Principles of Marketing
CHAPTER # 10
Pricing – Understanding and Capturing
Customer Value
Objective Outline
Objective 1 Answer the question “What is a price?” and discuss the
importance of pricing in today’s
What Is a Price? (pp 312–313)
Objective 2 Identify the three major pricing strategies and discuss the
importance of understanding
Major Pricing Strategies (pp 313–321)
Objective 3 Identify and define the other important external and internal
factors affecting a firm’s pricing decisions.
Other Internal and External Considerations Affecting Price Decisions (pp 321–
328)
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To the Seller…
What is Price? Price is the Revenue
and Profit earning
source
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 To the Consumer...
having or using a product or service. Price is what you
give up (sacrifice) to
Historically, price has been the major factor get what you want
affecting buyer choice.
In recent decades, however, nonprice factors
have gained increasing importance.
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What is Price?
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.
Unlike product features and channel commitments, prices
can be changed quickly.
At the same time, pricing is the number-one problem
facing many marketing executives, and many companies do
not handle pricing well.
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Factors to be Considered in Setting Price
Other Internal and External
Considerations
Customer Company
Perceptions Marketing strategy, Objective and Mix, And
of Value Competitors’ Strategies and Prices Product cost
Nature of the market and Demand etc.
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Factors to be Considered in Setting Price
Customer Perceptions of Value
Effective customer-oriented pricing involves understanding how much value
(monetary or other) consumers place on the benefits that they receive
from a product.
While setting the price, marketers need to maintain a balance between customers’ costs
(sacrifice) and benefits of the product.
Customers Value Price Cost Product
Value-based Pricing is Customer Driven.
Factors to be Considered in Setting Price
Customer Perceptions of Value
Value-based pricing has two options:
➢ Good-value Pricing
➢ Value-added Pricing
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Factors to be Considered in Setting Price
Good-Value Pricing offers the right combination of quality and
good service to fair price.
Ex: Fast food restaurant such as McDonald’s offer “value meal”, Armani
offers less expensive, more casual Armani Exchange fashion line, Tata
Motors has recently unveiled the TATA Nano, an economical car with a
base price of about Rs. 100,000/-
Existing brands are being redesigned to offer more quality for a given
price or the same quality for less price.
Important types of good-value pricing at the retailer level are:
- Everyday Low Pricing (EDLP)
- High-Low Pricing 8
Factors to be Considered in Setting Price
Everyday low pricing (EDLP) involves charging a constant everyday low
price with few or no temporary price discounts.
Example: Grocery Stores (Shwapno, Meena bazar) - Perishable Goods – Fish,
Vegetables, etc.
WALMART promises everyday low prices on everything it sells.
Big Bazar – offers the cheapest price by asking, “Isse Sasta Aur Kahaan?” (where else
does it get any cheaper?”
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Factors to be Considered in Setting Price
High-low pricing involves charging higher prices on an everyday basis
but running frequent promotion to lower prices temporarily on
selected items.
Example: Seasonal Goods – Price of Tomato in Winter Season and in Summer –
Varies to a greater extent.
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Factors to be Considered in Setting Price
Value-added Pricing refers attaching value-added features and
services to differentiate a company’s offers and to support
charging higher prices and build pricing power.
Telecommunication companies, Boutique shops and Restaurants
are using this types of strategies for pricing their products.
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Factors to be Considered in Setting Price
Cost-based Pricing
Product Cost Price Value Customers
Cost-based Pricing is Product Driven.
The company designs what it considers to be a good product, adds up the costs of
making the product, and sets a price that covers costs plus a target profit.
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Factors to be Considered in Setting Price
Cost-based Pricing
Whereas customer value perceptions set the price ceiling, costs set the floor for
the price that the company can charge.
Cost-based pricing involves 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.
A company’s costs may be an important element in its pricing strategy.
Some companies, such as Walmart or Air Asia Airlines, work to become the low-
cost producers in their industries.
13
Factors to be Considered in Setting Price
Cost-based Pricing
Total Costs
Variable Fixed
Costs Costs
Deviate with changes Do not deviate
in level of output as level of output changes
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Factors to be Considered in Setting Price
Cost-based Pricing
Fixed Costs are the costs that do not vary with the level of
production or sales like:
✓ Factory/Office Rent, Plant and Equipment's cost
✓ Bank Interest, Executives’ Salaries etc.
Variable Costs are the costs that vary with the level of
production like:
✓ Raw materials cost, Packaging & Labeling cost
✓ Sales & Distribution cost, Channel partners’ commission
✓ Utilities cost, Promotion cost etc. 15
Factors to be Considered in Setting Price
Cost-based pricing has two options:
➢ Cost-plus pricing
➢ Break even pricing
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Factors to be Considered in Setting Price
Cost-based Pricing
Cost-Plus Pricing
The simplest pricing method is cost-plus pricing (or markup pricing) - adding a
standard markup to the cost of the product.
