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									        MARKETING MIX (PRICE)
Learning objectives
After reading this chapter, you should be able to;
1.    Understand what is price?
2.    Explain all the Pricing strategies
3.    Explain how price affects demand and how demand affects price
4.    Explain the Pricing objectives
5.    Explain What is price discrimination
6.    Discuss the importance of price in marketing.
7.    Identify and define the internal and external factors affecting pricing
8.    Contrast general approaches to setting prices
9.    Describe pricing strategies for imitative and new products and know
      when to use them.
10.   Explain how pricing is influenced by the product mix and show how
      companies determine a set of prices that maximizes the profits of
      the total product mix
11.   Discuss how companies adapt prices to meet different market
      circumstances and opportunities.
12.   Discuss the key issues relating to initiating and responding to price
                         MARKETING MIX (PRICE)

   Price is the amount of money charged for a product or service, or the sum of the
    values that
consumers exchange for the benefits of having or using the product or service. ( Philip
principles of marketing – 4th European Edition).

   Price is the monetary value of a good or service.
                          MARKETING MIX (PRICE)

Factors to consider when setting prices:
factors affecting pricing decisions.

                                               External factors:
Internal Factors:                              •Nature of the market and
•Marketing objectives                          Demand
•Marketing mix strategy             Pricing
                                   decisions   •Competition
•Production Costs                              •Other environmental factors
•Organisational considerations                 (economy, resellers,

                                                                               High price
Low price

No possible                    Competitors’ prices and           Consumer
                 product                                                        No possible
Profit at this     cost
                           other external and internal factors   Perceptions
                                                                                demand at
price                                                             of value
                                                                                this stage
                            PRICE AND DEMAND
 Price influences the demand for goods and services.
Generally, the higher the price the lower the demand and the lower the price
higher the demand. But there are exception to this rule. Some ostentatious
products or (speciality products) may show a different pattern which is when
increase demand may instead increase.
 Price influences the quantity of goods demanded.
 Price influences the level of profit made by businesses.
 Price determines the quality and value.
 Price also varies from one market to the other and from one geographical
    region to
another. A product priced in UK for £10 may be priced differently in other
    countries say
France, Ghana, USA etc because of differences in demand, value of currency
different economic situation.
 Production costs influences prices. The higher the cost of producing a
    product, the higher the prices and the lower the production cost, the lower
    the prices.
                                                 PRICING STRATEGIES
     General pricing approaches – pricing strategies
1.     Cost-based pricing
      Cost-plus pricing
      Mark-up/Mark-down pricing
      Break-even pricing/target profit pricing
2.      Value based pricing
3.     Competition-based pricing
      Going rate pricing
      Sealed-bid pricing
New Product pricing strategies:
4.     Market-skimming pricing
5.     Market-penetration pricing
Product mix pricing strategies
6.     Product line pricing
7.     Optional-product pricing
8.     Captive-product pricing
9.     By-product pricing
10.    Product-bundle pricing
Price adjustment strategies
11.    Discount and allowance pricing
12.    Segmented pricing: customer segment pricing, product-form pricing, location pricing & time
13.    Psychological pricing: reference prices
14.    Promotional pricing: cash discount, quantity discount, quantity premium, functional discount (trade
       discount), seasonal discount, trade-in allowance & promotional allowance)
15.    Geographical pricing: FOB – Origin pricing, Uniform delivered pricing, Zero pricing, Basing-point
       pricing & Freight-absorption pricing.
16.    International pricing
Other pricing strategies
17      Demand based pricing
18      Market based pricing
                    PRICING STRATEGIES
            Cost-based versus value-based pricing

