Chapter Five: Pricing Decisions

Meaning and significance of price

• All profit and nonprofit organizations must set
prices on their products and services.
 Price is 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.
 Pricing is one of the four Ps of the marketing
mix. The other three aspects are product,
promotion, and place.
 Price is the only revenue generating element
amongst the 4ps,the rest being cost centers.
 Historically, price has been the major factor affecting
buyer choice.
 Recently, however, non price factors have become
increasingly important in buyer-choice behavior.
 Throughout history, prices were set by negotiation
between buyers and sellers.
 Fixed price policies-setting one price for all
buyers--is a relatively modern idea that arose with
the development of large-scale retailing at the end of
the nineteenth century.
 Today, we may be returning to dynamic pricing--
charging different prices depending on the individual
customers and situations.
 Price is also one of the most flexible elements of
the marketing mix.
 It has been stated that pricing and price competition
is the number-one problem facing many
marketing executives.
 Many companies do not handle pricing well.
 Common mistakes that they make are:
1. Pricing is too cost-oriented.
2.Prices are not revised often enough to reflect
market changes.
3. Prices do not take into account the other elements
of the marketing mix.
4. Prices are not varied for different products,
market segments, and purchase occasions.
Significance Of Price
1. Price communicates value
 The more expensive a product or service is, the
more valuable people often perceive it to be. By
setting a high price, marketers communicate that the
offering delivers a proportionate amount of value.
2. Prices affect profits fast
 Price is the most important device in your business.
3. Strategic prices increase your customer base
 Pricing isn’t always about a constant increase,
though. Marketing can go in the complete opposite
direction and decrease prices. This strategy builds
up your base of customers.
4. Price as an indicator of service quality
 One of the interesting aspects of pricing is
that buyers are likely to use price as an
indicator of both service costs and service
quality.
5. To maximize profit
 One of the objectives of pricing is to maximize
the profit.
INTERNAL FACTORS AFFECTING PRICING
DECISION:
 Marketing Objectives.
 Marketing Mix-Strategy.
 Costs.
 Organizational Considerations.
1) MARKETING OBJECTIVES
Competition is very hard.
 Survival: Low Prices to Cover Variable Costs and
Some Fixed Costs to Stay in Business (To less
price to continue).
 CURRENT PROFIT MAXIMIZATION:
 Choose the Price that Produces the Maximum
Current Profit, Cash Flow or ROI (Earn the profit
in a shortcut.
 MARKETSHARE LEADERSHIP:
 Low as possible prices to become the market share
leader (you want to be the highest share of the market.
 PRODUCT QUALITY LEADERSHIP:
 High prices to cover higher performance quality (high
price – high quality)
2) MARKETING MIX-STRATEGY:
 Pricing must be carefully coordinated with the other
marketing mix elements.
 Target costing is often used to support product positioning
strategies based on price.
 Non price positioning can also be used.
 Product design & quality.
 Promotion
 Distribution.
 These are all price related.
3) COST:
Those Factors which determines what your cost is.
 TOTAL COSTS: sum of the fixed and variable
costs for a given level of production.
 FIXED COST: It remains constant. Costs that
don’t vary with sales or production levels.
E.g: Executive Salaries, Rent
 VARIABLE COST: It varies in total cost of
production.
 Costs that do vary directly with the level of
production.
E.g: Raw materials
4) ORGANIZATION CONSIDERATION
 LEVEL OF PRODUCTION: Increasing productivity and
decreasing the cost.

GENERAL PRICING STRATEGIES AND

APPROACHES
1. COST BASED PRICING:
 First Design Product.
 Then How much cost it would take to produce the product.
 Then determined its price.
 Include a profit percentage with product cost
Disadvantages of cost based pricing
 There are two important reasons why cost based pricing
doesn't work for some businesses.
1. Cost based pricing doesn't consider how customer
demand affects price. Demand for a product will
directly affect how much people will pay.
2. Competition is not included in cost-based pricing
methods.
• Competition should affect how you price your product.
The idea of simply adding a profit level or percentage to
a product price will only work in industries with
limited competition.
2. VALUE BASED PRICING:
 What customer value and preferred.
 Consider its value.
 According to the value we set the price.
 Use price to support product image
 Set price to increase product sales
 Design a price range to attract many consumer
groups
 Price a bundle of products to reduce inventory or
to excite customers
Disadvantages of customer based pricing
 Before you implement a customer based pricing
method, note the following disadvantages. If you
are too focused on the customer, you may:
 Ignore production costs
 Forget about the competition
 There are other factors which may affect your
pricing strategy.
 You need to decide how to set both wholesale
and retail prices for your product.
 Volume discounts and rebate much be
considered.
3. COMPETITION BASED PRICING:
 Price is the same as the competition
 Set price to increase customer base
 Seek larger market share through price
 The big advantage of competition based pricing
is that you are focused on your industry and
therefore your competition.
 Going Rate Pricing  Company sets prices
based on what competitors are charging.
 Sealed Bid Pricing  Company sets prices
based on what they think competitors will
 Disadvantages of competition based pricing

While competition based pricing offers

advantages, you need to consider the following
disadvantages.

