1. Pricing

2. What this topic is all about
• Pricing strategies,
methods and tactics
• Matching price to
marketing objectives
• How demand changes in
response to changes in
price

3. What is Price?
• The money charged for a
product or service
• Everything that a
customer has to give up
in order to acquire a
product or service
• Usually expressed in
terms of £

4. Four views of price
Economists view Price is set by the forces of supply and
demand
Accountant’s Price should cover costs so that a
view profit can be made
Customer’s view Price has to represent good value
Marketer’s view Pricing is an opportunity to gain a
competitive advantage

5. Many Factors Affect Price
• Costs of production • Marketing mix
• Competitors’ prices • Stage in the product life
• Customer perception of cycle
value • State of the economy
• The firm’s objectives • Expectations of
• Customer demand distributors
• Price elasticity of • State of competition in
demand the market
• Target market • Likely reaction from
customers

6. Setting
prices

7. Stages of price setting
• Develop pricing objectives
• Assess of target market’s ability to purchase
• Determine demand for product
• Analyse demand, cost and profit relationship
• Evaluate competitors’ prices
• Select pricing strategy & tactics
• Decide on price

8. Some Pricing Objectives
Financial Marketing
Maximise profit Maintain/improve market
Achieve a target level of share
profits Beat/prevent competition
Achieve a target rate of Increase sales
return Build a brand
Maximise sales revenue
Improve cash flow

9. Methods, strategies and tactics
Pricing method The method used to calculate the
actual price set
Pricing Adopted over the medium to long
strategies term to achieve marketing objectives
Have a significant impact on marketing
strategy
Pricing tactics Adopted in the short run to suit
particular situations
Limited impact beyond the product
itself

10. Pricing
Methods

11. Pricing methods
• Market based pricing
– Customer value pricing
– Psychological price barrier
– Going rate pricing
• Cost based pricing
– Full cost pricing
– Mark up pricing
– Contribution pricing

12. Market based methods (1)
• Customer perceived value
– What customers value the product at
– Price is set at an estimate of the product’s value to
customers
• Psychological price barriers
– A price beyond which customers will not go
– Prices are set based upon the psychological
expectation of customers about price

13. Market based methods (2)
• Going rate pricing
– Price set after taking competitors into account
– Method favoured by new entrants to a market
since it avoids price wars
– Makes use of the expertise of established firms
– But it assumes that competitors set the correct
price and it ignores the fact that firms have
different cost bases

14. Who takes the lead?
Price takers Have no option but to charge
the ruling market price
Price makers Able to fix their own price
Price leaders Market leaders whose price
changes are followed by rivals
Price followers Follow the price-changing lead
of the market leader

15. Cost plus pricing
• Full cost of making the product plus a %
mark up
• Price is set by calculating the full costs
(variable/direct plus fixed/indirect cost)
of a product and adding a profit margin
• It is relatively easy to calculate the direct
costs, but some way has to be devised to
allocate the indirect costs

16. Example of Cost Plus Pricing
Total Costs for producing 10,000 units £100,000
Cost per Unit £10
Add mark-up 100% of cost £10
Selling price = cost + mark-up £20

17. Factors influencing the mark up %
• Should discounts be offered for bulk
purchases?
• Stage in the product life cycle –products
at the early stages may need a lower
mark up in order to establish demand
• Product : high mark up on slow moving
products, low mark up on fast moving
products

18. Advantages of cost plus pricing
• Easy to calculate
• Price increases can be justified when costs
rise
• Cost increases can be passed onto the
customer
• Price stability may arise if competitors take
the same approach
• Pricing decisions can be made at a junior level
in a business based on formulas
• All costs are covered

19. Disadvantages of cost plus pricing
• Ignores demand and price elasticity of
demand
• May not take account of competition
• Profit is missed if price is set below the that
customers are prepared to pay
• Lost sales if price is set above the price
customers are willing to pay
• Business has less incentive to control costs

20. Mark up pricing
• % mark up on direct costs
• Calculate direct costs and then add an
amount to cover indirect costs
• This method is widely used in retailing
• Example:
– Buying in price of an item of clothing:£8
– Mark up of 200% on buying in price
– Selling price £8 plus £16 equals £24

21. Contribution (marginal) pricing
• Where price is set above the variable
costs of production and a contribution is
made towards fixed costs and profit
• This is setting a price which covers
marginal cost and therefore makes a
contribution
• Often used in order to increase capacity
utilisation