                    Cost-based pricing

 Product    Cost            Price         Value     Customers

                    Value-based pricing

Customers   Value          Price          Cost      Product
Competition based pricing
Setting the price based upon prices of the similar competitor products.
Competitive Pricing is based on three types of competitive product:
1) Products have lasting distinctiveness from competitor's product. here we can
assume a) The product has low price elasticity. b) The product has low cross
elasticity. c) The demand of the product will rise.
2) Products have perishable distinctiveness from competitor's product, assuming
the product features are medium distinctiveness.
3) Products have little distinctiveness from competitor's product. assuming that:
a) The product has high price elasticity. b) The product has some cross elasticity.
c) No expectation that demand of the product will rise.
The pricing is done based on these three factors.
                        PRICING STRATEGIES
Cost-plus pricing is the simplest pricing method. The firm calculates the cost of
 Cost-plus pricing
producing the product and adds on a percentage (profit) to that price to give the
price. This method although simple has two flaws; it takes no account of demand and
there is no way of determining if potential customers will purchase the product at the
calculated price.
Price = Cost of Production + Margin of Profit.
 Price skimming
Selling a product at a high price, sacrificing high sales to gain a high profit, therefore
‘skimming’ the market. Usually employed to reimburse the cost of investment of the
original research into the product - commonly used in electronic markets when a new
range, such as DVD players, are firstly dispatched into the market at a high price. This
strategy is often used to target "early adopters" of a product/service. These early
adopters are relatively less price sensitive because either their need for the product is
more than others or they understand the value of the product better than others. This
strategy is employed only for a limited duration to recover most of investment made to
build the product. To gain further market share, a seller must use other pricing tactics
such as economy or penetration.
 In price skimming, price varies over time. Typically a company starts selling a new
    product at a
relatively high price then gradually reduces the price as the low price elasticity
    segment gets
satiated. Price skimming is closely related to the concept of yield management.
                        PRICING STRATEGIES
   Limit pricing
This is a strategy of pricing adopted by firms in a contestable market in order to
    'limit' the
ability of new entrants to take advantage of economies of scale where by costs are
Low enough for them to become competitive.
Market oriented pricing
Setting a price based upon analysis and research compiled from the targeted
    market. Price discrimination exists when sales of identical goods or services
    are transacted at different prices from the same provider. In a theoretical
    market with perfect information, no
transaction costs and a prohibition on secondary exchange (or re-selling) to
    prevent arbitrage,
price discrimination can only be a feature of monopoly markets. Otherwise, the
    moment the
seller tries to sell the same good at different prices, the buyer at the lower price
    can arbitrage
by selling to the consumer buying at the higher price but with a tiny discount.
However, market frictions in oligopolies such as the airlines, and even in fully
competitive retail or industrial markets allows for a limited degree of differential
pricing to different consumers.
Price discrimination also occurs when it costs more to supply one customer than it
another, and yet the supplier charges both the same price.

   Although the term "discrimination" has negative connotations, "price
    discrimination" is merely a technical term meaning differentiation in price to
    increase efficiency.
                        PRICING STRATEGIES
   However, the effects of price discrimination on social efficiency are unclear.
    Typically such behaviour leads to lower prices for some consumers and higher
    prices for others. Output can be expanded as when price discrimination is very
    efficient, but output can also decline when discrimination is more effective at
    extracting surplus from high-valued users than expanding sales to low valued
    users. Even if output remains constant, price discrimination can reduce efficiency
    by misallocating output among consumers.

   Price discrimination requires market segmentation and some means to discourage
    discount customers from becoming resellers and, by extension, competitors. This
    usually entails using one or more means of preventing any resale, keeping the
    different price groups separate, making price comparisons difficult, or restricting
    pricing information. The boundary set up by the marketer to keep segments
    separate are referred to as a rate fence. Price discrimination is thus very common in
    services, where resale is not possible; an example is student discounts at museums.

   In price discrimination, price may vary according to customer, location, quantity,
    quality, and according to segment
                 Four price-positioning strategies
                          High                  Low

          High                                  Good-value
                   Premium strategy

          Low    Overcharging strategy        Economy strategy

   Product line    Optional product   Captive product      By-product   Product-bundle
     pricing            pricing           pricing           pricing         pricing

  Setting price    Pricing optional    Pricing products
                                                        Pricing low-value
                   Or accessory       That must be used
 Steps between                                           By-products to Pricing bundles
                      Products          With the main                      Of products
Product line items                                       Get rid of them
                      sold with            products                       Sold together
                   The main product
         Price adjustment strategies
 Discount and    Segmented      Psychological Value pricing       Promotional   Geographical   International
 Allowance       pricing        pricing                           pricing       pricing        pricing

