Marketing Management

Module V, Part II
Pricing
Pricing Strategies
Price – Some Basic Definitions

Price is also the sum of all values that

Simply said, price is the amount of money
consumers exchange for the benefits of
charged for a product or service
having or using the product or service

Dynamic pricing policy :

Fixed price policy : Having Charging different prices
one fixed price for various depending on individual
categories of consumers customers and situations. E.g.
Airline tickets
I. Factors Influencing Pricing
Pricing Strategies
Factors influencing pricing decisions

External factors
Internal factors
• Nature of market &
• Marketing
demand
Objectives
• Competition
• Marketing Mix
• Other
• Costs
environmental
• Organisational
factors (Economy
considerations
etc)
II. General Approaches to Pricing
Pricing Strategies
General Approaches to Pricing

Cost
Based

Pricing
Compe-
Value
tition
Based
Based
Pricing Strategies
General Approaches to Pricing

Cost
Based

Pricing
Compe-
Value
tition
Based
Based
Pricing Strategies
General Approaches to Pricing
Cost Based Pricing
There are 2 main approaches to Cost Based Pricing….

Cost Plus
Pricing

Break-even Analysis and

Target Profit Pricing
Pricing Strategies
General Approaches to Pricing
Cost Based Pricing : Cost Plus Pricing

Competition, Consumer
Product internal & perceptio
Adding a standard markup to Costs external factors ns of value
the cost of the product
Price Floor Price Ceiling
No profits below No demand
this point above this point

Cost Plus pricing is popular because:

Sellers are surer about costs than about demand
When everyone in the industry uses this method, price competition is eliminated
Fair to buyers and sellers. Sellers get a good RoI and do not exploit buyers when demand increases
Pricing Strategies
General Approaches to Pricing
Cost Based Pricing : Break Even Analysis and Target Profit Pricing

Setting price to break even on

Setting price to make a
costs of making and marketing
predetermined target profit is
the product is called Break Even
called Target Profit Pricing
Analysis
Pricing Strategies
General Approaches to Pricing

Cost
Based

Pricing
Compe-
Value
tition
Based
Based
Pricing Strategies
General Approaches to Pricing
Value Based Pricing
Pricing Strategies
General Approaches to Pricing
Value Based Pricing
Pricing Strategies
General Approaches to Pricing
Value Based Pricing

Price is considered along with the

Value based pricing uses buyers
perception of value, not the sellers
cost, as the key to pricing
It means that the buyer cannot design
a product and then set a price
marketing mix variables before the
marketing program is set
The targeted value and price then
drive decisions about product price
and cost to be incurred
Pricing Strategies
General Approaches to Pricing

Cost
Based

Pricing
Compe-
Value
tition
Based
Based
Pricing Strategies
General Approaches to Pricing
Competition Based Pricing

Consumers form judgements on a They do not base pricing decisions

products value based on the prices based on their own costs.
which competitors charge for similar
products

One form of competition based As a result the firm ends up charging

pricing is going-rate pricing, in which same as, or more than or less than its
the firm bases its prices on major competitors
competitor’s prices
Pricing Strategies
General Approaches to Pricing
Competition Based Pricing

Commodity industries like steel or They change their prices, not based
paper charge more or less the same on demand or supply of their
price as the leader. The small firms products but when the industry
follow the leader leader changes its prices
III. Pricing Strategies
Pricing Strategies
Pricing Strategies

New
product
pricing

Price Pricing Product

Changes Strategies mix pricing

Price
adjustment
strategies
Pricing Strategies
Pricing Strategies

New
product
pricing

Price Pricing Product

Changes Strategies mix pricing

Price
adjustment
strategies
Pricing Strategies
Pricing Strategies
New Product Pricing

Market Skimming
Market Penetration
Pricing Strategies
Pricing Strategies
New Product Pricing

Market Skimming
Market Penetration
Pricing Strategies
Pricing Strategies
New Product Pricing : Market Skimming
Pricing Strategies
Pricing Strategies
New Product Pricing : Market Skimming
Pricing Strategies
Pricing Strategies
New Product Pricing : Market Skimming

