1. Developing Pricing
Strategies and
Programs

2. 14-2
Price is the sum of all values that consumers exchange for
the benefits of having or using the product or service. Price is
the only element in the marketing mix that produces revenue;
What is Price?
the others produce cost.

3. 14-3
Price has many names:
• Rent
• Tuition
• Fare
• Rate
• Commission
• Wage
• Fee
• Dues
• Interest
• Donation
• Salary

4. 14-4
Common Pricing Mistakes
• Companies base their prices on their costs, not their customers’
perceptions of value.
• Companies base their prices on “the marketplace” taking
traditional industry margins
• Failure to vary price by product item, market segment, distribution
channels, and purchase occasion attempting to achieve the same
profit margin across different product lines.
• Companies hold prices at the same level for too long, ignoring
changes in costs, market, competitive environment and in
customers’ preferences.
• Setting price independently of the rest of the marketing mix

5. Steps in
Setting Pricing

6. 14-6
Setting the Price
Pricing Steps
1. Select pricing
objective
2. Determine demand
3. Estimate costs
4. Analyze competition
5. Select pricing method
6. Select final price
• Survival
• Maximize current profits
• Maximize market share
– Penetration strategy
• Market skimming
– Skimming strategy
• Product quality leaders
• Partial cost recovery

7. Pricing Objectives:
• Survival. Companies pursue survival as their major objective if they are
plagued with overcapacity, intense competition, or changing consumer
wants. As long as prices cover variable costs and some fixed costs, the
company stays in business.
• Maximum Current Profit. Many companies try to set a 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.
• Maximum Market Share/Market-penetration Pricing. Some companies
want to maximize their market share. 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.
• Market Skimming. Companies unveiling a new technology favor setting
high prices to maximize market skimming,i.e. prices start high and slowly
drop over time.
14-7

8. Pricing Objectives:
• Product-Quality Leadership. A company might aim to be the product-
quality leader in the market. Products or services characterized by high
levels of perceived quality, taste, and status are priced just high enough
not to be out of consumers’ reach.
• Partial Cost Recovery. Nonprofit and public organizations may have
other pricing objectives such as partial cost recovery knowing that it must
rely on private gifts and public grants to cover its remaining costs.
14-8

9. 14-9
Setting the Price
Pricing Steps
1. Select pricing objective
2. Determine demand
3. Estimate costs
4. Analyze competition
5. Select pricing method
6. Select final price
• Understand factors that
affect price sensitivity

10. 14-10
Consumers are less price sensitive when:
• Product is more distinctive
• Buyers are less aware of
substitutes
• Buyers cannot easily
compare quality of
substitutes
• The expenditure is a lower
part of buyer’s total income
• The expenditure is small
compared to the total cost
• Part of the cost is borne
by another party
• The product is used with
assets previously bought
• The product is assumed
to have more quality,
prestige, or exclusiveness
• Buyers cannot store the
product

11. 14-11
Setting the Price
Pricing Steps
1. Select pricing objective
2. Determine demand
3. Estimate costs
4. Analyze competition
5. Select pricing method
6. Select final price
• Understand factors that
affect price sensitivity
• Estimate demand curves:
Statistical analysis
Price experiments
Surveys
• Understand price elasticity
of demand:
Elasticity
Inelasticity

12. 14-12
Inelastic & Elastic Demand

13. 14-13
Demand is less elastic when:
• There are few or no substitutes/competitors
• Buyers do not readily notice the higher price
• Buyers are slow to change their buying habits and search
for lower prices
• Buyers think higher prices are justified

14. 14-14
Setting the Price
Pricing Steps
1. Select pricing objective
2. Determine demand
3. Estimate costs
4. Analyze competition
5. Select pricing method
6. Select final price
• Types of costs and levels
of production must be
considered

15. 14-15
Setting the Price
Major Types of Costs:
 Fixed costs/overhead: costs that don’t vary with
production or sales revenue.
 Variable costs: vary with the level of production.
 Total costs: sum of fixed and variable costs at a given
level of production
 Average cost: cost per unit at a given level of
production = total cost/quantity of production.