Construction companies, for example, submit job bids by estimating the total
project cost and adding a standard markup for profit.
Lawyers, accountants, and other professionals typically price by adding a standard
markup to their costs.
Some sellers tell their customers they will charge cost plus a specified markup; for
example, aerospace companies often price this way to the government.
Markup Price = _________unit cost_________
(1 - desired return on sales) 17
Factors to be Considered in Setting Price
Cost-based Pricing
Cost-Plus Pricing
To illustrate markup pricing, suppose a pen manufacturer had the following costs and expected
sales:
Variable Cost $10 Fixed Costs $300,000 Unit Sales 50,000 Expected Mark up 20%
Find out the Selling Price of the product using the Mark up Pricing system!
The manufacturer’s cost per pen is given by the following:
Unit Cost = variable cost + fixed cost = $10 + $300,000 = $16
unit sales 50,000
The manufacturer’s markup price is given by the following:
Markup Price = _________unit cost_________ = __16__ = $20
(1 - desired return on sales) 1- 0.2 18
The manufacturer would charge $20 per pen and make a profit of $4 per unit.
Factors to be Considered in Setting Price
Cost-based Pricing
Break-Even Analysis and Target Profit Pricing
Another cost-oriented pricing approach is break-even pricing (or a variation
called target return pricing).
The firm sets a price at which it will break even or make the target return on the
costs of making and marketing a product.
Target return pricing uses the concept of a break-even chart, which shows the
total cost and total revenue expected at different sales volume levels.
Break-even volume = ____Fixed Cost_____
Price - Variable Cost
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Factors to be Considered in Setting Price
Cost-based Pricing
Break-Even Analysis and Target Profit Pricing
To illustrate break-even pricing, suppose a pen manufacturer had the following costs and
selling price:
Variable Cost $10 Fixed Costs $300,000 Selling Price $20
Find out the break-even production and sales Volume!
Break-even volume can be calculated using the following formula:
Break-even volume = ____Fixed Cost_____ = $ 300,000 = 30,000 units
Price - Variable Cost $20 - $10
At $20, the company must sell at least 30,000 units of pen to ensure break even, that is, for
total revenue to cover total cost. 20
Factors to be Considered in Setting Price
Other Internal and External
Considerations Affecting Price Decisions
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Factors to be Considered in Setting Price
Internal Factors
Overall marketing strategies and Mix
Pricing of the product of any company should be consistent
with its marketing strategies and marketing mix and the target
customer.
Toyota developed its ‘Lexus’ brand to compete with the European luxury
performance cars in the higher income segment, this required a charging a
higher price.
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Factors to be Considered in Setting Price
Internal Factors
Overall marketing strategies and Mix
Competition-Based Pricing
Competition-based pricing involves setting prices based on competitors’
strategies, costs, prices, and market offerings.
Consumers will base their judgments of a product’s value on the prices that
competitors charge for similar products.
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Factors to be Considered in Setting Price
External Considerations Affecting Pricing Decision
Market Conditions
Economists recognizes four types of market conditions:
Pure Competition
Monopolistic Competition
Oligopolistic Competition
Pure Monopoly 24
Factors to be Considered in Setting Price
External Considerations Affecting Pricing Decision
Market Conditions
Pure Competition
Is a competitive market in which every company has a similar
product and selling to lots of consumers. So, no single buyer or
seller has much effect on market price.
For example:
Fast Moving Consumer Goods
[FMCG] industry of
Bangladesh. 25
Factors to be Considered in Setting Price
External Considerations Affecting Pricing Decision
Market Conditions
Monopolistic Competition
Is a market with many buyers and sellers who trade over a range of
prices rather than a single market price. A range of prices because
sellers can differentiate their offers to buyers.
For example:
Home and Kitchen Appliances,
and Electronics industry of
Bangladesh. 26
Factors to be Considered in Setting Price
External Considerations Affecting Pricing Decision
Market Conditions
Oligopolistic Competition
Is a competitive market in which a few companies control most of
the industry’s sales and who are highly sensitive to each other’s
pricing and marketing strategies. So, there is no absolute price
power to one individual company.
For example:
ICT and Telecom Services
Operators’ industry of 27
Bangladesh.
Factors to be Considered in Setting Price
External Considerations Affecting Pricing Decision
Market Conditions
Pure Monopoly
Is a market with only one seller who sets the price of a unique product. In
a regulated monopoly, the government permits a price that will yield a fair
return. In a non-regulated monopoly, companies are free to set a market
price.
For example:
Utilities services [Electricity, Gas,
Water supply] industries of
Bangladesh. 28
END OF THE CHAPTER
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