CHAPTER 7

PRICING STRATEGY
Product: is a good or service Price: is the amount of
that satisfies the wants of a money customers must
company’s target market.  pay to obtain the product. 

PRODUCT Marketing PRICE

Mix (4Ps)

Promotion: is defined as the Place: includes

activities that communicate the company activities that
merits of the product and make a product
PROMOTION PLACE available to target
persuade target customers to
buy it.  consumers.
Product: is a good or service Price: is the amount of
that satisfies the wants of a money customers must
company’s target market.  pay to obtain the product. 

PRODUCT Marketing PRICE

Mix (4Ps)

Promotion: is defined as the Place: includes

activities that communicate the company activities that
merits of the product and make a product
PROMOTION PLACE available to target
persuade target customers to
buy it.  consumers.
4Ps (seller’s mind-set) (buyer’s mind-set) 4Cs

Customers are buying value and

 Businesses sell products solutions to problems
PRODUCT CUSTOMER VALUE

Customer refers to the total costs

Price of obtaining, using, and disposing
of a product 
PRICE CUSTOMER COSTS

Activities that make a product

Easy to buying
available to target consumers.
PLACE CONVENIENCE

Consumers want two-way

Eg. 30 second commercials
communication and relationships
on television and/or radio
with businesses 
PROMOTION COMMUNICATION
4Ps (seller’s mind-set) (buyer’s mind-set) 4Cs

Customers are buying value and

 Businesses sell products solutions to problems
PRODUCT CUSTOMER VALUE

Customer refers to the total costs

Price of obtaining, using, and disposing
of a product 
PRICE CUSTOMER COSTS

Activities that make a product

Easy to buying
available to target consumers.
PLACE CONVENIENCE

Consumers want two-way

Eg. 30 second commercials
communication and relationships
on television and/or radio
with businesses 
PROMOTION COMMUNICATION
 The
 importance of Pricing

What
 is a Price?

CONTENT Pricing
 strategies

S Other
 Internal and External Considerations Affecting Price

Decisions

New-Product
 Pricing Strategies

Product
 Mix Pricing Strategies

Price-Adjustment
 Strategies

Price
 Changes
 1
The importance of Pricing
1. The importance of Pricing
THE IMPORTANCE OF PRICING

 Historically, price has been the major factor affecting buyer choice. In recent decades,
nonprice factors have gained increasing importance. However, price still remains one of
the most important elements that determines a firm’s market share and profitability.
 Price is the only element in the marketing mix that produces revenue; all other elements
represent costs. Price is also one of the most flexible marketing mix elements.
1. The importance of Pricing
HOW MUCH SHOULD YOU CHARGE FOR YOUR PRODUCT?
An old Russian proverb says:
“There are two fools in every market - one asks too little,
another asks too much.”
 Charging too little wins the sale but makes little profit. Furthermore, it attracts the wrong customers -
those who will switch to save a dime. It also attracts competitors who will match or exceed the price
cut. And it cheapens the customer’s view of the product.
 Charging too much may lose both the sale and the customer. Peter Drucker adds another concern:
“The worship of premium prices always creates a market for a competitor.”
 2
What is a Price?
2. What is a Price?

In the narrowest sense, price is the amount of money charged for

a product or a service.

More broadly, price is the sum of all the values that customers give up to gain the
benefits of having or using a product or service.
 3
Pricing strategies
3. Pricing strategies
THREE MAJOR PRICING STRATEGIES
Good-Value Pricing
CUSTOMER VALUE-BASED PRICING
Value-Added Pricing

Cost-Plus Pricing (or Markup Pricing)

COST-BASED PRICING Break-even Pricing

(or Target Return Pricing)

COMPETITATION-BASED PRICING
3. Pricing strategies
THREE MAJOR PRICING STRATEGIES

CUSTOMER
COST-BASED COMPETITATION-
VALUE-BASED
PRICING BASED PRICING
PRICING
3. Pricing strategies
THREE MAJOR PRICING STRATEGIES

CUSTOMER
COST-BASED COMPETITATION-
VALUE-BASED
PRICING BASED PRICING
PRICING
 3. Pricing strategies
 Setting price based on buyers’ perceptions of value rather than on the seller’s cost.

