Pricing:

Approaches and
Strategies
Session 5
Chapter 10 & 11
Objectives
o Understand the internal & external factors affecting a
firms pricing decisions.

o Be able to contrast the three general approaches to
setting prices.

o Learn the major strategies for pricing imitative and
new products.

o Understand how companies find a set of prices that
maximizes the profits from the total product mix.

o Learn how companies adjust their prices to take into
account different types of customers and situations.

o Know the key issues related to initiating and
responding to price changes.
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 or
service.

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
o Marketing objectives
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
Internal Factors
o Marketing objectives
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

Internal Factors
Factors to Consider in Setting Price (contd.)
o Marketing objectives
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
Internal Factors
Factors to Consider in Setting Price (contd.)
Strategic Impact & Cost Analysis: Pareto Law Effect
CitiBank NA Example

o 80% of Cost Structure on staff and
even Marketing Expenses is
caused by 20% of Accounts for
their Low Deposits and high
Transaction Volume.

o There are only few things that are
really important.

o If you successfully improve 20% of
the most important problems, you
will gain the same effect as you
would by improving the rest 80%.
This represents a big advantage
with respect to cost versus effect.
80% 20%
20% 80% No. of Customers
80%
20%
No. of Services
Service Revenue
C
u
s
t
o
m
e
r

R
e
v
e
n
u
e
Customer Accounts
for purification
S
e
r
v
i
c
e

R
a
n
g
e

f
o
r

R
a
t
i
o
n
a
l
i
z
a
t
i
o
n
Customer/ Service
for Elimination
20%
80%
Figure: Customer/Service Revenue Matrix
80% 20%
20% 80% No. of Customers
80%
20%
No. of Services
Service Revenue
C
u
s
t
o
m
e
r

R
e
v
e
n
u
e
Customer Accounts
for purification
S
e
r
v
i
c
e

R
a
n
g
e

f
o
r

R
a
t
i
o
n
a
l
i
z
a
t
i
o
n
Customer/ Service
for Elimination
20%
80%
Figure: Customer/Service Revenue Matrix
For an Effective Cost-Structure:
o 20% of the Customers and 20% of the Services contribute 80% of Revenue.

o Rationalize 80% services & Purify 80% Accounts as they contribute only 20% of revenue.

o Eliminate Services & Accounts in the Bottom-Right-Cell as they are certainly running at a loss.
o Marketing objectives
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

Internal Factors
Factors to Consider in Setting Price (contd.)
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

External
Factors
Factors to Consider in Setting Price (contd.)
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

External
Factors
Factors to Consider in Setting Price (contd.)
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

External
Factors
Factors to Consider in Setting Price (contd.)
1. Cost-Based Pricing: a) 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

Example

Variable costs: Tk. 20 Fixed costs: Tk. 500,000
Expected sales: 100,000 units 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
b) Break-Even Analysis & Target Profit Pricing
o Break-even charts show total cost and total revenues at different
levels of unit volume.
o The intersection of the total revenue and total cost curves is the
break-even point.
o Companies wishing to make a profit must exceed the break-even unit
volume.
General Pricing Approaches (contd.)
Fixed Costs
Total Costs
Revenues
Sales Volume in Thousands of Units
T
h
o
u
s
a
n
d
s

T
a
k
a
0 10 20 30 40
1000
800
600
400
200
Break-even
point
Target Profit Tk. 200,000
Quantity To Be Sold To
Meet Target Profit
Fixed Costs
Total Costs
Revenues
Sales Volume in Thousands of Units
T
h
o
u
s
a
n
d
s

T
a
k
a
0 10 20 30 40
1000
800
600
400
200
Break-even
point
Target Profit Tk. 200,000
Quantity To Be Sold To
Meet Target Profit
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.)

o Business-to-business
firms seek to retain
pricing power
Value-added strategies
can help

o Value pricing at the
retail level
Everyday low pricing
(EDLP) vs. high-low
pricing
3. Competition-Based Pricing
Also called going-rate pricing
May price at the same level, above, or below the
competition
Bidding for jobs is another variation of competition-
based pricing
Sealed bid pricing
General Pricing Approaches (contd.)
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 Market Rate Pricing
Ceding the initiative to the key competitors to set the price.
Dangerous for leaving the strategic initiative to competitors
Potential threat of Sudden Price Shift by newer, or Changes in
delivery system capability.

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

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

o By-Product Pricing
Pricing low-value by-products to
get rid of them
Product Mix Pricing Strategies
o Captive-Product Pricing
Pricing products that must
be used with the main
product
High margins are often set
for supplies

Services: two-part pricing
strategy
Fixed fee plus a variable
usage rate

o Product Bundle Pricing
Pricing bundles of products
sold together
Price Adjustment Strategies
o Discount / allowance
o Segmented
o Psychological
o Promotional
o Types of discounts
Cash discount
Quantity discount
Functional (trade) discount
Seasonal discount

o Allowances
Trade-in allowances
Promotional allowances
Strategies
Price Adjustment Strategies (contd.)
o Discount / allowance
o Segmented
o Psychological
o Promotional
o Types of segmented pricing
strategies:
Customer-segment
Product-form pricing
Location pricing
Time pricing

o Also called revenue or yield
management

o Certain conditions must
exist for segmented pricing to
be effective
Strategies
Conditions Necessary for
Segmented Pricing Effectiveness
o Market is segmentable

o Lower priced segments
are not able to resell

o Competitors can not
undersell segments
charging higher prices

o Pricing must be legal

o Costs of segmentation
can not exceed revenues
earned

o Segmented pricing must
reflect real differences in
customers perceived
value
o Discount / allowance
o Segmented
o Psychological
o Promotional
o The price is used to say
something about the product.

Price-quality relationship

Reference prices

Differences as small as five
cents can be important

Numeric digits may have
symbolic and visual qualities
that psychologically influence
the buyer
Odd
rounding
Strategies
Price Adjustment Strategies (contd.)
o Discount / allowance
o Segmented
o Psychological
o Promotional
o Temporarily pricing products below
the list price or even below cost

o Loss leaders
Special-event pricing
Cash rebates
Low-interest financing, longer
warranties, free maintenance

o Promotional pricing can have
adverse effects
Strategies
Price Adjustment Strategies (contd.)
Promotional Pricing Problems
o Easily copied by
competitors

o Creates deal-prone
consumers

o May erode brands value


o Not a legitimate substitute
for effective strategic
planning

o Frequent use leads to
industry price wars which
benefit few firms

o Customer Discrimination
for students only

o Product-form Discrimination
Telecom products

o Place Discrimination
service at ATM versus at counters

o Time Discrimination
peak -hours/ off-peak-hours
Price Discrimination
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 Methods of Increasing Price

o Alternatives to Increasing Price
Reducing product size, using less expensive materials,
unbundling the product.
Price Changes
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
Price Changes (contd.)
o Pricing within Channel Levels
Price-fixing
Competitors can not work with each other to set prices
Predatory pricing
Firms may 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
Scanner fraud
Price confusion
Public Policy and Pricing