22. Pricing
Strategies

23. Pricing strategies
• Strategies for new products
– Skimming
– Penetration
• Strategies for existing products
– Price leaders, price followers and price taker
– Pre-emptive pricing
– Price discrimination

24. Price Skimming (1)
• Set a high price to maximise profit
• Product is sold to different market
segments at different times
• Top segment is skimmed off first with the
highest price
• Objective
– Maximize profit per unit to achieve quick recovery
of development costs

25. Price Skimming (2)
• Works very well for products
that create excitement
amongst “early adopters”
• Best used in introduction or
early growth stage of product
life cycle
• Electronic items provide
many great examples

26. Penetration pricing
• Introduce a new product at a lower price
than competitors
• Aim is to
– Gain market share quickly
– Build customer usage and loyalty
• Opposite of price skimming
• Price is raised once target market share is
reached

27. Prestige pricing
• High price to enhance or
reinforce a product’s high
quality, luxury image
• Unlike skimming the high
price is maintained
throughout the life of the
product
• Examples : Channel, Bang
and Olufsen, Cartier, Lotus

28. Price quality matrix
High price Medium Low price
price
High quality Premium Penetration Superb value
strategy strategy
Medium Overcharging Average Good value
quality strategy strategy strategy
Low quality Rips off Cheap, Bargain price
strategy flashy strategy
strategy

29. Pre-emptive pricing
• Setting prices low to deter new entrants
to the market
• This strategy is especially suitable in
markets where there are few other
barriers to entry
• Pre-emptive pricing should not be
confused with predatory pricing

30. Price discrimination
• Charging different prices to different market
segments, based on customer willingness to
pay
• Time based discrimination - peak/ off peak
pricing used in transport & travel
• Geographic discrimination – e.g. cars are
cheaper on mainland Europe than in the UK
• Age discrimination - reductions for the young
and the old

31. Pricing
Tactics

32. Pricing tactics
• Unlike pricing strategies, these refer to
the short run
• Predatory pricing (illegal)
• Loss leaders
• Psychological pricing
• Promotional pricing and discounts

33. Predatory pricing
• “Predatory pricing occurs when a
dominant undertaking incurs losses with
the intention of removing a rival and/ or
deterring other potential competition”
(OFT)
• This anti- competitive practice is used
when competitors threaten to reduce
market share and profitability

34. Price wars
• Competitive price reductions by firms in a
competitive industry
• Each seeks to increase market share by price
reduction but the result is destructive spiral
of price reductions
• The process continues until weaker firms go
out of business
• Price wars might be seen as good for
customers in the short run but it is harmful in
the long run if competition is reduced

35. Psychological pricing
• In this case consideration is given to the
psychology of prices and not simply the
economics of pricing
• Charging at a price which ends in 99p is a
way of deceiving people into believing
that the product is cheaper than it really
is

36. Loss leader
• A loss leader is a product prominently displayed
and advertised and price below the normal price
and even below cost to the seller
• A product which is sold at a low (even loss
making) price in order to encourage customers
to buy other full price products from the
business along with the loss leader product
• Loss leaders are widely used by supermarkets to
draw in customers from rival firms
• The aim is to encourage people to buy
complementary goods at full price

37. Promotional pricing and discounts
Type of Who for?
discount
Cash For those who pay cash
Quantity For customers who buy large volumes
(bulk buying)
Trade Intermediaries in the trade
Seasonal For buying off peak or out of season
Promotional Temporary pricing of products below
list price to increase short run sales

38. Price
Elasticity
of Demand

39. Price Elasticity of Demand
• The demand curve slopes downwards
• This means that the quantity demanded falls as price
rises
• To increase the quantity sold, it is necessary to reduce
the price
• Price elasticity of demand refers to the responsiveness
of demand to changes in price
• When demand is elastic, a price rise leads to a more
than proportionate fall off in quantity demanded
• When demand is inelastic, a price rise leads to a less
than proportionate fall off in quantity demanded

40. Elastic demand and sales revenue
• When demand is elastic (responsive to price
changes), a rise in price leads to such a fall off
in quantity sold that sales revenue falls
• And a price reduction will lead to such a
large increase in sales volume that sales
revenue rises
• Conclusion : when demand is elastic, price
and sales revenue move in opposite
directions

41. Inelastic demand and sales revenue
• When demand is inelastic (not very
responsive to price changes), a rise in price
will result in only a small reduction in sales
volume that sales revenue rises
• And a cut in price produces such a small
increase in sales volume that sales revenue
falls
• Conclusion: when demand is inelastic price
and sales revenue move in the same direction

42. Test Your Understanding
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43. Pricing