For example:
A Steinway piano - any Steinway piano - costs a
lot ($40,000 to $165,000). But to those who own
one, a Steinway is a great value: Steinway
makes very high quality pianos; handcrafting
CUSTOMER each Steinway requires up to one full year.
VALUE-BASED
PRICING
 3. Pricing strategies

CUSTOMER Good-Value Pricing Value-Added Pricing

VALUE-BASED
PRICING
 3. Pricing strategies

CUSTOMER Good-Value Pricing Value-Added Pricing

VALUE-BASED
PRICING
3. Pricing strategies
CUSTOMER VALUE-BASED PRICING

 Offering the right combination of quality and good service at a fair price.
For example:
 To meet tougher economic times and more frugal consumer spending habits, fast-
food restaurants such as Taco Bell and McDonald’s offer value meals and dollar
menu items.
 Armani offers the less-expensive, more-casual Armani Exchange fashion line.
Good-Value  And every car company now offers small, inexpensive models better suited to
Pricing the strapped consumer’s budget.
 3. Pricing strategies

CUSTOMER Good-Value Pricing Value-Added Pricing

VALUE-BASED
PRICING
 3. Pricing strategies
CUSTOMER VALUE-BASED PRICING

 Attaching value-added features and services to differentiate a company’s offers and

charging higher prices.

For example:
When re-branding their hotels, Southern Sun realized they could give their customers a
Value-Added positive experience not buy lowering prices but by adding value to the services they
Pricing provide.
 3. Pricing strategies
CUSTOMER VALUE-BASED PRICING

“If consumers thought the best deal was simply a question of money
saved, we’d all be shopping in one big discount store. Customers want
value and are willing to pay for it. Savvy marketers price their products
accordingly.”
Value-Added (says one pricing expert)
Pricing
3. Pricing strategies
THREE MAJOR PRICING STRATEGIES

CUSTOMER
COST-BASED COMPETITATION-
VALUE-BASED
PRICING BASED PRICING
PRICING
3. Pricing strategies
THREE MAJOR PRICING STRATEGIES

CUSTOMER
COST-BASED COMPETITATION-
VALUE-BASED
PRICING BASED PRICING
PRICING
3. Pricing strategies

 Setting prices based on the costs for producing, distributing, and selling the
product plus a fair rate of return for effort and risk.

For example:
It costs more to make a “handcrafted” Steinway piano than a Yamaha
production model. But the higher costs result in higher quality, justifying that
eyepopping $72,000 price.

COST-BASED
PRICING
3. Pricing strategies

Types of costs

Fixed Variable Total

costs costs costs
COST-BASED
PRICING
3. Pricing strategies
Types of costs
 FIXED COSTS (OVERHEAD)
Costs that do not vary with production or sales level: Rent, Heat, Interest,
Executive salaries.

 VARIABLE COSTS
Costs that vary directly with the level of production: Packaging, Raw materials.

 TOTAL COSTS
COST-BASED The sum of the fixed and variable costs for any given level of production.
PRICING
 3. Pricing strategies
Costs as a Function of Production Experience

Experience curve (learning curve)

The drop in the average per-unit production cost that comes with
accumulated production experience.
COST-BASED
PRICING
 3. Pricing strategies
Costs as a Function of Production Experience

 The average cost of producing the first

100,000 calculators is $10 per calculator.
 When the company has produced the first
200,000 calculators, the average cost has
fallen to $8.50.
 After its accumulated production
experience doubles again to 400,000, the
COST-BASED
average cost is $7.
PRICING
3. Pricing strategies
THREE MAJOR PRICING STRATEGIES

Cost-Plus Pricing Break-even Pricing

COST-BASED
(or Markup Pricing) (or Target Return Pricing)
PRICING
3. Pricing strategies
THREE MAJOR PRICING STRATEGIES

Cost-Plus Pricing Break-even Pricing

COST-BASED
(or Markup Pricing) (or Target Return Pricing)
PRICING
3. Pricing strategies
COST-BASED PRICING

Adding a standard markup to the cost of the product.

For example:

Cost-Plus Pricing
(or Markup Pricing)
3. Pricing strategies
THREE MAJOR PRICING STRATEGIES

Cost-Plus Pricing Break-even Pricing

COST-BASED
(or Markup Pricing) (or Target Return Pricing)
PRICING
 3. Pricing strategies
 Setting price to break even on the costs of making and
COST-BASED PRICING
marketing a product or setting price to make a target return.

