Marketing Management
Arab World Edition
Kotler, Keller, Hassan, Baalbaki and Shamma
Chapter 4
Developing Pricing
Strategies and
Programs
What Is a Price?
1. Price is the amount of money charged for a
product or service. It is the sum of all the
values that consumers give up in order to
gain the benefits of having or using a
product or service.
2. Price is the only element in the marketing
mix that produces revenue; all other
elements represent costs
3. Price has been the major factor affecting
buyer choice.
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall Slide 2 of 33
Chapter Question 2:
How should a company set
Setting the Price prices initially for products
or services?
Six-step procedure for setting a pricing policy:
• Select the price objective
• Determine demand
• Estimate costs
• Analyze competitor price mix
• Select pricing method
• Select final price
Let’s look at each step…
Copyright © 2012 Pearson Education 14-3
Chapter Question 2:
How should a company set
prices initially for products
or services?
Step 1: Selecting the Pricing
Objective
The company first decides where to position its market offering.
The clearer a firm’s objectives, the easier it is to set price.
Five major objectives are:
• Survival
• Maximum current profit
• Maximum market share
• Maximum market skimming
• Product-quality leadership
Copyright © 2012 Pearson Education 14-4
Selecting the Pricing Objective
1- Survival : Companies pursue survival as their major objective
when they are plagued with overcapacity, intense competition, or
changing consumer wants.
2- Maximum Current Profit: Many companies try to set a price
that will maximize current profits. They estimate the demand and
costs associated with alternative prices and choose the price that
produces maximum current profit, cash flow, or rate of return on
investment.
3- Maximum Market Share: Some companies want to maximize
their market share. They believe that a higher sales volume will
lead to lower unit costs and higher long-run profit.
(market-penetration pricing).
Selecting the Pricing Objective
4- Maximum Market Skimming: Companies unveiling a new
technology favor setting high prices to maximize market skimming
(market-skimming pricing), where prices start high and are slowly
lowered over time.
5- Product-Quality Leadership: A company might aim to be the
product- quality leader in the market. Many brands strive to be
“affordable luxuries”.
6- Other Objectives: Nonprofit and public organizations may have
other pricing objectives.
2- Determining Demand
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, we say the demand is inelastic.
• If demand changes considerably, demand is
elastic.
Copyright © 2012 Pearson Education 14-7
Chapter Question 2:
How should a company set
prices initially for products
or services?
Determining Demand
A demand curve illustrates the relationship between price and demand.
Fig. 14.1: Inelastic and Elastic Demand
Copyright © 2012 Pearson Education 14-8
Chapter Question 2:
How should a company set
prices initially for products
or services?
Step 2: Determining Demand
Price Sensitivity
Customers are less price sensitive in certain situations (see Box 14.4).
Box 14.4: Factors
Leading to Less
Price Sensitivity
Copyright © 2012 Pearson Education 14-9
2- Determining Demand
Price Sensitivity:
.The first step in estimating demand is to understand what affects
price sensitivity.
• customers are most price-sensitive to products that cost a lot or
are bought frequently.
• Customers are less price-sensitive to low-cost items or items
they buy infrequently.
• They are also less price-sensitive when price is only a small part
of the total cost of obtaining, operating, and servicing the
product over its lifetime (total cost of ownership—TCO).
Copyright © 2012 Pearson Education 14-10
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall Slide 10 of 33
Chapter Question 2:
How should a company set
prices initially for products
or services?
Step 3: Estimating Costs
Demand sets a maximum on the price the company
can charge for its product. Costs set the minimum.
Types of Cost and Levels of Production
•Fixed costs
•Variable costs
•Total cost
•Average cost
•Activity-based cost
Fig. 14.2: Cost per Unit at Different
Levels of Production per Period
Copyright © 2012 Pearson Education 14-11
3- Estimating Costs
• Demand sets a ceiling on the price the company can charge
for its product. Costs set the floor.
A company’s costs take two forms, fixed and variable.
• Fixed costs are costs that do not vary with production or
sales revenue.
• Variable costs vary directly with the level of production.
• Total costs consist of the sum of the fixed and variable costs
for any given level of production.
