Pricing Products:

Pricing
Considerations &
Strategies
By
Dr. Kevin Lance Jones
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Factors to Consider When
Setting Prices
Price is the Amount of Money Charged for a Product or
Service.

Internal Factors

Pricing
Decisions

External Factors

2
Internal Factors Affecting
Pricing Decisions

Marketing
Objectives

Marketing-Mix
Strategy

Costs

Organizational
Considerations

3
Marketing Objectives that Affect
Pricing Decisions

Survival
Low Prices to Cover Variable Costs and
Some Fixed Costs to Stay in Business.
Current Profit Maximization
Choose the Price that Produces the
Maximum Current Profit, Cash Flow or
Marketing ROI.

Objectives Market Share Leadership

Low as Possible Prices to Become
the Market Share Leader.

Product Quality Leadership

High Prices to Cover Higher
Performance Quality and R & D.

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Marketing Mix Variables that Affect
Pricing Decisions
Companies Will Consider Price Along With All the Other
Marketing-Mix Elements When Developing the Marketing
Program. Price Must be Coordinated With:
Product Design

Marketing-Mix
Non-Price Strategy Distribution
Factors

Promotion

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Types of Cost Factors that
Affect Pricing Decisions
Fixed Costs Variable Costs
(Overhead)
Costs that don’t Costs that do vary
vary with sales or directly with the
production levels. level of production.
Executive Salaries Raw materials
Rent

Total Costs
Sum of the Fixed and Variable Costs for a Given
Level of Production
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External Factors Affecting Pricing
Decisions

Market and
Demand

Competitors’ Costs,
Prices, and Offers

Other External Factors

Economic Conditions
Reseller Needs
Government Actions
Social Concerns

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Market and Demand Factors that
Affect Pricing Decisions
Pure Competition
Many Buyers and Sellers Who
Have Little Effect on the Price.
Monopolistic Competition
Many Buyers and Sellers Who
Trade Over a Range of Prices.

Pricing in Different Types of Markets

Oligopolistic Competition Pure Monopoly

Few Sellers Who Are Sensitive to Each
Single Seller
Other’s Pricing/ Marketing Strategies

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Price Elasticity of Demand
A. Inelastic Demand -
Demand Hardly Changes With
a Small Change in Price.
Price

P2
P1

Q2 Q1
Quantity Demanded per Period
B. Elastic Demand -
Demand Changes Greatly With
a Small Change in Price.
Price

P’2
P’1

Q2 Q1
Quantity Demanded per Period
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Major Considerations in
Setting Prices
No No
Possible Consumer Possible
Profit at Product Perceptions Demand at
This Price Costs of Value This Price

Selling Profits High

Low Existing
Factory and through Price
Price Products
Promoting Volume

Competitors’ Price and

Other External &
Internal Factors

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What is Cost-Plus Pricing and Why
is it Popular?
Adding a Standard Markup to the Cost of the Product.

Sellers Are More Minimizes

Certain About Price
Costs Than Competition
Demand

Perceived
Fairness to
Both Buyers
and Sellers

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Breakeven Analysis or
Target Profit Pricing
Tries to Determine the Price at Which a Firm Will
Break Even or Make a Target Profit
Cost in Dollars (millions)

Total Revenue

Target Profit
12 ($2 million)
10 Total Cost
8
6 Fixed Cost
4
2
0

200 400 600 800 1,000

Sales Volume in Units (thousands)

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Cost-Based Vs. Value-Based Pricing
Cost-Based Pricing Value-Based Pricing

Product Customer

Cost Value

Price Price

Value Cost

Customers Product

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Competition-Based Pricing

Setting Prices

Going-Rate
Company Sets Prices Based on What
Competitors Are Charging.

? Sealed-Bid

? Company Sets Prices Based on

What They Think Competitors
Will Charge.

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New-Product Pricing Strategies
Price - Quality Strategies
Price
Higher Lower

Higher
Premium Good-Value
Quality

Strategy Strategy

Lower Overcharging Economy

Strategy Strategy

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Setting Initial Product Prices

Market Skimming Market Penetration

> Setting a High Price > Setting a Low Price

for a New Product for a New Product in
to Skim Maximum Order to Attract a
Revenues from the Large Number of
Target Market. Buyers.
> Results in Fewer, > Results in a Larger
More Profitable Market Share.
Sales. > Wal-mart
> Intel’s $1,000 Chip

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Product Mix Pricing Strategies
Product Line Pricing
Setting Price Steps
Between Product Line Items
i.e. Lawnmowers at $299 & $399
Optional-Product Pricing
Pricing Optional or Accessory Products
Sold With The Main Product
i.e. Car Options such as a CD player
Product Captive-Product Pricing
Mix Pricing Products That Must Be
Used Along With The Main Product
Pricing i.e. Razor Blades, Film, Software
Strategies By-Product Pricing
Pricing Low-Value By-Products To
Get Rid of Them
i.e. From Chemicals, Lumber Mills, Zoos
Product-Bundle Pricing
Bundles Of Products Sold
Together at a Reduced Price
i.e. Season Tickets, Computer Makers
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Price-Adjustment Strategies
Price Adjustment Strategies

Discount & Allowance Segmented

Reducing Prices to Reward Adjusting Prices to Allow
Customer Responses such as for Differences in Customers,
Paying Early or Promoting Products, and Locations.
the Product.

Cash Discount Customer

Quantity Discount Product-Form

Functional Discount Location

Seasonal Discount Time

Trade-In Allowance Promotional Allowance

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Price-Adjustment Strategies

• Adjusting Prices for

Psychological Pricing Psychological Effect.
• Price Used as a Quality
Indicator.
• Reference Prices i.e.
Clothing.

• Temporarily Reducing Prices

Promotional Pricing to Increase Short-Run Sales.
• i.e. Loss Leaders, for
Special-Events, Cash Rebates

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Price-Adjustment Strategies

• Adjusting Prices to Account

for the Geographical Location

Geographical Pricing of Customers.
• i.e. FOB-Origin, Uniform-
Delivered, Zone Pricing, etc.

• Adjusting Prices for

International Pricing International Markets.
• Price Depends on Costs,
Consumers, Economic
Conditions & Other Factors.

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Initiating and Responding to
Price Changes

Competitor
Reactions Initiating
to Price Cuts
Price Changes

Price
Changes

Buyer Reactions Initiating

to Price
Price Increases
Changes

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Assessing & Responding to
Competitor Price Changes
No
Has Competitor Cut
Price? Hold Current Price;
Continue to Monitor
Competitor’s Price.
Yes

Will Lower Price No

Negatively Affect Our
Market Share & Profits?
Reduce Price
Yes
No Raise Perceived
Quality
Can/ Should Effective
Action be Taken? Yes Improve Quality
& Increase Price

Launch Low-Price
“Fighting Brand”22
Public Policy and Pricing
Public Policy on Pricing Centers on Three Potentially
Damaging Pricing Practices.

Price
Fixing

Price
Discrimination

Deceptive
Pricing

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