For example:
The breakeven price of a house would be the sale price the owner would
need to get to cover the home's purchase price, interest paid on the
mortgage, hazard insurance, property taxes, maintenance,
improvements, closing costs and real estate sales commission. At this
Break-even Pricing
price, the homeowner would not see any profit, but also would not lose
(or Target Return Pricing) any money.
3. Pricing strategies
THREE MAJOR PRICING STRATEGIES

CUSTOMER
COST-BASED COMPETITATION-
VALUE-BASED
PRICING BASED PRICING
PRICING
3. Pricing strategies
THREE MAJOR PRICING STRATEGIES

CUSTOMER
COST-BASED COMPETITATION-
VALUE-BASED
PRICING BASED PRICING
PRICING
3. Pricing strategies
 Setting prices based on competitors’ strategies, prices, costs, and market
offerings.

For example:
Walmart is selling a face wash for $3.99. NuMart, who is looking
to sell this product in the same area, also prices their product at
$3.99 in order to capture market share. They will not receive
COMPETITATION- higher profits per unit than Walmart with this pricing strategy, and
BASED PRICING will have to engage in marketing tactics to engage customers, since
the price itself is not an incentive.
 4
Other Internal and External Considerations
Affecting Price Decisions
4. Other Internal and External Considerations
Affecting Price Decisions

 Overall Marketing Strategy, Objectives, and Mix

 Organizational Considerations

 The Market and Demand

 The Economy

 Other External Factors

4. Other Internal and External Considerations
Affecting Price Decisions

 The Market and Demand:

 Pricing in Different Types of Markets

 Price Elasticity of Demand

 PRICING IN DIFFERENT TYPES OF

PURE
MARKETS
 Many buyers and sellers trading in a uniform commodity, such as wheat, copper, or
financial securities.
COMPETITION
 Do not spend much time on marketing strategy.

 Many buyers and sellers who trade over a range of prices rather than a single
MONOPOLISTIC market price.
COMPETITION  Less affected by competitors’ pricing strategies
(many competitors).

OLIGOPOLISTIC  A few sellers who are highly sensitive to each other’s pricing and marketing
COMPETITION strategies.

PURE  One seller, such as a power company

MONOPOLY  Pricing is handled differently in each case.
 4. Other Internal and External Considerations
Affecting Price Decisions

PRICE ELASTICITY OF DEMAND

 Price elasticity: A measure of the sensitivity of demand to changes in price.
 The price elasticity of demand is given by the following formula:
 PRICE ELASTICITY OF DEMAND

Price elasticity of demand < 1 Demand is inelastic

Price elasticity of demand > 1 Demand is elastic

Price elasticity of demand = 1 Demand is unit elastic

For example, Suppose demand falls by 10 percent when a seller raises its price by 2 percent.
The price elasticity of demand is therefore -5 and demand is elastic.
 5
New-Product Pricing Strategies
5. New-product Pricing Strategies
MARKET-SKIMMING
PRICING MARKET-PENETRATION
(PRICE SKIMMING) PRICING
Setting a high price for a new Setting a low price for a new
product to skim maximum product to attract a large
revenues layer by layer from number of buyers and a large
the segments willing to pay the market share.
high price; the company makes
fewer but more profitable sales.
 5. New-product Pricing Strategies

Conditions
 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
MARKET-SKIMMING advantage of higher prices.
PRICING
(PRICE SKIMMING)  Competitors should not be able to enter the market easily.
 5. New-product Pricing Strategies

 For example:
When Apple first introduced the iPhone, its initial price was as much as $599
per phone. Six months later, Apple dropped the price to $399 for an 8GB model
and $499 for the 16GB model to attract new buyers. Within a year, it dropped
prices again to $199 and $299. In this way, Apple skimmed the maximum
MARKET-SKIMMING
amount of revenue from the various segments of the market.
PRICING
(PRICE SKIMMING)
5. New-product Pricing Strategies

 Price sensitive market.

 Inverse relationship of production and distribution cost to sales growth.
 Low prices must keep competition out of the market.

MARKET-
PENETRATION
PRICING
5. New-product Pricing Strategies

 For example:
The giant Swedish retailer IKEA used penetration pricing to boost its
success in the Chinese market.

