Principles of Marketing

1
Pricing Products: Pricing Considerations and Approaches

Pricing Products: Pricing Considerations and

Approaches

In small business management and marketing, few decisions have as large an

impact on success as setting product prices. The prices a business sets
influences how many customers actually purchase products, the types of
customers a business attracts and sales revenue. Business owners and
marketing managers should consider several key factors when setting
product prices to work toward their business goals.

Objectives:
1. Identify and define the internal factors affecting a firm’s pricing decisions.
2. Identify and define the external factors affecting pricing decisions,
including the impact of consumer perceptions of price and value
3. Contrast the three general approaches to setting prices.

Price
The amount of money charged for a product or service, or the sum of the
values that consumers exchange for the benefits of having or using the
product or service.
Dynamic Pricing on the Web allows SELLERS to:
 Monitor customer behavior and tailor offers.
 Change prices on the fly to adjust for changes in demand or costs.
 Aid consumers with price comparisons.
 Negotiate prices in online auctions and exchanges.
Price and the Marketing Mix
Price is the only element that produces revenues. It is flexible and can be
changed quickly.
Some of the most common pricing mistakes are reducing prices too quickly
to get sales and pricing based on costs, not customer value.

Course Module
Factors to Consider When Setting Price:

Costs
Businesses have to sell more than they spend to make profit and stay in
business. If a product costs Php10 to produce, setting a price of Php5 is not
financially viable, since the company takes a loss on each unit sold.
Companies should consider the cost of producing a product as well as other
operating expenses when considering product prices. The price of products
should exceed production costs and leave enough money left over to pay for
operating expenses like rent, insurance and taxes for a business to make
money.
Competing Products
In most markets, consumers have the choice of buying several similar
products. The prices that competitors set for their products are an important
consideration for small businesses that are introducing new products. If a
company sets prices too far above competitors, consumers may shop
elsewhere. Setting prices too low can also be dangerous as it could start a
bidding war where competitors slash prices in an attempt to retain market
share, resulting in lower profit margins for all companies in the industry.
Consumer Demand
Small businesses often focus on innovate products that meet the needs of
specific niche markets within larger markets. Marketing research, such as
surveys given to potential customers, can help business managers gauge the
level of demand for new products and the amount that the average consumer
is willing to pay for a new product. Consumers may be willing to pay a
premium for new products with special features that fulfill needs that are not
met by other products.
Product Positioning
The prices a company sets influences the way consumers view the company
and the quality of its products. When a company sets low prices, it is signal to
consumers that the company is a discount retailer that sells cheap products.
Inexpensive products are often associated with low quality, regardless of the
actual quality of the products. Companies that set high prices position
themselves as upscale or luxury brands. Managers should consider the image
they wish to promote for their company and products when setting prices.

General Pricing Approaches

Cost-Based Pricing: 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 and is perceived as more fair to
both buyers and sellers.
Variable Cost + Fixed Costs/Unit Sales = Unit Cost
 Principles of Marketing
3
Pricing Products: Pricing Considerations and Approaches

Unit Cost/ (1 – Desired Return on Sales) = Markup Price

Cost-Based Pricing: Break-Even Analysis and Target Profit Pricing

 Break-even charts show total cost and total revenues at different
levels of unit volume.
 The intersection of the total revenue and total cost curves is the
break-even point.
 Companies wishing to make a profit must exceed the break-even unit
volume.
Value-Based Pricing
 Uses buyers’ perceptions of value rather than seller’s costs to set
price.
 Measuring perceived value can be difficult.
 Consumer attitudes toward price and quality have shifted during the
last decade.
 Value pricing at the retail level
 Everyday low pricing (EDLP) vs. high-low pricing
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

Who sets the Price?

For small companies, the Chief Executive Officer (CEO) or top management.
For large companies, it is the divisional or product line managers.

Course Module
Glossary
Price - the amount of money charged for a product or service, or the sum of
the values that consumers exchange for the benefits of having or using the
product or service

References
1. http://smallbusiness.chron.com/list-factors-consider-setting-product-
price-49478.html
2. https://www.slideshare.net/mehmetcihangir/pricing-products-pricing-
considerations-and-approaches-presentation-765073