2. Chapter Objectives
1. Explain the benefits of value-based pricing.
2. Discuss how marketing objectives, marketing-mix strategy and costs
and other company factors affect pricing decisions.
3. List and discuss factors outside the company that affect pricing
4. Explain how price setting depends on consumer perceptions of price
and on the price-demand relationship.
5. Describe the major strategies for pricing new products.
6. Comprehend the way in which companies establish a set of prices that
maximises the profits from the total product mix.
7. Explain how companies adjust their prices to take into account
different types of customers and situations.
3. What is Price?
Price is the amount of money charged for a product or
service, or the sum of values consumers exchange for the
benefits of having or using the product or service.
Price is the only element of the marketing mix that produces
revenue; all other elements represent costs.
A company does not usually set a single price, but rather a
pricing structure that covers different items in its product line.
The company adjusts product prices to reflect changing costs
and demand and to account for variations in buyers and
4. Pricing For Different Types of
The market consists of many buyers and
sellers trading in a uniform commodity
No single buyer or seller has much effect
on the going market price.
The market consists of many buyers and
sellers. A range of prices occurs because
sellers can differentiate their offers to the
5. Pricing For Different Types of
The market consists of a few sellers who
are highly sensitive to each other’s pricing
and marketing strategies. The product
can be uniform or non-uniform. The
sellers are few because it is difficult for
new sellers to enter the market.
A pure monopoly
Consists of one seller. The seller may be a
government monopoly, a private,
regulated monopoly or a private, non-
6. Factors to Consider When
Setting Prices (1)
The price a company charges usually falls
somewhere between one that is too high
to produce any demand and one that is
too low to produce a profit.
The company must consider a number of
internal and external factors including
marketing strategy and mix, the nature of
demand, and competitors’ strategies and
Pricing decisions start with customer value.
7. Factors to Consider When
Setting Prices (2)
Value-based pricing is setting the price
based on buyers’ perceptions of value rather
than on the seller’s cost.
Good-value pricing is offering just the right
combination of quality and good service that
customers want at a fair price.
Value-added pricing means attaching value
added features and services to differentiate
their offerings and this supports higher
8. Internal Factors to Consider
When Setting Prices
Current profit maximisation
Cost Based Pricing
Costs at different levels of production
Costs as a function of production experience
9. Pricing Decisions
Adding a standard mark up to the cost of the product.
Breakeven analysis and target profit pricing
Setting the price to break even on the costs of making and
marketing a product, or to make the desired profit.
Management must decide who within the organisation should set
In smaller companies, the top management often set the prices.
In larger companies, pricing is typically handled by divisional or
10. External Factors Affecting
The Market and Demand
Pricing in different types of markets
Consumer Perceptions of Price and Value
Price and Demand Relationship
Price Elasticity of Demand
Competitor’s Prices and Offers
Other External Factors
11. Analysing the Price-Demand
The demand curve shows the
number of units the market will buy
in a given time period at different
Price elasticity is the measure of the
sensitivity of demand to changes in
12. Competitors’ Strategies and
The competitors’ prices and possible
reactions to the company’s own
pricing moves must be considered.
The company needs to learn the price
and quality of each competitor’s offer.
This can be done in a number of ways
e.g. comparison shopping, examining
competitors’ products and pricing,
speaking to consumers.
13. Sealed Bids and Tenders
Setting the price based on how the firm thinks
competitors will price, rather than on its own costs or
demand, used when a company bids for jobs.
14. New-Product Pricing Strategies:
Pricing an Innovative Product
Market-skimming pricing: setting a high price
for a new product to skim maximum revenue
from the segments willing to pay the high
price, the company makes fewer but more
Market-penetration pricing: setting a low
price for a new product in order to attract a
large number of buyers and a large market
15. New-Product Pricing Strategies:
Pricing an Imitative New Product
A company that plans to develop an
imitative product faces a product-
It must decide where to position on quality
It must consider the competition.
16. Product-Mix Pricing
Setting the price steps between product line items.
Pricing optional products sold with the main product.
Pricing products that must be used with the main
Two-part pricing is a strategy for pricing services in which
price is broken into a fixed fee plus a variable usage rate.
Pricing by-products to be more competitive.
Pricing bundles of products sold together.
17. Price-Adjustment Strategies
Discount pricing and allowances: cash
discounts, quantity discounts,
functional discounts, seasonal
discounts and allowances.
Segmented pricing: setting different
prices for different clients, product
forms, places or times.
Psychological pricing: adjusting the
price to communicate the product’s
intended competitive position.
18. Price-Adjustment Strategies
Promotional pricing: loss leader pricing,
special and psychological discounting.
Value pricing: right combination of quality
at fair prices.
Geographic pricing: different pricing for
distant customers, zone pricing, basing
point pricing and freight absorption
International pricing: the company adjusts
its price to meet different conditions and
expectation in different world markets.