MARK1012 LECTURE 8: PRICING: MOHAMMED
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MARK 1012
MOHAMMED A RAZZAQUE
Lecture�Objectives
1. Define�pricing�and�understand�factors�influencing�pricing�decisions�and�three�main�pricing�strategies.
2. Discuss�the�importance�of�understanding�customerͲvalue�perceptions,�costs,�and�competitor�strategies�when�setting�prices.
3. Identify�and�define�the�other�important�internal�and�external�factors�affecting�a�firm’s�pricing�decisions.�
4. Describe�the�main�strategies�for�pricing�new�and�imitative�products.
5. Explain�how�companies�find�a�set�of�prices�that�maximise�the�profits�from�the�total�product�mix.
6. Discuss�how�companies�adjust�their�prices�to�take�into�account�different�types�of�customers�and�situations.
7. Discuss�the�key�issues�related�to�initiating�and�responding�to�price�changes.
Mohammed A Razzaque . School of Marketing . University of New South Wales L8-2
MARK1012 LECTURE 8: PRICING: MOHAMMED
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What�is�Price?�
Price�is�the�…�amount�of�money�charged�for�a�product�or�service;
�sum�of�the�values�consumers�exchange�for�the�benefits�of�having�or�using�the�product�or�service;�and�
�only�element�of�the�marketing�mix�that�produces�revenue;�
�all�other�elements��������represent�costs.
Companies�…�do�not�usually�set�a�single�price,�they�adopt�a�pricing�structure that�covers�different�items�in�its�product�line.
�adjust�product�prices�to�reflect�changing�costs�and�demand�and�to�account�for�variations�in�buyers�and�situations.
Mohammed A Razzaque . School of Marketing University of New South Wales L8-3
Predetermined Receivable In Commercial Exchanges
Revenue�[or�turnover]�is�income�that�a�company�receives�from�the�sale of�its�offerings�to�customers.
Factors�influencing�Pricing�Decisions�and�Pricing�Strategies
Factors
� Internal�¾ Company’s�marketing�
objectives,�¾ Company’s��marketingͲmix�
strategy,�costs�and�organisation.
� External¾ the�nature�of�the�market�and�
demand,�¾ competition�and�other�
environmental�factors�that�influence�pricing�decision).�
Strategies
� Three�main�pricing�strategies:�¾ Customer�valueͲbased�
pricing,�¾ CostͲbased�pricing�and�¾ CompetitionͲbased�pricing.��
Mohammed A Razzaque . School of Marketing . University of New South Wales
L8-4
MARK1012 LECTURE 8: PRICING: MOHAMMED
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FACTORS�AFFECTING�PRICE
L8-5
CUSTOMER�PERCEPTIONS�OF�VALUE
PRODUCT�COST
MARKETING STRATEGYMARKETING OBJECTIVES
MARKETING MIXNATURE OF THE MARKET
NATURE OF DEMAND
Competitors’�actionsGovernment
Mohammed A Razzaque . School of Marketing . University of New South Wales
Factors�Affecting�Price
Mohammed A Razzaque . School of Marketing . University of New South Wales L8-6
Internal Factors
PricingDecisions
External Factors
Marketing�Objectives. The�overall�objectives�influence�price:� Survival:¾ primary�factor�in�marginal�businesses;�¾ staying�in�business�in�hopes�of�making�profits�
when�conditions�improve.� Current�Profit�Maximisation:¾ emphasising�short�term�results�over�longͲrun�
performance.� MarketͲShare�Leadership:¾ company�seeks�the�dominant�market�share;¾ Low�prices�increase�demand�so�that�later�
volume�creates�profit.� ProductͲQuality�Leadership:¾ tends�to�push�prices�high;¾ may�be�linked�to�niching strategy.��
Next page
MARK1012 LECTURE 8: PRICING: MOHAMMED
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Internal�Factors�Affecting�Price
�Marketing�Mix�Strategy.¾ Price�must�support the�overall�marketing�mix�and�the�positioning�strategy.��
¾ Price�conveys�to�consumer�one�kind�of�information about�the�product.�
�Costs.¾ Set�the�pricing�floor�that�the�company�can�charge for�its�product.�
�Organisation�for�Pricing.¾How�the�Organisation�delegates�the�pricing�function�affects�price.��
¾ Pricing�is�also�linked�to�overall�company�goals.
