Pricing Strategy Chapter 1

Component of price
01 Defining price 04
Understanding
Difference between
02 value and price 05 psychological pricing
methods
Understanding pricing
03 objectives 06
Your Date Here Your Footer Here 2

Introduction
to
Pricing 3
Marketing Mix
Revenue
Cost Product Price Producer
Cost Place Promotion Cost
4
Pricing
• Price is the one element of the marketing

mix that produces revenue; the other
elements produce costs.
• easiest element of the marketing program to

adjust; product features, channels, and even
communications take more time.
5
…Pricing
• Price also communicates to the market the

company’s intended value positioning of its
product or brand.
• A well-designed and marketed product can

command a price premium and reap big
profits.
…Pricing
• Pricing decisions are clearly complex

and difficult, and many marketers
neglect their pricing strategies.
7
…Pricing
• Holistic marketers must take into account many

factors in making pricing decisions—the
company, the customers, the competition, and
the marketing environment.
• Pricing decisions must be consistent with the

firm’s marketing strategy and its target markets
and brand positioning.
Synonyms for Price
• Rent • Commission
• Tuition • Premium
• Fare • Honorarium
• Fee • Bribe
• Rate • Dues
• Toll • Salary
• Retainer • Tax
• Wage • Special assessment
9
A Changing Price Environment
The Internet has been changing how buyers

and sellers interact. Here is a short list of how
the Internet allows sellers to discriminate
between buyers, and buyers to discriminate
between sellers.
10
…A Changing Price Environment
• Buyers can:
– Get instant price comparisons from thousands of
vendors.
– Name their price and have it met.
– Get products free.
• Sellers can:
– Monitor customer behavior and tailor offers
to individuals.
– Give certain customers access to special
prices.
12
• Both buyers and sellers can:

– Negotiate prices in online auctions
and exchanges or even in person.
How Companies Price
Small Business Owner Pricing Department
14
Product-line Managers
Consumer Psychology and Pricing
• Marketers recognize that consumers often

actively process price information, interpreting
it from the context of prior purchasing
experience, formal communications
(advertising, sales calls, and brochures),
informal communications (friends, colleagues,
or family members), point-of-purchase or
online resources, and other factors.
15
…Consumer Psychology and Pricing
• Purchase decisions are based on how

consumers perceive prices and what they
consider the current actual price to be—
not on the marketer’s stated price.
The following example helps illustrate the large part
consumer psychology plays in determining three different
prices for essentially the same item: a black T-shirt.
Armani - $275
Gap - $14.90
H&M - $7.90
17
Price-Quality Inferences
Reference Prices
$1. 99
Price Endings
18
• Reference prices: consumers compare an

observed price to an internal reference
price they remember or an external frame
of reference such as a posted “regular retail
price.”
19
• Price-quality inferences: consumers use price

as an indicator of quality. Image pricing is
especially effective with ego-sensitive
products such as perfumes, expensive cars,
and designer clothing.
• Price cues / Price endings: Many sellers believe

prices should end in an odd number. Customers see
an item priced at $299 as being in the $200 rather
than the $300 range; they tend to process prices
“left-to-right” rather than by rounding. Another
explanation for the popularity of “9” endings is that
they suggest a discount or bargain. Prices that end
with 0 and 5 are also popular and are thought to be
easier for consumers to process and retrieve from
memory.
• Price Importance
The price of a product holds a host of associated business and

marketing implications. Price can exert three cardinal implications
on a business. One must always take these implications into account
during the pricing process:
• Price affects the product’s brand image.
• Price determines the customers and the competition.
• Price determines profitability and, consequently, the potential for
the company to survive.
Difference between value and price
• "Price is what you pay; value is what you get."

