Chapter 6 Price Decisions

CHAPTER SIX
PRICING PRODUCTS
The Meaning of Pricing
Price
• The amount of money charged for a good or
service, or the sum of the values that customers
exchange for the benefits of having or using the
good or service.
• It is the only element in the marketing mix that
produces revenue; all other elements represent
costs.
• It is also one of the most flexible marketing mix
elements.
Factors Affecting Pricing Decisions
Internal Factors:
i) Overall marketing objectives
• Price is only one element of the company’s broader
marketing strategy.
• Before setting price, the company must decide on
its overall marketing strategy for the product or
service.
• Examples of common objectives are survival,
current profit maximization, market-share
maximization and product-quality leadership.
ii. Marketing-mix strategy
• Price decisions must be coordinated with other

mixes decisions to form a consistent & effective
marketing program.
• For example: producers using many resellers that are
expected to support & promote their products may
have to build larger reseller margins into their prices.
• The decision to position the product on high
performance quality will mean that the seller must
charge a higher price to cover higher costs.
• The intended price determines what product
features can be offered & what production costs can
be incurred.
iii. Costs
• Costs set the floor for the price that the company
can charge for its product.
• The company wants to charge a price that covers all
its costs.
• Many companies work to become the ‘low-cost
producers’ in their industries.
• Companies with lower costs can set lower prices
that result in greater sales & profits.
iv. Organizational
Considerations
• Management, must decide who within the
organization, should set prices.
• In small & large companies, prices are often set by
top management & by the by divisional or product
line managers, respectively.
• In industrial markets, salespeople may be allowed
to negotiate with customers within certain price
ranges.
External Factors
i. The market and demand
• It sets the upper price limit.
• Both consumer & industrial buyers balance the
price of a product or service against the benefits of
owning it.
• Thus, before setting prices, the marketer must
understand the relationship between price &
demand for its product.
ii. Competitors’ Costs, Prices & Offers
• Companies may follow the competitors conditions

to set their prices.
iii. Other external factors
• When setting prices, the company must also
consider other factors in its external environment.
Economic conditions, the government intervention,
social concerns, and others.
Major Pricing Strategies
• In setting prices, the company must also consider
competitors’ prices.
• No matter what price it charges– high, low or in-between–
the company must be certain to give customers superior
value for that price.
Major pricing
strategies..Cont’d…
1) Customer value-based pricing
• Setting price based on buyers’ perceptions of value
rather than on the seller’s cost.
• The company first assesses customer needs and
value perceptions.
2) Cost-based pricing
• Involves setting prices based on the costs of
producing, distributing & selling the product, plus a
fair rate of return for the company’s effort and risk.
• Includes the cost plus & break-even point pricing
3) Competition-based pricing
• Setting prices based on competitors’ strategies,
prices, costs & market offerings.
New product pricing strategies
• Pricing strategies usually change as the product passes
through its life cycle.
• The introductory stage is especially challenging.
• Companies bringing out a new product face the
challenge of setting prices for the first time.
• They can choose between two broad strategies:
market-skimming pricing & market-penetration
pricing.
A. Market-skimming pricing
• Many companies that invent new products set high

initial prices to skim revenues layer by layer from
the market.
• Market skimming makes sense only under certain
conditions.
the product’s quality and image must support
its higher price, and enough buyers must want
the product at that price.
competitors should not be able to enter the
market easily and undercut the high price.
B. Market-penetration pricing
• Companies set a low initial price to penetrate the
market quickly and deeply– to attract a large
number of buyers quickly and win a large market
share.
• The high sales volume results in falling costs,
allowing companies to cut their prices even further.

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CHAPTER SIX

• Price decisions must be coordinated with other

• Companies may follow the competitors conditions

• Many companies that invent new products set high

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