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Pricing Products:Pricing Products:
Pricing Pricing Considerations & Considerations &
StrategiesStrategies
By By
Dr. Kevin Lance JonesDr. Kevin Lance Jones
22
Factors to Consider When Setting PricesFactors to Consider When Setting Prices
Internal FactorsInternal Factors
PricingDecisions
PricingDecisions
External FactorsExternal Factors
Price is the Amount of Money Charged for a Product or Service.
33
Internal Factors Affecting Pricing DecisionsInternal Factors Affecting Pricing Decisions
Marketing Objectives
Marketing-MixStrategy
Costs
OrganizationalConsiderations
44
Marketing Objectives that Affect Pricing Decisions Marketing Objectives that Affect Pricing Decisions
Marketing
Objectives
Marketing
Objectives
Survival
Low Prices to Cover Variable Costs andSome Fixed Costs to Stay in Business.
Survival
Low Prices to Cover Variable Costs andSome Fixed Costs to Stay in Business.
Current Profit Maximization
Choose the Price that Produces the Maximum Current Profit, Cash Flow or ROI.
Current Profit Maximization
Choose the Price that Produces the Maximum Current Profit, Cash Flow or ROI.
Market Share Leadership
Low as Possible Prices to Becomethe Market Share Leader.
Market Share Leadership
Low as Possible Prices to Becomethe Market Share Leader.
Product Quality Leadership
High Prices to Cover Higher Performance Quality and R & D.
Product Quality Leadership
High Prices to Cover Higher Performance Quality and R & D.
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Marketing Mix Variables that Affect Pricing DecisionsMarketing Mix Variables that Affect Pricing Decisions
Marketing-Mix Strategy
Product DesignProduct Design
DistributionDistribution
PromotionPromotion
Non-Price Factors
Non-Price Factors
Companies Will Consider Price Along With All the Other Marketing-Mix Elements When Developing the Marketing
Program. Price Must be Coordinated With:
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Types of Cost Factors that Affect Pricing Decisions Types of Cost Factors that Affect Pricing Decisions
Total CostsSum of the Fixed and Variable Costs for a Given
Level of Production
Total CostsSum of the Fixed and Variable Costs for a Given
Level of Production
Variable Costs
Costs that do varydirectly with the
level of production.
Raw materials
Fixed Costs(Overhead)
Costs that don’tvary with sales or production levels.
Executive SalariesRent
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External Factors Affecting PricingDecisionsExternal Factors Affecting PricingDecisions
Market andDemand
Competitors’ Costs, Prices, and Offers
Other External FactorsEconomic Conditions
Reseller NeedsGovernment Actions
Social Concerns
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Market and Demand Factors that
Affect Pricing Decisions
Market and Demand Factors that
Affect Pricing Decisions Pure CompetitionPure CompetitionMany Buyers and Sellers WhoHave Little Effect on the Price.
Pure CompetitionPure CompetitionMany Buyers and Sellers WhoHave Little Effect on the Price.
Monopolistic CompetitionMonopolistic CompetitionMany Buyers and Sellers Who Trade Over a Range of Prices.
Monopolistic CompetitionMonopolistic CompetitionMany Buyers and Sellers Who Trade Over a Range of Prices.
Oligopolistic CompetitionFew Sellers Who Are Sensitive to EachOther’s Pricing/ Marketing Strategies
Oligopolistic CompetitionFew Sellers Who Are Sensitive to EachOther’s Pricing/ Marketing Strategies
Pure MonopolySingle Seller
Pure MonopolySingle Seller
Pricing in Different Types of MarketsPricing in Different Types of Markets
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Price Elasticity of DemandPrice Elasticity of Demand
Pri
ce
Quantity Demanded per Period
A. Inelastic Demand - Demand Hardly Changes Witha Small Change in Price.
P2
P1
Q1Q2
Pri
ce
Quantity Demanded per Period
P’2
P’1
Q1Q2
B. Elastic Demand -Demand Changes Greatly Witha Small Change in Price.
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Major Considerations in Setting PricesMajor Considerations in Setting Prices
No PossibleProfit at
This PriceProduct
Costs
ConsumerPerceptions
of Value
No Possible
Demand atThis Price
Competitors’ Price and Other External &
Internal Factors
FactoryExistingProducts
Sellingand
Promoting
ProfitsthroughVolume
High Price
Low Price
1111
MinimizesPrice
Competition
MinimizesPrice
Competition
What is Cost-Plus Pricing and Why is it Popular?What is Cost-Plus Pricing and Why is it Popular?
PerceivedFairness to
Both Buyersand Sellers
PerceivedFairness to
Both Buyersand Sellers
Sellers Are MoreCertain AboutCosts Than
Demand
Sellers Are MoreCertain AboutCosts Than
Demand
Adding a Standard Markup to the Cost of the Product.
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Breakeven Analysis or
Target Profit Pricing
Breakeven Analysis or
Target Profit Pricing
2
4
6
8
10
12
200 400 600 800 1,000
Total Revenue
Total Cost
Fixed Cost
Target Profit($2 million)
Sales Volume in Units (thousands)
Co
st
in D
olla
rs (
mill
ion
s)
Tries to Determine the Price at Which a Firm Will Break Even or Make a Target Profit
0
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Cost-Based Vs. Value-Based PricingCost-Based Vs. Value-Based Pricing
ProductProduct
CostCost
PricePrice
ValueValue
CustomersCustomers
CustomerCustomer
ValueValue
PricePrice
CostCost
ProductProduct
Cost-Based Pricing Value-Based Pricing
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Competition-Based PricingCompetition-Based Pricing
Setting PricesSetting Prices
Sealed-BidCompany Sets Prices Based on What They Think Competitors
Will Charge.
