1. Pricing Products: Pricing Considerations and Approaches
Chapter 10
Pricing Products:
Pricing Considerations and Approaches

2. Price
Price is the sum of all the values that consumers exchange for the benefits of having or using the product or service.
Price has been the major factor affecting buyer choice; nonprice factors have become increasingly important in buyer-choice behavior.
Price is the only element in the marketing mix that produces revenues; all others represent costs.

3. More Factors to Consider when Setting Prices
Stage
of the PLC
Decision
Maker
Industry
Conditions
Threat of new
entrants
Market power
Substitutes
Capacity
Government
Social Concerns
Marketing
Objectives
Psychological
Aspects
Survival
ST Profit Max
Market Share
Quality Leadership
Reference Price
Price/Perceived Quality
Price points

4. Internal Factors Affecting Pricing Decisions: Marketing Objectives
Survival
Low Prices to Cover Variable Costs and
Some Fixed Costs to Stay in Business.
Current Profit Maximization Choose the Price that Produces the Maximum Current Profit, Etc.
Marketing
Objectives
Market Share Leadership
Low as Possible Prices to Become
the Market Share Leader.
Product Quality Leadership
High Prices to Cover Higher
Performance Quality and R & D.

5. Internal Factors Affecting Pricing Decisions: Marketing Objectives
Other specific objectives include:
Set prices low to prevent competition from entering the market,
Prices might be reduced temporarily to create excitement or draw more customers.
Nonprofit and public organization may have other pricing objectives such as:
University aims for partial cost recovery,
Hospital may aim for full cost recovery,
Theater may price to fill maximum number of seats.

6. Internal Factors Affecting Pricing Decisions: Marketing Mix
Customers Seek Products that Give Them the Best
Value in Terms of Benefits Received for the Price Paid.
Product Design
Nonprice
Positions
Price
Distribution
Promotion

7. Types of Cost Factors that Affect Pricing Decisions
Fixed Costs
(Overhead)
Costs that don’t
vary with sales or
production levels.
Executive Salaries, Rent
Variable Costs
Costs that do vary
directly with the
level of production.
Raw materials
Total Costs
Sum of the Fixed and Variable Costs for a Given
Level of Production

8. Costs Considerations
Cost Per Unit at Different Levels of Production Per Period 1 2
Cost per unit 3
SRAC 4
LRAC
1,000
2,000
3,000
4,000
Quantity Produced per Day

9. Types of Cost Factors that Affect Pricing Decisions
As a firm gains experience in production, it learns how to do it better.
The experience curve (or the learning curve) indicates that average cost drops with accumulated production experience.
Strategy: company should price products low; sales increases; costs continue to decrease; and then lower prices further.
Risks are present with this strategy.

10. External Factors Affecting Pricing Decisions
Market and
Demand
External Factors Affecting Pricing Decisions
Competitors’ Costs,
Prices, and Offers
Other External Factors
Economic Conditions
Reseller Needs
Government Actions
Social Concerns

11. Market and Demand Factors Affecting Pricing Decisions
Pricing in Different Types of Markets
Pure Monopoly
Single Seller
Pure Competition
Many Buyers and Sellers
Who Have Little
Effect on the Price
Oligopolistic
Competition
Few Sellers Who Are
Sensitive to Each Other’s
Pricing/ Marketing
Strategies
Monopolistic
Competition
Many Buyers and Sellers
Who Trade Over a
Range of Prices

12. Demand Curves and Price Elasticity of Demand
A Demand Curve is a Curve that Shows the Number of Units the Market Will Buy in a Given Time Period at Different Prices that Might be Charged.
Price Elasticity Refers to How Responsive Demand Will be to a Change in Price.
Price Elasticity of Demand = % Change in Quantity Demanded
% Change in Price

13. Price Elasticity of Demand
A. Inelastic Demand -
Demand Hardly Changes With
a Small Change in Price.
Price P2 P1 Q2 Q1
Quantity Demanded per Period
B. Elastic Demand -
Demand Changes Greatly With
a Small Change in Price.
Price
P’2
P’1 Q2 Q1
Quantity Demanded per Period

14. Cost-Based Pricing
Certainty About Costs
Factors
Situational
Unexpected
Attitudes of
Others
Ethical
Ignores Current Demand & Competition
Cost-Plus Pricing is an Approach That Adds a Standard Markup to the Cost of the Product.
Simplest Pricing Method
Pricing is Simplified
Price Competition Is Minimized
Much Fairer to Buyers & Sellers

15. Break-even Chart for Determining Target Price
Total revenue
Target profit
$2 million 12
Total cost 10 8
Dollars (millions)
Fixed cost 6 4 2
200
400
600
800
1,000
Sales volume in units (thousands) 4

16. Cost-Based Versus Value-Based Pricing (Fig. 10.7)
Product
Cost
Price
Value
Customers
Customer
Cost-Based Pricing
Value-Based Pricing

17. Competition-Based Pricing
Setting Prices
Competition-Based Pricing
Going-Rate
Company Sets Prices Based on What
Competitors Are Charging.
Sealed-Bid
Company Sets Prices Based on
What They Think Competitors
Will Charge. ? ?

