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Marketing · Week 11

Pricing Strategies

What price is and why it's special, internal and external factors affecting price, the 6-step pricing process (objectives, demand and elasticity, costs, competitors, methods, final price), skimming vs penetration, seven price-adjustment strategies, and initiating and reacting to price changes.

ITE36421 video · 53 min📄 Reading Assignment 11.pdf

1Price: the revenue P

  • Pricing is how a firm sets the amount it sells a product for. Price is the amount the consumer pays.
  • Managers consider the purchase or manufacturing cost, competition, market conditions, brand and quality.
Why price is special

Price is the only one of the 4 Ps that generates income. Product, place and promotion are cost centres. But good product, place and promotion lower price elasticity, so the firm can raise prices profitably.

2Factors affecting pricing decisions

Internal factors

  • Marketing and pricing objectives: e.g. a target return on capital means revenue must exceed cost by enough
  • Marketing-mix strategy: price must fit the other Ps; use research and the MIS
  • Costs: price below cost means a loss. Cutting production cost allows a lower price
  • Organisational structure: top management sets pricing policy; marketing managers and cost accountants (cost data) contribute; some firms involve workers
  • Product differentiation: unique design, style or package means a higher price (e.g. Emerald and Signature shirts)

External factors

  • Nature of the market and demand: no demand means no sale; strong demand can be used
  • Competition: many local and foreign products; without differentiation you can't charge more than rivals
  • Economy and government: depressed economy means lower prices, boom means higher. Government regulates unfair practices (Nestlé's "free Kit Kat with Milo" offer was cancelled and penalised because the Kit Kat price was hidden in Milo's price)
  • Willingness to pay: buyers' characteristics and preferences
  • Positioning and channels: longer distribution chains add more margin; allow for discounts and concessions

3The 6-step pricing process

A firm must set a price when it launches a new product, enters a new channel, or bids for contract work.

  1. Select the pricing objective
  1. Determine demand
  1. Estimate costs
  1. Analyse competitors' costs, prices & offers
  1. Select a pricing method
  1. Select the final price

1. Select the pricing objective

The clearer the objective, the easier the price.

Objective Pricing implication
Survival Cut prices to raise volume against severe competition. Short-term only: costs aren't covered in the long run
Current profit maximisation The price that gives the maximum current profit
Market skimming High prices to skim the market
Market-share maximisation As low as possible to become the market leader
Product-quality leadership Higher prices to cover quality and R&D, and to signal better quality

2. Determine demand

  • Price sensitivity: a higher price usually means lower demand and a shift to substitutes.
  • Demand curve: the statistical relationship between price and quantity demanded. Normally inverse.
  • Price elasticity of demand:
Price elasticity = % change in quantity demanded ÷ % change in price
  • Elastic (|E| > 1): demand changes a lot with price.
  • Inelastic (|E| < 1): demand barely changes.

Demand curves are measured through surveys, price experiments and statistical analysis.

3. Estimate costs

  • Fixed and variable costs: price must cover both. Costs fall as production rises (bulk materials, experience), so estimate costs at different output levels.
  • Activity-based costing (ABC): different retailers cost different amounts to serve.
  • Target costing: start from the price the product can sell at, subtract the desired margin, and you get the cost target that design, engineering and production must hit.

4. Analyse competitors

Benchmark your price, quality and competitors' costs, using public data and statements. When a competitor changes its price, there are three responses:

  1. Maintain the status quo (don't respond)
  2. Match their price
  3. Undercut them

5. Select a pricing method

Basis Method How
Cost-based Cost-plus (mark-up) Price = average cost + mark-up %. P = AVC + AVC × M. The most common in manufacturing. + minimal information, simple, protects against cost changes. − ignores competitors and customers
Target-return Price that gives the desired return on invested capital
Customer-based Good-value pricing The right mix of quality and service at a fair price
Value-added (perceived-value) pricing Add features and services to differentiate, then charge more
Competitor-based Going-rate pricing Benchmark on competitors' prices (airlines on the same route; textbook publishers)
Sealed-bid pricing Bid on what competitors are expected to bid; the lowest price wins
Target-return price = unit cost + (desired return × invested capital) ÷ expected unit sales
Note on the PDF

The PDF writes the target-return formula as "Desired Return × Invested Capital ÷ Expected Unit Sales" without the unit cost term. The standard formula (Kotler) adds the per-unit return to the unit cost, as shown above.

