Slide 16.1
Assignment requirements
Assigned task: Case Study - Starbucks:
Analyse the individual elements of the
extended marketing mix for your
chosen organisation
Assessment requirements for a pass:
• 3.3: Explain how prices are set to
reflect an organisation’s objectives and
market conditions
1
John A. Heather
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Slide 16.2
Price is the only element that
produces revenue
Price is the means whereby an
organisation covers the costs of
its research, manufacturing,
marketing and other activities and
in a profit making organisation,
the surplus is profit.
Kotler, Keller, Brady, Goodman and Hansen, Marketing Management, 1st Edition © Pearson Education Limited 2009
Slide 16.3
Price
• The following definition comes from a 1990
issue of the CIM newsletter Marketing
Success:
• "Price represents the amount of income that
has to be given up in exchange for the
package of benefits to be derived from the
product."
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Slide 16.4
Tesco’s reduced price chicken
Tesco’s low-priced chickens have caused intensive public debate
Source: Marco Secchi/Rex Features
Kotler, Keller, Brady, Goodman and Hansen, Marketing Management, 1st Edition © Pearson Education Limited 2009
Slide 16.5
Consumer Psychology and Pricing
• Purchase decisions are based on how
consumers perceive prices and what they
consider the current actual price to be – not
the marketer’s stated price.
• Customers may have a lower price threshold
below which prices signal inferior or
unacceptable quality, as well as an upper
price threshold above which prices are
prohibitive and seen as not worth the money.
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Slide 16.6
Consumer psychology and pricing
Reference prices
Price-quality inferences
price endings
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Slide 16.7
Reference Prices
• Consumers may employ reference prices,
comparing an observed price to an internal
reference price they remember or to an
external frame of reference such as a posted
‘regular retail price.’
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Slide 16.8
Table 16.1
Possible consumer reference prices
Source: Adapted from R. S. Winer (1988) Behavioral perspectives on pricing: buyers’ subjective perceptions of price revisited, in T. Devinney (ed.) Issues in Pricing: Theory and
Research, Lexington, MA: Lexington Books, pp. 35–57. Copyright © 1988 Lexington Books. Reproduced with permission
Kotler, Keller, Brady, Goodman and Hansen, Marketing Management, 1st Edition © Pearson Education Limited 2009
Slide 16.9
Price-Quality Inferences
• Many consumers use price as an indicator of
quality. Some brands adopt exclusivity and
scarcity as a means to signify uniqueness
and justify premium pricing.
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Slide 16.10
Price Endings
• Many sellers believe prices should end in an
odd number. This denotes the notion of a
discount or bargain. Prices that end in 0 or 5
are also common as they are thought to be
easier for consumers to process and retrieve
from memory.
Kotler, Keller, Brady, Goodman and Hansen, Marketing Management, 1st Edition © Pearson Education Limited 2009
Slide 16.11
The importance of pricing
• Price is the means whereby an
organisation covers the costs of its
research, manufacturing, marketing and
other activities and in a profit making
organisation, the surplus is profit.
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Slide 16.12
The importance of pricing
• Price is also important in ‘not for profit’
organisations where services or products are
sold or dispensed. Here, the organisation
must work within budget constraints so any
revenues that might be accrued from the sale
or dispensation of services must be within
the constraints of the agreed budget.
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Slide 16.13
The importance of pricing
• Organisations should consider pricing in
conjunction with marketing objectives
(Starbucks) and these too should be
quantified in terms of reaching organisation
goals through marketing planning.
Therefore, pricing is the means through
which marketing objectives are reached.
However, prices should be set at a realistic
level which infers that marketing (and pricing)
objectives should be attainable through the
organisation’s marketing efforts.
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Slide 16.14
The importance of pricing
• As individuals, the level of prices in the economy
affects our individual standards of living as well as
the functioning of the economy as a whole. In a
market driven economy the goal must, therefore,
be to provide products and services that we need,
but at good value for money, which will be a
reflection of prices charged.
