Ch 10 -0 Copyright © 2011 Pearson Education

Principles of Marketing,
Arab World Edition
Philip Kotler, Gary Armstrong, Anwar Habib, Ahmed
Tolba
Presentation prepared by Annelie Moukaddem Baalbaki

CHAPTER TEN
Pricing

Lecturer: Insert your name here

Ch 10 -1 Copyright © 2011 Pearson Education

 Chapter Learning Outcomes
Topic Outline

10.1 What Is a Price?

10.2 Customer Perceptions of Value
10.3 Company and Product Costs
10.4 Other Internal and External Considerations Affecting
Price Decisions
10.5 New Product Pricing strategies
10.6 Product Mix Pricing Strategies
10.7 Price-Adjustment Strategies
10.8 Price Changes

Ch 10 -2 Copyright © 2011 Pearson Education

 What Is a Price?
Price

• Price is the amount of money charged for a product or

service. It is the sum of all the values that consumers give
up in order to gain the benefits of having or using a
product or service.

• Price is the only element in the marketing mix that

produces revenue; all other elements represent costs.

Ch 10 -3 Copyright © 2011 Pearson Education

 Factors to Consider When Setting Prices

Ch 10 -4 Copyright © 2011 Pearson Education

 Customer Perceptions of Value

Customer oriented prices involves understanding how much

value consumers place on the benefits they receive from the
product and setting a price that captures that value.

Ch 10 -5 Copyright © 2011 Pearson Education

 Customer Perceptions of Value
Value –Based Pricing

Value-based pricing uses the buyers’ perceptions of value,

not the sellers cost, as the key to pricing. Price is considered
before the marketing program is set.

• Value-based pricing is customer driven

- Good-Value Pricing
- Value-Added Pricing
• Cost-based pricing is product driven

Ch 10 -6 Copyright © 2011 Pearson Education

 Customer Perceptions of Value

Ch 10 -7 Copyright © 2011 Pearson Education

 Customer Perceptions of Value
Value-Based Pricing

Good-value pricing offers the right combination of quality

and good service to fair price.

Existing brands are being redesigned to offer more quality for

a given price or the same quality for less price.

Ch 10 -8 Copyright © 2011 Pearson Education

 Customer Perceptions of Value
Value-Based Pricing: Good-Value Pricing

Everyday low pricing (EDLP) involves charging a constant

everyday low price with few or no temporary price discounts.

High-low pricing involves charging higher prices on an

everyday basis but running frequent promotions to lower
prices temporarily on selected items.

Ch 10 -9 Copyright © 2011 Pearson Education

 Customer Perceptions of Value
Value-Based Pricing: Value-Added Pricing

Value-added pricing attaches value-added features and

services to differentiate offers, support higher prices, and build
pricing power.

Pricing power is the ability to escape price competition and to

justify higher prices and margins without losing market share.

Ch 10 - Copyright © 2011 Pearson Education

10
 Company and Product Costs
Cost-Based Pricing

Cost-based pricing involves setting prices based on the costs

for producing, distributing, and selling the product plus a fair
rate of return for its effort and risk.

Cost-based pricing adds a standard markup to the cost of

the product.

Ch 10 -11 Copyright © 2011 Pearson Education

 Company and Product Costs
Types of costs

Variable
Fixed costs Total costs
costs

Ch 10 -12 Copyright © 2011 Pearson Education

 Company and Product Costs
Types of costs

Fixed costs are the costs that do not vary with production or
sales level.
• Rent
• Heat
• Interest
• Executive salaries

Ch 10 -13 Copyright © 2011 Pearson Education

 Company and Product Costs
Types of Costs

Variable costs are the costs that vary with the level of
production.
• Packaging
• Raw materials

Total costs are the sum of the fixed and variable costs for any
given level of production.

Average cost is the cost associated with a given level

of output.

Ch 10 -14 Copyright © 2011 Pearson Education

 Company and Product Costs

Ch 10 -15 Copyright © 2011 Pearson Education

 Company and Product Costs
Costs as a Function of Production Experience

Experience or learning curve is when average cost falls as

production increases because fixed costs are spread over
more units.

Ch 10 -16 Copyright © 2011 Pearson Education

Company and Product Costs
Costs as a Function of Production Experience
 Company and Product Costs
Cost-Plus Pricing

Cost-plus pricing adds a standard markup to the cost of the

product Benefits.
• Sellers are certain about costs
• Prices are similar in industry and price competition is
minimized
• Consumers feel it is fair
Disadvantages
• Ignores demand and competitor prices

Ch 10 -18 Copyright © 2011 Pearson Education

 Company and Product Costs
Break-Even Analysis and Target Profit Pricing

Break-even pricing is the price at which total costs are equal

to total revenue and there is no profit.