y The�market�and�demand�sets�the�upper�limit
y Competitor’s�price�and�other�offers
y Other�external�factorsy Economic�conditionsy Governmenty Trade�practices
Mohammed A Razzaque . School of Marketing . University of New South Wales L8-7
External�Factors
From Previous page
L8-8
Major�pricing�strategies
Customer�Value�Based�Pricing
GoodͲvalue�Pricing
Value�Added�Pricing
CostͲbased�Pricing
CostͲplus�pricing
Breakeven�pricing
Target�return�Pricing
CompetitionͲbased�Pricing
Different organisations may use different pricing strategies
Mohammed A Razzaque . School of Marketing . University of New South Wales
MARK1012 LECTURE 8: PRICING: MOHAMMED
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GoodͲvalue�pricing
� ‘Offering�just�the�right�combination�of�quality�and�good�service�that�customers�want�at�a�fair�price’.
� Involves:– introducing�less�expensive�versions�
of�established�name,�or�– redesigning�existing�brands�to�offer�
more�quality�for�a�given�price,�or�the�same�quality�for�less,�and�
– EDLP�or�everyday�low�pricing�(EDLP)�in�the�retail�sector�is�an�example.
ValueͲadded�pricing
• Companies�adopt�valueͲadded�pricing�strategies�to�increase�pricing�power.
• NOT�cutting�prices�to�match�competitors;�rather�adding�valueͲadded�features�and�services�to�differentiate�their�offerings�and�this�supports�higher�prices’.
L8-9
CustomerͲvalue�based�pricing�and�its�two�types� Price�is�based�on�buyers’�perceptions�of�value�NOT�the�seller’s�cost.� Analyse�consumer�needs�and�value�perceptions�and�then�determine�
the�price��to�match�consumers’�perceived�value.��
Mohammed A Razzaque . School of Marketing . University of New South Wales
CostͲbased�pricing
� Costs set�the�floor for�the�company’s�price.��
� The�price�must;¾ cover�all�costs�for�
producing,�distributing,�delivering�and�selling�the�product;�and
¾ deliver�a�fair�rate�of�return�for�its�effort�and�risk.��
� Low�cost�and�low�price�can�generate�great�sales�and�profit�and�revenue.�
� It�is�argued�that�many�companies�pursue�the�following�cycle:�
Mohammed A Razzaque . School of Marketing . University of New South Wales L8-10
Low�Price�
Increase�in�sales
Increase�in�level�of�
production
Decreases�the�cost
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Types�of�CostͲbased�pricing
CostͲplus�pricing
� The�simplest�method,�involves�‘adding�a�standard�markͲup�to�the�cost�of�the�product’.
� Price�is�based�on�costs�and�the�desired�profit�margin but�ignores�market�demand�factors.¾ No�standard�markͲups�to�set�prices.¾ Highest�markͲup has�the�highest�risk.��¾ MarkͲups�are�smallest�on�some�
commodities�such�as�milk�and�bread;�higher�on�seasonal�items�and�perishable�goods.��
¾ MarkͲups�vary�widely�across�different�industries.�
Breakeven�pricing�and�targetͲreturn�pricing
� Involves�‘setting�the�price�to�break�even�on�the�costs�of�making�and�marketing�a�product,�or�to�make�the�desired�profit’.��¾ Based�on�the�concept�of�a�breakeven�chart,�which�shows�the�total�cost�and�total�revenue�expected�at�different�sales�volume�levels.�
L8-11Mohammed A Razzaque . School of Marketing . University of New South Wales
Cost-Plus Pricing [Cost + Mark-Up]
Mohammed A Razzaque . School of Marketing . University of New South Wales L8-12
IncreasedCertainty
MinimisePrice
CompetitionKeyReasons forCost-PlusPopularity
As�all�firms�in�the�industry�use�this�method,�prices�tend�to�be�similar�and�price�competition�is�minimised.