• However, competition between providers of such
goods and services will tend to drive prices down
as purchasers look for value, and this principle is at
the very heart of marketing thought
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Slide 16.15
Pricing perspectives
• The economist’s approach
• The accountant’s approach
• The marketer’s approach
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Slide 16.16
The economist’s approach
• This approach contends that price is the means
through which supply and demand are brought into
equilibrium. The mechanism operates along a range
of markets from perfect competition, through
imperfect competition to monopoly. The assumption
is that profit will be maximised and the only input to
purchasing decisions is the relationship between
demand and price.
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Slide 16.17
The accountant’s approach
• Here the thrust is upon recovering costs in order to
make profits. This is often expressed as a required
rate of return. The accountant’s approach thus
emphasises the importance of identifying and
classifying different costs. The principal
disadvantage with this approach is the tendency to
ignore the volume of demand and prevailing market
conditions
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Slide 16.18
The marketer’s approach
• The marketer’s approach emphasises
the effect of price on the organisation’s
competitive market position.
• This includes factors like level of sales,
market share and levels of profit.
• Value is emphasised as well as price,
and the notion is to set prices at ‘what
the market will bear’.
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Slide 16.19
Pricing Decisions
• The principal inputs to pricing
decisions are customers,
competitors, costs and company
considerations.
• Under each of these four Cs
each is now examined in terms
of pricing considerations
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Slide 16.20
Customers
• Customers –
• what they will be willing which will be
affected by price levels in the
marketplace;
• the effect of price on long terms
relationships;
• their loyalty to your particular product
(brand loyalty in the case of FMCG –
Fast Moving Consumer Goods)
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Slide 16.21
Competitors
• Competitors –
• the nature and extent of competition;
• their numbers - how many or how few
for the type of market being supplied;
• how aggressive they are in terms of
marketing activity which will include
pricing;
• the prices they charge
Kotler, Keller, Brady, Goodman and Hansen, Marketing Management, 1st Edition © Pearson Education Limited 2009
Slide 16.22
Costs
• Costs –
• materials; labour; overheads;
• considerations as to whether, in a highly
competitive market, the goods might be
produced on a marginal cost basis where overheads have been recovered
on other product manufacture - and
where the only costs in the equation are
direct costs of materials, labour and a
margin for profit
Kotler, Keller, Brady, Goodman and Hansen, Marketing Management, 1st Edition © Pearson Education Limited 2009
Slide 16.23
Company
• Company –
• its objectives in terms of growth,
whether it wishes to be the market
leader or a market follower;
• company image;
• resources of the company
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Slide 16.24
Other Factors
• In addition to these four ‘C’ factors, there are also a
number of macro considerations that will affect
price including: legislation - corporation tax, sales
tax, value added tax and excise taxes depending
upon the country’s taxation policies; tariffs and
duty where appropriate; the effect of Government
on pricing (e.g. if the company is becoming a
powerful player in the industry, perhaps through
merger or takeover, any suspicion of prices that
are, or might become, too high would probably
attract the attention of the Restrictive Practices
legislators.
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Slide 16.25
Influences on pricing decisions
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Slide 16.26
Two Pricing Strategies
• There are two pricing strategies called
‘market penetration’ and ‘market
skimming’ and they relate very much
to new products that are being
introduced to the market place.
• It is at the start of a product’s life cycle
that such pricing decisions should be
taken, for that decision will help to
determine the volume of sales for that
product over its life.
Kotler, Keller, Brady, Goodman and Hansen, Marketing Management, 1st Edition © Pearson Education Limited 2009
Slide 16.27
Penetration Strategy
• A market penetration strategy relies on the economies
of large-scale production to allow the product to be
introduced to the market at a price low enough to attract a
large number of buyers as quickly as possible.
• This will tend to constrain possible competitors by
creating a low price barrier to market entry.
• If product design and manufacture is costly to set up and
operate and is also conducted on a large scale, then this
too will deter competitors.
• The aim is to attain a high, or even total, initial market
share and keep this share high during the later stages of
the product’s life cycle.
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Slide 16.28
market skimming
• A market skimming policy infers that a company
will initially charge the highest price that the market
will bear, and promotional effort is directed at a
small percentage of the potential market.
• These customers are likely to be the innovators
who will purchase during the introduction stage of
the product’s life cycle, followed closely by the early
adopters who are also more receptive to new
concepts and products.
• Their income levels and generally higher social
status make them less sensitive to high initial
prices.
