TOPIC 6

PRICING
sitinurazani@pmj.edu.my

CHAPTERS OUTLINE
At the end of this topic, student will be able
to:

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DEFINITION OF PRICE

PRICE
DEFINITION

SPECIFICALLY

COMMONLY

The amount of money

charged for a product
or services.

The sum of values that

consumer exchanged
for the benefits of
having or using a
product or services.

Example : RM1.00 for

a pen.

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INTRODUCTION
Pricing is a problem when a firm has to set a
price for the first time. This happens when:

A firm
develops or
acquires a
new product

A firm introduces
its product to
new distribution
channel or
geographical
area

A firm enters
bids on new
contract work

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PRICE DECISIONS
Firm's has to consider many factors that will
affect the pricing decision:

INTERNAL FACTOR
Marketing Strategy
Pricing Objective
Marketing Mix
Strategy
Organizational
Considerations

EXTERNAL FACTOR
Market & Demand
Competitors
Strategy & Price
Economic Condition
Government &
Social Concern
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INTERNAL FACTORS

INTERNAL FACTORS
AFFECTING PRICE DECISIONS

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1. MARKETING STRATEGY
Before setting the price, company must decide
on its strategy for the product. If the target
market and positioning has been selected
carefully, then the overall marketing mix strategy
including price will be fairly straightforward.
Example: When TOYOTA introduced its LEXUS
brand, the aim is to compete with European
luxury-performance cars. So, its require them to
charge at higher price level.

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2. PRICING OBJECTIVS

Survival

Product
quality
leadership

PRICING
OBJECTIVES

Maximum
current
profit

Market
share
leadership

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Survival
Companies pursues survival as their major objective if plagued with:

Over
Capacity

Changing Consumer
Wants

Intense
Competition

To keep plant operating & inventories turning

over, they will often cut prices.
Profits are less important than survival. As long
as prices cover variable costs and some fixed
costs, the companies stay in business.
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Max. Current Profit

Many companies try to set the price that will
maximize current profits.
They estimate the demand and costs associated
with alternative prices and choose the price that
produces maximum current profit, cash flow,
or rate of return on investment.
These make the company ignore the effects of:

Other Marketing
Mix Variables

Competitors
Reaction

Legal Restraint
On Price

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Market Share Leadership

Some companies will set a price as low as
possible to become a market share leader.
They believe that company with largest
market share will enjoy the lowest cost and
highest long-run profit.
Becoming a market share leader means:
A leader for a specific product category.
Continuous demand in long-term period.
Sales volume is higher than competitors.

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Product Q Leadership
A company might aim to be the product-quality
leader in the market.
This normally calls for charging high price to
cover higher performance quality and high
cost of R&D.

EXAMPLE

National, build high quality

washing machines and prices
them at RM200 more than
competitors washing machines.
So, this makes National
products are of better quality in
the eye of the customers.

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3. MARKETING MIX STRATEGY

Price is influenced by the other marketing mix strategy:
PRODUCT: Product factors such as features, design,
quality, size, technical expertise, raw material etc.
Many consumers use price as an indicator of product
quality. So, the quality of product must suits with the
price suggests.
PROMOTION: The firms decision on their
promotional mix strategy will also influence the
pricing decision.
PLACE: The distribution channel management such
as warehouse, transportation, distance , reseller
margin etc will influence the price decision.
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4. ORGANIZATION CONSIDERATION
Companies handle pricing in a variety of ways. In
small companies, prices are often set by top
management rather than by marketing or
salespeople.
In large companies, pricing is typically handled by
division and product-line managers.
In industrial market, salespeople may allowed to
negotiate with customers within certain price range.
Here, top management sets the general pricing
objectives and policies and often approves the prices
proposed by lower levels management.

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EXTERNAL FACTORS

EXTERNAL FACTORS
AFFECTING PRICE DECISIONS

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1(a). MARKET
PRICING IN DIFFERENT TYPE OF MARKET :
MARKET

NATURE

EFFECT ON PRICE

EXAMPLE

PURE
Many buyers &
COMPETITION sellers trading in
uniform
commodity

Cannot simply charge more Wheat, sugar

or less because buyers will
easily can obtain from
another sellers

MONOPOLISTI Many buyers &

C
sellers trade
COMPETITION over a range of
price

A range of price occurs

because sellers can
differentiate their offers to
buyers

Food, drinks,
beauty

OLIGOPOLISTI Few sellers who

C
highly sensitive
COMPETITION to each others
pricing

Price changes will cause

competitor to respond by
lowering price or
increasing services

Cars,
computers

PURE
MONOPOLY

Pricing is handled
differently in each case

TNB, ASTRO

Consist of one
seller

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1(b). DEMAND

Pri
ce

PRICE DEMAND RELATIONSHIP :

Qty demanded per

period

Qty demanded per

period

a) INELASTIC DD

b) ELASTIC DD

The demand schedule shows the number of units the market will buy in the given
time period at alternative prices that might be charged during the period.
The higher the price, the fewer goods or services consumers will demand.
Conversely, the lower the price, the more goods and services they will demand.

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2. COMPETITORS STRATEGY & PRICE

The company also needs to benchmark its costs
against its competitors costs to learn whether it is
operating at a cost advantage or disadvantage. Firms
with larger size plant, having more facilities and
equipment, experienced in the market surely will have
cost advantage compare to other smaller firms.

Example : TOYOTA compare to PERODUA

The company also needs to learn the price, quality &

offer of the competitors. Consumer will base their
judgments of a products value on the price that
competitors charge for similar product.

Example: A consumer who is thinking to buy Canon digital

camera evaluate price, quality and offer of comparable product
such as Kodak, Nikon, Sony etc.

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3. ECONOMIC CONDITIONS
Several economic factors will strongly affect
the company pricing decisions including:

Economic boom
Economic recession
Inflation
Interest rate etc

Those factors will affect on:

The cost of production
Consumer perception on products price and value
Consumer buying power

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4. GOVERNMENT
All the price should be follows the rules and
regulations imposed by the government.
Will the government intervene and prevent this
price from being charged?
Example: Government price controlled
products such as petroleum, sugar, wheat etc.

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5. SOCIAL CONCERN
In setting price, company usually are not free
to charge whatever prices they wish. Many
federal, state and even local laws govern the
rules of fair play in price to protect the
businesses and consumers.
Few illegal pricing strategy includes:
Price-fixing sellers must set price
without talking to competitors.
Predatory pricing selling below cost to
putting out competitors from the market.
Price discrimination ensuring seller will
offer same price to the customer.
Deceptive pricing retailer purposely set
high regular price then announce sale
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NEW PRODUCT PRICING STRATEGY

MARKET-PENETRATION PRICING
&
MARKET-SKIMMING PRICING

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MARKET PENETRATION
PRICING
Market penetration pricing usually use as newproduct pricing strategies.
They set low initial price to penetrate the
market quickly & deeply (attract large no of buyer
/ high volume). The high volume will results lower
cost in return.

Following
The market is highly price sensitive
condition favor
setting a low price Production & distribution costs fall with experience gained
Low price discourages actual and potential competition

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MARKET SKIMMING PRICING

Many companies favor setting high prices to
skim the market.
Example: When SONY first introduced their first
HDTV to Japanese market.
Market skimming makes sense under the
following conditions:
A sufficient number of buyers have a high current demand.
The unit costs of producing a small volume are not so much higher
that they cancel the advantage of charging what the traffic will bear.
The high initial price does not attract more competitors.
The high price communicated the image of superior product.

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Thank You !
sitinurazani@pmj.edu.my