Reasons�for�costͲplus�pricing�popularity�are:
Sellers�are�more�certain�of�their�costs�than�they�are�about�demand.
Ensures�a�profit�for�sellers�for�their�valueͲadded�activities�and�does�not�take�advantage�of�consumers�when�demand�is�greater.
PerceivedFairness
MARK1012 LECTURE 8: PRICING: MOHAMMED
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Breakeven�pricing�and�targetǦreturn�pricing
� Breakeven Analysis.¾ An analysis of the company's costs in relation to
units of the product produced and sold.
¾ Identifies the minimum pricing level the company's activities can support.
� Target Profit Pricing.¾ A variation on break-even analysis that links price
to profit objectives above total costs. ¾ Computationally appealing; however, its use in planning
should accommodate the fact that increased prices decrease demand.
Mohammed A Razzaque . School of Marketing . University of New South Wales
L8-13
Types�of�Costs
� Costs set�the�pricing�floor�that�the�company�can�charge�for�its�product.��There�are�two�types�of�costs:¾ Fixed�Costs (or�overhead)�are�costs�that�do�not�vary�with�
production�or�sales�levels.��¾ Variable�Costs vary�directly�with�the�level�of�production.��
� Total�Costs Ͳ the�sum�of�the�fixed�and�variable�costs�for�any�given�level�of�production�Ͳ vary�with�level�of�production.¾ Price�must�cover�the�total�cost.��Higher�cost�will�lead�to�a�higher�
price�and�less�profit,�which�results�in�a�competitive�disadvantage.�¾ Management�must�consider�how�costs�will�change�at�different�
levels�of�production�as�part�of�their�overall�demand�management�strategy.��
Mohammed A Razzaque . School of Marketing . University of New South Wales L8-14
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COSTͲPLUS�PRICING:�COMPUTATION
� For�Product�X,�per�unit�variable�cost�is�$47,�fixed�costs�is�$500,000�and�expected�unit�sales�volume�is�20,000�units.�If�the�manufacturer�intends�to�earn�a�20%�markͲup�on�sales,�what�will�be�the�manufacturer’s�markͲup�price?
� Manufacturer’s�costs�per�unit�of�X�=�unit�cost�+�fixed�costs/unit�sales=��$47�+�500,000/20,000��=��$72
� Let�the�markͲup�price�be��SThen�S (1�Ͳ desired�return�on�sales)�=��$72S =�$72/�(1�Ͳ .2)�=��$90.00
ÄWhat�is�the�Marginal�Revenue�[MR]�here?����$�90.00Ä MR�is�the�additional�revenue�that�a�producer�receives�from�selling�one�more�unit�
of�the�good.
L8-15Mohammed A Razzaque . School of Marketing . University of New South Wales
Unless otherwise stated, mark-up is always calculated on sales; NOT on costs. In�the�above�example,�calculating�the�markǦup�price�as�$72�x�(1�+.2)�=�$86.4�would�be�incorrect.
Breakeven�Analysis�I
L8-16
200400600800
1,0001,200
10 20 30 40 50
Total Revenue
Total Cost
Fixed Cost
Target Profit ($200,000)
Sales Volume in Units (thousands)
Cos
t in
Dol
lars
(th
ousa
nds)
Break-even analysis identifies the so-called break-even point, i.e., the volume at which total costs (fixed and variable) and total revenue are
equal. At Break-even volume [unit terms or dollar terms]total profit is zero: the organization neither makes a profit nor incurs a loss.
