What is price?
• The sum of the values consumers exchange for the bene ts of having or using the goods or
services
• Normally the amount of money exchanged for a product or service
• Price is what the customer is prepared to pay
Use of pricing strategy:
• Maximising current pro t
• Maximising market share
• Meet customer expectations
• Generate cash ow
• Positioning
• Product quality leadership
• Introducing new products
• Market skimming
• Survival
Major pricing strategies (3Cs):
Cost-based pricing - based on the cost of the product:
◦Simplest pricing method - easy to use
◦Involves adding a standard mark-up to the cost of the product
◦Frequently used by groceries stores as they have many product they need to set price at the
same time which might need extensive research for each product.
◦Example: a pen costs a retailer $2.45 but cost consumer $4.20 (The retailer added 70% mark-
up ($1.75) to the original cost)
Competition-based pricing - going rate pricing
◦Looks at what competition is charging
and set price accordingly
◦Pay less attention to its own costs or
demand
◦Smaller rms follow the leader => the
prices change when the market leader
change (monopolistic competition)
Value-based pricing - based on consumer
value perception, not seller's cost
◦Example: price of beer at fancy
restaurant would be higher than
price at a food court
◦Need to create the perception that
the product worth that much by
using marketing mix
What to look at when setting prices:
• Recovering costs:
◦Fixed costs - do not vary with production or sales level (rent
◦Variable costs - vary with production or sales level
◦Total costs = Fixed + variable
◦Break-even point = the charging price - variable cost/total xed cost
• Consumer perceptions of price and value:
◦Marketer must understand consumer's reasons for buying the products and set price
accordingly.
Cost-based pricing vs Value-based pricing => value-based pricing has more potential to generate
pro t
How to set a price for a new technology?
• Consider what is customer willing to pay for the product? -> Value-based pricing
• Consider the cost of the item -> Cost-based pricing
• Consider the prices charged by the competition (direct and indirect competitors) -> competition-
based pricing
New product pricing strategies:
Market-skimming pricing - set price high for a new product to skim maximum revenues layer by layer
from segments willing to pay the high price (use for high brand)
• Example: IPhone set high price for the new version (targeting loyal customers), then lower and
lower the price till most segment can a ord the product.
• Apply when:
◦Enough high valuation consumers
◦Product's quality and image support as high price
◦Di cult for competition to enter the market
Market-penetration pricing - setting lower price in order to attract a large number of buyers and a
large market share.
• Based on the idea of experience curve - the more product you create the lower the cost of creating
these product (economies of scales)
• Not pro table at rst and may take a long time to meet break-even point
• Example: Amazon
• Apply when:
◦Consumers have highly elastic demand
◦There are signi cant learning e ects and economies of scales
◦It helps drive or keep out competitors
Consider the marketing mix:
Product:
• Attributes of the product in uence its perspective value
• The brand equity, warranties, styling, durability, performance rating and quality re ect the products
value
• Price should be consistent with the positioning; prestige positioning should be accompanied by
above-the-market pricing
Place:
• Need to be considered to ensure the nal customer gets the product at the expected price and the
intermediaries get adequate margins to continue distribution.
• example: Prices of snack is di erent in hotel rooms, groceries stores and vending machine.
Promotion:
• Expenditure on advertising and other activities reinforces the value of the product in the mind of the
consumer.
• Price must be consistent with the promotion strategy and image.
Pricing best practises:
• Make pricing a process - it is not just something you do one time at a certain kind of percentage...
overtime there would be adjustment needed according to change in value perception of consumers
• Consistently deliver more value
• Price strategically, not opportunistically (not too much competitive based pricing)
◦In the long run, nobody wins in a price war
◦In the short run, the customer wins!
• Know your competition
◦Try to di erentiate rather compete head-on based on price
