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Setting Prices

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Objectives
• Describe six major stages of process to
establish prices
• Explore issues in developing pricing objectives
• Understand importance of identifying target
market’s evaluation of price
• Examine how marketers analyze competitors’
prices
• Describe bases for setting prices
• Explain types of pricing strategies

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Development
of Pricing Objectives
Pricing objectives – goals that describe what
a firm wants to achieve through pricing

Business Planning- Pricing

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Stages For Establishing Prices

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Pricing Objectives And
Typical Actions To Achieve Them

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Pricing Objectives
• Survival
• Profit
• Return on Investment (ROI)
• Market Share
• Cash Flow
• Status Quo
• Product Quality

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High-quality
products are
usually priced
to reflect the
quality level

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Assessment of the Target
Market’s Evaluation of Price
• Price depends on:
– Type of product
– Type of target market
– Purchase situation (e.g: price of concessions
at movies)

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Evaluation of
Competitors’ Prices
• Regular function of marketing research
• Importance of customer view of pricing
and marketing mix variables
– Pricing above competition – creates an
exclusive image
– Pricing below competition – gains market
share

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Some prices are


set higher than
the competition
to create an
exclusive image

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Selection of a Basis of Pricing


• Cost
• Demand
• Competition
• Other

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Cost Based Pricing
• Cost-based pricing – is one of the pricing
methods of determining the selling price
of a product by the company, wherein the
price of a product is determined by adding
a profit element (percentage) in addition to
the cost of making the product.

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Cost-plus pricing – involves adding a
markup to the cost of goods and services
to arrive at a selling price. Under this
approach, you add together the direct
material cost, direct labor cost, and
overhead costs for a product, and add to it
a markup percentage in order to derive the
price of the product.

Markup – Adding to the cost of the


product a predetermined percentage of
that cost
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Markup as % Markup 15
of Cost
= Cost = 45 = 33.3 %

Markup as % Markup 15
= Selling Price = 60 = 25.0 %
of Selling Price

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Demand-Based Pricing
Customers pay a higher price when demand
for the product is strong and a lower price
when demand is weak

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Non-Price Factors
• Product
Affecting Demand
• Market
– Quality – Degree of competition
– Range – Competitor action/reaction
– Nature- essential/luxury – General economic
– Substitutes conditions

• Support
– Service at point of sale
& after
– Advertising/promotion
– Distribution Methods

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Point-of-sale
service affects
demand

Reprinted with permission of Lowe's Companies

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Competition-Based Pricing
• Pricing influenced primarily by
competitors’ prices
– method increases when:
• competing products are homogeneous
• organization is serving markets in which price
is a key consideration

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Selection of a Pricing Strategy
• Differential Pricing – different prices to different buyers
for the same product
• New-Product Pricing
• Product-Line Pricing – establishing prices of multiple
products within a product line
• Psychological Pricing – influence customer perception
to make a product’s price attractive
• Professional Pricing – fees set by experienced people
in particular field
• Promotional Pricing

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Common Pricing Strategies

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Differential Pricing Techniques


• Negotiated – final price established through buyer/seller
bargaining
• Secondary-market – one price for primary target market
and different price for another
• Periodic discounting – systematic temporary price
reduction
• Random discounting – unsystematic temporary
price reduction

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Steps In
Developing New Product Pricing
1) Develop Marketing Strategy
2) Make Marketing Mix Decisions
3) Estimate Demand Curve
4) Calculate Cost
5) Understand Environmental Factors
6) Set Pricing Objectives
7) Determine Pricing

NetMBA, “Pricing Strategy”, 2005,


http://www.netmba.com/marketing/pricing/

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New-Product Pricing
• Price skimming – charging the highest possible
price that buyers who most desire the product
will pay
• Penetration pricing – prices set below competing
brands to penetrate market and gain market
share quickly

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Product-Line Pricing Strategies
• Captive – basic product in a product line low
while related items higher
• Premium – pricing highest-quality product
higher than other models
• Bait – low pricing on one item in line with
intention of selling higher-priced item in the line
• Price Lining – limited number of prices for
selected lines of merchandise

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For Premium Pricing,


Engage The Emotions
1) Taking Care of Me - overstressed people want
to pamper selves
2) Connect with Friends & Family - serious money
to nurture family, romantic getaways, cosmetic
surgery
3) Questing - consumers appreciate adventure
4) Individual Style - personal taste, differentiate
self from others
iBizResources, “For Premium Pricing, engage the Emotions”, 2006,
http://www.familybusinessstrategies.com/articles4/041404f.html

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Psychological
Pricing Techniques
• Reference pricing – moderate pricing positioned
next to a more expensive brand
• Bundles pricing – packaging multiple products
to be sold at a single price
• Multiple-unit pricing – packaging together
two or more identical products to be sold at a
single price
• Everyday low prices (EDLP) – pricing products
low on a consistent basis

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More Psychological
Pricing Techniques
• Odd-even pricing – ending the price with a
certain number to influences buyers’ perceptions
• Customary pricing – on the basis of tradition
• Prestige pricing – setting prices at a high level to
convey prestige

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Consumers
associate
higher prices
with higher
quality

Reprinted with permission of Mannington Mills, Inc.

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Concept of Professional Pricing

Professional pricing carries the idea that


professional have an ethical responsibility
not to overcharge customers

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Types Of
Promotional Pricing
• Price Leader- firm prices a few products below
the usual markup, near cost, or below cost
• Special-Event- advertised sales or price-cutting
linked to a holiday, a season, or an event
• Comparison Discounting- price is set at a
specific level and simultaneously compares it
with a high price

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Special events
are often
seasonal
and employ
special-event
pricing

Reprinted with permission of Montage, Inc.

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Determination of
Price: Pricing Strategy
• Yields a certain price- may need refining
• Helps in setting final price
• In absence of government price controls,
remains flexible and convenient to adjust the
marketing mix

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