Chapter # 10

Pricing Products:
Pricing Considerations
Price is the amount of money charged for a
product or service or the some of the values that
consumer exchange for the benefits of having or
using the product or service.
Fixing pricing setting one price for all buyers
Dynamic pricing charging different pricing
depending on individual consumers and
situations.
What is a price ?
Importance of pricing
Price is the only one element of marketing mix
that can generate revenue
Most flexible element of the marketing mix
Many companies do not handle pricing well -
One problem Companies are too quick to
reduce price to get sale rather convincing buyer
that their product are worth a higher price ;
Other mistake pricing is too cost oriented
rather customer value oriented.
Factors affecting price decision
Internal Factors
Marketing objectives
Marketing mix strategy
Cost
Organizational consideration
Pricing Decisions
External Factors
Nature of market and demand
Competition
Other environmental factors ( economy, Gvt.)
Marketing Objectives that Affect
Pricing Decisions
Marketing
Objectives
Survival
Low Prices to Cover Variable Costs and Some Fixed
Costs to Stay in Business.
Current Profit Maximization
Choose the Price that Produces the Maximum
Current Profit, Cash Flow or ROI.
Market Share Leadership
Low as Possible Prices to Become the Market Share
Leader.
Product Quality Leadership
High Prices to Cover Higher Performance Quality
Other & more specific objectives
Low price to prevent entrance of the competitors
Set price at competitors level to stabilize the market
Pricing strategy is largely determine by the decision
on market positioning
Marketing-Mix
Strategy
Product Design
and Quality
Distribution
Promotion
Marketing Mix Variables that
Affect Pricing Decisions

Variable Costs

Costs that do vary
directly with the
level of production.

Raw materials

Fixed Costs

(Overhead)
Costs that dont
vary with sales or
production levels.

Executive Salaries,
Rent
Total Costs

Sum of the Fixed and Variable Costs for a Given
Level of Production
Types of Cost Factors that
Affect Pricing Decisions
C
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1
2
3
4
SRAC
LRAC
Quantity Produced per Day
1
,
0
0
0

2
,
0
0
0

3
,
0
0
0

4
,
0
0
0

Cost Per Unit at Different Levels of Production Per Period
Costs Considerations
Organizational consideration
In small companies, price are set by top
management rather by the marketing or sales
departments.

In large companies, pricing is typically handled
by divisional or product line managers.

In industrial markets, sales people may be
allowed to negotiate with customer within certain
price ranges.
The Market and Demand
Competitors Costs, Prices, and Offers
Other External Factors
Economic Conditions, Reseller Needs
Government Actions, Social Concerns
External Factors Affecting Pricing
Decisions
Pure Competition
Many Buyers and Sellers Who
Have Little Affect on the Price.
Monopolistic Competition
Many Buyers and Sellers Trading
Over a Range of Prices.
Oligopolistic Competition
Few Sellers Each Sensitive to Others
Pricing/ Marketing Strategies
Pure Monopoly
Single Seller
Different Types of Markets
The Market and Demand Factors
that Affect Pricing Decisions
Analyzing the Price- demand Relationship
A. Inelastic Demand -
Demand Hardly Changes With
a Small Change in Price.
Quantity Demanded per Period
B. Elastic Demand -
Demand Changes Greatly With
a Small Change in Price.
P
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P
2
P
1
Q
1
Q
2
P
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Quantity Demanded per Period
P
2
P
1
Q
1
Q
2
Competitors costs, prices and offers
Another external factor affecting the companys
decision is competitors costs and prices and
possible competitors reactions to the companys
own pricing moves
In addition, the companys pricing strategy may
affects the the nature of competitors it faces.
if the company follows a high price, high -
margin strategy, it may attract competitors, but a
low- price, low margin strategy may stop
competitors, or drive them out of the market.
Other external factors
Economic Conditions Economic factors such
as boom or recession, Inflation and interest rates
affect the pricing decision.
Reseller Needs the company should set
price that ensure the resellers fair profit and help
them to sell their product effectively.

Government Actions
Social Concerns -
General pricing Approaches
1. Cost-based approach
Cost- plus pricing
Break- even
Target-profit pricing
2. Buyer-based approach
3. Competition-based approach
Simplest pricing method - adding a standard markup to the
cost of the product
To illustrate mark- up cost, suppose a manufacturer had the
following cost and expected sales
Variable cost $ 10
Fixed cost $ 300000
Expected unit sales 50000
Unit cost = Variable cost + Fixed cost / unit sales
= 10+ $ 300000/50000 = $ 16
Now say, the manufacturer wants to earn 20% mark up on
sale, thus
Mark-up Price = unit cost / 1- desired return on sale
= $ 16 / 1- .2 = $ 20
Cost-Plus Pricing
Why Cost-Plus Pricing Popular?

Minimizes
price competition


Perceived
fairness to
both buyers
and sellers

Sellers are more
certain about
costs than
demand
Drawback : Cost based pricing works only if that
price actually brings the expected level of sales.
The firm tries to determine the price at which a firm will
break even or make a target profit
According to the information of cost- based pricing
Break even volume = fixed cost / price variable cost
= $ 300,000 / $ 20 - $ 10 = $ 30,000
If the target profit is $ 200,000, the sales would be 50,000
unites.
With the increases or decreases of unit price the break-even
volume will changes, expected demand, total revenue, total
coat and finally profit will be changed. (Table 11.1, page
no 359)
Break- even analysis and target
Profit pricing
200
400
600
800
1,000
1,200

10

20

30

40

50
Total Revenue
Total Cost
Fixed Cost
Target Profit
($200,000)
Sales Volume in Units (thousands)
C
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D
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(
t
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Break- even analysis and target
Profit pricing
Value-Based Pricing
Setting price based on buyers perceptions of
value rather than on the seller cost.
Value pricing offering just the right
combination of quality and good service at a
fair price
Product
Cost
Price
Value
Customers
Customer
Value
Price
Cost
Product
Cost-Based Pricing
Value-Based Pricing
Comparison of value-based
Pricing and cost based pricing
Setting Prices based on the prices that competitors
charges for similar products
Sealed-Bid
Company Sets Prices Based on What They
Think Competitors Will Charge.
Going-Rate
Company Sets Prices Based on What
Competitors Are Charging.
?
?
Competition-Based Pricing