Pricing decisions and strategies

1. PRICING
Prof.Dr.S.Kathirrvelu
EiTEX, BDU, Ethiopia.

2. • Price is the value that customers give up
or exchange to obtain a desired product
• Payment may be in the form of money,
goods, services, favors, votes or
anything else that has value to the other
party.

3. Opportunity Costs
• The value of something that is given up to
obtain something else also affects the “price”
of a decision
• Example: the cost of going to college is
charged in tuition and fees but also includes
the opportunity cost of what a student cannot
earn by working instead

4. The Importance of Pricing Decisions
• Price is the only P which represents
revenue rather than an expense
• Pricing and the Marketing Mix
– Price and Place
– Price and Product
– Price and Promotion

5. The price of four different purchasesThe price of four different purchases

6. Identify objectives & constraints
Estimate demand & revenue
Determine cost, volume and profit
Set an approximate price level
Set List or Quoted price
Make adjustments to list price
Steps in setting priceSteps in setting price

7. Identifying Pricing constraints
– Demand for the Product Class, Product, and Brand
– Newness of the Product: Stage in the Product Life
Cycle
– Single Product versus a Product Line
– Cost of Producing and Marketing the Product
– Cost of Changing Prices & Time Period They Apply
– Types of Competitive Markets - Competitors’ Prices

8. Pricing Objectives
• Sales or market share objectives
• Profit objectives
• Competitive effect objectives
• Customer satisfaction objectives
• Image enhancement objectives
– Social Responsibility

9. Estimating Demand
• Demand refers to customers’ desire for products
– How much of a product do consumers want?
– How will this change as the price goes up or down?
• Identify demand for an entire product category in
markets the company serves
• Predict what the company’s market share is likely
to be

10. The Price Elasticity of Demand
• How sensitive are customers to changes in
the price of a product?
• Price elasticity of demand is a measure of
the sensitivity of customers to changes in
price.
• Price elasticity of demand = Percentage
change in quantity demanded / Percentage
change in price

11. Demand Curves
• Shows the quantity of a product that
customers will buy in a market during a
period of time at various prices if all other
factors remain the same
• Vertical axis represents the different prices
a firm might charge
• Horizontal axis shows the number of units

12. Demand Curves

13. Influences on Price Elasticity of Demand
• Availability of substitute goods or services
– If a product has a close substitute, its demand will be elastic
• Time period
– The longer the time period, the greater the likelihood that
demand will be more elastic
• Income effect
– Change in income affects demand for a product even if its
price remains the same
• normal goods, luxury goods, inferior goods

14. Elastic and Inelastic Demand Curves

15. Types of Costs - 1
• Variable costs - per-unit costs of production
that will fluctuate depending on how many
units or individual products a firm produces
• Fixed costs - do not vary with the number of
units produced. Costs remain the same
regardless of amount produced

16. Types of Costs - 2
• Average fixed cost is the fixed cost per unit
produced (total fixed costs / number of units
produced)
• Total costs = variable costs plus fixed costs

17. Break-Even Analysis
• Technique used to examine the relationship
between cost and price and to determine what
sales volume must be reached at a given price
before the company will completely cover its
total costs and past which it will begin making a
profit
• All costs are covered but there isn’t a penny left
over

18. Break-even analysis chartBreak-even analysis chart

19. Marginal Analysis
• Provides a way for marketers to look at cost and
demand at the same time
• Examines the relationship of marginal cost to
marginal revenue
– marginal cost is the increase in total costs from producing
one additional unit of a product
– marginal revenue is the increase in total income or revenue
that results from selling one additional unit of a product

20. Marginal Analysis

21. Pricing Strategies Based on Cost
• Advantages
– Simple to calculate
– Relatively risk free
• Disadvantages
– Fail to consider several
factors
• target market
• demand
• competition
• product life cycle
• product’s image
– Difficult to accurately
estimate costs

22. Cost-Plus Pricing
• Most common cost-based approach
• Marketer figures all costs for the product and
then adds desired profit per unit
• Straight markup pricing is the most frequently
used type of cost-plus pricing
– price is calculated by adding a pre-determined
percentage to the cost

23. Steps in Cost-Plus Pricing
• Estimate unit cost
• Calculate markup
– Markup on cost
– Markup on selling price - markup percentage is the
seller’s gross margin
• gross margin is the difference between the cost to the
wholesaler or retailer and the price needed to cover
overhead and profit

24. Cost Plus Pricing Excerpt
• Fixed costs = $2,000,000
• Number of jeans produced = 400,000
• Fixed costs per unit = $5
• Variable costs per unit = $15
• Markup as % of costs = 25%
• Markup on cost
– Price = total cost + (total cost * markup percentage)
– Price = $20 + ($20 * .25) = $20 + $5 = $25

25. Markup on Cost versus Markup on Selling Price
• on Cost
– Price paid = $30
– Markup = 40%
– Price = total cost + (total
cost * markup percentage)
– Price = $30 + ($30 *.40) =
$42
• on Selling Price
– Price paid = $30
– Markup = 40%
– Price = cost/1.00 – markup %
– Price = $30/ 1-.40 = $50

