This is useful for educators and learners of MBA, which is made in lucid style for easier understanding and to be a handy tool before exams or while teaching.

1. MARKETING MANAGEMENT
Developing Pricing Strategies
D.V. Madhusudan Rao
Dept. MBA,
School of Graduate Studies,
Jigjiga University
ETHOPIA
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2. Learning Objectives
After studying this chapter, you should be able to:
1. Describe the major strategies for pricing initiative and new
products
2. Explain how companies find a set of prices that maximize
the profits from the total product mix
3. Discuss how companies adjust their prices to take into
account different types of customers and situations
4. Discuss the key issues related to initiating and responding
to price changes
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3. Pricing Products
Topic Outline
• New-Product Pricing Strategies
• Product Mix Pricing Strategies
• Price Adjustment Strategies
• Price Changes

4. What Is a Price?
Price is the only element
in the marketing mix that
produces revenue; all
other elements represent
costs.
So Cost =FACT;
Price (cost+Margin) =
POLICY
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5. Pricing Puzzle
Minimize Optimize Maximize
Costs + Margins = PRICE
VALUE
• Production costs  Product performance
• Indirect costs • Usefulness & Quality
• Advertising costs  Image / Aspirations
• Brand Equity
• Distribution costs
 Availability
• Manufacturer’s margin • Distribution Strategy
• Distributor’s margin  Service
• Seller’s margin • Before/During & After sales

6. VALUE
Value is a ratio between what customer gets and what
he gives
Value = Benefits/Costs
How to increase its Value?
•Raise benefits
•Reduce costs
•Raise benefits and reduce costs
•Raise benefits by more than the raise of costs
•Lower benefits by less than the reduction of
costs

7. A Secret Pie
• Impact of a 1 % price increase on profits
– Coca-Cola 6,4 %
– Nestlé 17,5 %
– Ford 26,0 %
– Philips 28,7 %

8. Synonyms for Price
• Rent • Special assessment
• Tuition • Bribe
• Fee • Dues
• Fare • Salary
• Rate • Interest
• Toll
• Donation
• Premium
• Commission
• Honorarium
• Tax
• Wage
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8

9. Common Pricing Mistakes
• Determine costs and take traditional industry
margins
• Failure to revise price to capitalize on market
changes
• Setting price independently of the rest of the
marketing mix
• Failure to vary price by product item, market
segment, distribution channels, and
purchase occasion
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10. Pricing Puzzle
4 P’s 4 C’s
• PRODUCT • CUSTOMER VALUE
• PRICE • COST
• PLACE • CONVENIENCE
• PROMOTION • COMMUNICATION
Seller’s Dilemma

11. Pricing Puzzle
4 P’s 4 C’s
• PRODUCT • CUSTOMER VALUE
• PRICE • COST
• PLACE • CONVENIENCE
• PROMOTION • COMMUNICATION
“ Tomorrow’s winner companies will
be those who offer distinct products
at comparatively low market prices ”

12. Key = Differentiation
The key to drive value is to offer relevant and
distinctive product differentiation
• Physical Differences
– Features, performance, durability, conformance, design, etc…
• Availability Differences
– Distribution channels ; Stores, mail-order, internet, etc…
• Service Differences
– Delivery, installation, training, consulting, maintenance, etc…
• Price Differences
– Price positioning (Very high / High / Medium / Low / Very Low)
• Image Differences
– Symbols, atmosphere, events, media, etc…

13. Key = Differentiation
Differentiation : Examples
• Physical Differences
– Levi’s Engineered Jeans (Ergonomic construction, durability, style)
• Availability Differences
– Dell Computer’s customized production, Volkswagen “e.lupo”
• Service Differences
– Acıbadem Hospital – Mother Care Division, Nissan “5-year Warranty”
• Image Differences
– Audi vs Mercedes, DuPont (Innovation Leader)

14. Key = Differentiation
Differentiating commodities…
• Perdue Chicken (USA)
– Guaranteed tenderness (30 % market-share, 10 % premium pricing)
• Flora Drinking Water (Turkey – Sabancı Holding)
– Service, packaging, attributes, operation
• Starbuck’s Coffee (USA)
– Atmosphere, standard service
Everything can be differentiated !...

