Principles of Marketing

Nineteenth Edition, Global Edition

Don’t leave money on the table

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What Is a Price?
Price is the amount of money charged for a product or
service, or the sum of all the values that customers
exchange for the benefits of having or using the product or
service.

Pricing: No matter what the

state of the economy,
companies should sell value,
not price.

magicoven/Shutterstock

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Dynamic pricing

Adjusts prices to demand changes often on individual leve

Consumer information: More information is available and it

makes pricing more efficient

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Topics
•Economics vocabulary: Market structure,
price sensitivity and price elasticity
•Threefold approach to pricing decisions:
costs, competition and consumer behavior
•Pricing strategy considerations

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Market structure

Pricing In Different Types of Markets

• Pure competition
• Monopolistic competition
• Oligopolistic competition
• Pure monopoly

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Price Sensitivity

Price Elasticity of Demand

Price elasticity is a measure of the sensitivity of demand to
changes in price.
Inelastic demand is when demand hardly changes with a
small change in price.
Elastic demand is when demand changes greatly with a
small change in price.

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Major Pricing Strategies
Figure 10.1 Considerations in Setting Price

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Value-based pricing
Figure 10.2 Value-Based Pricing versus Cost-Based Pricing

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Major Pricing Strategies in FMCG
Customer Value-Based 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.

But consumers often lack the capability to understand value,

price is often a perceived variable

.
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Price Perceptions

•Reference prices serve as a starting point.

Consumers form price references based
on past experience and add future
expectations.

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Separate versus comparative evaluation

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Compromise effect

Items can GAIN market share when new

options are added to the market when they
become the compromise or middle option in
the choice set (Simonson 1989)

Example: Cheeseburger

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Example: Cheeseburgers

50% 50%
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Example: Cheeseburgers

50%
30% 50%
60% 10%
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Major Pricing Strategies
Cost-Based Pricing

Cost-based pricing sets prices based on the costs for

producing, distributing, and selling the product plus a fair
rate of return for effort and risk.
Fixed and variable costs behave differently and influence
pricing strategy

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Target costing
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.
Brands might build their
marketing strategies around
premium pricing or affordable
pricing. Consumer electronics
maker Visio’s aim is “to make
high-quality technology and
content affordable to
everyone.” Andrey_Popov/Shutterstock

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Lee Iacocca: Ford Mustang

“We needed a car for four passengers. To

achieve good performance, it had to be
lightweight… And finally, it needed to be
cheap. We designed it, that it should not
cost more than $ 2500 …”
Today: $ 44 695

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Major Pricing Strategies
Figure 10.4 Cost per Unit as a Function of Accumulated
Production: The Experience Curve

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Major Pricing Strategies
Cost-Based Pricing
Cost-plus pricing adds a standard markup to the cost of the
product.
• Benefits
– Sellers are certain about costs.
– Price competition is minimized.
– Buyers feel it is fair.
• Disadvantages
– Ignores demand and competitor prices

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Major Pricing Strategies
Cost-Based Pricing
Break-even pricing (target return pricing) is setting price
to break even on costs or to make a target return.
Figure 10.5 Break-Even Chart for Determining Target Return
Price and Break-Even Volume

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Major Pricing Strategies
Competition-Based Pricing
Competition-based pricing is setting prices based on
competitors’ strategies, costs, prices, and market offerings.

Pricing versus competitors:

Caterpillar dominates the
heavy equipment industry
despite charging premium
prices. Customers believe
that Caterpillar gives them a
lot more value for the price
over the lifetime of its Kristoffer Tripplaar/Alamy Stock Photo

machines.

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Price Changes
Figure 11.1 Responding to Competitor Price Changes

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Price Changes
Responding to Pricing Changes
Effective Action Responses
• 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

Fighter brands: Intel launched its

Celeron microprocessor as a fighter
brand to compete head-to-head with
competitor AMD’s lower-priced Ralf Liebhold/Shutterstock

processors, allowing Intel’s high-end

Pentium processor line to maintain its
premium prices.

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Price War Logics

Sports Competition Price Competition

– The more intense, the ⚫ The more intense, the
better the game worse the game

– Play as hard as you ⚫ Weigh the cost of each

can confrontation

– Goal is to win, ⚫ Goal is to profit

regardless of cost considering all costs

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The Strategic Pricing Pyramid

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The Reason for Segmented Pricing
A one-size fits all approach to pricing reduces profitability and
intensifies customer pricing pressure

2 ….leaves money on the table for these

customers and communicates that value
does not have to be paid for… High

1 Setting price here

Value
A B C D
Low
Segment Size

3 ….and misses growth opportunities by pricing

these customers out of the market

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Revenue Management Protects Seats
• High fares make reservations close to departure day
• Low fares could fill airplane and prevent high-fare sales
• Revenue Management limits low-fare sales and protects
high-fare space
• Revenue Management does not set fares, pricing does
• Most airlines match each other’s high fares
• Lowest fares may vary by airline

$1700
$1900 $900 $600
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Four Types of Fares
Fare Type: BUSINESS COACH DISCOUNT PROMOTION
Prices: 250-140% 140%-70% 60%-30% 40%-25%
Letter codes: F, C, J Y H, Q, M K, V
Commissions: 10%-30% 10%-15% 10%-15% 0%-10%
Seat size: BIG small small small
Service: high normal normal normal
Early 0 days 0 days 14-30 days 30-60 days
Purchase?
Refundable? yes yes partial no
Min. Stay? no no 7-14 days 7-14 days
Days “full”: under 5% under 5% 5%-50% 20%-80%
Typical user: business business holiday group
Elasticity: -0.5 -0.7 -1.4 -2.0
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Marketing strategy: segmentation

• The company can segment the market by the price

sensitivity of consumers
• It can be based on consumer self selection, geography
and time.
• Yield management based on timing
• Geographic pricing

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Considerations Affecting Price Decisions

Organizational Considerations
• Who should set prices?
• Who can influence prices?

• Quite often prices are set by intermediaries not by

manufacturers

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