- Warren Buffett
• What is the value formula?
•
(a) Value = Features - Costsc
(b) Value = Benefits - TCO
(c) Value = Features - TCO
(d) Value = Benefits - Costsc
•
2. What is value?
•
(a) Usefulness or importance that the product holds for the customer
(b) Benefits that something is held to deserve for a customer
(c) Worth derived by the customer from owning and using the product
(d) Monetary, material or assessed advantage of an asset, good or service
• 3. What is relative value?
(a) A concept that addresses the ratio between benefits and Costsc that
a product holds for customers
(b) The implicit promise a product holds for customers to deliver a
better ratio of gains relative to cost
(c) A product’s value that takes into account the value of similar
products
(d) The attractiveness of an investment in a product in comparison to
another
•
4. What is a sales axiom?
(a) The level of subjective usefulness or importance that the product
holds for the customer
(b) Direct financial gains by selling
(c) A term used to identify and explain the fundamental concepts that
the product is built upon
(d) A pricing principle that is universally accepted within a practice or
subject
• 1-(d), 2-(c), 3-(b), 4-(c)
Understanding pricing objectives
Selecting the Pricing Objective
1. Survival
2. Maximum Current Profit
3. Maximum Market Share
4. Maximum Market Skimming
5. Product-Quality Leadership
6. Other Objectives
30
1. Survival is a short-run objective for

firms to deal with overcapacity, intense
competition, or changing consumer
wants.
31
1. Maximize current profits emphasis current

performance . But firms may sacrifice long-run
performance by ignoring the effects of other
marketing variables, competitors’ reactions, and
legal restraints on price.
2. Maximum market share utilizes a market-
penetration pricing strategy, in which a higher
sales volume will lead to lower unit costs and
higher long-run profit.
1. Maximum market skimming utilizes a

market-skimming pricing strategy, in which
prices start high and slowly drip over time.
This strategy can be fatal if competitors
price low.
1. A firm striving to be a product-quality leader offers

brands that are “affordable luxuries” –products or
services characterized by high levels of perceived
quality, taste, and status with a price just high
enough not to be out of consumers’ reach.
2. Other objectives: Nonprofit and public organizations
may have other pricing objectives.
Understanding psychological pricing methods
Value pricing
Perceived-value pricing
Going-rate pricing
Sealed-bid pricing
Value pricing
Under this pricing method companies design the low
priced products and maintain the high-quality offering.
Here the prices are not kept low, but the product is re-
engineered to reduce the cost of production and maintain
the quality simultaneously.
E.g. Tata Nano is the best example of value pricing,

despite several Tata cars, the company designed a car
with necessary features at a low price and lived up to its
quality.
Perceived-value pricing
Manufacturer decides the price on the basis of customer’s
perception of the goods and services taking into
consideration all the elements such as advertising,
promotional tools, additional benefits, product quality, the
channel of distribution, etc. that influence the customer’s
perception.
E.g. Customer buy Sony products despite less price

products available in the market, this is because Sony
company follows the perceived pricing policy wherein the
customer is willing to pay extra for better quality and
durability of the product.
Going-rate pricing
The firms consider the competitor’s price as a

base in determining the price of its own
offerings. Generally, the prices are more or
less same as that of the competitor and the
price war gets over among the firms.
E.g. In Oligopolistic Industry such as steel,

paper, fertilizer, etc. the price charged is same.
Sealed-bid pricing
Sealed-bid pricing is followed in construction or

contract business. It is also a competitive pricing
method. Here, price is selected on the basis of
sealed bids (quotation or estimated price) for the
jobs.
The firm sets its price on expectations of how
competitors will price the product. The firm
wants to win the contract requires submitting the
lower price than competitors. However, costs and
profits are not totally ignored. The firm cannot
set price below the costs.

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Component of price

Your Date Here Your Footer Here 2

Cost Place Promotion Cost

• Price is the one element of the marketing

• easiest element of the marketing program to

• Price also communicates to the market the

• A well-designed and marketed product can

• Pricing decisions are clearly complex

• Holistic marketers must take into account many

• Pricing decisions must be consistent with the

The Internet has been changing how buyers

• Both buyers and sellers can:

Small Business Owner Pricing Department

• Marketers recognize that consumers often

• Purchase decisions are based on how

• Reference prices: consumers compare an

• Price-quality inferences: consumers use price

• Price cues / Price endings: Many sellers believe

The price of a product holds a host of associated business and

• "Price is what you pay; value is what you get."

1. Survival is a short-run objective for

1. Maximize current profits emphasis current

1. Maximum market skimming utilizes a

1. A firm striving to be a product-quality leader offers

E.g. Tata Nano is the best example of value pricing,

E.g. Customer buy Sony products despite less price

The firms consider the competitor’s price as a

E.g. In Oligopolistic Industry such as steel,

Sealed-bid pricing is followed in construction or

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