15. Pricing Decisions
• INTERNAL FACTORS • EXTERNAL FACTORS
– Marketing Objectives – Market
• Pure Competition
• Positioning
• Monopolistic Competition
• Target Group
• Oligopolistic Competition
– Marketing Mix Strategy • Pure Monopoly
• 4 P’s – Demand
– Costs • Elastic / Inelastic
• Fixed & Variable – Competition
• Competitors’ offers
– Management Approach
• Competitiors’ reactions
• Responsibility
– Economy
• Perspective • Buying power
– Government Influence
• Laws & Regulations

16. Consumer Psychology and Pricing
Reference Prices
Price-quality inferences
Price endings
Price cues
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17. Table 14.1 Possible Consumer Reference Prices
• “Fair price” • Lower-bound price
• Typical price • Competitor prices
• Last price paid • Expected future price
• Upper-bound price • Usual discounted
price
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18. Price–Quality Inferences: An Image pricing for ego-
sensitive products. Eg: Perfumes, cars (over-valued and
under-valued)
When information about true quality is known, price
becomes a less significant indicator of quality. When
information is not available, price acts as a signal of
quality.
Price endings: Price tags end with 0 and 5 or 9 are
commonly seen examples.

19. Price Cues
• “Left to right” pricing ($299 vs. $300)
• Odd number discount perceptions
• Even number value perceptions
• Ending prices with 0 or 5
• “Sale” written next to price
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20. Steps in Setting
the Price
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21. Pricing Strategies
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22. Internal Factors Affecting Pricing
Decisions: Marketing Objectives
Survival
Low Prices to Cover Variable Costs and
Some Fixed Costs to Stay in Business.
Current Profit Maximization
Choose the Price that Produces the
Maximum Current Profit, Etc.
Marketing
Objectives
Market Share Leadership
Low as Possible Prices to Become
the Market Share Leader.
Product Quality Leadership
High Prices to Cover Higher
Performance Quality and R & D.

23. Internal Factors Affecting Pricing
Decisions: Marketing Mix
Product Design
Nonprice
Price Distribution
Positions
Promotion

24. External Factors Affecting Pricing Decisions
Market and
Demand
Competitors’ Costs,
Prices, and Offers
Other External Factors
Economic Conditions
Reseller Needs
Government Actions
Social Concerns

25. Market Skimming
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26. New-Product Pricing Strategies
• Market-skimming pricing
• Market-penetration pricing
• Intermediate Pricing

27. Market Skimming
Market-skimming pricing is a strategy for setting a high price for a
new product to skim maximum revenues layer by layer from the
segments willing to pay the high price, the company make fewer (low
volume) but more profitable sales.
• Product quality and image must support the price
• Buyers must want the product at the price
• Costs of producing the product in small volume should not cancel
the advantage of higher prices
• Competitors should not be able to enter the market easily
• Suitable for products that have short life cycles or which will face
competition at some point in the future (e.g. after a patent runs
out)
• Examples include: Playstation, jewellery, digital technology, new
DVDs, Bic, Biro etc

28. Market-skimming pricing
• For example when Sony introduced the world first
high definition television (HDTV) to the Japanese
market , the high tech sets cost 43,000$ . These
televisions were purchased only by customers who
really wanted the new technology and afford to pay
high prices.
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29. Penetration Pricing
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30. Market Penetration Contd..
Market-penetration pricing sets a low initial price
in order to penetrate the market quickly and
deeply to attract a large number of buyers
quickly to gain market share
• Price sensitive market
• Production and distribution costs must fail as
sales volume increases.
• Low prices must keep competition out of the
market

31. Market-penetration pricing
• For example ,Dell used penetration pricing
to enter the personal computer market,
selling high quality computer products
through lower cost direct channels.
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32. Price-Quality Strategies
• Philip Kotler identified 9 price-quality strategies
High Price Mid Price Low Price
High Quality High Super
Premium
Value Value
Middle Quality Over Mid Good
Charging Value Value
False
Rip-off Economy
Economy
Low Quality
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33. Product Mix Pricing Strategies
Product Line Pricing
Setting Price Steps Between Product Line Items
i.e. $299, $399
Optional-Product Pricing
Pricing Optional or Accessory Products
Sold With The Main Product
i.e. Car Options
Product Captive-Product Pricing
Mix Pricing Products That Must Be Used
With The Main Product
Pricing i.e. Razor Blades, Film, Software
Strategies By-Product Pricing
Pricing Low-Value By-Products To Get Rid
of Them
i.e. Lumber Mills, Zoos
Product-Bundle Pricing
Pricing Bundles Of Products Sold Together
i.e. Season Tickets, Computer Makers
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34. Product line pricing
Product line pricing takes into account the
cost differences between products in the
line, customer evaluation of their features,
and competitors’ prices
* For example channel offers 20 different
collections of bags of all shapes and sizes
at price that range from under $50 to more
than $1,250.

