Pricing Strategies

Tim Pendamping
PKP Manajemen Universitas Brawijaya

Jakarta, 12 Maret 2018

What is Price?
• In the narrowest sense, price is the amount of money charged for a
product or a service.
• More broadly, price is the sum of all the values that customers give up
to gain the benefits of having or using a product or service.
• Price is the only element in the marketing mix that produces revenue;
all other elements represent costs.
Major Pricing Strategies
• The price the company charges will fall somewhere between one that
is too low to produce a profit and one that is too high to produce any
demand.
Customer Value-Based Pricing
• Customer value-based pricing uses buyers’ perceptions of value as
the key to pricing.
Good-Value Pricing
• In response, many companies have changed their pricing approaches to
bring them in line with changing economic conditions and consumer price
perceptions.
• More and more, marketers have adopted good-value pricing strategies ─
offering the right combination of quality and good service at a fair price.

Everyday low pricing (EDLP) High-Low Pricing

It involves charging higher prices on an

EDLP involves charging a constant, everyday low
everyday basis but running frequent
price with few or no temporary price discounts.
promotions to lower price temporarily on
selected items.
Value-Added Pricing
• Many companies adopt value-added pricing strategies.
• Rather than cutting prices to match competitors, they attach value-
added features and services to differentiate their offers and thus
support their higher prices.
Cost-Based Pricing
• Cost-Based pricing involves setting prices based on the costs of
producing, distributing, and selling the product plus a fair rate of
return for its effort and risk.
• A company’s costs may be an important element in its pricing strategy.
Types of Costs The sum of the fixed and
variable costs for any
Costs that do not vary given level of production.
with production or sales
level.

Fixed
costs Variable Total costs
(over- costs
head)

Costs that vary directly with

the level of production.
Costs at Different Levels of Production
• To price wisely, management needs to know how its costs vary with
different levels of production.
 Mark-Up Pricing (Also known as Cost-Plus Pricing)
Markup pricing remains popular for many reasons.

Sellers are more certain

The simplest pricing method is cost- about costs than about
plus pricing (or markup pricing) ─ demand.
adding a standard markup to the
cost of the product.
Many people feel that When all firms in the
cost-plus pricing is fairer industry use this pricing
to both buyers and method, prices tend to be
sellers. similar, so price
competition is minimized.
Mark-Up Pricing Illustrations
To illustrate markup pricing, suppose a toaster manufacturer
had the following costs and expected sales:
Variable cost $10
Fixed costs $300,000
Expected unit sales 50,000
Then the manufacturer’s cost per toaster is given by the following:
fixed costs $300,000
unit cost = variable Cost + = $10+ = $16
unit sales 50,000
Now suppose the manufacturer wants to earn a 20 percent
Markup on sales. The manufacturer’s markup price is given by the
following:
unit cost $16
markup price = = =$20
(1−desired reture on sales) 1−0.2
 Break-Even Analysis and Target Profit Pricing

• Break-even pricing
The total (target
revenue andreturn) sets
total cost pricecross
curves to break evenunits.
at 30,000 on the
Thiscosts
is theof making
and marketing a product,
break-even volume. or
At setting
$20, theprice to make
company mustasell
target return.
at least 30,000
units topricing
• Target return break even, thatconcept
uses the is, for total
of revenue to cover
a break-even totalwhich
chart, cost. Break-
shows the
even
total cost andvolume can be calculated
total revenue expectedusing the following
at different salesformula:
volume levels.

fixed cost $300,000

Break−even volume= = = 30,000
price−variable cost $20−$10
Competition-Based Pricing
• Competition-based pricing involves setting prices based on
competitors’ strategies, costs, prices, and market offerings.
• Consumers will base their judgments of a product’s value on the
prices that competitors charge for similar products.
Other Internal and External Considerations
Affecting Price Decisions
• Internal factors affecting pricing include the company’s overall
marketing strategy, objectives, and marketing mix, as well as other
organizational considerations.
• External factors include the nature of the market and demand and
other environmental factors.
Overall Marketing Strategy, Objectives, and
Mix
• Price is only one element of the company’s broader marketing
strategy.
• So, before setting price, the company must decide on its overall
marketing strategy for the product or service.
• Pricing may play an important role in helping to accomplish company
objectives at many levels.
• Target costing is the pricing that starts with an ideal selling price, then
targets costs that will ensure that the price is met.
Organizational Considerations
• Top management sets the pricing objectives and policies, and it often
approves the prices proposed by lower level management or
salespeople.
• In industries in which pricing is a key factor, companies often have
pricing departments to set the best prices or help others set them.
• These departments report to the marketing department or top
management.
• Others who have an influence on pricing include sales managers,
production managers, finance managers, and accountants.
The Market and Demand
• In this section, we take a deeper look at the price-demand
relationship and how it caries for different types of markets.
• We then discuss methods for analyzing the price-demand relationship
 Pricing in Different Types of Markets
Pure Competition Monopolistic Competition
Oligopolistic
• It consists Competition
of many Four types of market
• It consists of many buyers and
• Economistsbuyers
recognize
• and four consists
Thesellers
market types of markets, each presenting a
of only
sellers who trade over a range of
different pricing challenge.
a
trading in few large
a uniform sellers.
prices rather than a single market
• Because
commodity, such there
as areprice.
few Pure Monopoly
wheat, sellers,or
Pure copper, each seller•is alert
The market is dominated by
• A range of prices occurs because
financialand
monopoly responsive to one seller.
securities. sellers can differentiate their
competitors’ pricing
• Thetoseller
• No single buyer or seller offers may be a Pure
buyers.
has muchstrategies
effect onand
themarketing
government
• Sellers competition
monopoly,
try to develop a
moves.
Oligopolistic
going market price. private regulated monopoly,
differentiated
Monopolisticoffers for different
competition or a private
customer unregulated
competition and, in
segments
monopoly.
addition to price, freely use
branding, advertising, and
personal selling to set their offers
apart.
Analyzing the Price-Demand Relationship
• Demand curve is a curve that shows the number of units the market
will buy in a given time period, at different prices that might be
charged.
Price Elasticity of Demand
• Price Elasticity is a measure of the sensitivity of demand to changes
in price.
• It is given by the following formula:
%change in quantity demanded
price elasticity of demand =
%change in price

• If demand is elastic rather than inelastic, sellers will

consider lowering their prices.
• A lower price will produce more total revenue.
• Marketers need to work harder than ever to differentiate
their offerings when a dozen competitors are selling
virtually the same product at a comparable or lower price.
The Economy
• Economic conditions can have a strong impact on the firm’s pricing
strategies.
• Economic factors such as a boom or recession, inflation, and interest
rates affect pricing decisions because they affect consumer spending,
consumer perceptions of the product’s price and value, and the
company’s costs of producing and selling a product.
Other External Factors
• Resellers react to various prices
• Government
• Social Concerns