Last week on Marketing 06

• Business markets vs. Consumer markets

• Major types of buying situations:
– Straight rebuying
– Modified rebuying
– New task buying
• The buying center concept
• Factors that influence business buying behavior
• The business buying process
• Segmenting business markets
• Characteristics of institutional and government
markets

1
 Marketing 07
Pricing Strategies
Learning objectives

• Identify the three major pricing strategies and the

other important external and internal factors affecting
a firm’s pricing decisions
• Describe the major strategies for pricing new products
• Discuss how companies adjust their prices to take into
account different types of customers and situations

Kotler and Armstrong (2016) 2

Marketing Strategy and the Marketing Mix

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 4

The role of price in the marketing mix

Profitability Positioning

Price
Promotion
Target market
pricing strategy
Elasticity
Price is the amount of money charged for a product or service, or the sum
of all the values that customers exchange for the benefits of having or
using the product or service.

Major Pricing Strategies

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 Major Pricing Strategies
Cost-Based Pricing
Cost-based pricing sets prices based on the costs for producing,
distributing, and selling the product plus a fair rate of return for
effort and risk.

Customer Value-Based Pricing

Value-based pricing uses the buyers’ perceptions of value rather
than the seller’s cost.
– Value-based pricing is customer driven.
– Cost-based pricing is product driven.
– Price is set to match perceived value.
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Major Pricing Strategies

https://www.youtube.com/watch?v=6PPq9h7bcUU

https://www.youtube.com/watch?v=SbH-A00CQlM

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 Major Pricing Strategies
Cost-Based Pricing
Fixed costs are the costs that do not vary with production
or sales level.
• Rent
• Heat
• Interest
• Executive salaries
Variable costs vary directly with the level of production.
• Raw materials
• Packaging
Total costs are the sum of the fixed and variable costs for any
given level of production.
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 Major Pricing Strategies
Cost-Based Pricing
Break-even pricing (target return pricing) is setting price to break even on
costs or to make a target return.

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Major Pricing Strategies

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Major Pricing Strategies
Competition-Based Pricing
Competition-based pricing is setting
prices based on competitors’ strategies,
costs, prices, and market offerings.
Importantly, the goal is not to match or beat competitors’ prices.
Rather, the goal is to set prices according to the relative value created
versus competitors. If a company creates For example, Caterpillar
makes greater value for customers, higher prices are justified.
high-quality, heavy-duty construction and mining equipment. It
dominates its industry despite charging higher prices than competitors
such as Komatsu. When a commercial customer once asked a
Caterpillar dealer why it should pay $500,000 for a big Caterpillar bull-
dozer when it could get an “equivalent” Komatsu dozer for $420,000,
the Caterpillar dealer famously provided an analysis like the following:
$420,000 the Caterpillar’s price if equivalent to the competitor’s bulldozer
$50,000 the value added by Caterpillar’s superior reliability and durability
$40,000 the value added by Caterpillar’s lower lifetime operating costs
$40,000 the value added by Caterpillar’s superior service
$20,000 the value added by Caterpillar’s longer parts warranty SERVITIZATION
$570,000 the value-added price for Caterpillar’s bulldozer
- 70,000 discount Thus, although the customer pays an $80,000 price premium
$500,000 final price for the Caterpillar bulldozer, it’s actually getting $150,000 in
added value over the product’s lifetime. The customer chose
the Caterpillar bulldozer.
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 Other Considerations Affecting Price Decisions
The Market and Demand
Pricing In Different Types of Markets
Under pure competition, the market consists of many buyers and sellers trading in a
uniform commodity, such as wheat, copper, or financial securities. No single buyer or

Pure seller has much effect on the going market price. In a purely competitive market,
marketing research, product development, pricing, advertising, and sales promotion
play little or no role. Thus, sellers in these markets do not spend much time on
competition marketing strategy.

Monopolistic Under monopolistic competition, the market consists of many buyers and sellers trading
over a range of prices rather than a single market price. A range of prices occurs because
sellers can differentiate their offers to buyers. Because there are many competitors, each
competition firm is less affected by competitors’ pricing strategies than in oligopolistic markets. Sellers
try to develop differentiated offers for different customer segments and, in addition to
Oligopolistic price, freely use branding, advertising, and personal selling to set their offers apart.
Under oligopolistic competition, the market consists of only a few large sellers.
competition Because there are few sellers, each seller is alert and responsive to competitors’ pricing
strategies and marketing moves.