• Average cost is the cost per unit at that level of production
Copyright © 2012 Pearson Education 14-12
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall Slide 12 of 33
3- Estimating Costs
Demand Price Ceiling
(Profit margin)
Price
Profit Price Floor
(variable cost +some
fixed costs)
(Contribution margin)
Costs
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall Slide 13 of 33
Chapter Question 2:
How should a company set
prices initially for products
or services?
Step 4: Analyzing Competitors’
Costs, Prices, and Offers
• The company must take competitors’ costs, prices, and possible
price reactions into account.
• The introduction of any price or the change of any existing price can
provoke a response from customers, competitors, distributors,
suppliers, and even government.
Copyright © 2012 Pearson Education 14-14
Chapter Question 2:
Step 5: Selecting a Pricing Method How should a company set
prices initially for products
or services?
Three major considerations
in price setting are
summarized in Fig. 14.4:
• Costs
• Competitors
• Customers
Fig. 14.4: The Three
Cs Model for Price
Setting
Copyright © 2012 Pearson Education 14-15
Chapter Question 2:
How should a company set
prices initially for products
or services?
Step 5: Selecting a Pricing Method
Six price-setting methods:
1. Markup pricing - pricing an item by adding a standard
increase to the product’s cost.
2. Target-return pricing - determining the price that would
yield the firm’s target rate of return on investment (ROI).
Fig. 14.5:
Break-Even Chart
for Determining
Target-Return Price
and Break-Even
Volume
Copyright © 2012 Pearson Education 14-16
Pricing Methods Examples
• 1. Koky’s Company is manufacturing toasters. It is
expected to sell 50,000 units at fixed cost of $300,000 and
the variable cost per unit is 10$.
• Calculate the price of each unit by using the markup pricing
strategy given that the desired return on sale is 20%.
Markup Pricing
Variable cost per toaster $10
Fixed costs $300,000
Expected unit sales 50,000
Target return pricing
• 2. Koky’s Company is manufacturing toys. It is expected to
sell 50,000 units, If the invested capital is $1000,000, and
the unit cost is $16.
• Calculate the price of each unit by using the Target return
strategy given that the desired return on invested capital is
20%
Target-Return Pricing
Chapter Question 2:
How should a company set
prices initially for products
or services?
Step 6: Selecting the Final Price
In selecting the price, the company must consider additional
factors, including
• Impact of other marketing activities
• Company pricing policies
• Gain-and-risk sharing pricing
• Impact of price on other parties
Copyright © 2012 Pearson Education 14-21
Credits
• Slide 1 Press Association Images: DON RYAN / AP
• Slide 3 Alamy Images: mediablitzimages (uk) Limited
• Slide 5 Peter J. Howe, “The Next Pinch: Fees to Check Bags,” Boston Globe,
March 8, 2007; Katherine Heires, “Why It Pays to Give Away the Store,”
Business 2.0, October 2006, pp. 36–37; Kerry Capel, “Wal-Mart with Wings,”
BusinessWeek, November 27, 2006, pp.44–45; Matthew Maier, “A Radical Fix for
Airlines: Make Flying Free,” Business 2.0, April 2006, pp.32–34; Gary Stoller,
“Would You Like Some Golf Balls with That Ticket,” USA Today, October 30,
1996
• Slide 8 Adapted from Russell S. Winer, “Behavioral Perspectives on Pricing:
Buyers’ Subjective Perceptions of Price Revisited,” in Issues in Pricing: Theory
and Research, ed. Timothy Devinney (Lexington, MA: Lexington Books, 1988),
pp. 35–57
• Slide 9 Getty Images: Bloomberg 8t
• Slide 10 David Kiley, “U.S. Automakers Get a Bum Rap,” USA Today, January
15, 2004, p. B5. Copyright © 2004 USA TODAY. Reprinted with permission
• Slide 11 Azza Fahmy. Reproduced with permission
• Slide 17 Adapted from Thomas T. Nagle and Reed K. Holden, The Strategy and
Tactics of Pricing, 3rd edn (Upper Saddle River, NJ: Prentice Hall, 2001),
Chapter 4
• Slide 32 Corbis: NameerGalal / Demotix 395