 You may ignore your own production costs if you

focus too closely on the prices set by competitors.
 More time is needed to conduct and update
market research.
 Competitors can easily imitate whatever price you
select.
Tips for Successful Pricing
 Pricing takes creativity, time, research, good
recordkeeping and flexibility.

 You need to balance the costs of producing a

product with competition and the perceptions
of your target customer to select the right
product price.
Pricing Objectives
 Many pricing objectives are available for careful
consideration.
 Revenue maximization—seeks to maximize revenue
from the sale of products without regard to profit.
 This objective can be useful when introducing a new
product into the market with the goals of growing
market share and establishing long-term customer base.

 Quality leadership—used to signal product quality to

the consumer by placing prices on products that convey
their quality.
 Quantity maximization—seeks to maximize the number
of items sold.
 This objective may be chosen if you have an underlying
goal of taking advantage of economies of scale that may be
realized in the production or sales arenas.
 Status quo—seeks to keep your product prices in line with
the same or similar products offered by your competitors to
avoid starting a price war or to maintain a stable level of
profit generated from a particular product.
 Survival—put into place in situations where a business
needs to price at a level that will just allow it to stay in
business and cover essential costs.
 To help society— You might keep the price lower than
"what the market will bear" in order to make essential
products available to the consumers.
Types of Pricing Strategies
1.Competitive pricing—pricing your product(s) based on
the prices your competitors have on the same product(s).
2. Multiple pricing—seeks to get customers to purchase a
product in greater quantities by offering a slight discount
on the greater quantity.
3.Optional product pricing—used to attempt to get
customers to spend a little extra on the product by
purchasing options or extra features.
4. Penetration pricing—used to gain entry into a new
market.
The objective for employing penetration pricing is to attract
and grow market share. Once desired levels for these
objectives are reached, product prices are typically increased.
5. Premium pricing—employed when the product you are
selling is unique and of very high quality, but you only
expect to sell a small amount.
6. Product bundle pricing—used to group several items
together for sale. This is a useful pricing strategy for
complementary, overstock, or older products.

7. Product line pricing—used when a range of products

or services complement each other and can be
packaged together to reflect increasing value.
8. Skim pricing—similar to premium pricing, calling for a
high price to be placed on the product you are selling.
9. Psychological Pricing—this approach is used
when the marketer wants the consumer to respond
on an emotional, rather than rational basis. For
example, ‘Price point perspective of ' 99 cents
instead of one birr.
10. Promotional Pricing- Pricing to promote a
product is a very common application. There are
many examples of promotional pricing including
approaches such as BOGOF (Buy One Get One
Free).
11. Geographical Pricing- Geographical pricing is
evident where there are variations in price in
different parts of the world.
The process of setting the price involves the
following steps:
Step 1: Selecting the Pricing Objective
Step 2: Determining Demand

Step 3: Estimating Costs

Step 4: Analyzing Competitors' Costs, Prices, and
Offers

Step 5: Selecting a Pricing Method

Step 6: Selecting Final Price
 General Objectives of Pricing
 Profit Oriented
 To achieve a target return:
 To maximize profit
 Sales oriented
 To increase sales volume
 To maintain or increase market share
 Status quo-oriented
– To stabilize prices
– To meet competition
 Pricing Strategy
 Factors to consider when setting prices

Internal Factors: External Factors:

Pricing
Marketing objectives Nature of the market
decisions
and demand
Marketing-mix strategy
Competition
Costs
Other environmental
Organizational
factors (economy,
considerations
resellers, government
 New Product pricing/Market Entry Strategy
 Market Skimming Pricing: Setting a relatively high
initial price for a new product.
 To recover research and development costs as quickly
as possible
 Provides the firm with flexibility- becomes easier to
lower prices

 Market Penetration Pricing: relatively low initial

pricing
 To penetrate the mass market immediately
 Generate substantial sales volume and large market
share
 To discourage other firms from introducing competing
THANK YOU
FOR YOUR
ATTENTION.