Kotler, Keller, Brady, Goodman and Hansen, Marketing Management, 1st Edition © Pearson Education Limited 2009
Slide 16.29
The product adoption process
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Slide 16.30
Social classification by
employment
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Slide 16.31
Steps in setting price
Select the price objective
Determine demand
Estimate costs
Analyze competitor price mix
Select pricing method
Select final price
Kotler, Keller, Brady, Goodman and Hansen, Marketing Management, 1st Edition © Pearson Education Limited 2009
Slide 16.32
Step 1: Selecting the
pricing objective
• Survival
• Maximum current profit
• Maximum market share
• Maximum market skimming
• Product-quality leadership
• Other objectives
Kotler, Keller, Brady, Goodman and Hansen, Marketing Management, 1st Edition © Pearson Education Limited 2009
Slide 16.33
Conditions favouring a marketpenetration pricing strategy
• Market is highly price sensitive and low prices
stimulate market growth
• Production and distribution costs fall with
accumulated production experience
Kotler, Keller, Brady, Goodman and Hansen, Marketing Management, 1st Edition © Pearson Education Limited 2009
Slide 16.34
Conditions favouring a marketskimming price strategy
• A sufficient number of buyers have high demand
• High initial price does not attract more
competitors to the market
• High price communicates superior product image
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Slide 16.35
Step 2: Determining demand
Price sensitivity
Estimating
demand curves
Price elasticity
of demand
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Slide 16.36
Price Sensitivity
• The demand curve shows the market’ probable purchase quantity at
alternative prices. It sums the reactions of many individuals who have
different price sensitivities.
• The first step in estimating demand is to understand what affects price
sensitivity. Generally speaking, customers are less price sensitive to lowcost items or items they buy infrequently. They are also less price
sensitive when:
•
•
•
•
•
(1) there are few or no substitutes or competitors;
(2) they do not readily notice the higher price;
(3) they are slow to change their buying habits;
(4) they think the higher prices are justified; and
(5) price is only a small part of the total cost of obtaining, operating and
servicing the product over its lifetime.
• A seller can charge a higher price than competitors and still get the
business if it can convince the customer that it offers the lowest total cost
of ownership (TCO). Marketers often do not realize the value they
actually provide but think only in terms of product features.
Kotler, Keller, Brady, Goodman and Hansen, Marketing Management, 1st Edition © Pearson Education Limited 2009
Slide 16.37
Estimating Demand Curves
• Most companies make some attempt to measure their
demand curves using several different methods.
• Surveys can explore how many units consumers would buy
at different proposed prices, although there is always a
chance they might understate their purchase intentions at
higher prices to discourage the company.
• Price experiments can vary the prices of different products
in a shop or charge different prices in similar territories to
see how the change affects sales.
• Statistical analysis of past prices, quantities sold, and other
factors can reveal their relationships.
Kotler, Keller, Brady, Goodman and Hansen, Marketing Management, 1st Edition © Pearson Education Limited 2009
Slide 16.38
•
•
•
•
•
•
Price Elasticity of Demand
Marketers need to know how responsive, or elastic, demand would be to a
change in price. If demand hardly changes with a small change in price, the
demand is inelastic. If demand changes considerably, demand is elastic.
The higher the elasticity the greater the volume growth resulting from a 1
percent price reduction.
If demand is elastic, sellers will consider lowering the price. A lower price will
produce more total revenue.
Price elasticity depends on the magnitude and direction of the contemplated
price change.
It may be negligible with a small price change and substantial with a large
price change. It may differ for a price cut versus a price increase, and there
may be a price indifference band within which price changes have little or no
effect.
Finally, long-run price elasticity may differ from short-run elasticity. Buyers
may continue to buy from a current supplier after a price increase, but they
may eventually switch suppliers. Here demand is more elastic in the long run
than in the short run, or the reverse may happen: buyers may drop a supplier
after being notified of a price increase but return later.
