Price and Pricing Strategy

A comprehensive guide to understanding how companies determine

pricing to influence customer decisions and maximize business objectives.
Introduction to Pricing
Price is a critical factor influencing customer purchase
decisions. Effective pricing requires careful evaluation of:

The firm's objectives

Market competition
Brand positioning
Target market characteristics
Six-Step Procedure for Setting Pricing Policy
Step 1: Select Pricing Objective
Identify which of the five key pricing objectives to pursue

Step 2: Determine Demand

Analyze price sensitivity and estimate demand curves

Step 3: Estimate Costs

Calculate fixed, variable, and total costs at different production levels

Step 4: Analyze Competitors

Evaluate competitors' costs, prices, and offers

Step 5: Select Pricing Method

Choose from various pricing approaches based on previous analysis

Step 6: Select Final Price

Consider marketing mix, company policies, and impact on
stakeholders
Step 1: Selecting the Pricing Objective

Survival Maximize Current Profit Maximize Market Share

Focus on covering costs during tough Set price for best short-term returns Use low prices to gain volume and
times reduce costs over time
Example: Apple setting premium prices
Example: A restaurant during pandemic on new iPhone models Example: Amazon's initial strategy of
offering meals at cost to maintain cash low prices to dominate e-commerce
flow
More Pricing Objectives
Market Skimming
High initial price to "skim" segments willing to pay more

Example: Tesla's pricing strategy with new electric vehicle models

Product Quality Leadership

Set high price to reflect premium value and status

Example: Rolex watches commanding premium prices for luxury

positioning
Step 2: Determining Demand
Understanding Demand Curves

Demand represents consumers' desire to buy products and

willingness to pay a given price.

The demand curve typically shows an inverse relationship

between price and quantity demanded:

Higher prices ³ Lower demand

Lower prices ³ Higher demand

Exception: Luxury goods may show upward-sloping demand

curves where higher prices signal higher quality.

Example: Standard demand curve showing inverse

relationship between price and quantity demanded
Price Sensitivity Factors
1 When Customers Are Less Price Sensitive
Limited or no substitute products exist (Example: Patented medications)
No competitors offer the same products (Example: Unique software solutions)
Customers missed the higher price (Example: Gradual price increases on subscription services)
Customers are slow to modify purchasing habits (Example: Brand-loyal coffee drinkers)
Price increases seem justified (Example: Rising costs due to supply chain issues)
Price is a small fraction of total ownership cost (Example: Printer ink for expensive printers)
Methods for Estimating Demand Curves
Surveys Price Experiments Statistical Analysis
Determine how many units Change prices of items in stores Analyze relationship between
consumers would purchase at or areas to observe sales impact historical prices, quantities sold,
various price points and other factors
Example: Starbucks testing
Example: Asking potential different prices for new Example: Airline analyzing years
customers if they would buy a beverages in select markets of ticket pricing data to optimize
new smartphone at $699, $799, revenue
or $899
Price Elasticity of Demand
Understanding Price Elasticity

Price elasticity measures how demand responds to price

changes:

Elastic demand: Small price changes cause large demand

changes
Inelastic demand: Large price changes cause small
demand changes

Example: If a 10% price increase causes a 20% drop in sales,

demand is elastic (elasticity = 2.0)

Key considerations:

Short-run vs. long-run elasticity differs

Price increases and decreases may have asymmetric
effects
Size of price change affects response magnitude
Step 3: Estimating Costs

Fixed Costs (Overhead) Variable Costs Total & Average Costs

Remain constant regardless of Change in direct proportion to Total costs = Fixed + Variable costs
production level production volume
Average cost = Total costs ÷ Units
Example: Samsung's factory rent, Example: Materials for each Samsung produced
executive salaries, and insurance costs tablet (plastic, glass, chips, packaging)
Example: If Samsung spends $10M fixed
+ $200/unit variable costs on 100,000
tablets, average cost is $300/unit
Step 4: Analyzing Competitors
Competitive Analysis Process

When setting prices, companies must consider:

Competitors' current prices

Likely competitor responses to price changes
Value differences between offerings

Example: If your product has extra features worth $50 more

than a competitor's $200 product, you might price at $250

Modern competitive approaches:

Low price + high quality (Example: IKEA)

Targeting specific segments (Example: Specialty retailers)

Efficient operations to maintain margins (Example:

Costco)
Step 5: Selecting a Pricing Method
1 Markup Pricing 2 Target-Return Pricing
Adding a standard markup to product cost Setting price to achieve desired return on investment

Example: A retailer buying shirts at $20 and marking Example: A manufacturer investing $1M in equipment
up 100% to sell at $40 and pricing products to earn 15% ROI
More Pricing Methods
1 Perceived-Value Pricing 2 Value Pricing 3 Everyday Low Pricing
Basing price on customer's Offering reasonable price for
(EDLP)
perception of product value high-quality goods Maintaining consistent low prices
rather than frequent promotions
Example: Premium skincare Example: Toyota providing
brands charging based on reliable vehicles at fair prices Example: Walmart's strategy of
perceived benefits rather than compared to luxury brands consistently low prices versus
ingredient costs competitors' high-low pricing
Additional Pricing Methods
1 Going-Rate Pricing 2 Auction-Type Pricing
Basing prices primarily on competitors' rates Setting prices through competitive bidding

Example: Local gas stations pricing fuel within pennies Examples:

of nearby competitors
English Auctions: eBay items where highest bidder
wins
Dutch Auctions: Flower markets where price starts
high and drops until someone buys
Sealed-Bid Auctions: Government contracts where
vendors submit confidential bids
Step 6: Selecting the Final Price
Final Considerations

