Marketing Management Chapter 20

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Excel BooksMarketing Management Text and Cases,S H H Kazmi20-1

Pricing Concepts, Strategies and Price Setting Approaches

Marketing Management Text and Cases

Excel Books20-1

Pricing Concepts,

Strategies andPrice Setting

Approaches

20Chapter


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Price setting is a very critical area in marketing mix decisions of a company. It is

the only element that generates revenues for the company, and all others

involve only costs.

Price represents the value that is exchanged in a marketing transaction.


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Price Competition: price-based competition occurs when consumers cannot

readily differentiate between competitive offerings. In this situation companies

use price as a tool to differentiate its products from competitors products to beat

ormatch prices set by competitors.

Non-Price Competition: Non-price competition focuses on otherthan price

factors of a product such as distinctive product features, quality, service,

packaging, and promotion to make it meaningfully differentiated from competing

brands.


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Pricing ObjectivesPricing objectives focus on what a company wants to achieve through

establishing prices.

Survival

Profit

Return on Investment (ROI)

Market Share

Product Quality


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Pricing Objectives

and Typical

Company Actions

Objectives Typical Actions

Survival Price adjustment to enable company to increase

sales volume to meet company expenses.

Profit Determine price and cost levels that permit

company to realise maximum profits.

Return on

Investment

Determine price levels that allow company to yield

targeted Return on Investment.

Market

Share

Adjust prices to maintain or increase sales volume

relative to competitors.

Product

Quality

Company sets prices to recoverR&D expenditures

and high product quality. Establish high-qualityimage.


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Factors Affecting Pricing DecisionsA numberof different internal and external factors affect pricing decisions

and this may pose some complexity.

Competitive Structure


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Price Setting Procedure

The steps involved in price setting include:

(1) Development of Pricing Objectives

(2) Determination of Demand

(3) Estimation of Costs

(4) Examining Competitors Costs, Prices, and Offers

(5) Selecting a Pricing Strategy

(6) Selection of Pricing Method

(7) Final Price Decision.


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Determination of DemandDemand forecasts furnish estimates of sales potential of a product reflecting

the quantity that can be sold in a specified period.

The Demand Curve

Assessing Price Elasticity of Demand


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Classic Demand

Curve Showing

Price-Quantity

Relationship

High

Price

Quantity

Low

P1

D1 D2

Q1 Q2


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Price/Quantity

Relationship for

Status Products

P3

P2

P1

Q1 Q2

Price

Quantity


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DemandElasticity

Q1 Q2

Price

P1

P2

Elastic

demand

Inelastic

demandP1P2

Price

Q1 Q2

Quantity Quantity


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Estimation of Costs

The purpose of price setting fora company is to set a price to covercosts

involved in a products production, selling, and distribution and some desired

level of profit for its efforts and risks.

Fixed costs

Variable costs

Total cost

Marginal cost


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Break Even Analysis is the point at which the cost of making a product

is equal to the revenue generated from selling that product.


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Selecting a Pricing Strategy

A pricing strategy is a course of action framed to affect and guide price

determination decisions.

There are many different strategies companies adopt foraccomplishing pricing

objectives. Some of the important ones and often used are discussed here.


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New Product Pricing

Price skimming

Penetration pricing

Psychological Pricing

Promotional Pricing

Loss Leader Pricing

Superficial Discounting

Special Event Pricing

Selecting a Pricing Strategy


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Selection of a Pricing MethodA pricing method is a systematic procedure forsetting the prices on a regularbasis.

Cost-Based Pricing

Markup Pricing

Target Return Pricing (Cost-Plus)

Competition-Based Pricing

Demand Based Pricing

Perceived-Value Pricing

Product Range Pricing

Optional Additional Items

Captive Product Pricing

Two-Part Pricing

Bid Pricing

Discount Policies

Allowance Policies

Marketing Management Chapter 20

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