Kotler, Keller, Brady, Goodman and Hansen, Marketing Management, 1st Edition © Pearson Education Limited 2009
Slide 16.39
Figure 16.2
Inelastic and elastic demand
Kotler, Keller, Brady, Goodman and Hansen, Marketing Management, 1st Edition © Pearson Education Limited 2009
Slide 16.40
Price elasticity of demand
• If demand hardly changes with a small change
in price, the demand is inelastic; if demand
changes considerably, it is elastic
• The higher the elasticity, the greater the volume
growth resulting from a 1% price reduction
• If demand is elastic, sellers consider lowering
price
• There may be a price indifference band within
which there is little or no effect
Kotler, Keller, Brady, Goodman and Hansen, Marketing Management, 1st Edition © Pearson Education Limited 2009
Slide 16.41
Table 16.3
Factors leading to less price sensitivity
Source: Adapted from T. T. Nagle and R. K. Holden (2001) The Strategy and Tactics of Pricing, 3rd edn, Upper Saddle River, NJ: Prentice Hall, Chapter 4. Copyright © 2001 Pearson
Education, Inc. Reproduced with permission
Kotler, Keller, Brady, Goodman and Hansen, Marketing Management, 1st Edition © Pearson Education Limited 2009
Slide 16.42
How can companies estimate
demand curves?
• Most companies make some attempt to measure their
demand curves using several different methods.
• Surveys can explore how many units consumers would
buy at different proposed prices, although there is always
a chance they might understate their purchase intentions
at higher prices to discourage the company.
• Price experiments can vary the prices of different
products in a shop or charge different prices in similar
territories to see how the change affects sales.
• Statistical analysis of past prices, quantities sold, and
other factors can reveal their relationships.
Kotler, Keller, Brady, Goodman and Hansen, Marketing Management, 1st Edition © Pearson Education Limited 2009
Slide 16.43
Step 3: Estimating costs
Types of costs
Accumulated
production
Target costing
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Slide 16.44
Estimating Costs
• Demand sets a ceiling on the price the
company can charge for its product. Costs
set the floor.
• The company wants to charge a price that
covers its cost of producing, distributing and
selling the product, including a fair return for
its effort and risk.
Kotler, Keller, Brady, Goodman and Hansen, Marketing Management, 1st Edition © Pearson Education Limited 2009
Slide 16.45
Types of Costs and Level of Production
• It may be negligible with a small price change and
substantial with a large price change.
• It may differ for a price cut versus a price increase, and
there may be a price indifference band within which price
changes have little or no effect.
• Finally, long-run price elasticity may differ from short-run
elasticity.
• Buyers may continue to buy from a current supplier after a
price increase, but they may eventually switch suppliers.
• Here demand is more elastic in the long run than in the
short run, or the reverse may happen: buyers may drop a
supplier after being notified of a price increase but return
later.
Kotler, Keller, Brady, Goodman and Hansen, Marketing Management, 1st Edition © Pearson Education Limited 2009
Slide 16.46
Types of Costs and Level of Production
• Management wants to charge a price that will at least cover
the total production costs at a given level of production.
• To price intelligently, management needs to know how its
costs vary with different levels of production.
• There are more costs than those associated with
manufacturing. To estimate the real profitability of selling to
different types of retailers or customers, the manufacturer
needs to use activity-based cost (ABC) accounting instead
of standard cost accounting.
• ABC accounting tries to identify the real costs associated
with serving each customer. It allocates indirect costs, such
as clerical costs, office expenses, supplies, and so on, to
the activities that use them, rather than in some proportion
to direct costs. Both variable and overhead costs are
tagged back to each customer
Kotler, Keller, Brady, Goodman and Hansen, Marketing Management, 1st Edition © Pearson Education Limited 2009
Slide 16.47
Accumulated Production
• Experience-curve pricing carries major risks.
Aggressive pricing might give the product a
cheap image.
• The strategy also assumes that competitors
are weak followers.
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Slide 16.48
Target Costing
• Costs change with production scale and
experience.
• They can also change as a result of efforts
by those involved through target costing.
• Market research establishes a new product’s
desired functions and the price at which the
product will sell, given its appeal and
competitors’ prices.
• Deducting the desired profit margin from this
price leaves the target cost the marketer
must achieve.
Kotler, Keller, Brady, Goodman and Hansen, Marketing Management, 1st Edition © Pearson Education Limited 2009
Slide 16.49
Types of costs
• Demand sets a ceiling on the price the
company can charge for its product. Costs
set the floor.
• The company wants to charge a price that
covers its cost of producing, distributing and
selling the product, including a fair return for
its effort and risk.