Mohammed A Razzaque . School of Marketing . University of New South Wales
MARK1012 LECTURE 8: PRICING: MOHAMMED
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Breakeven�Analysis�II
L8-17
In�equation�form�a�firm's�profit�(or�loss)�may�be�expressed�as:�
Profit�=�Total�revenue�– [�total�variable�costs�+�total�fixed�costs]
Since�profit�(or�loss)�is�zero�at�the�break�even�point,�the�above�equation�may�be�reͲwritten�as:Total�revenue =�Total�variable�costs�+�Total�fixed�costs
The�formula�for�determining�the�number�of�units�required�to�breakͲeven�is�as�follows:
1. BreakͲeven�point�[BEP]�in�units =��Total�Fixed�CostContribution�margin
2. BreakͲeven�point��[BEP]�in�dollars =������Total�fixed�cost�
Variable�cost�per�unit��selling�price�per�unit
=� BreakͲeven�point�in�units��x�Selling�price�per�unit
1--
Mohammed A Razzaque . School of Marketing . University of New South Wales
Illustrative�Example�I
L8-18
� Consider�the�following�data�for�Positron�Inc:�(1)�direct�labor�is�$8.50�per�unit,�(2)�raw�materials�are�$3�per�unit,�(3)�selling�price�is�$24�per�units,�(4)�advertising�and�sales�force�costs�are�$380,000,�and�(5)�other�relevant�fixed�costs�are�$120,000.
� Contribution�per�unit� =�Selling�price�– Variable�costs=�$24.00�– ($8.50�+�$3.00)����=�$12.50
� BreakͲeven�point�in�units =����������__Total�fixed�costs__Contribution�per�unit=�[$380,000�+�$120,000]�/�$12.50=��40,000�units
� BreakͲeven�point�in�dollars =��_�����$500,000__1�– $11.50/24.00
=��_$500,000_ =��$960,000��1�– 0.479167�
� Alternatively�BreakͲeven�point�in�dollars�=�40,000�X�$24.00�per�unit�=�$960,000
Mohammed A Razzaque . School of Marketing . University of New South Wales
MARK1012 LECTURE 8: PRICING: MOHAMMED
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Illustrative�Example�IIBEP�With�profit�Target
� Suppose�Singtron�wants�to��achieve�a�profit�goal�of�$100,000.�How�many�units�should�they�sell?
� BreakͲeven�point�in�units������=�__Total�fixed�costs_+�Target�profit_Contribution�per�unit
=�[$380,000�+�$120,000�+�$100,000�]/�$12.50=��48,000�units
� BreakͲeven�point�in�dollars���=��_�����$600,000__1�– $11.50/24.00
=��_$600,000_ =��$1152,000��1�– 0.479167�
� Alternatively�BreakͲeven�point�in�dollars�=�40,000�X�$24.00�per�unit�=�$1152,000
L8-19Mohammed A Razzaque . School of Marketing . University of New South Wales
Value�based�pricing�vs Cost�Based�Pricing
L8-20Mohammed A Razzaque . School of Marketing . University of New South Wales
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L8-21
ValueͲBased�Pricing
L8-21
Product
Cost
Price
Value
Customers
Customer
Value
Price
Cost
Product
START� Reverse�of�cost�based�approach,�
¾ uses�the�buyer's�perception�of�value�as�the�key�to�pricing,�and�
¾ utilises�non�price�mix�variables�to�help�set�perceived�value�in�buyer's�mind.�
� The�marketer�must�have�an�accurate�view�of�what�benefits�and�features�consumer�want�and�are�willing�to�pay�for�in�setting�a�specific�valueͲpricing�goal.
Toyota used this approach on its lower end cars like the Tercel and the Corolla in the early 1980s. Once the value price was determined and profit per car objectives set, engineers and designers were challenged with the task of making the cost of production support those goals.