16. 14-16
Setting the Price
Pricing Steps
1. Select pricing objective
2. Determine demand
3. Estimate costs
4. Analyze competition
5. Select pricing method
6. Select final price
• Types of costs and levels
of production must be
considered
• Accumulated production
leads to cost reduction
via the experience curve
• Differentiated marketing
offers create different
cost levels (Activity-
based cost ABC)

17. 14-17
Cost per Unit as a Function of Accumulated
Production: The Experience Curve
As production accumulates average cost decreases

18. 14-18
Setting the Price
Pricing Steps
1. Select pricing objective
2. Determine demand
3. Estimate costs
4. Analyze competition
5. Select pricing method
6. Select final price
• Firms must analyze the
competition with respect
to:
Costs
Prices
Possible price
reactions
• Pricing decisions are
also influenced by quality
of offering relative to
competition

19. 14-19
Setting the Price
Pricing Steps
1. Select pricing objective
2. Determine demand
3. Estimate costs
4. Analyze competition
5. Select pricing method
6. Select final price
• Price-setting begins with
the three “Cs”

20. 14-20
The Three C’s Model for Price Setting
Costs Competitors’
prices and
prices of
substitutes
Customers’
assessment
of unique
product
features
Low Price
No possible
profit at
this price
High Price
No possible
demand at
this price

21. 14-21
Setting the Price
Pricing Steps
1. Select pricing objective
2. Determine demand
3. Estimate costs
4. Analyze competition
5. Select pricing method
6. Select final price
• Price-setting begins with
the three “Cs”
• Select pricing method:
– Markup pricing
– Target-return pricing
– Perceived-value
pricing
– Value pricing
– Going-rate pricing
– Auction-type pricing

22. 14-22
Pricing Methods:
1. Markup Pricing. Markup Pricing is just adding a standard
mark-up to the product’s cost.
• Variable cost per unit $10.00
• Fixed Cost $ 300,000.00
• Expected Unit Sales 50,000 units
• Unit cost = variable cost + fixed cost
= $10.00 + $ 300,000.00 = $16.00
50,000
• Desired Mark Up= 20%
• Selling Price= Unit Cost = $16.00 = $20
(1- desired return) (1-0.20)
• It will make profit of 4$ per unit

23. 14-23
Pricing Methods:
Target-return price = unit cost + desired return x invested capital
Unit sales
2. Target-Return Pricing. pricing used to achieve a planned
or target rate of return on investment.
Target-return price = 16$ + 0.20 x 1,000,000
$50,000
= $20.00

24. 14-24
Break-Even Chart for Determining
Target-Return Price and Break-Even Volume

25. 14-25
Pricing Methods:
3. Perceived-Value Pricing
• Companies base their price on the customer’s perceived value.
• The key to perceived-value pricing is to deliver more value than
the competitor and to demonstrate this to prospective buyers.

26. Perceived Value Pricing Example:
• $ 90,000 tractor’s price = competitor’s price
• $ 7,000 superior durability
• $ 6,000 superior reliability
• $ 5,000 superior service
• $ 2,000 longer warranty
• $ 110,000 superior value
• - 10,000 discount
• $ 100,000 final price

27. 14-27
Pricing Methods:
4. Value Pricing. Win loyal customer by charging a fairly low
price for a high-quality offering, that means : reengineering
the companies operations to be low-cost without sacrificing
quality.
5. Going-Rate Pricing. The firm bases its price largely on
competitors’ prices. (smaller firms “follow the leader”).It is
quite popular where costs are difficult to measure or
competitive response is uncertain.

28. 14-28
Pricing Methods:
6. Auction-Type Pricing. One major purpose of auctions is to
dispose of excess inventories or used goods. Three major
types of auctions:
1- English auctions (ascending bids).
2- Dutch auctions (descending bids).
3- Sealed-bid auctions.

29. 14-29
Setting the Price
Pricing Steps
1. Select pricing objective
2. Determine demand
3. Estimate costs
4. Analyze competition
5. Select pricing method
6. Select final price
• Requires consideration of
additional factors:
– Impact of other
marketing activities
– Company pricing
policies
– Gain and risk sharing
pricing
– Impact of price on other
parties

30. Final Price-Additional Considerations:
• Impact of Other Marketing Activities .The final price must take into
account the brand’s quality and advertising relative to the competition.
• Company Pricing Policies. The price must be consistent with company
pricing policies in order to ensure that salespeople quote prices that are
reasonable to customers and profitable to the company.
• Gain and Risk Sharing Pricing. In case buyers resist accepting a seller’s
proposal because of a high perceived level of risk,the seller has the
option of offering to absorb part or all the risk if it does not deliver the full
promised value.
• Impact of Price on Other Parties. Considering the impact of
contemplated price on other parties such as:
– distributors - sales force
– suppliers - competitors
– dealers /retailers
14-30

31. 14-31
Adapting the Price
1. Geographical Pricing
 Barter: the direct exchange of goods with no money and no
third party involved
 Compensation deal: the seller receives some percentage of
the payment in cash and the rest in products
 Buyback arrangement: the seller sells a plant equipment or
technology to another country and agrees to accept as partial
payment products manufactured with the supplied equipment
 Offset: the seller receives full payment in cash but agrees to
spend a substantial amount of the money in that country within
a stated time period.