26. Price Floor Pricing
• Method for calculating price that considers both costs
and what can be done to assure that a plant can operate
at capacity
• Typically used when market conditions make it
impossible for a firm to sell enough
• If the price-floor price can be set above the variable
costs, the firm can use the difference to increase profits
or cover fixed costs

27. Pricing Strategies Based on Demand-1
• Demand-based pricing means that the selling
price is based on an estimate of volume or
quantity that a firm can sell in different markets
at different prices
• Demand-backward pricing starts with a
customer-pleasing price and works backward to
costs

28. Pricing Strategies Based on Demand-2
• Chain-Markup Pricing extends demand
backward pricing from end consumer back
to the manufacturer
– Example:
• Price customers are willing to pay = $39.99
• Markup required by retailer = 40%
• Price retailer will pay $39.99 * .60 = $23.99

29. Pricing Strategies Based on Competition
• Competitive parity - price products at near the
competition
• Price leadership - price products based on
prices of industry leaders
• Loss leaders - price products below competition

30. Pricing Strategies Based on Customers’ Needs
• Cost of ownership strategy - price consumers
pay for product, plus the cost of maintaining
and using the product, less any resale value
(e.g., Sanyo batteries)
• Value pricing (EDLP*) - offers a fair value to
consumers (e.g., Kmart’s blue light specials)
** EDLP = everyday low pricing

31. New Product Pricing
• Skimming price - firm charges a high, premium
price for its new product with the intention of
reducing it in future response to market pressures
• Penetration pricing - new product is introduced
at a very low price
• Trial pricing - product carries a low price for a
limited time period

32. Pricing Tactics
• Pricing for Individual Products
– two-part pricing (e.g., country clubs)
– payment pricing (e.g., easy payments for new cars)
• Pricing for Multiple Products
– Price bundling (e.g., monitor, keyboard, CPU in a
computer package)
– Captive pricing (e.g., razors and razor blades)

33. More Pricing Tactics
• Geographic pricing
• F.O.B. pricing
• Zone pricing
• Uniform delivered pricing
• Freight absorption pricing

34. Discounting for Channel Members
• Trade or functional discounts
• Quantity discounts
• Cash discounts
• Seasonal discounts

35. Trade Discounts
• Pricing structure built around list price
– List price, also called suggested retail price, is
the price that the manufacturer sets as the
appropriate price for the end consumer
– Manufacturers offer discounts because channel
members perform selling, credit, storage and
transportation services

36. Pricing with Electronic Commerce
• Dynamic pricing strategies
– price can be adjusted to meet changes in the
marketplace
– online price changes can occur quickly, easily, and
at virtually no cost
• Auctions
– sites offer chance to bid on items
– sites offer reverse-price auctions

37. Price Discrimination
• Means that marketers classify customers based
on some characteristic that indicates what they
are willing or able to pay
• Acceptable when price differences are in
response to
– changes in cost of product
– changes in competitive activity

38. Psychological Issues in Pricing
• Internal Reference Prices - consumers have a set price or
price range in their mind
– If the actual price is higher, consumers will feel the product is
overpriced
– If it is too low below the internal reference price, consumers
may assume its quality is inferior
• Competition as Reference Price - If the price is close, the
assimilation effect will encourage the customer to think
the products are similar enough and choose the lower
priced product

39. Price-Quality Inferences
• If consumers are unable to judge the quality
of a product through examination or prior
experience, they usually will assume that
the higher-priced product is the higher-
quality product

40. Price and Quality
Consumers tend to
associate high prices with
high quality. This Belgian
ad for Chat Noir coffee
tries to suggest otherwise.
It reads, “Quality coffee.
But we’ve really squeezed
the price.”

41. Psychological Pricing Strategies
• Odd-even pricing
• Price lining

42. Price Lining

43. Legal and Ethical Considerations in Pricing
• Deceptive pricing practices
• Price discrimination

44. Deceptive Pricing Practices
• Retailers must not claim prices are lower than
competitors unless it is true
• A going out-of-business sale should be the last sale
before going out of business
• Bait-and-switch - consumers are lured into store for a
very low price, but then the item is not available. A
more expensive product is offered instead
– Trading up is acceptable

45. Price Discrimination
• Means selling the same product to different
wholesalers and retailers at different prices
if practices lessen competition

46. Price Fixing
• Occurs when two or more companies
conspire to keep prices at a certain level
– Horizontal price fixing occurs when competitors
making the same product jointly determine what
price they each will charge
– Vertical price fixing occurs when manufacturers
attempt to force the retailer to charge the suggested
retail price

47. Predatory Pricing
• Means that a company sets a very low price
for the purpose of driving competitors out
of business.

48. Dumping (US)
• Selling in foreign market at or below cost
• Selling in a foreign market more than 5%
below price in home market

49. Thank you very much