CHAPTER 8
Pricing Strategy
and Management
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-1
AFTER READING THIS CHAPTER
YOU SHOULD BE ABLE TO:
1. Identify the factors that determine
price.
2. Describe how price is an indicator
of demand.
3. Explain the concept of price elasticity.
4. Estimate the profit impact from
changes in price.
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-2
AFTER READING THIS CHAPTER
YOU SHOULD BE ABLE TO:
5. Describe the pricing strategies
available to a marketing manager.
6. Discuss how pricing is affected by
competitive interactions.
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-3
PRICING DECISIONS
“Pricing is an art, a game played for
marketing strategists, it is the moment of
truth. All of marketing comes to focus in
the pricing decision.”
 Pricing decisions determine the types of
customers and competitors a firm attracts
 A single pricing error can effectively nullify
all other marketing mix activities
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-4
PROFIT EQUATION
Price affects the quantity sold and hence
profit because it directly affects both
revenues and costs:
Profit
=
Total
Revenue
–
Total
Costs
Total
Costs
Total
Revenue
Profit
=
(
Unit
Price
×
Quantity
Sold
) [
–
Fixed
Costs
+
© 2013 Pearson Education, Inc. publishing as Prentice Hall
(
Unit
Variable
Costs
×
Quantity
Sold
)]
Slide 8-5
CHAPTER 8: PRICING STRATEGY AND
MANAGEMENT
PRICING CONSIDERATIONS
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-6
PRICING CONSIDERATIONS
Pricing Objectives
 Be consistent with a firm’s overall
marketing objectives
 Objectives include:
• Enhancing brand image
• Providing customer value
• Obtaining an adequate ROI or cash flow
• Maintaining price stability in an industry or market
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-7
EXHIBIT 8.1: CONCEPTUAL
ORIENTATION TO PRICING
(Value to Buyers)
Demand Factors
(Price Ceiling)
Competitive Factors
Final
Pricing
Discretion
Corporate Objectives
Initial
Pricing
Discretion
Regulatory Constraints
Direct Variable Costs
(Price Floor)
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-8
PRICING CONSIDERATIONS
Pricing Factors
 Demand for an offering sets the price ceiling
 Costs, particularly variable costs, determine the
price floor
 Consumer value perceptions and price sensitivity
determines the maximum price charged
 The price must at least cover unit variable costs;
otherwise, a loss will result for each offering sold
 Government regulations, such as predatory pricing
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-9
PRICING CONSIDERATIONS
Pricing Factors
 Life-cycle stage of the offering—greater
price discretion exists earlier than later
in the life cycle
 Profit margins of marketing channel
members
 The price differentials of a firm’s offerings
to maintain perceived value differences
among buyers
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-10
PRICING CONSIDERATIONS
Price as an Indicator of Value
 Consumers pair price with the perceived benefits
derived from an offering to determine value
 Value is the ratio of perceived benefits to price:
Perceived Benefits
Value
=
Price
 This shows that for a given price, value increases as
perceived benefits increase and vice versa
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-11
PRICING CONSIDERATIONS
Price as an Indicator of Value
 For some offerings, price influences
consumers’ perception of quality—
and ultimately value
 Price affects consumer perceptions of
prestige: As the price for an item
increases, the demand for it rises
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-12
PRICING CONSIDERATIONS
Price as an Indicator of Value
Consumers determine value by judging the
worth and desirability of an offering relative
to substitutes that satisfy the same need
 Comparing the costs and benefits of substitute
items gives rise to a “reference value”
 Pricing store brands more than 20 to 25 percent
below manufacturers’ brands causes consumers
to view the lower price as indicating lower quality
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-13
PRICING CONSIDERATIONS
Price Elasticity of Demand (E)
 Measures how responsive consumer demand
is to changes in an offering’s price
 Is the ratio of the percentage change in quantity
demanded relative to a percentage change in price
Price
Elasticity
of Demand
Percentage Change in
Quantity Demanded
=
E
=
Percentage Change in Price
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-14
PRICING CONSIDERATIONS
Price Elasticity of Demand (E)
Elastic Demand
The percentage change in quantity demanded is
greater than the percentage change in price ( E > 1)
 A small price reduction will result in a large
increase in the quantity purchased
 As a result, total revenue will rise significantly
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-15
PRICING CONSIDERATIONS
Price Elasticity of Demand (E)
Inelastic Demand
The percentage change in quantity demanded is
less than the percentage change in price ( E < 1)
 A small price reduction will result in a small
increase in the quantity purchased
 As a result, total revenue will rise very little
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-16
PRICING CONSIDERATIONS
Price Elasticity of Demand (E) Factors
 The more substitutes an offering has, the
greater its price elasticity
 The more uses an offering has, the greater its
price elasticity
