CH 10: pricing

Chapter learning outcomes:

Topic

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.

10.1 what is a price?

Price:

Is the amount of money charged for a product or service it is the sum of all the
values that consumers 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 produce revenue; all other
elements represent costs.

Price: is one of the most flexible marketing mix element

Figure 10.1

Factors to consider when setting prices

Customer Other internal and external  Product

perceptions of consideration marketing strategy,
 objectives, and mix Costs
value  Nature of the market and demand
competitors strategies and prices

Price celling Price floor no

profits below this
No demand price
above this price

10.2 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.

Value – based : uses the buyers perceptions of value, not the sellers cost, as the
key to pricing. Price is considered before the marketing program is se.

Value based pricing is customer driven

- good value pricing.

- Value added pricing.

- Cost – based pricing is product driven

Note that :

" good value " is not the same as " low price"

1) good value pricing: offers the right combination of quality and good
service to fair price.

Exiting brands are being redesigned to offer more quality for a given price or
the same quality for less price.
Everyday low pricing ( EDLP): involves charging a constant everyday low price
with few or no temporary price discounts

2) high – low pricing : involves charging higher prices on an everyday basis

but running frequent promotions to lower prices temporarily on selected
items.

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.

Value based pricing versus cost – based pricing

Cost based pricing

Set price
Design a  Determine Convince buyers of
based on 
good product product costs  products value
cost

Value based pricing

Set target Design product

Assess customer Determine
 pricing to to deliver
needs and value costs that can 
match customer  desired value
perceptions be incurred
perceived value at target price

The right way like every thing else in marketing good pricing stars with the
customer

10.3 company and product costs:

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.

It adds a standard markup to cost of the product.

Types of costs:
 Fixed costs Variable costs Total costs

1) fixed costs: are the costs that do not vary with production or sales level

 rent.

 Interest.

 Heat.

 excutive salaries.

Note: fixed costs also known as overheads.

2) variable costs: are the costs that vary directly with the level of production.
They are called variable because their total varies with the number of
units produced.

 packaging.

 Raw materials.

3) total costs : are the costs that result from the sum of the fixed costs and
variable costs for any given level of production.

Average cost: is the cost associated with a given level of output

Figure 10.3 : cost per unit at different levels of product per period

C
C
SRAC

SRAV

LRAC

Q Q
1000 1000 2000 3000
b. cost behavior over different size
a. cost behavior in a fixed size plant plants
Costs as a function of production experience

experience for learning curve is when average cost falls s production increases
because fixed costs are speared over more units.

(figure 10.4)

Cost per unit as a function of accumulated production experience curve

$10

$8

$6

$4

$2
100000 200000 400000 800000

Accumulated production

 average cost tends to fall with accumulated production experience this is

shown in figure "10.4" this drop in the average cost units accumulated
production experience is called the experience curve or the learning curve.

 A single minded focus on reducing costs and exploiting the experience

curve will not always work. The aggressive pricing might give the product
a cheap image. The strategy also assumes that competitors are weak not
willing to fight it out by meeting the company's price.

 Cuts, finally, while the company Is building volume under one technology,
a competitor may find a lower – cost technology that lets it start at prices
lower than those of the market leader who still operates on the ld
experience curve.

 Cost plus pricing adds a standard markup to the cost of the product
benefits. Advantages:

o Sellers are certain about costs than about demand.

o Prices are similar in industry and price competition is minimized.

o Consumers feel it is fair to both buyers and sellers.

  Disadvantages:

o Ignores demand and competitor prices.

o Does using standard markups to set prices make sense? Generally,

no

 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 its seeking.

 another cost oriented pricing approach is break – even pricing or a

variation called target profit pricing. The firm tries to determine the price
at which it will break even or make the target profit it is seeking.

 Target pricing uses the concept of a break even chart that shows the total
cost and total revenue expected at different sales volume levels figure 10.5
shows a break even chart.

(figure 10.5) break even point chart for Deterring target price
At B.E.p, here 30000 units
TR = TC

1200
Total cost
1000

8000

600

Fixed cost
400

200
40 30 20 10
0 Sales volume in units (thousands)
50
 10.4 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.

Overall marketing strategy, objectives, and mix

 target costing : starts with an ideal selling price based on consumer value
consideration and then targets costs that will ensure that the price is met.

 General pricing objectives might include survival, current profit

maximization, market share leadership, or customer retention and
relationship building.

 Price is only one of the marketing mix tools that a company uses to achieve
its marketing objectives.

 Same marketers even position their, products on high prices featuring hig
prices as part of their product's appeal.

Organizational considerations:

 these include:

o who should set the price.

o Who can influence the prices.

 In small compares, price are often set by the top management rather than
by the marketing or sales departments.

 In large companies, pricing is typically handled by divisional or product

line managers.
  In industrial markets, sales people may be allowed to negotiate with
customers within certain price ranges.

The market and demand

 before setting prices, the marketer must understand the relationship

between price and demand for its products.

o Pricing in different types of markets.

o Analyzing the price demand relationship.

o Price elasticity of demand.