Kotler, Keller, Brady, Goodman and Hansen, Marketing Management, 1st Edition © Pearson Education Limited 2009
Slide 16.50
Types of Costs and Level of Production
• It may be negligible with a small price change and
substantial with a large price change.
• It may differ for a price cut versus a price increase, and
there may be a price indifference band within which price
changes have little or no effect.
• Finally, long-run price elasticity may differ from short-run
elasticity. Buyers may continue to buy from a current
supplier after a price increase, but they may eventually
switch suppliers.
• Here demand is more elastic in the long run than in the
short run, or the reverse may happen: buyers may drop a
supplier after being notified of a price increase but return
later.
Kotler, Keller, Brady, Goodman and Hansen, Marketing Management, 1st Edition © Pearson Education Limited 2009
Slide 16.51
Cost terms and production
•
•
•
•
•
Fixed costs
Variable costs
Total costs
Average cost
Cost at different levels
of production
• Activity-based cost
accounting
Figure 16.3
Cost per unit at different levels of production per period
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Slide 16.52
Figure 16.4
Cost per unit as a function of accumulated production: the experience
curve
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Slide 16.53
What is the experience curve?
The experience curve, also known as the
learning curve, is the decline in the
average cost with accumulated production
experience.
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Slide 16.54
Step 4: Analyse competitors’
costs, prices and offers
• Consider the nearest competitor’s price
• Evaluate worth to customer for differentiated
features
• Anticipate response from competition
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Slide 16.55
Analysing Competitors’ Costs, Prices, and
Offers
• Within the range of possible prices determined by
market demand and company costs, the firm must
take competitors’ costs, prices, and possible price
reactions into account.
• How can a firm anticipate a competitor’s
reactions? One way is to assume the
• competitor reacts in the standard way to a price
being set or changed.
• Another is to assume the competitor treats each
price difference or change at a fresh challenge
and reacts according to self-interest.
Kotler, Keller, Brady, Goodman and Hansen, Marketing Management, 1st Edition © Pearson Education Limited 2009
Slide 16.56
Step 5: Selecting a pricing method
•
•
•
•
•
•
Markup pricing
Target-return pricing
Perceived-value pricing
Value pricing
Going-rate pricing
Auction-type pricing
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Slide 16.57
There are six price-setting methods described below
1. Mark-up Pricing
• The most elementary pricing method is to add a standard mark-up to the product’s cost.
2. Target-Return Pricing
• In target-return pricing, the firm determines the price that would yield its target rate of return
on investment.
3. Perceived-Value Pricing
• Perceived value is made up of several elements such as the buyer’s image of the product
performance, the ability to deliver on time, the warranty quality, customer support, and
softer attributes like the supplier’s reputation. Companies must deliver the value promised
by their value proposition, and the customer must perceive this value. The key to
perceived-value pricing is to deliver more value than the competitor and to demonstrate this
to prospective buyers.
4. Value Pricing
• Value pricing is a matter of re-engineering the company’s operations to become a low-cost
producer without sacrificing quality, to attract a large number of value-conscious customers.
An important type of value pricing is everyday low pricing (EDLP) which takes place at the
retail level. A retailer that holds to an EDLP pricing policy charges a low constant price with
little or no price promotions. In high-low pricing, the retailer charges higher prices on an
everyday basis but then runs frequent promotions in which prices are temporarily lowered
below the EDLP level.
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Slide 16.58
There are six price-setting methods
described below
5. Going-Rate Pricing
• In going-rate pricing, the firm bases its price largely on
competitors’ prices, charging the same, more, or less than
major competitors.
6. Auction-Type Pricing
• Auction-type pricing is the subject of the ‘Breakthrough
Marketing: eBay” feature insert. One major purpose of auctions
is to dispose of excess inventories or used goods. There are
three major types of auctions.
• English auctions (ascending bids)
• Dutch auctions (descending bids)
• Sealed-bid auctions
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Slide 16.59
Selecting the Final Price
• Pricing methods narrow the range from which
the company must select its final price.
• In selecting that price, the company must
consider additional factors, including the
impact of other marketing activities, company
pricing policies, gain-and-risk-sharing pricing,
and the impact of price on other parties.
