Strategic

Marketing
Pricing Strategy
Dr. Mohamed Abdelazim

Definition
Price
The amount of money charged
for a product or service
or
The sum of the values that
consumers exchange for the
benefits of having or using the
product or service.
10 - 2

Goal 1: Identify and define internal factors affecting pricing decis

What is Price?
Price Has Many Names

Rent
Fee
Rate
Commission
Assessment

Tuition
Fare
Toll
Premium
Retainer

Bribe
Salary
Wage
Interest
Tax
10 - 3

Goal 1: Identify and define internal factors affecting pricing decis

Dynamic Pricing on the Web

allows SELLERS to:
Monitor customer behavior and tailor
offers.
Change prices according to changes in
demand or costs.
Aid consumers with price comparisons.
Negotiate prices in online auctions and
exchanges.
10 - 4

Goal 1: Identify and define internal factors affecting pricing decis

Price and the Marketing

Mix
Only element to produce
revenues
Most flexible element
Can be changed quickly
10 - 5

Goal 1: Identify and define internal factors affecting pricing decis

Common Pricing Mistakes

Reducing prices too quickly to
get sales
Pricing based on costs, not
customer value

10 - 6

Factors to Consider
When Setting Price
Internal
Factors

Marketing
objectives

Marketing mix
strategies
Costs
Organizational
considerations

Market positioning
influences pricing
strategy
Other pricing objectives:
Survival
Current profit
maximization
Market share
leadership
Product quality
leadership
10 - 7

Goal 1: Identify and define internal factors affecting pricing decis

Factors to Consider
When Setting Price
Internal
Factors

Marketing
objectives

Marketing mix
strategies
Costs
Organizational
considerations

Pricing must be carefully

coordinated with the
other marketing mix
elements
Target costing is often
used to support product
positioning strategies
based on price
Nonprice positioning can
also be used
10 - 8

Goal 1: Identify and define internal factors affecting pricing decis

Factors to Consider
When Setting Price
Internal
Factors

Marketing
objectives

Marketing mix
strategies
Costs
Organizational
considerations

Types of costs:
Variable
Fixed
Total costs
How costs vary at
different production
levels will influence
price setting

Experience (learning)10 - 9
curve
affects
pricepricing decis
Goal 1: Identify and define internal
factors
affecting

Factors to Consider
When Setting Price
Internal
Factors

Marketing
objectives

Marketing mix
strategies
Costs

Who sets the price?

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

Price negotiation is
common in industrial
Organizational
settings where pricing
considerations
departments may be
10 - 10
created
Goal 1: Identify and define internal factors affecting pricing decis

Factors to Consider
When Setting Price
External
Factors

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

Types of markets
Pure competition
Monopolistic
competition
Oligopolistic
competition
Pure monopoly
Consumer perceptions of
price and value
Price-demand relationship
Demand curve
Price elasticity of
10 - 11
demand

Goal 2: Identify and define external factors affecting pricing deci

Factors to Consider
When Setting Price
External
Factors
Nature of market
and demand
Competitors
costs, prices, and
offers
Other
environmental
elements

Consider competitors costs,

prices, and possible
reactions
Pricing strategy influences
the nature of competition
Low-price low-margin
strategies inhibit
competition
High-price high-margin
strategies attract
competition
Benchmarking costs against
the competition is
recommended
10 - 12

Goal 2: Identify and define external factors affecting pricing deci

Factors to Consider
When Setting Price
External
Factors
Nature of market
and demand
Competitors
costs, prices, and
offers
Other
environmental
elements

Economic conditions
Affect production costs
Affect buyer
perceptions of price
and value
Reseller reactions to
prices must be
considered
Government may restrict
or limit pricing options
Social considerations may
be taken into account

10 - 13

Goal 2: Identify and define external factors affecting pricing deci

General Pricing
Approaches
Cost-Based Pricing: Cost-Plus
Pricing
Adding a standard markup to cost
Ignores demand and competition
Popular pricing technique because:
It simplifies the pricing process
Price competition may be minimized
It is perceived as more fair to both
buyers and sellers
10 - 14

Goal 3: Contrast the three general approaches to setting prices

General Pricing
Approaches
Cost-Based Pricing Example
- Variable costs: $20
- Fixed costs: $ 500,000
- Expected sales: 100,000 units - Desired Sales Markup:
20%
(Total Variable Cost + Fixed Costs)/Unit Sales = Unit Cost
$2,000,000 + $500,000/100,000 = $25 per unit
Unit Cost/(1 Desired Return on Sales) = Markup Price
$25 / (1 - .20) = $31.25

10 - 15

Goal 3: Contrast the three general approaches to setting prices

General Pricing
Approaches
Cost-Based Pricing: Break-Even
Analysis and Target Profit Pricing
Break-even charts show total cost and
total revenues at different levels of unit
volume.
The intersection of the total revenue and
total cost curves is the break-even point.
Companies wishing to make a profit must
exceed the break-even unit volume.
10 - 16

Goal 3: Contrast the three general approaches to setting prices

Break-Even Chart

10 - 17

General Pricing
Approaches
Value-Based Pricing:
Uses buyers perceptions of value rather
than sellers costs to set price.
Measuring perceived value can be difficult.
Consumer attitudes toward price and quality
have shifted during the last decade.
Value pricing at the retail level

Everyday low pricing (EDLP) vs. high-low pricing

10 - 18

Goal 3: Contrast the three general approaches to setting prices

General Pricing
Approaches
Competition-Based Pricing:
Also called going-rate pricing
May price at the same level, above, or
below the competition
Bidding is another variation of
competition-based pricing
Sealed bid pricing
10 - 19

Goal 3: Contrast the three general approaches to setting prices

Market-Entry
Strategies

Market-Skimming
Market-Skimming
Pricing
Pricing

Set a relatively high price

Market-Penetration
Market-Penetration
Pricing
Pricing
Low initial price
10 - 20

Market-Skimming
Pricing
Many companies
that invent new products
set high initial prices
to skim revenues layer-bylayer from the market

10 - 21

Market skimming makes

sense only under certain
conditions
First, the products quality and image
must support high price, and enough
buyers must want the product at that
price.

Second, the costs of producing a smaller

volume cannot be so high that they
cancel the advantage of charging more.

Finally, competitors should not be able

to enter the market easily and undercut
the high price.
10 - 22

Market-Penetration
Pricing
Rather than setting a high price to skim
off small but profitable market
segments
some companies use
market-penetration pricing
They set a low initial price
in order to
penetrate the market quickly and deeply
to attract a large number of buyers quickly
and win a large market share
10 - 23

Several conditions must be met

for the market-penetration
pricing

The market must be highly price sensitive so

that a low price produces more market
growth.

Production and distribution costs must fall as

sales volume increase.

The low price must help keep out the

competition

The penetration pricer must maintain its

low-price positionotherwise.
The price advantage may be only temporary.

10 - 24

Discounts and
Allowances

Quantity
Quantity
Discounts
Discounts

Reductions
Reductions based
based on
on
size
size of
of purchase
purchase

Trade
Reductions based
based on
on buyer
buyer
Trade Reductions
performing
Discounts
performing marketing
marketing functions
functions
Discounts
Reductions
Cash
Reductions based
based on
on
Cash
paying
Discounts
paying within
within a
a specified
specified time
time
Discounts
10 - 25

Discounts and
Allowances
E-coupons

Coupons

Seasonal
Discounts

Rebates

Promotional
Allowances
10 - 26