6. Select the final price

Pricing methods narrow the range. The final choice also considers:

  • the impact of other marketing activities
  • company pricing policies
  • gain-and-risk-sharing pricing
  • the impact on other parties (distributors, competitors, government)
🧪 Try it — Pricing calculator

4New-product pricing: skimming vs penetration

Price skimming Market-penetration pricing
Idea Set a high initial price to skim maximum revenue from segments willing to pay, then lower it step by step Set a low initial price to penetrate the market quickly and deeply and win share
Result Fewer but more profitable sales Large volume and share, lower profit per unit; volume cuts costs, allowing even lower prices
Conditions Quality and image support a high price; enough buyers at that price; competitors can't easily enter and undercut Market is highly price-sensitive; economies of scale are possible; the low price keeps competitors out; the firm must keep its low-price position
Example Apple's first iPhone: high price, cut after about 6 months, cut again within a year Low-priced phones or FMCG brands entering a mass market
🧪 Try it — Skimming vs penetration simulator

5Seven price-adjustment strategies

Strategy Meaning Examples
1. Discount & allowance pricing Reduce prices to reward responses: early payment, bulk purchase, off-season buying. A discount is a direct reduction. Allowances: trade-in (cars), promotional allowances for dealers who advertise or support sales 2% off for paying within 10 days
2. Segmented pricing Two or more prices not based on cost differences: customer-segment (students, seniors), product-form, location (cinema seats), time Museum student rates; cinema seat classes
3. Psychological pricing Price says something about the product; many buyers judge quality by price Rs 1,000 perfume containing Rs 300 of scent; Rs 999 instead of Rs 1,000
4. Promotional pricing Temporary prices below list (sometimes below cost) to boost short-run sales or clear stock. Risks: shoppers wait for sales, and the brand looks cheap Seasonal sales
5. Geographical pricing Prices for different locations, linked to buying power and freight See the five methods below
6. Dynamic and internet pricing Prices change continually (daily or hourly) with demand, inventory, costs; online auctions (eBay) Airline seats, ride-hailing surge pricing
7. International pricing Prices per country based on its economy, competition, laws, distribution system, or a uniform world price Different phone prices across countries

Five geographical pricing methods:

Method How
FOB-origin Goods placed free on board; the buyer pays freight from the factory, so prices differ by location
Uniform-delivered Same price + freight for everyone, regardless of location
Zone pricing Two or more zones; same price within a zone, higher for distant zones
Basing-point Freight charged from a chosen base city to the customer
Freight-absorption The seller absorbs some or all freight to win the business

6Price changes & reactions

Initiating price cuts

  • Why: excess capacity, falling demand under strong price competition, a weak economy, or to dominate through lower costs and gain share and volume. Example: Lenovo mobiles' aggressive low prices in developing markets.
  • Risk: price wars, and lower margins.

Initiating price increases

  • Why: cost inflation, or demand exceeding supply (e.g. the oil and gas industry).
The power of a 1% price rise

If the profit margin is 3% of sales, a 1% price increase (with volume unchanged) raises profits by 1/3 ≈ 33%.

Check: sales Rs 100 → profit Rs 3. A 1% increase gives sales Rs 101 at the same cost, so profit is Rs 4, which is +33%.

Avoid looking like a price gouger. Consumers have long memories, and gouging can bring regulation.

  • Explain the reasons for the increase.
  • Find alternatives: shrink the product (smaller pack), use cheaper ingredients, remove features or services, or price previously bundled elements separately.

Buyer and competitor reactions

Price and image are closely linked:

  • A Rolex price increase may signal more exclusivity or better quality.
  • A Rolex price cut may signal lower quality and a dulled luxury image.

So price cuts can hurt how customers see the brand.

Exam focus

Expect:

  • Internal and external pricing factors
  • The pricing process (explain it with your own product)
  • Price elasticity
  • Cost-plus vs target-return vs value vs going-rate pricing
  • Skimming vs penetration with the conditions for each
  • The seven adjustment strategies with examples (the five geographical methods)
  • Initiating cuts and increases (the 3% → 33% example)
  • FMCG price changes: shrink the pack size, promotions, explaining increases

7Quick revision sheet

Concept Remember it as
Price The only revenue P
Internal factors Objectives · mix · costs · organisation · differentiation
External factors Demand · competition · economy & government · willingness to pay · channels and positioning
Process Objective → demand → costs → competitors → method → final price
Objectives Survival · current profit · skimming · market share · quality leadership
Elasticity %ΔQ ÷ %ΔP; elastic vs inelastic
Cost concepts Fixed and variable · ABC · target costing
Methods Cost-plus · target-return · good-value · value-added · going-rate · sealed-bid
New product Skimming (iPhone) vs penetration
Adjustments Discount/allowance · segmented · psychological · promotional · geographical · dynamic · international
Geographical FOB-origin · uniform-delivered · zone · basing-point · freight-absorption
Changes Cuts (excess capacity, share; price-war risk) · increases (inflation; 1% → +33% profit)
Rolex A price cut can damage a luxury image

?Self-check quiz

11 questions on this week. Answer them all, then press Check my answers. Your best and latest scores are saved and shown on the subject page.

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