What is price?What is price?• Sum of all the values that consumers exchange for

the benefits of having or using the product or service.

• Major factor affecting buyer choice

• Direct link between the product and profits

• Only element in the marketing mix that produces revenues; all others represent costs.

• Least sustainable advantage?

A well-designed pricing A well-designed pricing mechanism should do the mechanism should do the following:following:

• Discriminate between customers according to market segments (Customers)

• Coordinate incentives across intermediaries and consumers (Collaborators)

• Effectively deal with competition (Competitors)• Integrate with the firm’s other marketing

efforts (Company)

PricinPricing g

strategstrategyy

Pricing ConsiderationsPricing Considerations• Internal considerations

o Firm objectives (survival, market share, profit maximization or product quality leadership)

o Marketing programo Production costs

• Cost plus (i.e. full cost + mark up as % of full cost)• Mark-up (i.e. direct cost + mark up as % of direct cost)

• External considerationso Consumer demand (Elasticity analysis)o Competition (Pure/dynamic parity)o Legal aspects (price controls & taxation)

Demand type

What happens

Occurs when

Recommended pricing

strategyELASTIC percentage

change in price causes a much higher percentage change in demand

products have many substitutes and consumption is discretionary

Lower price to sell more

INELASTIC percentage change in price causes a much smaller percentage change in demand

products have few if any substitutes and consumption is necessary

Raise prices to earn more profits

General pricing General pricing approachesapproaches

Product

Cost

Price

Value

Customers

Customer

Value

Price

Cost

Product

Cost-Based Pricing Value-Based Pricing

High or low price?High or low price?• The decision to price high or low depends on whether the

firm wishes to penetrate (i.e. obtain high market share with low margins) or skim (i.e. obtain low market share with high margins)

• High prices should be supported with marketing efforts that communicate product benefits (intensive selling)

• Low prices should be supported with a plan that focuses on general awareness and productive capacity

New Product Pricing New Product Pricing StrategiesStrategies

Market Skimming

Setting a High Price for a New Product to “Skim” Maximum Revenues from the Target Market.

Results in Fewer, But More Profitable Sales.

• Use under these conditions:o Product’s quality and

image must support its higher price.

o Costs can’t be so high that they cancel the advantage of charging more.

o Competitors shouldn’t be able to enter market easily and undercut the high price.

New Product Pricing New Product Pricing StrategiesStrategies

• Use under these conditions:o Market must be highly

price-sensitive so a low price produces more market growth.

o Production/distribution costs must fall as sales volume increases.

o Must keep out competition and maintain its low price position or benefits may only be temporary.

Market Penetration

Setting a Low Price for a New Product in Order to “Penetrate” the Market Quickly and Deeply.

Attract a Large Number of Buyers and Win a Larger Market Share.

Product Mix-Pricing Product Mix-Pricing StrategiesStrategies

• Product Line Pricing• Involves setting price

steps between various products in a product line based on:o Cost differences between

products,o Customer evaluations of

different features, and

o competitors’ prices.

Product Mix - Pricing Product Mix - Pricing StrategiesStrategies

• Optional-Product pricingo Pricing optional or

accessory products sold with the main product

o e.g. smartphone accessories

• Captive-Product pricingo Pricing products that must

be used with the main product

o e.g. printer cartridges

Product Mix- Pricing Product Mix- Pricing StrategiesStrategies

• By-Producto Pricing low-

value by-products to get rid of them and make the main product’s price more competitive.

o i.e. sawdust

Product Mix- Pricing Product Mix- Pricing StrategiesStrategies

• Product-Bundlingo Combining

several products and offering the bundle at a reduced price.

o i.e. amusement park tickets

Segmented PricingSegmented Pricing

Custom er - Segm ent Location Pric ing

Product - Form Tim e Pric ing

S ell ing Products A t D iffe rent Pr ices EvenT hough T here is No D iffe rence in C os t

Psychological Psychological PricingPricing

• Considers the psychology of prices and not simply the economics.

• Customers use price less when they can judge quality of a product.

• Price becomes an important quality signal when customers can’t judge quality; price is used to say something about a product.

Value $22.00Sale $14.99

Promotional pricingPromotional pricing

Special-Event Pricing

Cash Rebates

Low-Interest FinancingLonger Warranties

Free MerchandiseDiscounts

Loss Leaders

Temporarily pricing products

below list price to increase short-

term sales through:

Promotional PricingPromotional Pricing

Discount and Discount and Allowance Allowance

PricingPricing

Cash Discount Seasonal Discount

Quantity Discount T rade-In Allow ance

Functional Discount Prom otional Allow ance

A djus ting Bas ic Price to Rew ard C ustom ersF or C erta in Responses

• Adjusting Prices to Account for the Geographical Location of Customers.• i.e. FOB-Origin, Uniform- Delivery, Zone Pricing, Basing Point, & Freight-Absorption.

• Adjusting Prices for International Markets.• Price Depends on Costs, Consumers, Economic Conditions, Competitive Situations & Other Factors.

Geographical Pricing

International Pricing

Other Price Other Price Adjustment StrategiesAdjustment Strategies