Reducing        Adjusting                       Adjusting         Temporarily   Adjusting      Adjusting
                                Adjusting       Prices to         Reducing      Prices to
Prices to       prices                                                                         Prices
                                Prices          Offer the         Prices to     Account
Reward          To allow for                                                                   in
                                for             Right             Increase      For the
Customers        differences                                                                   Internatio-
                                Psychological   combination       short-run     Geographical
Responses       In customers,                                                                  nal
                                effect          Of quality        sales         Location of
Such as         Products and                                                                   markets
Paying          locations                       And service                     customers
Early or                                        At a fair price
The product
                                Elasticity of demand
                             Price elasticity of demand
   the price elasticity of demand (PED) is an elasticity that measures the nature and degree of
the relationship between changes in quantity demanded of a good and changes in its price.
   Price elasticity of demand is measured as the percentage change in quantity
demanded that occurs in response to a percentage change in price. For example, if,in
response to a 10 % fall in the price of a good, the quantity demanded increases by
20 %, the price elasticity of demand would be 20 %/(− 10 %) = −2
   In general, a fall in the price of a good is expected to increase the quantity
demanded, so the price elasticity of demand is negative as above. Note that in
economics literature the minus sign is often omitted and the elasticity is given as an
absolute value. (Case & Fair, 1999: 110). Because both the denominator and numerator
of the fraction are percent changes, price elasticities of demand are dimensionless
numbers and can be compared even if the original calculations were performed using
different currencies or goods.

An example of a good with a highly inelastic demand curve is salt: people need salt, so for even
    relatively large changes in the
price of salt, the amount demanded will not be significantly altered. Similarly, a product with a
    highly elastic demand curve is red
cars: if the price of red cars went up even a small amount, demand is likely to go down since
    substitutes are readily available for
purchase (cars of other colors).
             Price elasticity of demand
  It may be possible that quantity demanded for a good rises as its price rises, even under
   conventional economic assumptions of consumer rationality. Two such classes of goods are
   known as Giffen goods or Veblen goods. Another case is the price inflation during an economic
  Various research methods are used to calculate price elasticity:
Test markets
Analysis of historical sales data
Conjoint analysis

The formula used to calculate the coefficient of price elasticity of demand is

                    Using all the differential calculus:

                              P = price
                             Q = quantity
       Types of elasticity of demand
   Fairly elastic demand (ED >1)
   Fairly inelastic demand (ED<1)
   Perfectly elastic demand (ED = Infinity)
   Perfectly inelastic demand (ED = 0)
   Unitary elasticity of demand (ED = 1)

                See also
          Supply and demand
       Price elasticity of demand
        Price elasticity of supply
      Income elasticity of demand
       Cross elasticity of demand
              Arc elasticity
             Perfectly elastic demand

Perfectly inelastic demand
                           PRICE CHANGES
   After developing their price structures and strategies, companies often face
    situations in which they must initiate price changes or respond to price changes by

 Initiating price cuts
 Initiating price increases
 Buyer reactions to price changes
 Competitor reactions to price changes

Here we reverse the question and ask how a firm should respond to a price change by
Competitor. The firm needs to consider several questions: Why did the competitor
change the price? Was it to make more market share, to use excess capacity, to meet
changing cost conditions or to lead an industry-wide price changes? Is the price
temporary or permanent? What will happen to the company’s market share and profits
if it does not respond? Are other companies going to respond? What are the
competitor’s and other firms’ responses to each possible reaction likely to be?
If the company decides that effective action can and should be
taken, it might make any of the following four responses.

1.   Reduce price
2.   Raise perceived value
3.   Improve quality and increase price.
4.   Launch low-price ‘fighting brand’.
           KEY Terms and definitions
   Dynamic pricing: Charging different prices depending on individual customers and
    situations: Dynamic pricing can be likened to price discrimination:
   Target costing - A technique to support pricing decisions, which starts with
    deciding a target cost for a new product and works back to designing the product.
   Fixed costs - Costs that do not vary with production or sales level. These are costs
    that remain fixed as output increases or decreases in the short run.
   Variable costs-costs that vary directly with the level of production – cost that
    changes as output increases or decreases in the short run
   Total costs - the sum of the fixed and variable costs for any given level of
   Experience curve (learning curve): The drop in the average per-unit production cost
    that comes with accumulated production experience.
   Pure competition: a market in which buyers and sellers trade in a uniform
    commodity- no single buyer or seller has much effect on the going market price.
   Monopolistic competition- A market in which many buyers and sellers trade over a
    range of prices rather than a single market price.
   Oligopolistic competition- A market in which there are a few sellers that are highly
    sensitive to each other’s pricing and marketing strategies.
   Pure monopoly – a market in which there is a single seller- it may be a government
    monopoly, a private regulated monopoly or a private non-regulated monopoly.
   PRICE ELASTICITY- A measure of the sensitivity of demand to changes in price.
   Net profit- the difference between the income from goods sold and all expenses
                    MARKETING MIX (PRICE)
                    KEY Terms and definitions
   Cost-plus pricing- Adding a standard mark-up to the cost of the product.
   Mark-up/mark-down – the difference between selling price and cost as a
    percentage of selling price or cost.
   Break-even pricing (target profit pricing): Setting price to break even on the costs
    of making and marketing a product; or setting a price to make a target profit. The
    break even price is when the price set is equal to the production cost.