MARKET-
PENETRATION
PRICING
 6
Product Mix Pricing Strategies
 6. Product Mix Pricing Strategies

PRODUCT LINE OPTIONAL CAPTIVE BY-PRODUCT PRODUCT

PRICING PRODUCT PRICING PRODUCT PRICING BUNDLE
Setting prices across Pricing optional or PRICING Pricing low-value PRICING
an entire product accessory products sold Pricing products that by-products to get Pricing bundles of
line with the main product must be used with the rid of them products sold
main product together
 6. Product Mix Pricing Strategies

For example, Quicken offers an entire line of financial

management software, including Starter, Deluxe, Premier, Home
& Business, and Rental Property versions priced at $29.99,
PRODUCT LINE
PRICING $59.99, $89.99, $99.99, and $149.99, respectively.
Setting prices across
an entire product
line
6. Product Mix Pricing Strategies

For example, a car buyer may choose to order a global

positioning system (GPS) and Bluetooth wireless
communication. Refrigerators come with optional ice makers.
OPTIONAL And when you order a new PC, you can select from a
PRODUCT PRICING bewildering array of processors, hard drives, docking systems,
Pricing optional or
accessory products sold software options, and service plans.
with the main product
6. Product Mix Pricing Strategies

Examples of captive products are razor blade cartridges,

videogames, and printer cartridges. Producers of the main
products (razors, videogame consoles, and printers) often price
CAPTIVE
PRODUCT them low and set high markups on the supplies.
PRICING
Pricing products that
must be used with the
main product
6. Product Mix Pricing Strategies

Example:
When meat is processed for human consumption, the by product
BY-PRODUCT can be used as food for dog/cat. So the manufacturer can sell it in
PRICING market to recover some of his expenses say transportation and
Pricing low-value
by-products to get storage costs.
rid of them
6. Product Mix Pricing Strategies

For example, fast-food restaurants bundle a burger, fries, and

a soft drink at a “combo” price.
PRODUCT
BUNDLE
PRICING
Pricing bundles of
products sold
together
 7
Price-Adjustment Strategies
7. Price-Adjustment Strategies

Discount and Segmented Psychological

allowance pricing pricing pricing

Geographic International
Promotional pricing Dynamic pricing
pricing pricing
Price-Adjustment Strategies
 8
Price Changes
8. Price Changes

PRICE CUTS occur due to: PRICE INCREASES from:

 Excess capacity.
 Falling demand (strong price competition
 Cost inflation
or a weakened economy).
 Increased demand
 To dominate the market through lower
costs.  Lack of supply
 The hope of gaining market share.
8. Price Changes

Buyer Reactions to Pricing Changes

PRICE CUTS PRICE INCREASES

 New models will be available

 Product is “hot”
 Models are not selling well
 Company greed
 Quality issues
 8. Price Changes
Responding to Price Changes
Questions Solutions
 Why did the competitor change the price?
 Reduce price to match competition
 Is the price cut permanent or temporary?
 What is the effect on market share and  Maintain price but raise the perceived value
profits? through communications
 Will competitors respond?
 Improve quality and increase price
 Launch a lower-price “fighting” brand
What do you need to
remember?
Product: is a good or service Price: is the amount of
that satisfies the wants of a money customers must
company’s target market.  pay to obtain the product. 

PRODUCT Marketing PRICE

Mix (4Ps)

Promotion: is defined as the Place: includes

activities that communicate the company activities that
merits of the product and make a product
PROMOTION PLACE available to target
persuade target customers to
buy it.  consumers.
Pricing strategies

THREE MAJOR PRICING STRATEGIES

Good-Value Pricing
CUSTOMER VALUE-BASED PRICING
Value-Added Pricing

Cost-Plus Pricing (or Markup Pricing)

COST-BASED PRICING Break-even Pricing

(or Target Return Pricing)

COMPETITATION-BASED PRICING
Other Internal and External Considerations
Affecting Price Decisions

 Overall Marketing Strategy, Objectives, and Mix

 Organizational Considerations

 The Market and Demand

 The Economy

 Other External Factors

New-product Pricing Strategies

MARKET-SKIMMING
PRICING MARKET-PENETRATION
(PRICE SKIMMING) PRICING
Setting a high price for a new Setting a low price for a new
product to skim maximum product to attract a large
revenues layer by layer from number of buyers and a large
the segments willing to pay the market share.
high price; the company makes
fewer but more profitable sales.
 Product Mix Pricing Strategies

PRODUCT LINE OPTIONAL CAPTIVE BY-PRODUCT PRODUCT

PRICING PRODUCT PRICING PRODUCT PRICING BUNDLE
Setting prices across Pricing optional or PRICING Pricing low-value PRICING
an entire product accessory products sold Pricing products that by-products to get Pricing bundles of
line with the main product must be used with the rid of them products sold
main product together
Price-Adjustment Strategies