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

Internal Factors o Types of costs:

Variable
Fixed
o Marketing objectives
Total costs
o Marketing mix strategies
o Costs o How costs vary at different
production levels will influence
o Organizational price setting
considerations
o Experience (learning) curve
effects on price
Factors to Consider in Setting Price (contd.)

Internal Factors o Who sets the price?

In Small companies:
CEO or top management
o Marketing objectives In Large companies:
Divisional or product line
o Marketing mix strategies
managers
o Costs
o Price negotiation is common
o Organizational in industrial settings
considerations
o Some industries have pricing
departments
Factors to Consider in Setting Price (contd.)

External o Types of markets

Factors Pure competition
Monopolistic competition
o Nature of market and Oligopolistic competition
demand Pure monopoly
o Competitors costs,
o Consumer perceptions of
prices, and offers price and value
o Other environmental
elements o Price-demand relationship
Demand curve
Price elasticity of demand
Factors to Consider in Setting Price (contd.)

o Consider competitors costs,

External prices, and possible reactions
Factors when developing a pricing
strategy

o Nature of market and o Pricing strategy influences the

nature of competition
demand
Low-price low-margin strategies
o Competitors costs, inhibit competition
prices, and offers High-price high-margin
strategies attract competition
o Other environmental
elements o Benchmarking costs against the
competition is recommended
Factors to Consider in Setting Price (contd.)

External
o Economic conditions
Factors Affect production costs
Affect buyer perceptions of
price and value
o Nature of market and
demand o Reseller reactions to prices
must be considered
o Competitors costs,
o Government may restrict or
prices, and offers limit pricing options
o Other environmental o Social considerations may
elements 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 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 (contd.)
b) Break-Even Analysis & Target Profit Pricing
Revenues
1000 Target Profit Tk. 200,000
Thousands Taka

800 Total Costs

Break-even
600 point

400
Fixed Costs
200

0 10 20 30 40 Quantity To Be Sold To
Sales Volume in Thousands of Units 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