Sealed-BidCompany Sets Prices Based on What They Think Competitors
Will Charge.
Going-Rate Company Sets Prices Based on What
Competitors Are Charging.
Going-Rate Company Sets Prices Based on What
Competitors Are Charging.
??
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New-Product Pricing StrategiesPrice - Quality StrategiesNew-Product Pricing StrategiesPrice - Quality Strategies
Premium Strategy
Overcharging Strategy
Overcharging Strategy
Good-Value Strategy
Good-Value Strategy
Economy Strategy
Economy Strategy
PricePrice
Higher Lower
Higher
Lower
Qu
alit
yQ
ual
ity
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Setting Initial Product Prices Setting Initial Product Prices
Market SkimmingMarket Skimming Market PenetrationMarket Penetration
> Setting a High Price for a New Product to Skim Maximum Revenues from the Target Market.
> Results in Fewer, More Profitable Sales.
> Intel’s $1,000 Chip
> Setting a Low Price for a New Product in Order to Attract a Large Number of Buyers.
> Results in a Larger Market Share.
> Wal-mart
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Product Line PricingProduct Line PricingSetting Price Steps
Between Product Line Itemsi.e. Lawnmowers at $299 & $399
Product Line PricingProduct Line PricingSetting Price Steps
Between Product Line Itemsi.e. Lawnmowers at $299 & $399
Optional-Product PricingOptional-Product PricingPricing Optional or Accessory Products
Sold With The Main Producti.e. Car Options such as a CD player
Optional-Product PricingOptional-Product PricingPricing Optional or Accessory Products
Sold With The Main Producti.e. Car Options such as a CD player
Captive-Product PricingCaptive-Product PricingPricing Products That Must Be
Used Along With The Main Producti.e. Razor Blades, Film, Software
Captive-Product PricingCaptive-Product PricingPricing Products That Must Be
Used Along With The Main Producti.e. Razor Blades, Film, Software
By-Product PricingBy-Product PricingPricing Low-Value By-Products To
Get Rid of Themi.e. From Chemicals, Lumber Mills, Zoos
By-Product PricingBy-Product PricingPricing Low-Value By-Products To
Get Rid of Themi.e. From Chemicals, Lumber Mills, Zoos
Product-Bundle PricingProduct-Bundle PricingBundles Of Products Sold
Together at a Reduced Pricei.e. Season Tickets, Computer Makers
Product-Bundle PricingProduct-Bundle PricingBundles Of Products Sold
Together at a Reduced Pricei.e. Season Tickets, Computer Makers
Product Mix Pricing StrategiesProduct Mix Pricing Strategies
ProductMix
PricingStrategies
ProductMix
PricingStrategies
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Price-Adjustment Strategies Price-Adjustment Strategies
Price Adjustment StrategiesPrice Adjustment Strategies
Discount & AllowanceReducing Prices to Reward
Customer Responses such asPaying Early or Promoting
the Product.
Discount & AllowanceReducing Prices to Reward
Customer Responses such asPaying Early or Promoting
the Product.
SegmentedAdjusting Prices to Allow
for Differences in Customers,Products, and Locations.
SegmentedAdjusting Prices to Allow
for Differences in Customers,Products, and Locations.
Cash DiscountCash Discount
Quantity DiscountQuantity Discount
Functional DiscountFunctional Discount
Seasonal DiscountSeasonal Discount
CustomerCustomer
Product-FormProduct-Form
LocationLocation
TimeTime
Trade-In AllowanceTrade-In Allowance Promotional AllowancePromotional Allowance
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Price-Adjustment Strategies Price-Adjustment Strategies
• Adjusting Prices for Psychological Effect.• Price Used as a Quality Indicator.• Reference Prices i.e. Clothing.
• Temporarily Reducing Prices to Increase Short-Run Sales.• i.e. Loss Leaders, for Special-Events, Cash Rebates
Psychological Pricing
Promotional Pricing
2020
Price-Adjustment Strategies Price-Adjustment Strategies
• Adjusting Prices to Account for the Geographical Location of Customers.• i.e. FOB-Origin, Uniform- Delivered, Zone Pricing, etc.
• Adjusting Prices for International Markets.• Price Depends on Costs, Consumers, Economic Conditions & Other Factors.
Geographical Pricing
International Pricing
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Initiating and Responding to Price ChangesInitiating and Responding to Price Changes
InitiatingPrice
Increases
CompetitorReactions
toPrice Changes
Initiating Price Cuts
Buyer Reactionsto
PriceChanges
Price Changes
2222
Assessing & Responding to Competitor Price Changes Assessing & Responding to Competitor Price Changes
Hold Current Price;Continue to MonitorCompetitor’s Price.
Hold Current Price;Continue to MonitorCompetitor’s Price.
Reduce PriceReduce Price
Raise PerceivedQuality
Raise PerceivedQuality
Improve Quality& Increase PriceImprove Quality& Increase Price
Launch Low-Price“Fighting Brand”
Launch Low-Price“Fighting Brand”
Has Competitor CutPrice?
Has Competitor CutPrice?
Will Lower Price Negatively Affect Our
Market Share & Profits?
Will Lower Price Negatively Affect Our
Market Share & Profits?
Can/ Should EffectiveAction be Taken?
Can/ Should EffectiveAction be Taken?
Yes
No
No
No
Yes
Yes
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Public Policy and PricingPublic Policy and Pricing
Deceptive Pricing
Deceptive Pricing
PriceFixing
PriceFixing
Price Discrimination
Price Discrimination
Public Policy on Pricing Centers on Three Potentially Damaging Pricing Practices.