32. 14-32
Adapting the Price
1. Geographical Pricing
 Barter: the direct exchange of goods with no money and no
third party involved
 Compensation deal: the seller receives some percentage of
the payment in cash and the rest in products
 Buyback arrangement: the seller sells a plant equipment or
technology to another country and agrees to accept as partial
payment products manufactured with the supplied equipment
 Offset: the seller receives full payment in cash but agrees to
spend a substantial amount of the money in that country within
a stated time period.

33. 14-33
Adapting the Price
2. Price Discounts and Allowances
•Quantity discount. The more you buy, the cheaper it becomes--
cumulative and non-cumulative.
•Functional/Trade discounts. Discount offered by a manufacturer to
trade-channel members if they will perform certain functions
•Cash discount. A deduction granted to buyers for paying their bills
within a specified period of time, (after first deducting trade and
quantity discounts from the base price).
•Seasonal discount. A price reduction to those who buy out of
season.
•Allowance. An extra payment designed to gain reseller participation
in special programs.

34. 14-34
Adapting the Price
3. Promotional Pricing
• Loss-leader pricing: supermarkets and department stores often
drop the price on well known brands to stimulate additional store
traffic
• Special-event pricing: sellers well establish special pricing in
certain seasons to draw in more customers
• Cash rebates: companies offer cash rebates to encourage
purchase of the manufacturers products within a specified time
period
• Low-interest financing: the company can offer customers low-
interest financing
• Longer payment terms : sellers especially mortgage banks and
auto companies stretch loans over longer periods and thus lower
the monthly payment

35. 14-35
Adapting the Price
• Warranties and service contracts: companies can promote
sales by adding a free or low cost warranty or service contract
• Psychological discounting: this strategy involves setting an
artificially high price and then offering the product at substantial
savings

36. 14-36
Adapting the Price
4. Differentiated/Discriminatory Pricing. Companies often adjust
their basic price to accommodate differences in customers,
products, locations, etc. Discriminatory pricing tactics include:
– Customer-segment pricing. Different customer groups pay
different prices for the same product or service.
– Product-form pricing. Different versions of the product are
priced differently, but not proportionately to their costs.
– Image pricing. Some companies price the same product at
two different levels based on image differences

37. 14-37
Adapting the Price
– Channel pricing. Coca-Cola carries a different price depending on whether the consumer
purchases it in a fine restaurant, a fast-food restaurant, or a vending machine.
– Location pricing. The same product is priced differently at different locations though the cost at
each location is the same
– Time pricing. Prices are varied by season, day, or hour. Energy rates to commercial users vary
accordingly.

38. 14-38
Initiating and Responding to
Price Changes
Key Considerations
1. Initiating price cuts
2. Initiating price
increases
3. Responding to
competitor’s price
changes
• Circumstances leading to
price cuts:
– Excess plant capacity
– Declining market share
– Attempt to dominate the
market via lower costs
• Price cutting traps:
– Price/quality perceptions
– Low prices don’t create
market loyalty
– Competition may match
or beat price cuts

39. 14-39
Key Considerations
1. Initiating price cuts
2. Initiating price
increases
3. Responding to
competitor’s price
changes
• Circumstances leading to
price increases:
– Cost inflation
– Over demand
Initiating and Responding to
Price Changes

40. 14-40
Key Considerations
1. Initiating price cuts
2. Initiating price
increases
3. Responding to
competitor’s price
changes
• The degree of product
homogeneity affects how
firms respond to price
cuts initiated by the
competition
• Market leaders can
respond to aggressive
price cutting by smaller
competitors in several
ways
Initiating and Responding to
Price Changes

41. 14-41
• Maintain price and profit margin (vulnerable)
• Maintain price and add value
• Reduce price (and cost)
• Increase price and improve quality (add new brand)
• Launch a low-price product line
Market Leader can respond to competitor initiated price
cuts in several ways:
Initiating and Responding to
Price Changes

42. Any Queries ?