MARKETING MANAGEMENT
Designing Pricing Strategies &
Programs
Chapter 17
What Is a Price?
Price is the amount of money charged for a
product or service. It is the sum of all the
values that consumers exchange in order to
gain the benefits of having or using a
product or service.
Importance of Price
Price remains one of the most important elements
that determine 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
Price is a part of a company’s overall value
proposition and plays a key role in creating
customer value and building customer
relationships.
Factors to Consider When
Setting Prices
Selecting a Pricing Method
• Companies can choose from three major pricing
methods depending on the factors to consider
when setting prices:
1. Customer value–based pricing
– Setting price based on buyers’ perceptions of
value rather than on the seller’s cost.
2. Cost-based pricing
– Setting prices based on the costs of producing,
distributing, and selling the product plus a fair
rate of return for the company’s effort and risk.
3. Competition-based pricing
– Setting prices based on competitors’ strategies,
costs, prices, and market offerings.
Selecting a Pricing Method
Value-based pricing Vs Cost-based pricing
Factors to Consider When
Setting Prices
Consumer Perception of Value
• Understanding how much value
consumers place on the benefits they
receive from the product and setting a
price that captures that value
• Customer perceptions of the product’s
value set the ceiling for its price. If
customers perceive that the product’s price
is greater than its value, they will not buy
the product.
Selecting a Pricing Method
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
Types of Value-based pricing
Good value pricing
Value-added pricing
Selecting a Pricing Method
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
1. Everyday low pricing (EDLP) involves charging
a constant everyday low price with few or no
temporary price discounts
2. High-low pricing involves charging higher
prices on an everyday basis but running
frequent promotions to lower prices
temporarily on selected items
Selecting a Pricing Method
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.
Many companies adopt value-added pricing
strategies. Rather than cutting prices to match
competitors, they add quality, services, and value-
added features to differentiate their offers and thus
support their higher prices.
Factors to Consider When
Setting Prices
Company and Product Costs
Company and Product costs set the floor for a
product’s price. If the company prices the
product below its costs, the company’s profits
will suffer.
Selecting a Pricing Method
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 is product driven
• A company’s costs take two forms; fixed costs
and variable costs.
• Management wants to charge a price that will at
least cover the total production costs at a given
level of production.
Types of cost-based pricing
• Cost-plus pricing (markup pricing)
• Break-even pricing (target return pricing)
Selecting a Pricing Method
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
Selecting a Pricing Method
Break-even pricing is setting price to break
even on the costs of making and marketing a
product or setting price to make a target return
.
Target profit pricing is the price at which the
firm will break even or make the profit it is
seeking.
Break even pricing is a strategy focused on
penetrating the market by pricing the product
in such a manner that the company is neither
in profit nor in loss.
Selecting a Pricing Method
Competition-based Pricing
Setting prices based on competitors’ strategies,
costs, prices, and market offerings.
• The company should compare its market offering with
the competitors’ offerings in terms of customer value.
• Company should analyze the strength of its current
competitors, and their current pricing strategies.
• The company’s goal is to set prices according to the
relative value created versus competitors rather than
matching or beating competitors’ prices.
Factors to Consider When
Setting Prices
• 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
• Along with these, various other
internal and external factors determine
the price levels
Factors to Consider When
Setting Prices
Other Internal and External Considerations
• Overall Marketing Strategy, Objectives, and Mix
• Organizational considerations include:
• Who should set the price
• Who can influence the prices
• The Market and Demand
• Before setting prices, the marketer must
understand the relationship between price and
demand for its products
Factors to Consider When
Setting Prices
Other Internal and External Consideration
Economic conditions
Resellers response to price
Government
Social concerns
Pricing Strategies
• Pricing strategies can be grouped into
three categories:
– New-Product Pricing Strategies
– Product Mix Pricing Strategies
– Price Adjustment Strategies
1. New-Product Pricing Strategies
• Pricing strategies usually change as the
product passes through its life cycle.