18. Pricing Products: Pricing Considerations and Strategies
Chapter 11
Pricing Products:
Pricing Considerations and Strategies

19. Steps in Price Planning
1. Develop Pricing Objectives
2. Estimate Demand
3. Determine Costs
4. Evaluate the Pricing Environment
5. Choose a Pricing Strategy
6. Develop Pricing Tactics

20. New Product Pricing Strategies
This CTR relates to the material on pp
New Product Pricing Strategies
Market Skimming
Market Penetration
Pricing Innovative Products
Market Skimming Pricing. Market skimming pricing is the strategy of setting high initial prices to skim maximum profits from each successive layer of the target market.
Setting a High Price for a New Product to Maximize Revenues from the Target Market.
Results in Fewer, More Profitable Sales.
Setting a Low Price for a New Product in Order to Attract a Large Number of Buyers.
Results in a Larger Market Share.
Skimming strategies typically set a price as high as some segments will bear. Once all customers within this segment have purchased, prices are lowered only so far as the next segment needs to be persuaded to buy. Skimming usually works well only when:
Product Distinctiveness. Product quality, image, and innovation are sufficiently distinct to support a high price.
Costs of Small Production Runs. The costs of producing small volume are not prohibitive.
Barriers to Entry. Competitors should not be able to enter the market easily and undercut the high price.
Market Penetration Pricing. Some innovations are priced low upon introduction in order to capture large market share quickly thus penetrating the market. High volume results in lower costs, which helps keep prices low. Several conditions favor penetration pricing:
Price Sensitive Markets. Highly price-sensitive markets with very large volume potential so that low price produces more market growth are needed.
Falling Costs. Production and distribution costs must fall as sales volume increases.
Barriers to Entry. Here the low costs must generate a sustainable advantage that cannot easily be duplicated by competitors.
Discussion Note: Penetration pricing may also accelerate overall market adoption rates thus supporting low price continuance that may discourage competitors from entering the market.

21. New Product Pricing Strategies
Market Skimming
Setting a High Price for a New Product to “Skim” Maximum Revenues from the Target Market.
Results in Fewer, But More Profitable Sales.
Use Under These Conditions:
Product’s Quality and Image Must Support Its Higher Price.
Costs Can’t be so High that They Cancel the Advantage of Charging More.
Competitors Shouldn’t be Able to Enter Market Easily and Undercut the High Price.

22. New Product Pricing Strategies
Use Under These Conditions:
Market Must be Highly Price-Sensitive so a Low Price Produces More Market Growth.
Production/ Distribution Costs Must Fall as Sales Volume Increases.
Must Keep Out Competition & Maintain Its Low Price Position or Benefits May Only be Temporary.
Market Penetration
Setting a Low Price for a New Product in Order to “Penetrate” the Market Quickly and Deeply.
Attract a Large Number of Buyers and Win a Larger Market Share.

23. Product Mix Pricing Strategies
This CTR corresponds to Table 11-1 on p. 331 and the relates to the material on pp
Product Line Pricing
Setting Price Steps Between Product Line Items
i.e. $299, $399
Optional-Product Pricing
Pricing Optional or Accessory Products
Sold With The Main Product
i.e. Car Options
Captive-Product Pricing
Pricing Products That Must Be Used
With The Main Product
i.e. Razor Blades, Film, Software
By-Product Pricing
Pricing Low-Value By-Products To Get Rid
of Them
i.e. Lumber Mills, Zoos
Product-Bundle Pricing
Pricing Bundles Of Products Sold Together
i.e. Season Tickets, Computer Makers
Product
Mix
Pricing
Strategies
Product-Mix Pricing Strategies
Product Line Pricing. Companies usually develop product lines rather than single products. In product line pricing, management must decide on the price steps to set between each product in the line. Companies often use price points to target distinctive combinations of product features and value represented by a particular price.
Optional-Product Pricing. Under this strategy, the company offers a base product and prices differently for each combination of additional features or options added to the base product as desired by the customer. Automobile pricing is famous -- or infamous -- for this practice. But many manufacturers use optional-product pricing, such as personal computer makers.
Captive-Product Pricing. Under this strategy, producers price products that must be used with a main product. The text describes razor blades as an example. The razor is priced low while high markups are attached to the price of the blades.
Discussion Note: Students should distinguish captive pricing from optional pricing on the basis of need versus convenience. When Apple Computer prices its keyboards separately from its computers, it is practicing captive-product pricing. When it offers additional RAM beyond the included board memory, it is practicing optional-product pricing.
By-Product Pricing. Waste from production and distribution may be marketable as by-products. Selling by-products allows producers to lower prices and costs on their main products. Otherwise, the prices of main products must cover the disposable or storage of by- products.
Product-Bundle Pricing. This strategy combines several products and offers them at a reduced price from the cost of each product purchased separately. Season tickets and group rates are examples.