 The higher the ratio of the price of the offering
to the income of the buyer, the greater the price
elasticity
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-17
PRICING CONSIDERATIONS
Product-Line Pricing
Cross-elasticity of demand relates the price
elasticity simultaneously to more than one offering:
 Measures the responsiveness of the quantity
demanded of Offering A to a price change in
Offering B
 Offerings are considered complements (substitutes)
if lowering (raising) the price of Offering A leads to
an increase in the unit sales of Offering B
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-18
PRICING CONSIDERATIONS
Product-Line Pricing
In most organizations, offerings are not priced
in isolation:
 They may be sold at a loss to entice buyers
 They ensure that the organization can offer
potential buyers complete product lines
 Thus, the price may bear little relationship
to the actual cost of an offering
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-19
PRICING CONSIDERATIONS
Product-Line Pricing
Involves determining the:
Lowest-Priced
Product Price
Is the traffic builder designed to capture the
attention of the hesitant or first-time buyer
Highest-Priced
Product & Price
Is typically positioned as the premium item
in quality and features
Price Differentials
for All Other
Products in the Line
• Should reflect differences in their
perceived value of the products offered
• Should get larger from less to more
expensive items as one moves up the
product line
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Slide 8-20
Product Line Pricing
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Slide 8-21
Value-Based versus Cost-Based Pricing
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Slide 8-22
NEW-OFFERING PRICING STRATEGIES
Conceptual new-offering pricing strategies are:
Skimming
Pricing Strategy
The price for a new offering is
set very high initially and is
typically reduced over time
Penetration
Pricing Strategy
An offering is introduced at a
low price
Intermediate
Pricing Strategy
The price is set between the two
extremes and is used in the vast
majority of initial pricing decisions
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-23
NEW-OFFERING PRICING STRATEGIES
Skimming Pricing Strategy
Is appropriate for a new offering if:
1. Demand is likely to be price inelastic
2. There are different price-market segments, of which one will pay a
higher price for it
3. It can be protected by patent or copyright
4. Production or marketing costs are unknown
5. Production capacity is constrained
6. The firm wants to quickly recoup its investment or fund other projects
7. There is a realistic perceived value in it
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-24
NEW-OFFERING PRICING STRATEGIES
Penetration Pricing Strategy
Is appropriate for a new offering if:
1. Demand is likely to be price elastic in the target market
segments at which the product or service is aimed
2. It is neither unique nor protected by patent or copyright
3. Competitors are expected to quickly enter the market
4. There are no distinct and separate price-market segments
5. There is a possibility of large savings in production and
marketing costs if a large sales volume can be generated
6. The firm’s major objective is to obtain a large market share
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-25
PRICING AND COMPETITIVE
INTERACTION
Price War
Involves successive price cutting by
competitors to increase or maintain
their unit sales or market share
 If competitors match the lower price, market
share, sales, and profit gains could be lost
 The overall price level resulting from the
lower price benefits none of the competitors
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-26
PRICE ADJUSTMENTS
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-27
Initiating Price Changes
Initiating
Price Cuts
Initiating
Price
Increases
Buyer
Reactions to
Price Changes
Competitor
Reactions to
Price Changes
9- 28
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall
PRICING STRATEGIES AND
COMPETITIVE INTERACTION
Competitive interaction refers to
the sequential action and reaction
of rival companies in:
 Setting and changing prices for their
offering(s)
 Assessing likely outcomes, such as
sales, unit volume, and profit for
each company and an entire market
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-29
Responding to Price Changes
9 - 30
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall
Pricing within Channel Levels
Prohibited
Price fixing – talking with
competitors to set prices
Predatory pricing – selling below
cost with the intention of
punishing a competitor or putting
them out of business
9- 31
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall
Pricing across Channel Levels
Prohibited
Price discrimination – ensure
same price to customers at
given level of trade
Price maintenance – requiring
dealers to charge a specified
retail price
Deceptive pricing – seller
states price that may mislead
customers
9- 32
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall
All rights reserved. No part of this publication may be reproduced, stored in a
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mechanical, photocopying, recording, or otherwise, without the prior written
permission of the publisher. Printed in the United States of America.
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-33