9

Pricing Considerations and

Strategies
What is a Price?
• Narrowly, price is the amount of
money charged for a product or
service.
• Broadly, price is the sum of all the
values that consumers exchange for
the benefits of having or using the
product or service.
• Dynamic Pricing: charging different
prices depending on individual
customers and situations.
9-2
Factors Affecting Pricing
Decisions

9-3
 Pricing in Different Types of
Markets

Pure Competition: Monopolistic Competition:

Many buyers and sellers Many buyers and sellers
where each has little effect who trade over a
on the going market price range of prices

Oligopolistic Competition:
Few sellers who are Pure Monopoly:
sensitive to each other’s Market consists of a
pricing/marketing strategies single seller

9-4
Demand Curve

A curve that
shows the
number of units
the market will
buy in a given
time period, at
different prices
that might be
charged.

9-5
Upward Sloping Demand Curve

Gibson was surprised to learn that its high-quality

instruments did not sell as well at lower prices. 9-6
Major Considerations in Setting
Price

9-7
Cost-Plus Pricing
• Adding a standard markup to the
cost of the product.
• Popular because:
– Sellers more certain about cost than
demand
– Simplifies pricing
– When all sellers use, prices are similar
and competition is minimized
– Some feel it is more fair to both buyers
and sellers
9-8
Break-Even Chart

9-9
Value-Based Pricing

• Uses buyers’ perceptions of value,

not the seller’s cost, as the key to
pricing.

9-10
Competition-Based Pricing

• Going-Rate Pricing:
– Firm bases its price largely on
competitors’ prices, with less attention
paid to its own costs or to demand.
• Sealed-Bid Pricing:
– Firm bases its price on how it thinks
competitors will price rather than on its
own costs or on demand.

9-11
 New-Product Pricing Strategies

Market-Skimming • When to use:

– Product’s quality and
 Set a high price for a image must support its
new product to higher price.
“skim” revenues – Costs of smaller volume
layer by layer from cannot be so high they
cancel the advantage of
the market.
charging more.
 Company makes – Competitors should not
fewer, but more be able to enter market
profitable sales. easily and undercut the
high price.
9-12
New-Product Pricing Strategies

• When to use:
Market – Market must be highly
Penetration price sensitive so a low
price produces more
 Set a low initial price market growth.
in order to – Production and
“penetrate” the distribution costs must
market quickly and fall as sales volume
deeply. increases.
– Must keep out
 Can attract a large competition and
number of buyers maintain low price or
quickly and win a effects are only
temporary.
large market share. 9-13
Optional- and Captive-Product
Pricing
• Optional-Product
– Pricing optional or accessory products
sold with the main product (e.g., ice
maker with the refrigerator).
• Captive-Product
– Pricing products that must be used with
the main product (e.g., replacement
cartridges for Gillette razors).

9-14
 Pricing Strategies

By-Product Pricing:
Setting a price for by-products in order to make the main
product’s price more competitive (e.g., sawdust and
Zoo Doo)

Product Bundle Pricing:

Combining several products and offering the bundle
at a reduced price (e.g., computer with software and
Internet access).
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Discounts and Allowances

Discounts Allowances

Cash Trade-In

Quantity Promotional

Functional

Seasonal

9-16
Segmented Pricing
• Selling a product or service at two
or more prices, where the
difference in prices is not based on
differences in costs.
• Types:
1. Customer-segment
2. Product-form
3. Location pricing
4. Time pricing
9-17
Psychological Pricing

• Considers the psychology

of prices and not simply
the economics.
• Consumers usually
perceive higher-priced
products as having higher
quality.
• Consumers use price less
when they can judge
quality of a product.

9-18
 Promotional Pricing
Temporarily pricing products below list price and
sometimes even below cost to create buying
excitement and urgency.

Approaches:

Loss Leaders Low-Interest Financing

Special-Event Pricing Longer Warranties

Cash Rebates Free Maintenance

Discounts
9-19
Initiating Price Changes

Price Cuts Price

Increases
Excess Capacity Cost Inflation

Falling Market Overdemand:

Share Cannot Supply
All Customers’
Dominate Market Needs
Through Lower
Costs
9-20
Assessing and Responding to
Competitor Price Changes

9-21
Public Policy and Pricing

9-22