Target profit pricing is the price at which the firm will break
even or make the profit it’s seeking.

Ch 10 -19 Copyright © 2011 Pearson Education

 Company and Product Costs

Ch 10 -20 Copyright © 2011 Pearson Education

 Other Internal and External Considerations
Affecting Price Decisions
Considerations

Customer perceptions of value set the upper limit for prices,

and costs set the lower limit.

Companies must consider internal and external factors when

setting prices.

Ch 10 -21 Copyright © 2011 Pearson Education

 Other Internal and External Considerations
Affecting Price Decisions
Overall Marketing Strategy, Objectives, and Mix

Target costing starts with an ideal selling price based on

consumer value considerations and then targets costs that
will ensure that the price is met.

Ch 10 -22 Copyright © 2011 Pearson Education

 Other Internal and External Considerations
Affecting Price Decisions
Organizational considerations

Organizational considerations include:

• Who should set the price
• Who can influence the prices

Ch 10 -23 Copyright © 2011 Pearson Education

 Other Internal and External Considerations
Affecting Price Decisions
The Market and Demand

Before setting prices, the marketer must understand the

relationship between price and demand for its products.

• Pricing in Different Types of Markets

• Analyzing the Price-Demand Relationship
• Price Elasticity of Demand

Ch 10 -24 Copyright © 2011 Pearson Education

 Other Internal and External Considerations
Affecting Price Decisions
Pricing in Different Types of Markets

Pure competition

Monopolistic competition

Oligopolistic competition

Pure monopoly

Ch 10 -25 Copyright © 2011 Pearson Education

 Other Internal and External Considerations
Affecting Price Decisions
Analyzing the Price-Demand Relationship

The demand curve shows the number of units the market will
buy in a given period at different prices.
• Normally, demand and price are inversely related
• Higher price = lower demand
• For prestige (luxury) goods, higher price can equal higher
demand when consumers perceive higher prices as higher
quality

Ch 10 -26 Copyright © 2011 Pearson Education

 Other Internal and External Considerations
Affecting Price Decisions
Price Elasticity of Demand

Ch 10 -27 Copyright © 2011 Pearson Education

 Other Internal and External Considerations
Affecting Price Decisions
Price Elasticity of Demand

Price elasticity of demand illustrates the response of

demand to a change in price.

Inelastic demand occurs when demand hardly changes when

there is a small change in price.

Elastic demand occurs when demand changes greatly for a

small change in price.

Price elasticity of demand = % change in quantity demand

% change in price

Ch 10 -28 Copyright © 2011 Pearson Education

Other Internal and External Considerations
Competitor's Strategies
Competitors’ Strategies and Prices

• Comparison of offering in terms of customer value

• Strength of competitors
• Competition pricing strategies
• Customer price sensitivity

Ch 10 -29 Copyright © 2011 Pearson Education

Other Internal and External Consideration
Affecting Price Decisions
Other External Factors

Economic conditions

Reseller’s response to price

Government

Social concerns

Ch 10 -30 Copyright © 2011 Pearson Education

New-Product Pricing Strategies

1. Market Skimming Pricing

2. Market Penetration Pricing

Ch 10 -31 Copyright © 2011 Pearson Education

 New-Product Pricing Strategies

Market-skimming pricing is a strategy with high initial

prices to “skim” revenue layers from the market.
• Product quality and image must support the price
• Buyers must want the product at the price
• Costs of producing the product in small volume should not
cancel the advantage of higher prices
• Competitors should not be able to enter the market easily

Ch 10 -32 Copyright © 2011 Pearson Education

 New-Product Pricing Strategies

Market-penetration pricing sets a low initial price in order to

penetrate the market quickly and deeply to attract a large
number of buyers quickly to gain market share.
• Price sensitive market
• Inverse relationship of production and distribution cost to
sales growth
• Low prices must keep competition out of the market

Ch 10 -33 Copyright © 2011 Pearson Education

 Product Mix Pricing Strategies

Optional- Captive-
Product line
product product
pricing
pricing pricing

By-product Product
pricing bundle pricing

Ch 10 -34 Copyright © 2011 Pearson Education

 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.

Ch 10 -35 Copyright © 2011 Pearson Education

 Product Mix Pricing Strategies

Captive-product pricing involves products that must be used

along with the main product.

For Services, it is called Two-part pricing.

• Fixed fee
• Variable usage fee

Ch 10 -36 Copyright © 2011 Pearson Education

 Price Mix Pricing Strategies

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.