Cost Based Value Based
Mohammed A Razzaque . School of Marketing . University of New South Wales
CompetitionͲbased�pricing�I
�Involves�‘setting�prices�based�on�competitors’�strategies,�costs,�prices�and�market�offerings’.�
�What�principle�should�guide�decisions�about�what�price�to�charge�relative�to�those�of�competitors?��The�answer�is�simple�in�concept�but�difficult�in�practice.��Be�certain�to�give�customers�superior�value�for�the�price.�
L8-22Mohammed A Razzaque . School of Marketing . University of New South Wales
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L8-23
CompetitionͲBased�Pricing�II
Mohammed A Razzaque . School of Marketing . University of New South Wales L8-23
Costs
Bid / Tender
Contract
??????
� Economic value pricing¾ more applicable to industrial markets; ¾ sort of a package pricing that may include purchase
price, installation costs, maintenance, disposal costs etc.
� Going-Rate Pricing approach¾ bases price largely on what competitors charge for
their products. ¾ Popular in markets where demand elasticity is
difficult to measure.� Sealed-Bid Pricing approach ¾ involves competition between sellers attempting to
under price each other while still covering costs.¾ Common in bidding for government contracts.
The�market�and�demand�Ͳ I
�Market�and�demand�set�the�upper�limit�of�prices. Pricing�varies�in�different�types�of�markets¾ Monopolistic�competition:�
� many�buyers and�sellers�trading�over�a�range�of�prices.��� Products�can�be�differentiated�in�quality,�features,�or�styles.
¾ Oligopolistic�competition:�� few�sellers�each�sensitive�to�the�other's�pricing�and�strategies.� Barriers�to�entry�prohibit�new�sellers�from�entering�the�market.�
¾ Pure�monopoly:�� a�single�seller,�e.g.,�government,�or�regulated�/unregulated�monopoly� Pricing�may�be�linked�to�other�than�cost�or�profit�factors,�including�fear�of�
competition�entering�or�regulation.¾ Pure�competition:�
�Many�buyers�and�sellers�trading�in�a�uniform�commodity�so�that�no�one�agent�affects�pricing.��
� Going�rate�pricing�is�the�rule.�
Mohammed A Razzaque . School of Marketing . University of New South Wales L8-24
MARK1012 LECTURE 8: PRICING: MOHAMMED
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The�market�and�demand�Ͳ II
�Consumer�Perceptions�of�Price�and�Value.¾ Buyers�ultimately�decide�prices.��Marketers�must�combine�technical�expertise�with�
creative�judgement�and�an�awareness�of�buyers’�motivations.
�Price�demand�relationship�varies�from�product�to�product¾ A�demand�curve shows�the�number�of�units�the�market�will�buy�in�a�given�time�
period�at�various�prices.��¾ The�price�elasticity�of�demand illustrates�how�responsive�demand�will�be�to�a�
change�in�price.��Two�concepts�are�important�here:
� Inelastic�Demand. demand�hardly�changes�with�a�small�change�in�price,�� Elastic�Demand. small�change�in�prices�changes�demand�greatly,�
�Ethical�issues�involved�in�pricing�products�characterised�by�inelastic�demand�are�often�complicated�and�controversial.
L8-25Mohammed A Razzaque . School of Marketing . University of New South Wales
Elasticity�of�Demand
L8-26
Price�elasticity�of�demand�=�Per�cent�change�in�quantity�demandedPer�cent�change�in�price
Mohammed A Razzaque . School of Marketing . University of New South Wales
Do�not�confuse�this�concept�with�Marginal�Revenue�or�MRMarginal�Revenue�=������Change�in�Revenue
Change�in�Quantity
MARK1012 LECTURE 8: PRICING: MOHAMMED
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More�on�elasticity
�Other�things�equal,�if�a�firm�finds�the�demand�for�one�of�its�products�is�inelastic,�it�can�INCREASE�its�total�revenues�by�raising�its�price.�¾With�inelastic�demand,�price�reduction�causes�the�quantity�sold�to�increase�but�total�revenue�actually�decreases.��So�with�inelastic�demand�while�a�price�increase�causes�the�quantity�sold�to�decrease,�the�total�revenue�increases.
