Chapter 10
Pricing Strategies
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix
Slides prepared by Angela Tasevski
10–1
Price
• Price is ‘what we pay for is what we get!’ It is the
amount of money needed to acquire a product.
• Value is the quantitative measure of the worth of a
product in an exchange for something else. So,
price is value expressed in money terms.
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix
Slides prepared by Angela Tasevski
10–2
Price setting process
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix
Slides prepared by Angela Tasevski
10–3
Pricing objectives
• Profit-oriented:
–
To achieve a target return, or to maximise
profits.
• Sales-oriented:
– To increase sales volume, or to maintain or
increase market share.
• Status-quo oriented:
– To stabilise prices, or to meet competition
(e.g. petrol).
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix
Slides prepared by Angela Tasevski
10–4
Factors influencing price setting
• the extent of demand
• determining the expected price from the:
–
Expected price—the price at which customers
consciously or unconsciously value a product.
– Inverse demand—the higher the price the
greater the unit sales (demand).
• Estimated sales at various prices
– Conduct survey of buyer intentions.
– Conduct test-market experiments.
– Use computerised models.
– Get sales estimates from seller.
– Sales team to estimate sales for their
areas/customers.
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix
Slides prepared by Angela Tasevski
10–5
The inverse demand curve
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix
Slides prepared by Angela Tasevski
10–6
Price elasticity of demand
• The effect that price change has on the number of
units sold and the total revenue.
• Demand is elastic when:
– A reduction in price causes an increase in total
revenue.
– An increase in price causes a decrease in total
revenue.
• Demand is inelastic when:
– A price cut causes total revenue to decline.
– A prise rise causes an increase in total revenue.
– Refer to Figure 10.3, page 343.
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix
Slides prepared by Angela Tasevski
10–7
Other parts of the marketing mix
• Product
• Stage of life cycle.
• Terms of sale.
• The product’s end use.
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix
Slides prepared by Angela Tasevski
10–8
Other parts of the marketing mix
• Distribution channels
• Factory pricing for various customer types through
intermediaries, e.g. direct to wholesale or direct to
customer.
• Direct to customer without intermediaries.
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix
Slides prepared by Angela Tasevski
10–9
Other parts of the marketing mix
• Promotion
• Type of channel used.
• Promotional responsibilities determine price for
product from supplier.
• Local to tie in with national advertising.
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix
Slides prepared by Angela Tasevski
10–10
Product cost
• These are various:
producer’s cost
– fixed cost
– variable cost
– total cost
– marginal cost
• Refer to Figure 10.4, page 346.
–
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix
Slides prepared by Angela Tasevski
10–11
Price-setting methods
• Cost-plus—setting price of unit based on total cost
plus desired profit (Table 10.2, p.349) or
• Marginal cost plus desired profit.
• Demand-based pricing (goods or services).
– Value-based pricing
 Includes tangible and intangible attributes.
 Objective is to determine the level of
satisfaction a customer wants and what price
they are prepared to pay for it.
 Also the price the firm believes a customer
will pay.
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix
Slides prepared by Angela Tasevski
10–12
Break-even point
The break-even point (zero profit):
BEP (Units) =
Total Fixed Costs ($)
Selling price per unit – average variable cost per unit
BEP (Dollars) = Fixed costs
Contribution margin ratio
= Fixed Costs
(Price–variable costs)/ V. costs
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix
Slides prepared by Angela Tasevski
10–13
Break-even point (chart)
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix
Slides prepared by Angela Tasevski
10–14
Competition-based pricing
• Firm’s price is influenced by what the competition
is charging.
Pricing to meet competition
• Firm finds out what the market price is, and after
allowing for mark-ups and intermediaries, it arrives
at its own selling price.
Pricing below the competition level
• Pricing below competition, commonly used by
discount retailers.
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix
Slides prepared by Angela Tasevski
10–15
Competition-based pricing
(continued)
Pricing above competition
• Pricing above competition, usually only when the
product is distinctive or the seller has acquired
prestige.
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix
Slides prepared by Angela Tasevski
10–16
Market entry strategies
• Market skimming pricing—involves setting a
relatively high initial price.
• The price is set at the highest possible level
that interested consumers will pay for the new
product.
• It can help to establish a high-quality image for
the new product.
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix
Slides prepared by Angela Tasevski
10–17
Market entry strategies
• Market-penetration pricing—a relatively low initial
price is set for a new product.
• Usually in order to reach mass markets.
•
Also to discourage competition.
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix
Slides prepared by Angela Tasevski
10–18
Discounts and allowances
• Quantity discounts
– Discounts based on the size of the purchase.
• Trade discounts
– Reductions from list price offered to buyers as
payment for the marketing functions that they
will perform.
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix
Slides prepared by Angela Tasevski
10–19
Discounts and allowances
• Cash discounts
– Deductions given to buyers for paying their
bills within a specified time.
• Promotional discounts
– Reductions granted by a seller in payment
for promotional services performed by
buyers.
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix
Slides prepared by Angela Tasevski
10–20
Legal and ethical pricing
Trade Practices Act 1974 (Cwlth)
Price discrimination
• Section 49 of the Act prohibits discrimination in
either price or non-price terms of trade (including
advertising and marketing assistance, allowances,
rebates and so on), if this discrimination could
substantially injure competition.
Price fixing
• Collusion between competitors to fix or control
prices is illegal under the Act.
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix
Slides prepared by Angela Tasevski
10–21
Legal and ethical pricing
Re-sale price maintenance
• This occurs where the supplier stipulates or
controls the resale price charged by the purchaser.
Misleading or deceptive pricing
• Misleading or deceptive advertising of the price of
a product is illegal under the general prohibition in
section 52 of the Trade Practices Act.
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix
Slides prepared by Angela Tasevski
10–22
Legal and ethical pricing
Freight costs and geographic pricing
• Marketers need to take into account costs involved
in shipping goods to buyers.
–
Alternative strategies:
 Buyer pays freight costs.
 Seller bears cost of freight.
 Both parties share freight cost.
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix
Slides prepared by Angela Tasevski
10–23
Legal and ethical pricing
Point-of-production pricing
• Commonly known as FOB (free on board) and
referring to export sales where the seller has paid
to have goods loaded on board the ship and the
buyer has paid for the cost of freight, ex-factory or
factory gate pricing.
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix
Slides prepared by Angela Tasevski
10–24
Legal and ethical pricing
Uniform-delivered pricing
• The same delivered price is quoted to all buyers
regardless of their locations.
• Usually where transport cost is minimal.
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix
Slides prepared by Angela Tasevski
10–25
Legal and ethical pricing
Zone-delivered pricing
• Divides a seller’s market into a limited number of
broad geographic zones, and then a uniform
delivered price is set within each zone.
Freight-absorption pricing
• Seller might absorb part of the freight cost to offset
competition.
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix
Slides prepared by Angela Tasevski
10–26
Other pricing strategies
• Flexible price strategy
–
Similar customers might pay a different price
when buying similar quantities.
• Price lining
– Involves selecting a limited number of prices at
which a business will set related products.
• Odd-pricing (psychological pricing)
– A strategy used by retailers for setting prices at
uneven (or odd) amounts, e.g. $2.99 instead of
$3.00.
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix
Slides prepared by Angela Tasevski
10–27
Other pricing strategies
Loss-leader pricing
• A promotional pricing strategy where the seller
sets a very low price, at cost or below cost, to
attract customers.
RRP (recommended retail price)
• Manufacturer recommends a price to seller to
assist in maintaining brand equity/image.
Changing price
• Firm may choose to change price depending
on varying circumstances.
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix
Slides prepared by Angela Tasevski
10–28