Pricing:

Approaches and
Strategies
Session 5
Chapter 10 & 11

Price
o The amount of money charged for a product, or
the sum of the values that consumers
exchange for the benefits of having/using the
product.
o Price and the Marketing Mix
Only element to produce revenues
Most flexible element; can be changed quickly

o Price as a tool of Competition

o Common Pricing Mistakes

Factors to Consider in Setting Price

Internal
Factors
Marketing objectives

o
o Marketing mix strategies
o Costs
o Organizational
considerations

o Market positioning influences

pricing strategy
o Other pricing objectives:

Survival
Current profit maximization
Market share leadership
Product quality leadership

o Not-for-profit objectives:
Partial or full cost recovery
Social pricing

Factors to Consider in Setting Price (contd.)

Internal
Factors
Marketing objectives

o
o Marketing mix strategies
o Costs
o Organizational
considerations

o Pricing must be carefully

coordinated with the other
marketing mix elements
o Target costing is often used to
support product positioning
strategies based on price
o Non-price positioning can also
be used

Factors to Consider in Setting Price (contd.)

Internal
Factors
Marketing objectives

o
o Marketing mix strategies
o Costs
o Organizational
considerations

o Types of costs:
Variable
Fixed
Total costs
o How costs vary at different
production levels will influence
price setting
o Experience (learning) curve
effects on price

Factors to Consider in Setting Price (contd.)

Internal
Factors
Marketing objectives

o
o Marketing mix strategies
o Costs
o Organizational
considerations

o Who sets the price?

In Small companies:
CEO or top management
In Large companies:
Divisional or product line
managers

o Price negotiation is common

in industrial settings
o Some industries have pricing
departments

Factors to Consider in Setting Price (contd.)

External
Factors
o Nature of market and
demand
o Competitors costs,
prices, and offers
o Other environmental
elements

o Types of markets
Pure competition
Monopolistic competition
Oligopolistic competition
Pure monopoly
o Consumer perceptions of
price and value
o Price-demand relationship
Demand curve
Price elasticity of demand

Factors to Consider in Setting Price (contd.)

External
Factors
o Nature of market and
demand
o Competitors costs,
prices, and offers
o Other environmental
elements

o Consider competitors costs,

prices, and possible reactions
when developing a pricing
strategy
o Pricing strategy influences the
nature of competition
Low-price low-margin strategies
inhibit competition
High-price high-margin
strategies attract competition

o Benchmarking costs against the

competition is recommended

Factors to Consider in Setting Price (contd.)

External
Factors
o Nature of market and
demand
o Competitors costs,
prices, and offers
o Other environmental
elements

o Economic conditions
Affect production costs
Affect buyer perceptions of
price and value

o Reseller reactions to prices

must be considered
o Government may restrict or
limit pricing options
o Social considerations may
be taken into account

General Pricing Approaches

1. Cost-Based Pricing: a) Cost-Plus Pricing
Adding a standard markup to average cost, ignoring
demand, competition.
Also called Full Cost Pricing (set to cover both FC & VC)
Example
Variable costs: Tk. 20
Expected sales:100,000 units

Fixed costs: Tk. 500,000

Desired Sales Markup: 20%

Variable Cost + Fixed Costs/Unit Sales = Unit Cost

Tk. 20 + Tk. 500,000/100,000 = Tk. 25 per unit
Unit Cost/(1 Desired Return on Sales) = Markup Price
Tk. 25 / (1 - .20) = Tk. 31.25

General Pricing Approaches (contd.)

b) Break-Even Analysis & Target Profit Pricing
Revenues
Thousands Taka

1000

Target Profit Tk. 200,000

800

Total Costs

Break-even
point

600
400

Fixed Costs

200
0

10

20

30

40

Sales Volume in Thousands of Units

Quantity To Be Sold To
Meet Target Profit

c) Contribution Pricing:
Contribution = Selling Price Variable (direct costs)
o Set price to cover variable costs+ a contribution to fixed costs
o Similar to marginal cost pricing, or absorption cost pricing

General Pricing Approaches (contd.)

2. Value-Based Pricing
o Uses buyers perceptions of value rather than
sellers costs to set price.
o Measuring perceived value can be difficult!
o Consumer attitudes toward price and quality
have shifted during the last decade.
Introduction of less expensive versions of
established brands has become common.

General Pricing Approaches (contd.)

3. Competition-Based Pricing
o Where there is a price leader, rivals can't compete
on price
too high & lose market share
too low & price leader matches price & forces smaller
rival out of market

o So follow pricing leads of rivals with dominant

market share
o Where competition is limited, going rate pricing
may apply banks, petrol, supermarkets, electrical
goods similar prices all outlets

Other Pricing Approaches

o Market-Skimming Pricing
Setting a high price for a new product to skim
maximum revenues layer by layer from segments
willing to pay the high price.
o Market-Penetration Pricing
Setting a low price for a new product in order to
attract a large number of buyers and a large market
share.
o Relationship Pricing
Different price for different class of customers
depending on relationship and the potentiality of
cross-selling or future business.

Other Pricing Approaches (contd.)

o Loss Leader Pricing
Setting price below cost to attract sales elsewhere. (people
attracted to the store & buy other things). Purchases of other
items more than covers loss on item sold

o Psychological Pricing
Playing on consumer perceptions e.g. Tk. 49.99 not Tk. 50!
Links with value pricing high value goods priced according
to what consumers THINK should be the price

o Destroyer Pricing/ Predatory Pricing

Deliberate price cutting or offer of free gifts/products to
force rivals (normally smaller & weaker) out & prevent new
entrants. Anti-competitive & illegal if proved.

Product Mix Pricing Strategies

o Product Line Pricing
Setting price steps between product line items.
Line of products rather single one

o Optional-Product Pricing
Pricing optional or accessory products sold with the
main product

o Product Bundle Pricing

Pricing bundles of products sold together

Price Discrimination
o Customer Discrimination
for students only
o Place Discrimination
service at ATM versus at counters
Rural/urban
o Time Discrimination
peak -hours/ off-peak-hours
Season/off-season
o Area Discrimination
Agri/industry/small-industry

Price Changes
o Initiating Price Cuts is Desirable When a Firm
Has excess capacity
Faces falling market share due to price competition
Desires to be a market share leader

o Price Increases are Desirable

If a firm can increase profit, faces cost inflation, or faces
greater demand than can be supplied.

o Alternatives to Increasing Price

Reducing product size, using less expensive materials,
unbundling the product.

Price Changes (contd.)

o Buyer reactions to price changes must be considered.
o Competitors are more likely to react to price changes
under certain conditions.
Number of firms is small
Product is uniform
Buyers are well informed

o Respond to price changes only if:

Market share / profits will be negatively affected if nothing is
changed.
Effective action can be taken:

Reducing price
Raising perceived quality
Improving quality and increasing price
Launching low-price fighting brand

Public Policy and Pricing

o Pricing within Channel Levels
Price-fixing
Competitors should not work with each other to set prices

Predatory pricing
Firms should not sell below cost with the intention of punishing a

competitor or gaining higher long-run profits or running a competitor

out of business.

o Pricing across Channel Levels

Price discrimination
Retail price maintenance
Deceptive pricing
Bogus reference / comparison pricing
Price confusion