Week 5 – Marketing Principles

Price

What is price?
●What is price?

Pricing and value

Price is the amount of money charged for a product or service; the sum of the values that consumers
exchange for the benefits of having or using the product or service.

Price is the only element in the marketing mix that produces revenue.

Pricing framework

Set pricing objectives

Estimate demand
Determine costs
Analyze factors affecting pricing decision
Determine pricing strategies and pricing policies for making price adjustments
Set initial prices
Offer and make price adjustments as needed

●Setting price objectives

Firms can set price objectives to:

-Maximize Sales

-Maximize Profits

-Maximize Market Share

-Meet short- and long-term brand growth objectives

Major Pricing Strategies

Value based pricing

Cost based pricing

Competitor based pricing

●Major considerations in setting price

The price the company charges falls between one that is too high to produce any demand and one that
is too low to produce a profit.

Customer Other internal and external considerations Product costs

perceptions of
value <-> -Marketing strategy, objectives, and mix <->
Price Ceiling: No -Nature of the market Price floor:
demand above -Competitor’s strategies and prices No profits below
this price this price

●Customer value-based pricing strategy

Value-based pricing: Setting the price based on buyers’ perceptions of value, rather than on the seller’s
cost. Price is considered before the marketing program is set.

-Good value pricing: Offering just the right combination of quality and good service that customers want
at a fair price.

-Value-added pricing: Rather than cutting prices to match competitors’ prices, marketers adopting this
strategy attach value-added features and services to differentiate their offerings, support higher prices,
and build pricing power. “Pricing power” is the ability to escape price competition and to justify higher
prices and margins without losing market share.

●Value-based pricing vs Cost-based pricing

Value-based pricing is customer driven Cost-based pricing is product driven

Cost-based pricing
Design a good product Determine product Set priced based on Convince buyers of
costs cost product’s value
Value-based pricing
Assess customer needs Set target price to Determine costs that Design a product to
and value perception match customer can be incurred deliver desired value at
perceived value target price

●Cost-based pricing

Cost-based pricing involves setting prices based on the costs for producing, distributing, and selling the
product plus a fair rate of return for its effort and risk.

Types of costs: Company and Product Costs. Main types of costs:

-Variable cost: are the costs that vary with the level of production. Such as: packaging, Raw materials,
Components & parts, Ingredients, Etc.

-Fixed costs: are the costs that do not vary with production or sales level. Such as: Facility, equipment,
Building, Rent, Heat, Interest, Executive & CEO salaries, etc.
-Total cost: are the sum of the fixed and variable costs for any given level of production

●Competition-based pricing

Competition-based pricing involves setting prices based on competitors’ strategies, costs, prices, and
market offerings. Consumers will base their judgments of a product’s value on the prices that
competitors charge for similar products.

Operational Pricing Strategies

●Operational pricing strategies

New-product pricing strategies Product-mix pricing strategies Price-adjustment strategies

Market-skimming pricing Product-line pricing Discounts
Market-penetration pricing Optional-product pricing Segmented pricing
Captive-product pricing Psychological pricing
Product-bundle pricing Promotional pricing
Dynamic pricing

●New-product pricing strategies

1. Market-skimming pricing:

Setting a high price for a new product to skim maximum revenue from the segments willing to pay the
high price; the company makes fewer but more profitable sales.

Many companies that invent new products set high initial prices to “skim” revenues layer-by-layer from
the market.

Works when:

-Superior quality and image

-Enough buyers

-Competitors cannot charge lower price

2. Market-penetration pricing:

Setting a low initial price for a new product in order to penetrate the market quickly and deeply - to
attract a large number of buyers and a large market share.

Works when:

-Market is price-sensitive

-Costs fall with large volume

-Low price helps to keep out competition

-Low price can be maintained

●Product-mix pricing strategies

When the company manages more than just 1 product (usually all firms have more than 1
product/brand to manage), it will face the following pricing decisions:

Strategy Description
1.Product-line pricing Setting price steps between product line items
2.Optional-product pricing Pricing optional or accessory products sold with the main product
3.Captive-product pricing Pricing products that must be used with the main product
4.Product-bundle pricing Pricing bundles of products sold together

●Price-adjustments strategies

1. Discounts

2. Segmented pricing

3. Psychological pricing

4. Promotional pricing

5. Dynamic pricing

1.Discounts

A quantity discount is a price reduction to buyers who buy large volumes.

A seasonal discount is a price reduction to buyers who buy merchandise or services out of season.

2.Segmented pricing

In segmented pricing, the company sells a product or service at two or more prices, even though the
difference in price is not based on differences in costs.

Types Description
Customer-segmented pricing Different customers pay different prices for the same product or
service
Product-form pricing Different versions of the product are priced differently but not
according to differences in their costs
Location-based pricing Different prices for different locations, even though the cost of
offering each location is the same
Time-based pricing Different prices by the season, the month, the day, and even the hour

3.Psychological pricing

Price says something about the product. Many consumers use price to judge quality.
In using psychological pricing, sellers consider the psychology of prices, not simply the economics.

4.Promotion pricing

Companies will temporarily price their products below list price and sometimes even below cost to
create buying excitement and urgency

5.Dynamic pricing

Adjusting prices continually to meet the needs of buyers and market situations