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Marketing: An Introduction Armstrong, Kotler


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Title: Marketing: An Introduction Armstrong, Kotler

Marketing An Introduction Armstrong, Kotler
  • Chapter nine
  • Pricing Considerations and Strategies

Looking Ahead
  • Identify and explain the external and internal
    factors affecting a firm's pricing decisions.
  • Contrast the three general approaches to setting
  • Describe the major strategies for pricing
    imitative and new products.
  • Explain how companies find a set of prices that
    maximizes the profits from the total product mix.
  • Discuss how companies adjust their prices to take
    into account different types of customers and
  • Discuss the key issues related to initiating and
    responding to price changes

Pricing Definition
  • Narrow definition.
  • price is the amount of money charged for a
    product or service.
  • Broad definition.
  • price is the sum of all the values that consumers
    exchange for the benefits of having or using the
    product or service.
  • Dynamic pricing.
  • charging different prices depending on individual
    customers and situations. like eBay

Pricing Decision Factors
  • External Factors
  • Nature of the market.
  • Demand
  • Competitor.
  • Economic state.
  • Reseller needs.
  • Government actions.
  • Social concerns.
  • Internal Factors
  • Marketing objectives.
  • Marketing mix.
  • Costs.
  • Organization style.
  • Target market.
  • Positioning objectives. Figure 1

Pricing Decision Internal Factors
  • Marketing objectives.
  • Company must decide on its strategy for the
  • General objectives.
  • Survival, current profit maximization, market
    share leadership and product quality leadership.

Factors Affecting Price Decisions
Figure 1
Internal factors
  • Marketing Objectives company strategy for the
    product. Survival, profit max. market share, or
    product quality.
  • Marketing Mix strategy Price decision must be
    coordinated with product design, quality, and
  • Costs cost set the floor . Fixed and variable
    costs. So the price should above the total cost,
    and clarify the profit margin.
  • Organizational considerations who should set the
    price? In small companies, top management. In
    large companies, marketing and sales managers

Pricing Decision Internal Factors
  • Marketing objectives.
  • Company must decide on its strategy for the
  • General objectives.
  • Survival, current profit maximization, market
    share leadership and product quality leadership.
  • Price decisions must be coordinated with product
    design, distribution and promotion decisions to
    form a consistent and effective marketing program.

Pricing Decision Internal Factors
  • Costs.
  • Fixed Costs.
  • Costs that do not vary with production or sales
  • Variable Costs.
  • Costs that vary directly with the level of

External factors
  • The Market Demand As the cost set the floor,
    the market and demand set the upper limit of the
  • Demand and Elasticity
  • A way of measuring how sensitive the market is to
    price changes.
  • Inelastic minimal change in demand as price
  • Elastic significant drop in demand as price
  • Figure 2

External factors
  • Pricing in Different Markets
  • Pure competition Many buyers and sellers where
    each has little effect on the going market price
  • Monopolistic competition Many buyers and sellers
    who trade over a range of prices
  • Oligopolistic competition Few sellers and
    sensitive to each others pricing/marketing
  • Pure monopoly Market consists of a single seller

  • Figure 2

P2 P1
Quantity demanded per time
Price Setting Considerations
  • Product costs.
  • Price floor no profits below this price.
  • Competitors prices and other internal and
    external factors.
  • Consumer perceptions of value.
  • Price ceiling no demand above this price.

General Pricing Approaches
  • Cost-based approach.
  • Cost-plus pricing.
  • Break-even analysis.
  • Target profit pricing.
  • Value-based approach.
  • Consumer perceptions of value.
  • Competition-based approach.
  • What competitors are charging. Figure 3

General Pricing Approaches
Figure 3
General Pricing Approaches
  • Cost-based pricing
  • Adding a standard markup to the cost of the
  • Advantages are
  • _ Sellers more certain about cost than
  • Simplifies pricing.
  • When all sellers use, prices are similar and
    competition is minimized.
  • Some feel it is more fair to both buyers and
  • Break-even (target profit) pricing setting price
    to break even (or make a target profit) on the
    costs of making and marketing a product. Figure 4

Break-even (target profit) pricing
Figure 4
Value Based-Pricing
  • Value-based pricing setting price based on
    buyers perceptions of value rather than on the
    sellers cost

Competition-Based Pricing
  • Going-rate pricing.
  • Firm bases its price largely on competitors
    prices, with less attention paid to its own costs
    or to demand.
  • Sealed-bid pricing.
  • Firm bases its price on how it thinks competitors
    will price rather than on its own costs or on

Pricing New Products
  • Skimming pricing.
  • High price to reap maximum profit from early
    adopter segments.
  • Can encourage competition.
  • Products must be unique and hard to copy. Sony
    New HDTV for 43000
  • Penetration pricing.
  • Low price to gain maximum market share.
  • May discourage competition.
  • Used when the product is easily copied.

Product Mix Pricing Strategies
  • 1- Product Line strategies
  • 2- Optional product pricing
  • 3- Captive product pricing
  • 4- By- product pricing
  • 5- Product Bundle pricing

  • 1- Product Line strategies
  • Setting the different price between various
    product lines based on cost differences between
    them. Clothes stores sells suits 300,400, 500.
  • 2- Optional product pricing
  • Pricing accessories products along with the main
    product. Car buyer may choose double CD exchanger
    for extra charges.

  • 3-Captive product pricing
  • Setting price for a product that must be used
    along with main product. Film with camera.
  • 4- By- product pricing
  • Setting prices for by-products . Products costly
    if the company get rid of. Chemicals, used Tires,
    disposed materials.
  • 5- Product Bundle Pricing
  • combining two or more products and sell it
    for less. Hotel Packages, meal, room, Travel

Price Adjustment Strategies
Discount and Allowance pricing
Reducing prices to reward customer responses
such as paying early. Cash discount, Volume.
Segmented pricing
Adjusting prices to allow for differences in
customers , products, or locations. time price.
Psychological pricing
Adjusting prices for psychological effect. High
Price high quality. Retail stores 100 or
Promotional pricing
Temporarily reducing prices to increase short-run
Sales. Sell below costs. Special events.
Industry war
Geographical pricing
Adjusting prices to account for geographic
location of customers.
International pricing
Adjusting prices for international markets.
Depends On cultural, laws, customers
Initiating Price Changes
  • Price Increases
  • Cost inflation.
  • Over-demand. Cannot supply all customers needs.
  • Price Cuts
  • Excess capacity.
  • Falling market share.
  • Follow the leader
  • Dominate market through lower costs.

Responding to Competitor Price Changes
  • When a competitor lowers prices
  • Reduce price to match the competitors price.
  • Maintain price but increase the perceived value
    of the offer.
  • Improve quality and raise price.
  • Hold price and introduce a new brand at a higher
  • Hold price and introduce a new brand at a lower
    price (fighting brand). Figure 5

Responding to price changes
Figure 5
Public Policy and Pricing
  • Prohibited to
  • Price fixing competitors agreed to stabilize
  • Price discrimination customers must be given
    proportionally equal discounts when buy from the
    manufactures, and wholesalers.
  • Deceptive pricing cannot mislead customers, then
    the customers dont know about the extra charges.