When finalizing price, companies must consider:

Impact of other marketing mix elements

Company pricing policies and guidelines
Gain-and-risk-sharing pricing approaches
Price impact on distributors, dealers, and other
stakeholders
Legal and regulatory constraints

Example: A pharmaceutical company balancing profit goals

with affordability concerns when pricing a new medication
New Product Pricing Strategies

Market Skimming Market Penetration

Setting high initial prices to "skim" Setting low initial prices to quickly
maximum revenue from early gain market share
adopters
Example: Netflix's initial low
Example: Apple's pricing of first- subscription prices to build customer
generation iPhones and iPads base
Market-Skimming Pricing
When Skimming Works

Market skimming is effective when:

Product quality and image support higher price

Enough buyers want the product at high price
Production costs at small volume aren't prohibitive
Competitors can't easily enter and undercut

Example: Sony's PlayStation 5 launch at premium prices for

early adopters before gradually reducing price as
competition increased
Market-Penetration Pricing
When Penetration Works

Market penetration is effective when:

Market is highly price-sensitive

Low price stimulates market growth
Production and distribution costs decrease with volume
Low price deters competition

Example: Xiaomi's strategy of offering feature-rich

smartphones at lower prices than competitors to rapidly gain
market share
Product Mix Pricing
Strategies
When a product is part of a larger mix, companies need pricing strategies
that maximize profits across the entire portfolio.

These strategies account for:

Related demands between products

Shared costs across product lines
Different competitive landscapes for each product
Product Line Pricing
Creating Price Tiers

Separating similar products into different price groups to

create quality perceptions

Example: Samsung's smartphone lineup:

Galaxy S Ultra ($1,199+): Premium features

Galaxy S Plus ($999+): High-end
Galaxy S ($799+): Standard flagship
Galaxy A Series ($149-$599): Budget to mid-range
Optional-Product Pricing
Main Product + Add-ons

Selling main products at lower prices and relying on optional

add-ons for profit

Examples:

Printers sold cheaply, ink cartridges at high margins

Cars with base models and expensive option packages
Video game consoles sold near cost, games and
accessories at higher margins
Captive-Product Pricing
Core Product + Essential Accessories

Selling the main product at low price, with essential

accessories at high prices

Examples:

Gaming apps free to download but with expensive in-app

purchases
Razors sold cheaply, blade refills at high margins
Coffee machines at low prices, proprietary coffee pods at
premium
By-Product Pricing
Monetizing Secondary Products

Pricing and selling by-products separately to generate

additional revenue

Example: Australia's Colonial Sugar Refinery (CSR)

Primary business: Sugar production

By-product: Waste sugarcane fiber
Secondary revenue: Selling fiber to manufacture
wallboard for construction
Product Bundle Pricing
Package Deals

Combining multiple products at a lower price than if

purchased separately

Examples:

Fast food value meals (burger + fries + drink)

Software suites (Microsoft Office with Word, Excel,
PowerPoint)
Cable TV packages with multiple channels
Vacation packages with flight, hotel, and car rental
Price Adjustment Strategies: Discounts

Cash Discount Quantity Discount

Price reduction for early payment Price reduction for large volume purchases

Example: "2/10, net 30" - 2% discount if paid within 10 days, Example: Office supplier offering 5% off orders over $500,
full amount due in 30 days 10% off over $1,000

Trade Discount Trade-in Allowance

Price reduction for channel members performing functions Price reduction for turning in old item when buying new one

Example: Manufacturer offering 30% discount to wholesalers Example: Car dealership offering $3,000 for any trade-in
who warehouse products toward new vehicle purchase
Segmented Pricing Strategies
Customer-Segment Pricing Product Form Pricing
Different prices for different customer Different prices for product versions
groups not based on cost differences

Example: Movie theaters charging Example: Airlines charging premium

less for students, seniors, and military for business class seats

Time-Based Pricing Location-Based Pricing

Prices vary by season, day, or hour Different prices for different locations
despite same costs
Example: Hotels charging peak rates
during tourist season, discounts in Example: Theaters charging more for
off-season center seats than side seats
Psychological Pricing
Using Psychology to Influence Purchases

Psychological pricing leverages consumer perceptions rather

than just economic factors

Examples:

Odd-even pricing: $9.99 instead of $10.00

Reference pricing: "Was $50, now $30"

Prestige pricing: Deliberately high prices to signal quality
Price anchoring: Showing expensive option first to make
others seem reasonable
Promotional Pricing

Special-Event Pricing Limited-Time Offers Rebates

Price reductions tied to special events or Promotional deals creating buying Cash back incentives after purchase
seasons urgency
Example: Appliance manufacturer
Example: Black Friday sales offering 50- Example: Amazon's "Lightning Deals" offering $100 mail-in rebate on
70% discounts to drive holiday shopping with countdown timers and limited refrigerators
quantities
Dynamic and International
Pricing
Dynamic Pricing International Pricing

Variable prices updated frequently Adapting prices for different

based on market conditions countries based on:

Examples: Economic conditions

Competitive landscape
Uber's surge pricing during
high demand Local regulations

Airline tickets changing price Distribution systems

based on demand and timing
Example: Apple pricing iPhones
Hotel rooms priced differently differently across countries based
each day based on occupancy on taxes, import duties, and local
purchasing power
Thank You
Price and Pricing Strategy

Marketing Management - BM 107

Mico S. Loncio, PhD