Kotler, Keller, Brady, Goodman and Hansen, Marketing Management, 1st Edition © Pearson Education Limited 2009
Slide 16.60
1. Impact of Other Marketing Activities
The final price must take into account the brand’s quality and advertising
relative to the competition. Research findings suggest that price is not as
important as quality and other benefits in the market offering.
2. Company Pricing Policies
The price must be consistent with company pricing policies. Companies may
use a pricing department to develop policies and establish or approve
decisions.
3. Gain-and-Risk-Sharing Pricing
Buyers may resist accepting a seller’s proposal because of a high perceived
level of risk. The seller has the option of offering to absorb part or all of the
risk if it does not deliver the full promised value.
4. Impact of Price on Other Parties
Management must also consider the reactions of other parties to the
contemplated price. EU competition law states that sellers must set prices
without talking to competitors: price fixing is illegal to protect consumers
against deceptive pricing practices
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Slide 16.61
Break-even chart
Figure 16.6
Break-even chart for determining target-return price and break-even
volume
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Slide 16.62
What are the components of
perceived-value pricing?
• Buyer’s image of
product
performance
• Ability to deliver on
time
• Warranty quality
•
•
•
•
Customer support
Supplier reputation
Trustworthiness
Esteem
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Slide 16.63
What is value pricing?
Value pricing refers to re-engineering the
company’s operations to become a low-cost
producer without sacrificing quality, to attract a
large number of value-conscious customers.
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Slide 16.64
What is going-rate pricing?
In going-rate pricing, firms base prices on
competitors’ prices, charging the same,
more or less than major competitors.
Smaller firms ‘follow the leader.’
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Slide 16.65
Auction-type pricing
English auctions
Dutch auctions
Sealed-bid auctions
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Slide 16.66
Step 6: Selecting the final price
•
•
•
•
Impact of other marketing activities
Company pricing policies
Gain-and-risk sharing pricing
Impact of price on other parties
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Slide 16.67
1. Impact of Other Marketing Activities
The final price must take into account the brand’s quality and advertising
relative to the competition. Research findings suggest that price is not as
important as quality and other benefits in the market offering.
2. Company Pricing Policies
The price must be consistent with company pricing policies. Companies
may use a pricing department to develop policies and establish or approve
decisions.
3. Gain-and-Risk-Sharing Pricing
Buyers may resist accepting a seller’s proposal because of a high
perceived level of risk. The seller has the option of offering to absorb part
or all of the risk if it does not deliver the full promised value.
4. Impact of Price on Other Parties
Management must also consider the reactions of other parties to the
contemplated price. EU competition law states that sellers must set prices
without talking to competitors: price fixing is illegal to protect consumers
against deceptive pricing practices.
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Slide 16.68
Ways to avoid price increases
•
•
•
•
•
•
•
Shrink the product
Substitute cheaper materials
Reduce or remove product features
Remove or reduce product services
Use less expensive packaging
Reduce the sizes and models offered
Create new economy brands
Kotler, Keller, Brady, Goodman and Hansen, Marketing Management, 1st Edition © Pearson Education Limited 2009
Slide 16.69
Marketing debate
Is the right price a fair price?
Take a position:
• Prices should reflect the value that
consumers are willing to pay.
or
• Prices should primarily just reflect the cost
involved in making a product.
Kotler, Keller, Brady, Goodman and Hansen, Marketing Management, 1st Edition © Pearson Education Limited 2009
Slide 16.70
QUALITY
LOW
HIGH
Economy
Penetration
Skimming
Premium
L
O
W
P
R
I
C
E
H
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G
H
Pricing Strategy Matrix
Kotler, Keller, Brady, Goodman and Hansen, Marketing Management, 1st Edition © Pearson Education Limited 2009
Slide 16.71
PREMIUM PRICING.
Use a high price where there is a uniqueness about the product or service. This
approach is used where a substantial competitive advantage exists. Such high
prices are charge for luxuries such as Cunard Cruises, Savoy Hotel rooms, and
Concorde flights.
PENETRATION PRICING.
The price charged for products and services is set artificially low in order to gain
market share. Once this is achieved, the price is increased.
ECONOMY PRICING.