• Pricing new products can be especially
challenging. Companies bringing out a
new product face the challenge of setting
prices for the first time. They can choose
between two broad strategies:
1. Market-skimming pricing
2. Market-penetration pricing
1. New-Product Pricing Strategies
Market-skimming pricing Setting a high price
for a new product to skim maximum revenues
layer by layer from the segments willing to pay
the high price.
Using this strategy, the company makes fewer
but more profitable sales
– 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
1. 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
2. Product Mix Pricing Strategies
Optional Captive
Product line
product product
pricing
pricing pricing
By-product Product
pricing bundle pricing
2. Product Mix Pricing Strategies
Product line pricing takes into account the cost
differences between products in the product
lines, customer evaluation of their features, and
competitors’ prices
Optional product pricing takes into account
optional or accessory products along with the
main product.
• Companies using this strategy attempt to
increase the amount customers spend once
they start to buy
2. Product Mix Pricing Strategies
Captive-product pricing involves Setting a price
for products that must be used along with the
main product
• In the case of services, captive-product
pricing is called two-part pricing. The price of
the service is broken into a fixed fee plus a
variable usage rate.
By-product pricing involves setting a price for by-
products to help offset the costs of disposing of
them and help make the main product’s price
more competitive
Product bundle pricing combines several
products and offerings in a bundle and offer
them at a reduced price.
3. Price Adjustment Strategies
Discount &
Segmented Psychological
Allowance
pricing pricing
pricing
Promotional Geographical Dynamic
pricing pricing pricing
International
pricing
3. Price Adjustment Strategies
• Discount and allowance pricing reduces
prices to reward customer responses
such as paying early or promoting the
product
Discounts
A straight reduction in price on purchases during a stated period
of time or of larger quantities
Allowances
Promotional money paid by manufacturers to retailers in return
for an agreement to feature the manufacturer’s products in some
way
3. 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.
• Forms of segmented pricing
– Customer-segment pricing: different customers pay different
prices for the same product or service.
– Product form pricing: different versions of the product are
priced differently but not according to differences in their costs.
– Location-based pricing: a company charges different prices
for different locations, even though the cost of offering each
location is the same.
– Time-based pricing: a firm varies its price by the season, the
month, the day, and even the hour. For example, movie
theaters charge matinee pricing during the daytime, and
resorts give weekend and seasonal discounts.
3. 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
3. Price Adjustment Strategies
• Promotional pricing is when prices are
temporarily priced below list price or cost
to increase demand
– Discounts
– Special event pricing
– Cash rebates
– Limited time offers
– Low-interest financing
– Longer warrantees
– Free maintenance
3. Price Adjustment Strategies
• Geographical pricing is used for customers
in different parts of the country or the world
– FOB pricing
– Uniformed-delivery pricing
– Zone pricing
– Basing-point pricing
– Freight-absorption pricing
3. Price Adjustment Strategies
• Dynamic pricing is when prices are adjusted
continually to meet the characteristics and needs
of the individual customer and situations.
• 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
Price Changes
Initiating Pricing Changes
Price cuts occur due to
• Excess capacity
• Falling demand
• Drive to dominate the market through lower
costs
Price increase due to
• Cost inflation
• Over-demand
• Lack of supply
Price Changes
Responding to Price Changes
End-of-the-Chapter Review Questions
1. Define price. What is the importance of pricing?
2. Discuss the factors that companies consider when setting prices.
3. Discuss the pricing methods depending on the consumer perception of
value.
4. Discuss the pricing methods depending on the company and product costs.
5. Define value-based pricing. Also discuss its types.
6. Define cost-based pricing. Also discuss its types.
7. Discuss how competition affects the company’s pricing decisions.
8. Explain the pricing strategies in detail.
9. Explain market-skimming and market-penetration pricing strategies.
[Link] why would a marketer of innovative high-tech products choose
market-skimming pricing rather than market-penetration pricing when
launching a new product?
11. Name and briefly describe the five product mix pricing decisions.
[Link] the major price adjustment strategies available with marketing
manager.
[Link] how companies initiate price changes and respond to price
changes by competitors.