Ch 10 -37 Copyright © 2011 Pearson Education

Price-Adjustment Strategies

Discount and
Segmented Psychological
allowance
pricing pricing
pricing

Promotional Geographic Dynamic

pricing pricing pricing

International
pricing

Ch 10 -38 Copyright © 2011 Pearson Education

 Price-Adjustment Strategies

Discount and allowance pricing reduces prices to reward

customer responses such as paying early or promoting the
product.
• Discounts: cash, quantity, functional, seasonal

Ch 10 -39 Copyright © 2011 Pearson Education

 Price-Adjustment Strategies

Segmented pricing is used when a company sells a product

at two or more prices even though the difference is not based
on cost.
• Customer
• Product form
• Location

Ch 10 -40 Copyright © 2011 Pearson Education

 Price-Adjustment Strategies

For Segmented Pricing to be effective:

• Market must be segmentable
• Segments must show different degrees of demand
• Watching the market cannot exceed the extra revenue
obtained from the price difference
• Must be legal

Ch 10 -41 Copyright © 2011 Pearson Education

 Price-Adjustment Strategies

Psychological pricing occurs when sellers consider the

psychology of prices and not simply the economics.
Reference prices are prices that buyers carry in their minds
and refer to when looking at a given product.
• Noting current prices
• Remembering past prices
• Assessing the buying situations

Ch 10 -42 Copyright © 2011 Pearson Education

 Price-Adjustment Strategies

Promotional pricing is when prices are temporarily priced

below list price or cost to increase demand.
• Loss leaders
• Special event pricing
• Cash rebates
• Low-interest financing
• Longer warrantees
• Free maintenance

Ch 10 -43 Copyright © 2011 Pearson Education

 Price-Adjustment Strategies

Risks of promotional pricing

• If it is used too frequently and copied by competitors, it can
create “deal-prone” customers who will wait for promotions
and avoid buying at regular price
• Creates price wars

Ch 10 -44 Copyright © 2011 Pearson Education

 Price-Adjustment Strategies
Geographic Pricing

Geographical pricing is used for customers in different parts

of the country or the world.
• FOB-origin pricing
• Uniformed-delivered pricing
• Zone pricing
• Freight-absorption pricing

Ch 10 -45 Copyright © 2011 Pearson Education

 Price-Adjustment Strategies
Geographic Pricing

FOB-origin (free on board) pricing means that the goods

are delivered to the carrier and the title and responsibility
passes to the customer.

Uniform-delivered pricing means the company charges the

same price plus freight to all customers, regardless of
location.

Ch 10 -46 Copyright © 2011 Pearson Education

Price-Adjustment Strategies
Geographic Pricing

Zone pricing means that the company sets up two or more

zones where customers within a given zone pay a single total
price.

Basing-point pricing means the seller designates some city

as a basing point and charges all customers the freight cost
from that city to the customer.

Freight-absorption pricing means the seller absorbs all or

part of the actual freight charge as an incentive to attract
business in competitive markets.

Ch 10 -47 Copyright © 2011 Pearson Education

 Price-Adjustment Strategies
Dynamic Pricing

Dynamic pricing is when prices are adjusted continually to

meet the characteristics and needs of the individual customer
and situations.

Ch 10 -48 Copyright © 2011 Pearson Education

 Price-Adjustment Strategies
Pricing 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

Ch 10 -49 Copyright © 2011 Pearson Education

 Price Changes
Initiating Pricing Changes

Price cuts occur due to:

• Excess capacity
• Increased market share

Price increase from:

• Cost inflation
• Increased demand
• Lack of supply

Ch 10 -50 Copyright © 2011 Pearson Education

 Price Changes
Buyer Reactions to Pricing Changes

• Product is “hot”
Price increases
• Company greed

• New models will be available

Price cuts • Models are not selling well
• Quality issues

Ch 10 -51 Copyright © 2011 Pearson Education

 Price Changes
Competitor Reactions to Pricing Changes

Competitors usually react when:

• The number of firms involved is small
• The product is uniform
• The buyers are well informed about products and prices

Ch 10 -52 Copyright © 2011 Pearson Education

 Price Changes
Responding to Price Changes

Questions
• Why did the competitor change the price?
• Is the price cut permanent or temporary?
• What is the effect on market share and profits?
• Will competitors respond?

Ch 10 -53 Copyright © 2011 Pearson Education

 Price Changes
Responding to Price Changes

Solutions
• Reduce price to match competition
• Maintain price but raise the perceived value through
communications
• Improve quality and increase price
• Launch a lower-price “fighting” brand

Ch 10 -54 Copyright © 2011 Pearson Education

 Price Changes

Ch 10 -55 Copyright © 2011 Pearson Education

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Ch 10 -56 Copyright © 2011 Pearson Education