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DETERMINANTS OF PRICE

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Factors Affecting PriceDecisions

Internal Factors

Marketing ObjectivesMarketing Mix StrategyCostsOrganizational

considerations

External Factors

Nature of the marketand demand

CompetitionOther environmentalfactors (economy,

resellers, government)

PricingDecisions

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Marketing

Objectives

SurvivalLow Prices to Cover Variable Costs andSome Fixed Costs to Stay in Business.

Current Profit MaximizationChoose the Price that Produces the

Maximum Current Profit, Etc.

Market Share Leadership

Low as Possible Prices to Becomethe Market Share Leader.

Product Quality LeadershipHigh Prices to Cover Higher

Performance Quality and R & D.

Internal Factors Affecting PricingDecisions: Marketing Objectives

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Price

Product Design

Distribution

Promotion

NonpricePositions

Internal Factors Affecting PricingDecisions: Marketing Mix

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COSTS

TYPES OF COST:

Fixed cost

Variable cost

Total cost

How costs vary at differentproduction levels will influence price

setting.

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Pure CompetitionMany Buyers and Sellers

Who Have LittleEffect on the Price

MonopolisticCompetition

Many Buyers and SellersWho Trade Over a

Range of Prices

Pricing in Different Types of Markets

Market and Demand FactorsAffecting Pricing Decisions

OligopolisticCompetition

Few Sellers Who AreSensitive to Each Others

Pricing/ MarketingStrategies

Pure MonopolySingle Seller

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COMPETITORS COSTS PRICES

AND OFFERSPricing strategy influences the natureof competition

Low price low margin strategiesinhibit competition

High price high margin strategiesattract competition

Benchmarking costs against thecompetition is recommended

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OTHER EXTERNAL FACTORS

Economic conditions

Affect production costs

Affect buyer perceptions of price andvalue

Reseller reactions to prices must be

consideredGovernment may restrict or limit pricingoptions

Social considerations may be taken intoaccount

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Major Considerations in SettingPrice (Fig. 10.5)

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Cost-Based Pricing

Certainty AboutCosts

Pricing isSimplified

Price CompetitionIs Minimized

UnexpectedSituationalFactors

Attitudes

ofOthers

Ethical

IgnoresCurrent

Demand &Competition

Cost-PlusPricing is anApproach That

Adds aStandard

Markup to theCost of theProduct.

Simplest

PricingMethod

Much Fairer to

Buyers & Sellers

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Product

Cost

Price

Value

Customers

Customer

Value

Price

Cost

Product

Cost-Based Pricing Value-Based Pricing

Cost-Based Versus Value-BasedPricing

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Setting Prices

Sealed-BidCompany Sets Prices Based onWhat They Think Competitors

Will Charge.

Going-RateCompany Sets Prices Based on What

Competitors Are Charging.

?

?

Competition-Based Pricing

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New Product Pricing Strategies

Market Skimming

Setting a High Pricefor a New Product toSkim MaximumRevenues from theTarget Market.

Results in Fewer, ButMore Profitable Sales.

Use Under TheseConditions:

Products Quality andImage Must Support ItsHigher Price.Costs Cant be so Highthat They Cancel theAdvantage of ChargingMore.Competitors Shouldnt beAble to Enter MarketEasily and Undercut theHigh Price.

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New Product Pricing Strategies

Market Penetration

Setting a Low Price for aNew Product in Order toPenetrate the MarketQuickly and Deeply.

Attract a Large Numberof Buyers and Win aLarger Market Share.

Use Under TheseConditions:

Market Must be HighlyPrice-Sensitive so a LowPrice Produces MoreMarket Growth.Production/ DistributionCosts Must Fall as SalesVolume Increases.Must Keep OutCompetition & MaintainIts Low Price Position orBenefits May Only be

Temporary.

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Product Mix-PricingStrategies:Product Line Pricing

Involves setting pricesteps between various

products in a productline based on:Cost differencesbetween products,

Customer evaluations ofdifferent features, and

competitors prices.

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Product Mix- Pricing Strategies

Optional-ProductPricing optional or

accessory productssold with the mainproduct. i.e camera bag.

Captive-ProductPricing products thatmust be used with themain product. i.e. film.

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Product Mix- Pricing

StrategiesBy-Product

Pricing low-valueby-products to getrid of them andmake the mainproducts pricemore competitive.

i.e. sawdust, ZooDoo

Product-BundlingCombining severalproducts andoffering thebundle at areduced price.

i.e. theater seasontickets.

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Discount and Allowance Pricing

Cash Discount Seasonal Discount

Quantity Discount Trade-In Allowance

Functional Discount Promotional Allowance

Adjusting Basic Price to Reward Customers

For Certain Responses

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Psychological Pricing

Considers the psychology ofprices and not simply theeconomics.

Customers use price lesswhen they can judge qualityof a product.

Price becomes an important

quality signal whencustomers cant judgequality; price is used to saysomething about a product.

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Special-Event Pricing

Cash Rebates

Low-Interest Financing

Longer Warranties

Free Merchandise

Discounts

Loss Leaders Temporarily PricingProducts Below List

Price to IncreaseShort-Term Sales

Through:

Promotional Pricing