�The�more�substitutes�a�product�has,�the�more�likely�it�is�to�be�price�elastic.��¾ In�many�snack�machines�today,�the�buyer�has�more�than�two�dozen�choices—making�the�demand�more�elastic.��
L8-27Mohammed A Razzaque . School of Marketing . University of New South Wales
Pricing�a�New�(and�inovative)�product
�Market�skimming�prices:¾setting�a�high�initial�price�for�a�new�product�to�‘skim’�maximum�revenue�from�the�segments�willing�to�pay�the�high�price;�¾the�company�makes�fewer�but�more�profitable�sales.
�Market�penetration�prices:¾setting�a�low�initial�price�for�a�new�product�to�attract�a�large�number�of�buyers;�and�¾obtain�a�large�market�share.
�Pricing�an�imitative�new�product:¾positioning�problems�encountered
Mohammed A Razzaque . School of Marketing . University of New South Wales L8-28
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L8-29
Four�New�Product�Pricing�Strategies
Mohammed A Razzaque . School of Marketing . University of New South Wales L8-29
Promotion
Rapid-skimmingstrategy
Slow-penetration
strategy
Rapid-penetration
strategy
Slow-skimmingstrategy
High
Price
Low
High
Low
ProductͲmix�pricing�strategies�I
� The�strategy�for�setting�a�price�on�an�offer�often�has�to�be�
� changed�when�the�product�or�service�is�part�of�a�mix.��
� This�section�introduces�five�productǦmix�and�serviceǦmix�pricing�situations
Mohammed A Razzaque . School of Marketing . University of New South Wales L
Product Line PricingSetting Price Steps Between Product Line Items
Optional-Product PricingPricing Optional Products Sold With The Main Product
Captive-Product PricingPricing Products That Must Be Used With The Main Product
By-Product PricingPricing Low-Value By-Products To Get Rid of Them
Product-Bundle PricingPricing Bundles Of Products Sold Together
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ProductͲMix�Pricing�Strategies�II
�Product�Line�Pricing.¾Companies�usually�develop�product�lines�rather�than�single�products.�(e.g.�dress�shirts,�airconditioners,�refrigerators).¾Refers�to�setting�price�steps�between�each�product�in�the�line�establishing�a�single�price�for�all�products�in�a�product�line,�such�as�having�a�price�of�$75�for�the�highͲpriced�line,�$55�for�the�mediumͲpriced�line,�and�$35�for�the�lower�priced�line.
�OptionalͲProduct�Pricing.�¾Allows�companies�to�present�a�low�base�price�capable�of�attracting�customers�while�maintaining�the�possibility�of�generating�high�revenues�by�selling�costly�addͲons�later.�¾Cars�are�good�examples.
Mohammed A Razzaque . School of Marketing . University of New South Wales L8-31
Product-Mix Pricing Strategies III
�CaptiveͲProduct�Pricing.¾Pricing�products�that�must�be�used�with�a�main�product.�9 For�example,�the�razor�is�priced�low�while�high�markͲups�are�attached�to�the�price�of�the�blades.
�ByͲProduct�Pricing.¾Waste�from�production�and�distribution�may�be�sold�as�byͲproducts�allowing�producers�to�lower�prices�and�costs�on�their�main�products.�9Meat�products,�petroleum�/chemical�products�are�examples.
�ProductͲBundle�Pricing.¾combines�several�products�and�offers�them�at�a�reduced�price�from�the�cost�of�each�product�purchased�separately.��9 Season�tickets�and�group�rates�are�examples.
