Profits?
Market Share & Profits?

No

Hold
HoldCurrent
CurrentPrice;
Price;
Continue
Continueto
toMonitor
Monitor
Competitors
CompetitorsPrice.
Price.

Reduce
ReducePrice
Price

Can/
Can/Should
ShouldEffective
Effective
Action
be
Taken?
Action be Taken?

No

Raise
RaisePerceived
Perceived
Quality
Quality

Yes

Improve
ImproveQuality
Quality
&&Increase
IncreasePrice
Price
Launch
LaunchLow-Price
Low-Price
Fighting
FightingBrand
Brand

Public Policy Issues in Pricing

Pricing
Pricing Within
Within Channel
Channel Levels
Levels

Price
Price
Fixing
Fixing

Predatory
Predatory
Pricing
Pricing

Pricing Across Channel Levels

Price
Price
Discrimination
Discrimination

Resale
Resale Price
Price
Maintenance
Maintenance

Deceptive
Deceptive
Pricing
Pricing

Ensure
Ensure Sellers
Sellers
Offers
Offers the
the
Same
Same Price
Price
Terms
Terms to
to aa
Given
Given Level
Level
Of
Of Trade
Trade

Manufacturer
Manufacturer
Cant
Cant Require
Require
Dealers
Dealers to
to
Charge
Charge aa
Specified
Specified Retail
Retail
Price
Price for
for Its
Its
Product
Product

Occurs
Occurs When
When aa
Seller
Seller States
States
Prices
Prices or
or Prices
Prices
Savings
Savings that
that
Available
Available
To
To Consumers
Consumers

Pricing and the Internet

The Web enables you to compare prices
quickly.
Some Web sites do bidding and price
comparison for you.