24. Price-Adjustment Strategies
Price Adjustment Strategies I
This CTR corresponds to Table 11-2 on p. 334 and relates to the material on pp
Price-Adjustment Strategies
Discount & Allowance
Reducing Prices to Reward
Customer Responses such as
Paying Early or Promoting
the Product.
Segmented
Adjusting Prices to Allow
for Differences in Customers,
Products, or Locations.
Price Adjustment Strategies
Companies typically adjust their prices to account for various customer differences and changing situations:
Cash Discount
Customer
Discount and Allowance Pricing. Several forms of discount and allowance pricing are used by marketers:
Cash Discounts. These are price reductions to buyers who pay bills promptly.
Quantity Discounts. These refer to price reductions per unit on large volumes.
Functional Discounts. These are granted to channel members who perform various marketing functions.
Seasonal Discounts. These are granted to buyers who purchase merchandise out of season.
Allowances. These are discounts such as trade-ins for turning in old items on new purchases or promotional allowances for participating in seller sponsored advertising can also lower buyer prices.
Segmented Pricing. Segmented pricing refers to pricing differences not based on costs and takes several forms:
Customer-segment pricing. These target a specific segment, as in senior citizen discounts.
Product-form pricing. This varies costs on versions of a product by features but not production costs.
Location pricing. This stems from preferences where different locations have different perceived values, such as seating in a theater.
Time pricing. This refers to price breaks given at times of lower demand.
Quantity Discount
Product Form
Functional Discount
Location
Seasonal Discount
Time
Trade-In Allowance

25. Price-Adjustment Strategies
Adjustment Strategies - II
This CTR corresponds to Table 11-2 on p. 334 and relates to the discussion on pp
Psychological Pricing
Promotional Pricing
Adjusting Prices for Psychological
Effect.
Price Used as a Quality Indicator.
Geographical Pricing
Temporarily Reducing Prices to
Increase Short-Run Sales.
i.e. Loss Leaders, Special-Events
Psychological Pricing. A key component in psychological pricing is the reference price consumers carry in their mind when considering sellers prices.
Promotional Pricing. Promotional prices are temporary reductions below list and sometimes below costs, used to attract customers:
Loss leaders. These may be offered below costs to attract attention to an entire line.
Special event. This type of pricing may be used during slow seasons.
Cash rebates or low financing. These “extras” may bring in customers “on the brink” and help them to decide to finally purchase.
Geographical Pricing. Several forms of geographical pricing are common:
FOB-Origin. Free On Board has customer pay freight.
Uniform Delivered. Here the company charges the same price to all.
Zone. Zone uses different areas pay different prices on freight but all customers within the same area pay the same freight charges.
Basing-Point. Under this system, all customers charged freight from a specified billing location.
Freight-Absorption. Here the seller pays all or part of the shipping costs to get the desired business.
International Pricing. Firms may charge the same price throughout the world, especially for high-ticket, high-tech products like jetliners. Or it may offer different prices based upon differing taxes, tariffs, distribution, and promotion costs.
International Pricing
Adjusting Prices to Account for the
Geographic Location of Customers.
i.e. FOB-Origin, Uniform-Delivered,
Zone Pricing, Basing-Point, &
Freight-Absorption.
Adjusting Prices for International
Markets.
Price Depends on Costs, Consumers,
Economic Conditions & Other Factors.

26. Reactions to Price Changes
Being Replaced by Newer Models
Price Cuts Are Seen by Buyers As:
Number of Firms is Small
Product is Uniform
Buyers are Well Informed
Competitors Reactions When:
Current Models Are Not Selling Well
Company is in Financial Trouble
Quality Has Been Reduced
Price Comes Down Further

27. Price-Adjustment Strategies
Has Competitor Cut
Price?
Price-Adjustment Strategies
Hold Current Price;
Continue to Monitor
Competitor’s Price. No
Will Lower Price
Negatively Affect Our
Market Share & Profits?
Reduce Price No
Can/ Should Effective
Action be Taken?
Raise Perceived
Quality
Improve Quality
& Increase Price No
Launch Low-Price
“Fighting Brand”
Yes

28. Public Policy Issues in Pricing
Pricing Within Channel Levels
Price
Fixing
Predatory
Pricing
Both Are Prohibited by Law

29. Pricing Across Channel Levels
Price
Discrimination
Ensure Sellers
Offers the
Same Price
Terms to a
Given Level
Of Trade
Resale Price
Maintenance
Manufacturer
Can’t Require
Dealers to
Charge a
Specified Retail
Price for Its
Product
Deceptive
Pricing
Occurs When a
Seller States
Prices or Prices
Savings that
Available
To Consumers

30. Pricing and the Internet
The Web enables you to compare prices quickly.
Some Web sites do bidding and price comparison for you.