Pricing Strategies and Programs
Pricing Strategies and Programs
• Factors Affecting Pricing Decisions.
• Value Based Pricing.
• Cost Based Pricing.
• Adapting the Price.
Factors Affecting Pricing Decisions
Price is the amount of money charged for a product or service, or more
broadly, price is the sum of the values that customers exchange for the
benefits of having or using the product or service.
Despite the increased role of nonprice factors in the modern marketing
process, price remains an important element in marketing mix. Price is
the only element in the marketing mix that produces revenue, all other
elements represent costs. Price is also one of the most flexible
elements of the marketing mix. It can be changed quickly, unlike
product features, channel commitments, and promotions.
Setting the right price is one of the marketer’s most difficult tasks. A
host of factors come into play. Customer perceptions of the product’s
value set the ceiling for price. Product costs set the floor for prices. In
setting the price between these two extremes, the company must
consider a number of other internal and external factors, including its
overall marketing strategy and mix, the nature of the market and
demand, and competitors’ strategies and prices.
Customer perception ov value – good pricing begins with a complete
understanding of the value that a product or service creates for
Considerations in setting price
Other internal and external
Marketing strategy, objectives
Customer nad mix Product
Nature of the market and costs
Competitors’ strategies and
Price ceiling Price floor
No demand above No profits
this price below the price
Product costs – involves setting prices based on the costs for
producing, distributing, and selling the product plus a fair rate of return
for its effort and risk.
Marketing strategy, objectives and mix – before setting price, the
company must decide on its overall marketing strategy. Price decisions
must be coordinated with product design, distribution, and promotion
decisions to form consistent and effective marketing program.
Nature of the market and demand – before setting prices, the
marketer must understand the relationship between price and demand
for the company’s product.
Competitors’ strategies and prices – in setting its price, the company
must also consider competitors’ costs, prices, and market offerings.
Value Based Pricing
Pricing decisions, like other marketing mix decisions, must start with
customer value. Value-based pricing uses buyers’ perceptions of value,
not the seller’s cost, as the key to pricing. Value-based pricing means
that the marketer cannot design a product and marketing program and
then set the price. Price is considered along with the other marketing
mix variables before the marketing program is set.
The company first assesses customer needs and value perceptions. It
then sets its target price based on customers perceptions of value. The
targeted value and price then drive decisions about what costs can be
incurred and the resulting product design.
Determine Design product
Asses customer Set target price to
costs that can to deliver desired
needs and value match customer
be incurred value at target
perception perceived value
Companies can pursue either of two types of value-based pricing:
good-value pricing and value-added pricing.
Good-value pricing – offering just the right combination of quality and
good service at a fair price. In many cases companies introduce less
expensive versions of established brand-name products, redesign
existing brands to offer more quality for a given price, or the same
quality for less. An important type of good-value pricing at the retail
level is everyday low pricing.
Value-added pricing – attaching value-added features and services to
differentiate a company’s offers and charging higher prices. Rather
than cutting prices to match competitors, companies attach value-
added features and services to differentiate their offers and thus
support higher prices.
Cost Based Pricing
A company’s costs may be an important element in pricing strategy.
However, cost-based pricing is product-driven rather than customer-
driven. The company designs what it considers to be a good product
and sets a price that covers costs plus a target profit. Marketers must
then convince buyers that the product’s value at that price justifies its
A company’s costs take two forms, fixed and variable. Fixed costs
(also known as overhead) are costs that do not vary with production or
sales level (bills for rent, heat, interest, and executive salaries),
whatever the company’s output. Variable costs vary directly with the
level of production. Total costs are the sum of the fixed and variable
costs for any given level of production.
Design a good Determine Set price based Convince buyers
product product costs on cost of product’s
Cost-based pricing approaches include cost-plus pricing and break-
Cost plus pricing – adding a standard markup to the cost of the
product. Markup pricing remains popular for many reasons. First,
sellers are more certain about costs than about demand. Second,
when all firms in the industry use the pricing method prices tend to be
similar and price competition is minimized.Third, many people feel, that
cost-plus pricing is fairer to both buyers and sellers.
Break-even pricing – the firm tries to determine the price at which it
will break even or make the target profit it is seeking.
Adapting the Price
Companies usually do not set a single price but, rather, a pricing
structure that reflects variations in geographical demand and costs,
market-segment requirements, purchase timing, order levels, delivery
frequency, guarantees, service contracts, and other factors.
Geographical pricing – a company must decide how to price its
products for customers located in different parts of the country or world.
Price discounts and allowances – most companies adjust their basic
price to reward customers for certain resposes, such as early payment
of bills, volume purchases, and off-season buying.
cash discount – a price reduction to buyers who pay bills promptly.
quantity discount – a price reduction to those who buy large
functional discount – discount, also called trade discount, offered by
a manufacturer to trade-channel members if they will perform certain
functions, such as selling, storing, and recordkeepig.
seasonal discount – a price reduction to those who buy merchandise
or services out of season.
allowances – an extra payment designed to gain reseller participation
in special programs. Trade-in allowances are granted for turning in an
old item when buying a new one. Promotional allowances reward
dealers for participating in advertising and sales support programs.
Promotional pricing – companies temporarily price their products
below list price, and sometimes even below cost, to increse short-run
sales. They use different techniques to stimulate purchase.
cash rebates – a price reduction to customers who buy the product
from dealers within a specified time.
special event pricing – sellers establish special prices in certain
seasons to draw more customers.
low-interest financing – instead of cutting price, the firm can offer
customers low or no-interest financing.
warranties and service contracts – companies promote sales with
free warranty or service contracts.
Price adjustment strategies
Discount and Reducing prices to reward customer responses such
allowance pricing as paying early or promoting the product
Segmented pricing Adjusting prices to allow for differences in customers,
products, or locations
Pychological pricing Adjusting prices for psychological effect
Promotional pricing Temporarily reducing prices to increase short-run sales
Geographical pricing Adjusting prices to account for the geographic location
Dynamic pricing Adjusting prices continually to meet the characteristics
and needs of individual customers and situations.
International pricing Adjusting prices for international markets