Pure monopoly In a pure monopoly, the market is dominated by one seller. The seller may be a
government monopoly (the U.S. Postal Service), a private regulated monopoly (a
power company), or a private unregulated monopoly (De Beers and diamonds).
Pricing is handled differently in each case.

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 Other Considerations Affecting Price
Decisions
The Market and Demand
Analyzing the Price–Demand Relationship
The demand curve shows the number of units the market will
buy in a given period at different prices
• Demand and price are inversely related.
• Higher price = lower demand

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14
 Other Considerations Affecting Price
Decisions
The Market and Demand
Price Elasticity of Demand
Price elasticity is a measure of the sensitivity of demand to
changes in price.
Inelastic demand is when demand hardly changes with a small
change in price.
Elastic demand is when demand changes greatly with a small
change in price.

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 Price elasticity of demand 16

It is a measure of the sensitivity of demand to changes in price.

Price elasticity of % change in quantity demand

demand (E) =
% change in price
Price Price

p2 p2

p1 p1

Q2 Q1 Quantity demanded Q2 Q1 Quantity demanded

per period per period
Inelastic demand Elastic demand
if E is less than 1 if E is greater than 1
Other Considerations Affecting Price
Decisions
The Economy and Other External Factors

Economic conditions

Reseller’s response to price

Government

Social concerns

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 New Pricing Strategies
Market-skimming pricing strategy sets high initial
prices to “skim” revenue layers from the market.
–Product quality and image must support the price.
–Buyers must want the product at the price.

https://www.youtube.com/watch?v=XBmWEduod5k

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 New Pricing
Strategies
Market-penetration pricing
involves setting a low price for a
new product in order to attract a
large number of buyers and a large
market share.
Before Wavestorm, surfers and would-be surfers typically bought
custom-made or high-end surfboards at local surf shops, where entry-
level boards typically run $300 to $1,000.
AGIT Global had a different idea. With a mission to make surfing more
accessible for both adults and children, it began 10 years ago mass-
producing good quality soft-foam surfboards and selling them through
big-box stores at penetration prices.
For example, it sells an entry-level, 8-foot, blue-and-white Wavestorm
board at Costco for only $99.99.
Thanks to penetration pricing, Wavestorm is now the market leader,
selling an estimated five times more boards than the other largest
surfboard brands. The inexpensive boards have even become favorites
of advanced surfers, who buy them for their friends or chil-
dren. “Margins are slim at Costco,” says Matt Zilinskas, AGIT’s vice
president of sales. “But we pump out volume and get paid on time.”
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 Price Adjustment Strategies
Segmented Pricing
• Customer-segment pricing

• Product-form pricing

• Location-based pricing

• Time-based pricing

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 Price Adjustment Strategies
Segmented Pricing
For segmented pricing to be effective:
– Market must be segmentable
– Segments must show different degrees of demand
– Costs of segmenting cannot exceed the extra revenue
– Must be legal

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 Price Adjustment Strategies
Psychological Pricing
Psychological pricing considers the psychology of prices and
not simply the economics; the price is used to say something
about the product.

Reference prices are prices that buyers carry in their minds and
refer to when they look at a given product.
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 Price Adjustment Strategies
Promotional Pricing
Promotional pricing is characterized by temporarily pricing products
below the list price, and sometimes even below cost, to increase short-
run sales. Examples include:
– special-event pricing
– limited-time offers
– cash rebates
– low-interest financing, extended warranties, or free
maintenance

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 Price Adjustment Strategies

Dynamic pricing involves adjusting

prices continually to meet the
characteristics and needs of
individual customers and
situations.

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 Pricing in different stages of product 26

life cycle

• Introductory stage:
– penetration pricing
– skimming pricing
• Growth stage: original or decreasing price, according to
demand
• Maturity stage: declining price (discounts, credits, etc.)
• Decline stage: decreased price, higher discounts
 Product Life-Cycle Strategies
Table 9.2 Part II

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Video case: Hammerpress
Video case: Smashburger