Pricing Strategies and Considerations

What is Price?

  • Price is the amount of money charged for a product or service.
  • It's the sum of all the values customers exchange for the benefits of having or using the product/service.
  • Companies should focus on selling value, not just price.

Major Pricing Strategies

Customer Value-Based Pricing

  • Uses buyers’ perceptions of value, not seller’s cost, to set prices.
  • Customer-driven, not product-driven like cost-based pricing.
  • Price is set to match the perceived value.

Good-Value Pricing

  • Offering the right combination of quality and good service at a fair price.

Everyday Low Pricing (EDLP)

  • Charging a constant, everyday low price with few or no temporary discounts.

High-Low Pricing

  • Charging higher prices daily but running frequent promotions to lower prices temporarily on selected items.

Value-Added Pricing

  • Attaching value-added features and services to differentiate a company’s offers and justify higher prices. Example: Porsche Drive subscription

Cost-Based Pricing

  • Sets prices based on the costs for producing, distributing, and selling the product, plus a fair rate of return for effort and risk.

Fixed Costs

  • Costs that do not vary with production or sales level. Examples: Rent, heat, interest, executive salaries.

Variable Costs

  • Costs that vary directly with the level of production. Examples: Raw materials, packaging.

Total Costs

  • The sum of the fixed and variable costs for any given level of production.

Cost-Plus Pricing

  • Adds a standard markup to the cost of the product.
    • Benefits: Sellers are certain about costs, price competition is minimized, buyers feel it is fair.
    • Disadvantages: Ignores demand and competitor prices.

Break-Even Pricing (Target Return Pricing)

  • Setting price to break even on costs or to make a target return.
  • It's found where Total Revenue = Total Costs.

Competition-Based Pricing

  • Setting prices based on competitors’ strategies, costs, prices, and market offerings.
  • Example: Caterpillar charges premium prices but dominates due to perceived value over lifetime.

Break-Even Volume and Profits at Different Prices

  • Table of Break-Even Volume and Profits at Different Prices

    PriceUnit Demand Needed to Break EvenExpected Unit Demand at Given PriceTotal RevenueTotal Costs*Profit (4) – (5)
    $1475,00071,000$994,000$1,010,000−$16,000
    $1650,00067,000$1,072,000$970,000$102,000
    $1837,50060,000$1,080,000$900,000$180,000
    $2030,00042,000$840,000$720,000$120,000
    $2225,00023,000$506,000$530,000−$24,000

  • *Assumes fixed costs of $300,000 and constant unit variable costs of $10.

Other Internal and External Considerations Affecting Price Decisions

Overall Marketing Strategy, Objectives, and Mix

  • Target costing: Starts with an ideal selling price based on consumer value and then targets costs to ensure the price is met.
  • Brands might build strategies around premium or affordable pricing.

Organizational Considerations

  • Who should set prices?
  • Who can influence prices?

The Market and Demand

  • Marketers must understand the relationship between price and demand.

Pricing in Different Types of Markets

  • Pure competition
  • Monopolistic competition
  • Oligopolistic competition
  • Pure monopoly

The Market Demand

  • The demand curve shows the number of units the market will buy in a given period at different prices.
  • Demand and price are inversely related: Higher price = lower demand.

Price Elasticity of Demand

  • A measure of the sensitivity of demand to changes in price.

Inelastic Demand

  • Demand hardly changes with a small change in price.

Elastic Demand

  • Demand changes greatly with a small change in price.

The Economy and Other External Factors

  • Economic conditions.
  • Reseller’s response to price.
  • Government.
  • Social concerns.