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Pricing Decisions

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Learning Objectives

• After studying this chapter, you should be able to:– Identify and define the internal factors affecting a

firm’s pricing decisions– Identify and define the external factors affecting

pricing decisions, including the impact of consumer perceptions of price and value

– Contrast the two general approaches to setting prices

– Discuss how companies use pricing strategies for different customers and situations

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What is a Price?• Price: the amount of money charged for a product

or service, or the sum of values exchanged for the benefits of having or using the product or service

– Fixed pricing– Dynamic pricing– Only marketing mix element that

produces revenue

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Factors Affecting Pricing Decisions

• Marketing objectives: – Survival– Current profit maximization– Market share leadership– Product quality leadership

• Marketing mix strategy: – Price should be

consistent with other mix elements

– Target costing– Non-price positions

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External Factors Affecting Pricing Decisions

• Types of markets: – Pure competition– Monopolistic competition– Oligopolistic competition– Pure monopoly

• Competition: – Consumers will

compare– High margins attract

competition– Benchmarking costs

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Types of Costs• Fixed costs: costs that do not vary with production

• Variable costs: costs that vary directly with the level of production

• Total costs: sum of fixed and variable costs

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Cost Per Unit/Accumulated Production

• Experience (learning) curve: the drop in the average per-unit production cost that comes with accumulated production experience

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How to set price?

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General Pricing Approaches

• Cost-based pricing: Adding a standard markup to the cost of the product; using formula:

– Average unit cost = variable cost + (fixed cost / unit sales)– Markup price = Unit cost / (1 - desired return on sales)– Example: – $10 + ($300,000/50,000) = $16– Selling price based on 20%: $16/(1 - .20) = $20– Double-check: $4 profit/selling price = 20% profit margin

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Break-even Pricing• Break-even (target profit) pricing: setting

price to break even (or make a target profit) on the costs of making and marketing a product

• Break-even = fixed cost / (price - variable cost)

• Example (a):• B/E = $300,000/($20 - $10)• B/E = 30,000 units

• Example (b):• B/E = ($300,000 + $75,000

profit)/($20 - $10)• B/E = 37,500 units

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Cost Versus Value Pricing

• Value-based pricing: setting price based on buyers’ perceptions of value rather than on the seller’s cost

• Everyday low pricing (EDLP): charging a constant low price with few discounts or promotional sales; used successfully by Wal-Mart, suits busy consumers, encourages impulse buying due to trust

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Pricing Strategies

•New product pricing strategies•Product Mix pricing strategies•Price adjustment strategies

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New-Product Pricing Strategies

• Market skimming pricing: setting a high price to skim maximum revenues layer by layer from the segments willing to pay the high price

• Market penetration pricing: setting a low price for a new product to attract a large number of buyers and achieve a large market share

Figure 7.7

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Product mix Pricing Strategies

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Product Mix Pricing Strategies

Product line pricing takes into account the cost differences between products in the line, customer evaluation of their features, and competitors’ prices

Optional product pricing takes into account optional or accessory products along with the main product

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Product Mix Pricing Strategies

Captive-product pricing involves products that must be used along with the main product

• Two-part pricing involves breaking the price into: – Fixed fee– Variable usage fee

Pricing Strategies

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By-product pricing refers to products with little or no value produced as a result of the main product. Producers will seek little or no profit other than the cost to cover storage and delivery.

Product bundle pricing combines several products at a reduced price

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Price Adjustment Strategies

Table 12.2

Discount andAllowance pricing

Segmentedpricing

Psychologicalpricing

Promotionalpricing

Geographicalpricing

Internationalpricing

Reducing prices to reward customerresponses such as paying early

Adjusting prices to allow for differencesin customers, products, or locations

Adjusting prices forpsychological effect

Temporarily reducing pricesto increase short-run sales

Adjusting prices to account forgeographic location of customers

Adjusting prices forinternational markets

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Price-Adjustment Strategies

Promotional pricing is when prices are temporarily priced below list price or cost to increase demand

Examples:• Special event pricing• Cash rebates• Low-interest financing• Longer warrantees• Free maintenance

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Price-Adjustment Strategies

• FOB (free on board) pricing means that the goods are delivered to the carrier and the title and responsibility passes to the customer

• Uniformed delivery pricing means the company charges the same price plus freight to all customers, regardless of location

• Zone pricing means that the company sets up two or more zones where customers within a given zone pay a single total price

Geographic Strategies

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Price-Adjustment Strategies

• Basing point pricing means that a seller selects a given city as a “basing point” and charges all customers the freight cost associated from that city to the customer location, regardless of the city from which the goods are actually shipped

• Freight absorption pricing means the seller absorbs all or part of the actual freight charge as an incentive to attract business in competitive markets

Geographic Strategies

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Price-Adjustment Strategies

International pricing is when prices are set in a specific country based on country-specific factors

• Economic conditions• Competitive conditions• Laws and regulations• Infrastructure• Company marketing objective