Mohammed A Razzaque . School of Marketing . University of New South Wales L8-32
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Price�Adjustment�Strategies�Ͳ I
L8-33
Companies typically adjust their prices to account for various customer differences and changing situations:
Mohammed A Razzaque . School of Marketing . University of New South Wales
Price�Adjustment�Strategies�– IIDiscounts�and�Allowances:�Reduction�from�the�usual�price
Discounts• Cash�discount,�a�price�reduction�to�
buyers�who�pay�their�bills�promptly.�• Quantity discount is�a�price�reduction�
to�buyers�who�buy�large�volumes.�• Functional�discount (or�trade�
discount)�is�offered�by�the�seller�to�tradeͲchannel�members�who�perform�certain�functions.�
• Seasonal�discount is�a�price�reduction�to�buyers�who�buy�merchandise�or�services�out�of�season.�
Allowances• TradeͲin�allowances are�price�
reductions�given�for�turning�in�an�old�item�when�buying�a�new�one.�
• Promotional�allowances are�payments�or�price�reductions�to�reward�dealers�for�participating�in�advertising�and�sales�support�programs
L8-34Mohammed A Razzaque . School of Marketing . University of New South Wales
MARK1012 LECTURE 8: PRICING: MOHAMMED
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Price�Adjustment�Strategies�Ͳ III
�Segmented�Pricing refers�to�pricing�differences�not�based�on�costs�and�takes�several�forms:��¾ CustomerͲsegment�pricing target�a�specific�segment,�as�in�senior�citizen�discounts.��
¾ ProductͲform�pricing�varies�costs�on�versions�of�a�product�by�features�but�not�production�costs.���
¾ Location�pricing��stems�from�preferences�where�different�locations�have�different�perceived�values,�e.g.,seating in�a�theatre.��
¾ Time�pricing�refers�to�price�breaks�given�at�times�of�lower�demand;�e.g.,�peak/offͲpeak�season�pricing
�Psychological�Pricing Ͳ based�on�the�reference�price�consumers�carry�in�their�mind�when�considering�sellers�prices.
L8-35Mohammed A Razzaque . School of Marketing . University of New South Wales
Price�Adjustment�Strategies�Ͳ IV
L8-36
MorePrice
AdjustmentStrategies
Promotional
Geographical
Inte
rnat
iona
l
Value
Promotional�adjustments�refer�to�temporary�reductions�below�list�and�sometimes�below�costs,�used�to�attract�customers:
� Special�event.�Pricing�used�during�slow�seasons.
� Cash�rebates or�low�financing.��Offering�“extras”�to�bring�in�customers�“on�the�brink”�and�help�them�decide�to�finally�purchase.
� Loss�leaders.��Products�offered�below�costs�to�attract�attention�to�an�entire�line.
�Value�Pricing.�Offering�the�right�combination�of�quality�and�good�service�at�a�fair�price.
Mohammed A Razzaque . School of Marketing . University of New South Wales
MARK1012 LECTURE 8: PRICING: MOHAMMED
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Price�Adjustment�Strategies�– VGeographical�pricing
� Involves�deciding�how�to�price�products�for�customers�located�in�different�parts�of�the�country�or�world.
� FOBǦorigin�pricing: ���������������������free�on�board ȋ�����ǡ�FOBȌ����������Ǥ��������������������������������������������������ǡ���������������������������������������������������������Ǥ�
� UniformǦdelivered�pricing ��������������������������Ǥ�����ǡ�����������������������������������������������������������������ǡ�����������������������������Ǥ�
� Zone�pricing ǣ�������������������������������������������������������Ǣ��������������������������ǡ���������������������Ǥ�
� BasingǦpoint�pricing: �������������������������������������Dz������������dz�����������������������������������������������������������������������������������ǡ�����������������������������������������������������������������Ǥ�
� FreightǦabsorption�pricing: �������������������������������������������������������������������������������������������������
L8-37Mohammed A Razzaque . School of Marketing . University of New South Wales
Other�Types�of�Price�Adjustments
�Dynamic�Pricing���¾Adjusting�prices�continually�to�meet�the�characteristics�and�needs�of�individual�customers�and�situations.�
�International�Pricing¾The�price�that�a�company�should�charge�in�a�specific�country�depends�on�many�factors,�including�economic�conditions,�competitive�situations,�laws�and�regulations.