Companies who invent new products,

set high initial prices to “skim”
revenues layer by layer from the
market

They set high prices to maximise on The company ends up making fewer
revenues, layer by layer from the number of sales, but extremely
segments willing to pay the high price profitable sales
Pricing Strategies
Pricing Strategies
New Product Pricing : Market Skimming
Conditions that favor Market Skimming

The product's quality and image

must support high price and enough
consumers must want the product
at that price

Costs of producing a smaller volume Competitors should not be able to

cannot be so high that it cancels the enter the market easily and undercut
advantage of a high price the high price
Pricing Strategies
Pricing Strategies
New Product Pricing

Market Skimming
Market Penetration
Pricing Strategies
Pricing Strategies
New Product Pricing : Market Penetration
Pricing Strategies
Pricing Strategies
New Product Pricing : Market Penetration

They do this to attract a large number of

It is the opposite of market skimming
buyers quickly and win a large market share

Under market penetration pricing, The high sales results in falling costs which
companies set a low initial price in order to enables the company to reduce prices
penetrate the market quickly and deeply. further
Pricing Strategies
Pricing Strategies
New Product Pricing : Market Penetration

Market should be price sensitive so

that low prices drive growth of the
market

Low price should keep competition out

Production and distribution costs
and the company must hold on to the low
must fall as sales volumes increase
price else the advantage will be temporary
Pricing Strategies
Pricing Strategies

New
product
pricing

Price Pricing Product

Changes Strategies mix pricing

Price
adjustment
strategies
Pricing Strategies
Pricing Strategies
Product Mix Pricing

The pricing strategy will have to change when the product is

part of a product mix.

In such a situation the company looks out for a set of prices

which maximises profit on the total product mix
Pricing Strategies
Pricing Strategies
Product Mix Pricing

Product
line

Product Optional
bundle product

By- Captive
product product
Pricing Strategies
Pricing Strategies
Product Mix Pricing

Product
line

Product Optional
bundle product

By- Captive
product product
Pricing Strategies
Pricing Strategies
Product Mix Pricing : Product Line Pricing

As discussed, companies usually

develop product lines rather than
single products

Product line pricing is setting the price steps
between various products in a product line
based on cost differences between the
products, customer evaluation of different
products and competitors’ prices
The seller’s task is to establish perceived
quality differences that support price
differences
Pricing Strategies
Pricing Strategies
Product Mix Pricing

Product
line

Product Optional
bundle product

By- Captive
product product
Pricing Strategies
Pricing Strategies
Product Mix Pricing : Optional Product Pricing

Pricing these options is a challenge as

Under optional product pricing companies
companies have to decide which items to
offer to sell optional or accessory products
include in the base price and which to
along with their main products
offer as options
Pricing Strategies
Pricing Strategies
Product Mix Pricing

Product
line

Product Optional
bundle product

By- Captive
product product
Pricing Strategies
Pricing Strategies
Product Mix Pricing : Captive Product Pricing

In the case of services, this strategy is

Companies that make products that must
called two-part pricing. The price of the
be used with the main product are using
service is broken into a fixed fee + a
Captive Product pricing
variable user rate

Often, the prices of the main products are Basic data plan + per kb charge for
kept low and high markups are charged on consumption above the basic level
the consumables
Pricing Strategies
Pricing Strategies
Product Mix Pricing

Product
line

Product Optional
bundle product

By- Captive
product product
Pricing Strategies
Pricing Strategies
Product Mix Pricing : Pricing of By-products

A marketer will seek a market for these

In the case of products like petroleum,
by-products and should accept any price
chemicals or even sugarcane there are often
which covers more than the cost of
by-products
storing & delivering them

If the by-products have no value and To realize value from the by-products,
getting rid of them is costly, the pricing of manufacturers need to find new markets
the main product is impacted for these by-products
Pricing Strategies
Pricing Strategies
Product Mix Pricing

Product
line

Product Optional
bundle product

By- Captive
product product
Pricing Strategies
Pricing Strategies
Product Mix Pricing : Pricing of Bundled Products

Price bundling can promote sale of a

Sellers often combine several of their product consumers may not otherwise
products and offer the bundle to buy, but the combined price should be low
consumers at a special price enough to get consumers to buy the
product
END OF MODULE 5, PARTII