Break-even volume = Fixed cost
                   Price-Variable cost
 Value-based pricing- setting price based on buyers’ perceptions of product values
   rather than cost.
 Value pricing- offering just the right combination of quality and good service at a
   fair price.
 Going-rate pricing/competitor based pricing- setting price based largely on
   following competitors’ prices rather than on company costs or demand.
 First price sealed-bid pricing- potential buyers submit sealed bids, and the item is
   awarded to the buyer who offers the best price. --- (common during auctions)
 English auction- price is raised successively until only one bidder remains
 Dutch auction- prices start high and lowered successively until someone buys.
 Collective buying- an increasing number of customers agree to buy as prices are
   lowered to the final bargain price.
 Reverse auction- customers name the price that they are willing to pay for an item
   and seek a company willing to sell.
          KEY Terms and definitions
   Second-price sealed bid- Sealed bids are submitted but the contender
    placing the best bid pays only the price equal to the second best bid.
   Strapline – a slogan often used in conjunction with a brand’s name,
    advertising and other promotions.
   Market-skimming pricing- setting a high price for a new product to
    skim maximum revenues layer by layer from the segments willing to
    pay the high price; the company makes fewer but more profitable
   Market penetration pricing- Setting a low price for a new product in
    order to attract large numbers of buyers and a large market share.
   Product line pricing- setting the price steps between various products
    in a product line based on cost differences between the products,
    customer evaluations of different features, and competitors’ prices.
   Optional-product pricing- the pricing of optional or accessory products
    along with a main product.
   Captive-product pricing- setting a price for products that must be used
    along with a main product, such as blades for a razor and film for a
   Two-part pricing- a strategy for pricing services in which price is
    broken into a fixed fee plus a variable usage rate.
   By-products- items produced as a result of the main factory process,
    such as waste and reject items.
   By-product pricing- setting a price for by-products in order to make
    the main product’s price more competitive.
                 KEY Terms and definitions
 Product-bundle pricing- combining several products and offering the
  bundle at a reduced price.
 Cash discount- a price reduction to buyers who pay their bills promptly.
 Quantity discount- a price reduction to buyers who buy large volumes.
 Quantity premium- A surcharge paid by buyers who purchase high
  volumes of a product.
 Functional discount (trade discount)- a price reduction offered by the
  seller to trade channel members that perform certain functions, such as
  selling, storing and record keeping.
 Seasonal discount- a price reduction to buyers who buy merchandise or
  services out of season.
 Trade-in allowance- a price reduction given for turning in an old item
  when buying a new one.
 Promotional allowance- a payment or price reduction to reward dealers for
  participating in advertising and sales support programmes.
 Segmenting pricing- pricing that allows for differences in customers,
  products and locations. The differences in prices are not based on
  differences in costs.
 Psychological pricing- a pricing approach that considers the psychology of
  prices and not simply the economics; the price is used to say something
  about the product.
 Reference prices- prices that buyers carry in their minds and refer to when
  they look at a given product.
             Key terms and definition
   Promotional pricing- temporarily pricing products below the list price, and
    sometimes even below cost, to increase short-run sales.
   Geographical pricing- pricing based on where customers are located
   FOB – ORIGIN PRICING- A geographical pricing strategy in which goods are placed
    free on board a carrier; the customer pays the freight from the factory to the
   Uniform delivered pricing- a geographic pricing strategy in which the company
    charges the same price plus freight to all customers, regardless of their location.
   Zero pricing – a geographic pricing strategy in which the company sets up two or
    more zones. All customers within a zone pay the same total price; the more distant
    the zone, the higher the price.
   Basing-point pricing – a geographical pricing strategy in which the seller
    designates some city as a basing point and charges all customers the freight cost
    from that city to the customer location, regardless of the city from which the goods
    are actually shipped.
   Freight-absorption pricing- a geographic pricing strategy in which the company
    absorbs all or part of the actual freight charges in order to get the business.
      Questions for revision:
1.   Examine the internal and external factors
     businesses should take into consideration
     before setting the price for their products?
2.   List and discuss four pricing strategies used by
3.   Explain how price can influence the demand
     for products and how the demand can
     influence the price of products.

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