L8-38
Mohammed A Razzaque . School of Marketing . University of New South Wales
MARK1012 LECTURE 8: PRICING: MOHAMMED
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Loss�Leader�Strategy
�Offering�a�product/service�at�a�price�that�is not�profitable�for�the�sake�of�offering�another�product/service�at�a�greater�profit�or�to�attract�new�customers.�¾ A�common�practice�when�a�business�first�enters�a�market;�¾ A�loss�leader�introduces�new�customers�to�a�product/service�in�
the hope�of�building�a�customer�base�and securing�recurring�revenue.¾ More�than�just�a�nifty�business�trick�Ͳ it�is�a�successful�strategy�if�
executed�properly.9 Example:�Razor�blades. Companies�like�Gillette�essentially�give�their�razor�
units�away�for�free,�knowing�that�customers�will�have�to�buy�their�replacement�blades,�which�is�where�the�company�makes�all�of�its�profit.
9 Example: Microsoft's�Xbox�video�game�system,�which�was�sold�at�a�loss�of more�than $100�per�unit�to�create�more�potential�to profit from�the�sale�of higherͲmargin�video�games.
Mohammed A Razzaque . School of Marketing . University of New South Wales L8-39
Price�changes�may�be�initiated�for�several�reasons
L8-40
InitiatingPrice Cuts
InitiatingPrice Increases
Buyer Reactions
Competitor Reactions
Issues in Price Change Strategies
Price�Cuts:�Stem�from�overǦcapacity,�falling�market�share,�or�attempts�to�dominate�the�market�through�lower�costs.
Price Increases: Inflation, tendency to speculate on inflationary trends, and over demand may cause prices to rise. Higher prices can also increase profit margins.
Buyer�Reactions�to�Price�Changes:�May�be�direct,�though�not�always.Sometimes�higher�prices�support�quality�improvements�and�lower�prices�mean�company�or�product�problems.�Whether the buyer perceptions are correct or wrong will not immediately change their inclination to act on them.
Competitor Reactions to Price Changes: Most often react in industries with a small number of firms, uniform products in the market, and buyers are well informed. May be similar price changes or increased non price competition.
Mohammed A Razzaque . School of Marketing . University of New South Wales
MARK1012 LECTURE 8: PRICING: MOHAMMED
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L8-41
Copyright ©2012 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781442531109/Kotler/POM/5e
Responding�to�price�changes
Mohammed A Razzaque . School of Marketing . University of New South Wales
L8-42
Copyright ©2012 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781442531109/Kotler/POM/5e
Public�policy�and�pricing[Practices�that�are�prohibited�by�law]
Mohammed A Razzaque . School of Marketing . University of New South Wales
PriceͲfixing:�setting�prices�by�a seller�after�talking�to�its�competitors
Predatory�pricing:�selling�below�cost�with�the�intention�of�punishing�a�competitor�or�driving�competitors�out�of�business.
Offering different price terms to customers at a given level of trade.
Requiring dealers to charge a specified retail price.
Stating prices or price savings that mislead consumers or are not actually available to consumers
MARK1012 LECTURE 8: PRICING: MOHAMMED
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Setting�Pricing�Policy
Mohammed A Razzaque . School of Marketing . University of New South Wales L8-43
1. Selecting the pricing objective
2. Determining demand
3. Estimating costs
4. Analyzing competitors’costs, prices, and offers
6. Selecting final price
5. Selecting a pricing method