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Setting Prices: Pricing Decisions

The document discusses various considerations and strategies for setting prices. It outlines the key stages in establishing prices which include: developing pricing objectives; assessing how customers value price; evaluating competitors' prices; selecting a pricing basis and strategy; and determining a specific price. Common pricing strategies discussed are cost-based pricing, markup pricing, penetration pricing, product line pricing, and promotional pricing.

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Pooja Khanna
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108 views22 pages

Setting Prices: Pricing Decisions

The document discusses various considerations and strategies for setting prices. It outlines the key stages in establishing prices which include: developing pricing objectives; assessing how customers value price; evaluating competitors' prices; selecting a pricing basis and strategy; and determining a specific price. Common pricing strategies discussed are cost-based pricing, markup pricing, penetration pricing, product line pricing, and promotional pricing.

Uploaded by

Pooja Khanna
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Pricing

Decisions

Setting Prices
Chapter Outline
• Development of Pricing Objectives
• Assessment of the Target Market’s Evaluation of
Price
• Evaluation of Competitors’ Prices
• Selection of a Basis for Pricing
• Selection of a Pricing Strategy
• Determination of a Specific Price
Stages for Establishing Prices

FIGURE 21.1
Development of Pricing Objectives
• Pricing objectives
– are goals that describe what a firm wants to achieve
through pricing.
– form the basis for decisions about other stages of
pricing.
– must be consistent with the firm’s overall marketing
objectives.
– can support the attainment of multiple short-term and
long-term goals.
Development of Pricing Objectives
(cont’d)

Survival
Survival Profit
Profit

Product Pricing
Pricing
Product Return
Returnon
on
Quality Objective
Objective
Quality Investment
Investment
ss

Status
StatusQuo
Quo Cash
CashFlow
Flow Market
Market Share
Share
Assessment of the Target Market’s
Evaluation of Price
• The Importance of Price
– Type of product
– Type of target market
– The purchase situation
• Value Focus
– A combination of product’s price and quality attributes
– Helps customers differentiate a product from competing
brands
– Guides marketers in their evaluation of the importance
of price to the consumer
Evaluation of Competitors’ Prices
• Sources of Competitors’ Pricing Information
– Comparative Shoppers
• Persons who systematically collect data on competitors’
prices
– Purchased Price Lists
• Developed by syndicated marketing research services
• Importance of Knowing Competitors’ Prices
– Helps determine how important price will be to
customers
– Helps marketers in setting competitive prices for their
products
Selection of a Basis for Pricing
• Dimensions of Pricing
– Cost, demand, and competition
• Bases for Pricing
– Type of product
– Market structure of the industry
– Brand’s market share relative to competing brands
– Customer characteristics
Selection of a Basis for Pricing (cont’d)
• Cost-Based Pricing
– Adding a dollar amount or percentage to the cost of the
product
• Cost-Plus Pricing
– Adding a specified dollar amount or percentage to the
seller’s cost
• Markup Pricing
– Adding to the cost of the product a predetermined
percentage of that cost
Selection of a Basis for Pricing (cont’d)
• Demand-Based Pricing
– Customers pay a higher price when demand for a
product is strong and and a lower price when demand
is weak.
– Effectiveness depends on marketer’s ability to estimate
demand accurately.
• Competition-Based Pricing
– Pricing influenced primarily by competitors’ prices
– Importance increases when competing products are
relatively homogeneous
– May necessitate frequent price adjustments
Calculating Markups

Markup as a 15
Markup
Percentage = = = 33.3%
of the Cost Cost 45

Markup as a Markup 15
Percentage of = = = 25.0%
the Selling Price Selling Price 60
Selection of a Pricing Strategy
• Differential Pricing
– Charging different prices to different buyers for the
same quality and quantity of product

Strategy Action

Negotiated pricing Establishing a final price through bargaining

Secondary-market Setting one price for the primary market and a


pricing different price for another market

Periodic discounting Temporary reduction of prices on a patterned or


systematic basis

Random discounting Temporary reduction of prices on an unsystem-


atic basis
New Product Pricing
• Price Skimming
– Charging the highest possible price that buyers who
desire the product will pay
• Penetration Pricing
– Setting prices below those of competing brands to
penetrate a market and gain a significant market share
quickly
Product-Line Pricing
– Establishing and adjusting prices of multiple products
within a product line
Strategy Action

Captive pricing Pricing the basic product in a product line low


while pricing related items at a higher level

Premium pricing Pricing the highest-quality or most versatile


products higher than other models in the product
line

Bait pricing Pricing an item in the product line low with the
intention of selling a higher-priced item in the line

Price lining Setting a limited number of prices for selected


groups or lines of merchandise
Psychological Pricing
– Pricing that attempts to influence a customer’s perception
of price to make a product’s price more attractive

Strategy Action

Reference pricing Pricing a product at a moderate level and


positioning it next to a more expensive
model or brand

Bundle pricing Packaging together two or more comple-


mentary products and selling them for a
single price

Multiple-unit pricing Packaging together two or more identical


products and selling them for a single price

Everyday low prices Setting a low price for products on a consis-


(EDLP) tent basis
Psychological Pricing (cont’d)
Strategy Action

Odd-even pricing Ending the price with certain numbers to


influence buyers’ perceptions of the price or
product

Customary pricing Pricing on the basis of tradition

Prestige pricing Setting prices at an artificially high level to


convey prestige or a quality image
Selection of a Pricing Strategy (cont’d)
• Professional Pricing
– Fees set by people with great skill or experience in a
particular field
• Promotional Pricing
– Price leaders
• Products priced below the usual markup, near cost, or
below cost
– Special-event pricing
• Advertised sales or price cutting linked to a holiday,
season, or event
– Comparison discounting
• Setting a price at a specific level and comparing it with a
higher price
Example:
Number of Manufactured Units= 200
Total Fixed Costs = 75000
Total Variable Costs = 25000
Targeted Profit = 20% of the Total Cost Per Unit.
There will be a Rs.100 Discount (Promotion) for Buyers on
Every Unit Bought.
Calculate the Following:
a. The Expected Selling Price Per Unit.
b. Using the Breakeven Formula, Calculate the
Breakeven Point & show that in Costs & Revenues.
c. Create a Table Showing, the fixed costs, the variable
costs, the total costs and the total revenue for all
manufactured units.
Solution:
a. Expected Selling Price Per Unit = Total cost per
unit + profit
Total Cost Per Unit = (75000+25000) ÷ 200 = SR 500
Targeted Profit = .20 × 500 = SR 100
The Expected Selling Price Per Unit = 500 +(100-
100)=
SR 500
b. The Breakeven Point = Total Fixed Costs ÷ (Expected
Selling Price Per Unit – Variable Cost per Unit)
75000 ÷ {500 – (25000÷200) = 75000 ÷{500-125}=
75000 ÷ 375 = 200 Units
The Breakeven in Costs & Revenues =
• Total Cost = 75000+25000 = SR 100000
• Total Revenue = 500 × 200 = SR 100000
d. Table of Costs & Revenues_________________________________________________________
Units Fixed Variable Total Total
Man/Sold Costs Costs Costs
Revenue____________________

20 75000 2500 77500 10000

40 75000 5000 80000 20000


60 75000 7500 82500 30000
80 75000 10000 85000 40000
100 75000 12500 87500 50000
120 75000 15000 90000 60000
140 75000 17500 92500 70000
160 75000 20000 95000 80000
180 75000 22500 97500 90000
200 75000 25000 100000 100000
220 75000 27500 102500 110000
240 75000 30000 105000 120000

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