This is a no frills low price. (service or product for which the non-essential features have been
removed to keep the price low) The cost of marketing and manufacture are kept at a
minimum. Supermarkets often have economy brands for soups, spaghetti, etc.
PRICE SKIMMING.
Charge a high price because you have a substantial competitive advantage.
However, the advantage is not sustainable. The high price tends to attract new
competitors into the market, and the price inevitably falls due to increased supply.
Manufacturers of digital watches used a skimming approach in the 1970s. Once
other manufacturers were tempted into the market and the watches were produced
at a lower unit cost, other marketing strategies and pricing approaches are
implemented.
Premium pricing, penetration pricing, economy pricing, and price skimming are the
four main pricing policies/strategies. They form the bases for the exercise. However
there are other important approaches to pricing.
Kotler, Keller, Brady, Goodman and Hansen, Marketing Management, 1st Edition © Pearson Education Limited 2009
Slide 16.72
PSYCHOLOGICAL PRICING.
This approach is used when the marketer wants the consumer to respond on an emotional,
rather than rational basis. For example 'price point perspective' 99 cents not one dollar.
PRODUCT LINE PRICING.
Where there is a range of product or services the pricing reflect the benefits of parts of the
range. For example car washes. Basic wash could be $2, wash and wax $4, and the whole
package $6.
OPTIONAL PRODUCT PRICING.
Companies will attempt to increase the amount customer spend once they start to buy.
Optional 'extras' increase the overall price of the product or service. For example airlines will
charge for optional extras such as guaranteeing a window seat or reserving a row of seats
next to each other.
CAPTIVE PRODUCT PRICING
Where products have complements, companies will charge a premium price where the
consumer is captured. For example a razor manufacturer will charge a low price and recoup
its margin (and more) from the sale of the only design of blades which fit the razor.
PRODUCT BUNDLE PRICING.
Here sellers combine several products in the same package. This also serves to move old
stock. Videos and CDs are often sold using the bundle approach.
PROMOTIONAL PRICING.
Pricing to promote a product is a very common application. There are many examples of
promotional pricing including approaches such as BOGOF (Buy One Get One Free).
GEOGRAPHICAL PRICING.
Geographical pricing is evident where there are variations in price in different parts of the
world. For example rarity value, or where shipping costs increase price.
an effort to stimulate other, profitable sales. It is a kind of sales promotion.
Kotler, Keller, Brady, Goodman and Hansen, Marketing Management, 1st Edition © Pearson Education Limited 2009
Slide 16.73
VALUE PRICING.
This approach is used where external factors such as recession or increased competition force
companies to provide 'value' products and services to retain sales e.g. value meals at
McDonalds.
Predatory pricing
(also known as destroyer pricing) is the practice of a firm selling a product at very low price with
the intent of driving competitors out of the market, or create a barrier to entry into the market for
potential new competitors. If the other firms cannot sustain equal or lower prices without losing
money, they go out of business. The predatory pricer then has fewer competitors or even a
monopoly, allowing it to raise prices above what the market would otherwise bear.
In many countries, including the United States, predatory pricing is considered anti-competitive
and is illegal under antitrust laws. However, it is usually difficult to prove that a drop in prices is
due to predatory pricing rather than normal competition, and predatory pricing claims are
difficult to prove due to high legal hurdles designed to protect legitimate price competition.
Limit Pricing
A Limit Price is the price set by a monopolist to discourage economic entry into a market, and
is illegal in many countries. The limit price is the price that the entrant would face upon entering
as long as the incumbent firm did not decrease output. The limit price is often lower than the
average cost of production or just low enough to make entering not profitable.
Loss Leader
In marketing, a loss leader (also called a key value item in the United Kingdom) is a type of
pricing strategy where an item is sold below cost in in an effort to stimulate other, profitable
sales. It is a kind of sales promotion.
Kotler, Keller, Brady, Goodman and Hansen, Marketing Management, 1st Edition © Pearson Education Limited 2009
Slide 16.74
• http://www.slideshare.net/Brijeshdholakia/sta
rbucks-3676573#
• http://www.studymode.com/coursenotes/Starbucks-Experience-879378.html
Kotler, Keller, Brady, Goodman and Hansen, Marketing Management, 1st Edition © Pearson Education Limited 2009