35. Optional Product pricing
• Optional-product pricing takes into account
optional or accessory products along with
the main product
• For example : a car buyer may choose to
order a GPS navigation system & Bluetooth
wireless communication.
• Refrigerators come with optional ice maker

36. Captive-product pricing
• Captive-product pricing
involves products that
must be used along with
the main product
• Examples of Captive
products are razor blade
cartridges , Gillette once
you bought the razor, you
are committed to buying
replacement cartridges at
$25 an eight pack

37. Two-part pricing
Two-part pricing involves breaking the price into:
– Fixed fee
– Variable usage fee
For example : Jawwal company charge a flat rate for
a basic calling plan, then charge for minutes over
what the plan allows.
The service firm must decide how much to charge for
the basic service and how much for the variable
usage.
– Another example is when you visit a park , you
pay a ticket charge + fee for food and additional
feature

38. By-product pricing
• By-product pricing refers to products with
little or no value produced as a result of
the main product. Producers will seek little
or no profit other than the cost to cover
storage and delivery.
• Petroleum products often results in by-
products.

39. Product bundle pricing
Product bundle pricing combines several
products at a reduced price
For example : fast food restaurants
bundle a burger , fries and a soft drink
at a combo price

40. Step 2: Determining Demand
1.Price Sensitivity
2. Estimating
Demand Curves
3. Price Elasticity
of Demand
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41. Fig 14.2 Inelastic and Elastic Demand
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42. Table 14.3 Factors Leading to Less Price Sensitivity
• The product is more distinctive
• Buyers are less aware of substitutes
• Buyers cannot easily compare the quality of substitutes
• Expenditure is a smaller part of buyer’s total income
• Expenditure is small compared to the total cost
• Part of the cost is paid by another party
• Product is used with previously purchased assets
• Product is assumed to have high quality and prestige
• Buyers cannot store the product
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43. Influence of Elasticity
• Any pricing decision must be mindful of the
impact of price elasticity
• The degree of price elasticity impacts on the level
of sales and hence revenue
• Elasticity focuses on proportionate (percentage)
changes
• PED = % Change in Quantity demanded/%
Change in Price
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44. Price Elasticity of Demand

45. Influence of Elasticity
• Price Inelastic:
• % change in Q < % change in P
• e.g. a 5% increase in price would be met by a fall in
sales of something less than 5%
• Revenue would rise
• A 7% reduction in price would lead to a rise in sales of
something less than 7%
• Revenue would fall
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46. Influence of Elasticity contd..
• Price Elastic:
• % change in quantity demanded > % change in
price
• e.g. A 4% rise in price would lead to sales falling by
something more than 4%
• Revenue would fall
• A 9% fall in price would lead to a rise in sales of
something more than 9%
• Revenue would rise
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47. Step 3: Estimating Costs
• Types of costs
• Cost Terms and Production
• Fixed costs
• Variable costs
• Total costs
• Average cost
• Cost at different levels of production
• Accumulated production
• Activity-Based Cost accounting
• Target costing
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48. Figure 14.3 Cost Per Unit at Different Levels of Production
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49. Figure 14.4 Estimating Cost per Unit as a Function of
Accumulated Production
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50. Target Costing
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51. Step 4: Analysing Competitors’ Costs,
Prices and Offers

52. Step 5: Selecting a Pricing Method
• Markup pricing
• Target-return pricing
• Perceived-value pricing
• Value pricing
• Going-rate pricing
• Auction-type pricing

53. Markup /Cost-Plus Pricing
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54. Markup/ Cost-Plus Pricing contd..
• Calculation of the average cost (AC) plus a
mark up
• AC = Total Cost/Output
Eg: An Immersion Rod mfg. costs are: Variable C=$10,
FC=$300,000, Expected unit sales = 50,000.
A Unit Cost = VC + FC/Unit sales
=10+300k/50k = $16.
IF mfr. Wants to earn a 20% markup on sales,
Markup price = Unit cost/ 1-desired return on sales
= $16/1-0.2 = $20 per unit
Hence Mfr can sell to Dealers at $ 20 and earn $4 as profit
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55. BEP / Target-return pricing
An expected percentage of profit on mfr’s investment (Return on Investment)
Target-return pricing = Unit Cost + Desired return x Invested Capital
Unit Sales
Break-Even Volume = Fixed Cost
(Price - Variable Cost)

