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1. Customer Value-based Pricing
uses buyers’ perceptions of value, not the
seller’s cost, as the key to pricing.
The company first assesses customer needs and
value perceptions. It then sets it target price
based on customer perceptions of value.
1. a. good-value pricing
Companies have changed their pricing
approaches to bring them in line with changing
economic conditions and consumer price
Increasingly, marketers are adopting good-
value pricing strategies—offering just the right
combination of quality and good service at a
1. b. value-added pricing
Rather than cutting prices to match
competitors, many companies use value added
They attach value-added features and services
to differentiate their offers and thus support
2. Cost-based Pricing
A company that uses cost based pricing sets
prices based on the costs for
producing, distributing, and selling the product
plus a fair rate of return for its effort and risk.
2. a. types of costs
A company’s costs take two forms.
1. Fixed costs (also known as overhead) are
costs that do not vary with production or sales
2. Variable costs vary directly with the level of
Total costs are the sum of the fixed and variable
costs for any given level of production.
2. b. costs at different levels of production
To price wisely, management needs to know
how its costs vary with different levels of
2. C. costs as a function of production
Average cost tends to fall with accumulated production
experience. This drop in the average cost with
accumulated production experience is called the
experience curve (or the learning curve).
Some companies have built successful strategies around
the experience curve. However, 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
2. d. cost-plus pricing
The simplest pricing method is cost-plus
pricing (or markup pricing), which involves
adding a standard markup to the cost of the
Does using standard markups to set prices
2. e. break-even analysis and target profit
Another cost-oriented pricing approach is
breakeven pricing, or a variation called target
The firm tries to determine the price at which it
will break even or make the target profit it is
3. Competition-based Pricing
Competition-based pricing involves setting
prices based on competitors’
strategies, costs, prices, and market offerings.
Consumers will judge a product’s value based
on the prices that competitors charge for
OTHER INTERNAL AND EXTERNAL
CONSIDERATIONS AFFECTING PRICE
Internal factors include the company’s overall marketing
strategy, objectives, and marketing mix, as well as other organizational
External factors include the nature of the market and demand, as well as other
1. Overall Marketing Strategy, Objectives, And
Price decisions must be coordinated with product
design, distribution, and promotion decisions to form a
consistent and effective integrated marketing program.
Many firms support such price-positioning strategies
with a technique called target costing. This technique
starts with an ideal selling price based on customer-value
considerations, and then targets costs that will ensure
that the price is met.
Often, the best strategy is not to charge the lowest price
but rather to differentiate the marketing offer to make it
worth the higher price.
2. Organizational Considerations
Management must decide who within the organization should set
In small companies, prices are often set by 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, salespeople may be allowed to negotiate with
customers within certain price ranges.
In industries in which pricing is a key factor, companies often have
pricing departments to set the best prices or to help others in
Others who can influence pricing include sales
managers, production managers, accountants, and finance
3. The Market and Demand
Before setting prices, the marketer must
understand the relationship between price and
demand for the company’s product.
3.1 Pricing in Different Types Of Markets
Under pure competition, the market consists of many buyers and
sellers trading in a uniform commodity, such as wheat or copper. In
a purely competitive market, marketing research, product
development, pricing, advertising, and sales promotion play little
or no role.
Under monopolistic competition, the market consists of many
buyers and sellers who trade over a range of prices rather than a
single market price. Sellers can differentiate their offers to buyers
via price, advertising, and personal selling.
Under 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. Because there are few sellers, each
seller is alert and responsive to the pricing strategies and moves of
In a pure monopoly, the market consists of one seller. The seller
may be a government monopoly, a private regulated monopoly, or
a private non-regulated monopoly. Pricing is handled differently in
3.2 Analyzing The Price-demand Relationship
Each price the company might charge will lead to a
different level of demand. 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 time period at different prices that
might be charged.
In the normal case, demand and price are inversely
related; that is, the higher the price, the lower the
3.3 Price Elasticity Of Demand
Price elasticity is how responsive demand will be to
a change in price.
If demand hardly changes with a small change in price, we say
demand is inelastic.
If demand changes greatly with a small change in price, we
say the demand is elastic.
The price elasticity of demand
% change in quantity demanded/% change in price.
What determines the price elasticity of
1. The product they are buying is unique or when it is
high in quality, prestige, or exclusiveness.
2. Substitute products are hard to find or when they
cannot easily compare the quality of substitutes.
4. The Economy
The most obvious response to the new economic
realities is to cut prices and offer deep discounts.
However, such price cuts have undesirable
Lower prices mean lower margins. Deep discounts may
cheapen a brand in consumers’ eyes. Once a company cuts
prices, it’s difficult to raise them again when the economy
Rather than cutting prices, therefore, many
companies are shifting their marketing focus to
more affordable items in their product mixes.
4. Other External Factors
Beyond the market and the economy, the company
must consider several other factors in its external
environment when setting prices. The company
must consider what impact its prices will have on
other parties in its environment.
For example, how will resellers react to various
The government is another important external
influence on pricing decisions.
Finally, the company’s short-term sales, market
share, and profit goals may need to be tempered by
broader social concerns.