Pricing in different types of markets;

Per competition

Monopolistic competition

oligopolistic competition

Pure monopoly

Pure competition:
The market consists of many buyers and sellers trading in a uniform commodity.
No single buyer or sellers has much effect on the going market price.

In a purely competitive market, marketing research, product development,

pricing, advertising, and sales promotion play little or no role. Thus, sellers in
these markets do not spend much time on marketing strategy.

Monopolistic competition: the market consists of many buyers and sellers who
trade over a range of prices rather than a single market price a range of prices
occurs because sellers can differentiation their offers to buyers.

Oligopolistic competition: the market consists of a few sellers who are highly
sensitive to each other's pricing and marketing strategies.

There are few sellers because it is difficult for new sellers to enter the market.

Pure monopoly: the market consists of one seller. The seller may be a
government monopoly, a private regulated monopoly or a privet nonregulated
monopoly.

(Analyzing the price – demand relationship)

The relationship between the price charged and the resulting demand level is
shown In the demand curve.

The demand curve: shows the number of units the market will buy in a given
period at different prices.

 normaly, demand and price are inversely related.

 Higher price= lower demand.

 For prestige ( luxury) goods, higher prices can equal higher demand when
consumers perceive higher prices are higher quality.

 In the case of prestige goods, the demand curve sometimes slops upward.
Consumers think that higher prices mean more quality.

 In a monopoly, the demand curve shows the total market demand

resulting from different prices.
  If the company faces competition, its demand at different prices will
depend on whether competitors' prices stay constant or change with the
company's own prices.

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.

% change in quantity demanded

Price elasticity of demand =
% change in price

(competitors' strategies and prices)

 comparison of offering in terns of customer value.

 Strength of competitors.

 Competition pricing strategies.

 Customer price sensitively.

(other external factors)

Economic conditions

Reseller's response to price

Government
 Social concerns

1) market skinning pricing: is a strategy with high initial prices to skin

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 show / not cancel the
advantage of higher prices.

 Competitors should not be able to enter the market easily.

2) market penetration pricing: sets a low initial price in order to penetrate

the market quick 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.

10.5 new product pricing strategies

Product Optional Captive

line product Product

pricing pricing Pricing

By – product Product
Pricing Bundle
 Pricing

1) product line pricing : takes into account the cost differences between
products in the line, customer evaluation of their features, and
competitors' prices.

2) Optional product pricing: takes into account optional or accessory

products a long with the main product.

3) Captive – product pricing : involves products that must be used a long

with the main product.

For services, it is called two – part pricing

 fixed fee.

 Variable usage fee.

4) by- product pricing: refers to products with title or no value produced as a

result of the main product. Producers will seek title or no profit other
than the cost to cover storage and delivery.

5) Product bundle pricing: combines several products at a reduced price.

10.6 product mix pricing strategies

Discount and allowance Segmented pricing Psychological pricing

pricing

Promotional pricing Geographic pricing Dynamic pricing

 International
pricing

(1) discount and allowance pricing: reduces pricing to reward customer

responses such paying early or promoting the product.

 discount : cash, quantity, functional, seasonal.

(2) Segmented pricing: is used when a company sells a product at how

or more prices even though the difference is not based on cost.

 customer.

 Product form.

 Locations.

For segmented pricing to be effective:

 market must be segment able.

 Segments must show different degrees of demand .

 Watching the market cannot exceed the extra revenue obtained from the
price difference.

 Must be legal.

3) psychological pricing : occurs when sellers consider the psychology of

prices and not simply and not simply the economics.

Reference prices are prices that buyers carry in their mind and refer to when
looking at a given product.

Noting current prices.

Remembering past prices.

Assessing the buying situations.

4) promotional pricing : is when prices are temporarily priced below list pric
or cost to increase demand .

 loss leaders.
  Special event pricing.

 Cash rebates.

 Low ineterst financing.

 Longer warrantees.

 Free maintenance.

Risk of promotional pricing:

If it used more frequently and copied by competitors, it can create deal. Prone
customers who will wait for promotions and avoid buying at regular prices.

3) creates price wars.

Geographic pricing: is used for customers in different perits of the country or

the world.

 fbo – origin pricing.

 Uniformed – delivered pricing.

 Zone pricing.

 Freght – absorption 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.

Uniformed delivered pricing: means the company charges the same price plus
freight to all customers, regardless of location.

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 paint of the actual
freight changes as an incentive to attract business in competitive markets.

6) dynamic pricing: is when prices are adjusted continually to meet the

characteristics and needs of the individual customer and situations.
7) international pricing: is when prices are set in a specific country based on
country – specific factors.

* economic condition.

* competitive conditions

* low and regulations.

* infrastructure.

* company marketing objective.

10.7 price adjustment strategies

* price cuts occure due to:

* excess capacity

* increased market share.

Price increase from:

 cost inflation

 increased demand

 lack of supply

price increases: product is "hot"

company greed

price cuts :

 new models will be available.

 Models are not selling well.

 Quality issues.

Competition reactions to pricing changes.

 competitors usually react when:

o the number of firms involved is small.

 o The product is uniform.

o The buyers are well informed about products and prices.

10.8 price changes

Responding 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 profites?

 Will competitors respond?

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.