56. Figure 14.6 Break-Even Chart
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57. Break-Even
• BE= Fixed Costs/Contribution (SP-VC)
• Example - Meal - SP = $20, VC = $8
• Fixed costs are $2400 a day
• BE=$2400/$12 = 200
• Need to sell 200 meals @ $20 to break-even
• VC = 40%, contribution = 60%
• BE = $2400/.6 = $4000

58. Break-even Analysis or Target Profit Pricing

59. Perceived Value Pricing
Table 14.2 Consumer Perceptions vs. Reality for Cars
Overvalued Brands Undervalued Brands
• Land Rover • Mercury
• Kia • Infiniti
• Volkswagen • Buick
• Volvo • Lincoln
• Mercedes • Chrysler

60. Some important pricing definitions
• Utility: The attribute that Value Example: Caterpillar
Tractor is $100,000 vs. Market
makes it capable of want $90,000
satisfaction $90,000 if equal
7,000 extra durable
• Value: The worth in 6,000 reliability
terms of other products 5,000 service
2,000 warranty
• Price: The monetary $110,000 in benefits - $10,000
medium of exchange. discount!

61. Value Pricing
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62. Value Pricing contd..
• Price set in accordance
with customer
perceptions about the
value of the
product/service
• Examples include status
products/exclusive
products Companies may be able to set prices according to
perceived value.
Copyright: iStock.com
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63. Going Rate (Price Leadership)
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64. Going Rate (Price Leadership)
• In case of price leader, rivals have difficulty in competing
on price – too high and they lose market share, too low
and the price leader would match price and force smaller
rival out of market
• May follow pricing leads of rivals especially where those
rivals have a clear dominance of market share
• Where competition is limited, ‘going rate’ pricing may be
applicable – banks, petrol, supermarkets, electrical goods
– find very similar prices in all outlets
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65. Auction / Tender Pricing
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66. Auction-Type Pricing
English auctions
Dutch auctions
Sealed-bid auctions

67. Step 6: Selecting the Final Price
• Impact of other
marketing activities
• Company pricing policies
• Gain-and-risk sharing
pricing
• Impact of price on other
parties

68. Price-Adjustment/ Adaption Strategies
Price Adaptation Strategies
Discount & Allowance
Reducing Prices to Reward Segmented
Customer Responses such as Adjusting Prices to Allow
Paying Early or Promoting for Differences in Customers,
the Product. Products, or Locations.
Cash Discount Customer
Quantity Discount Product Form
Functional Discount Location
Seasonal Discount Time
Trade-In Allowance
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69. Price-Adjustment Strategies
• Adjusting Prices for Psychological
Psychological Pricing Effect.
•Price Used as a Quality Indicator.
• Temporarily Reducing Prices to
Promotional Pricing Increase Short-Run Sales.
• i.e. Loss Leaders, Special-Events
• Adjusting Prices to Account for the
Geographical Pricing Geographic Location of Customers.
• i.e. FOB-Origin, Uniform-Delivered,
Zone Pricing, Basing-Point, &
Freight-Absorption.
International Pricing • Adjusting Prices for International
Markets.
• Price Depends on Costs, Consumers,
Economic Conditions & Other Factors.
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70. Price-Adjustment Strategies contd..
Geographical pricing is used for customers in
different parts of the country or the world
• FOB pricing
• Uniformed-delivery pricing
• Zone pricing
• Basing-point pricing
• Freight-absorption pricing
• Counter trade (Barter,Compensation deal,
Buyback arrangement, Offset)

71. Price Adjustment Strategies
• FOB (free on board) pricing means that the
goods are delivered to the carrier and the title
and responsibility passes to the customer
• Uniformed-delivery pricing means the
company charges the same price plus freight to
all customers, regardless of location

72. Price Adjustment Strategies
• Zone pricing means that the company sets up
two or more zones where customers within a
given zone pay a single total price
• Basing-point pricing means that a seller selects
a given city as a “basing point” and charges all
customers the freight cost associated from that
city to the customer location, regardless of the
city from which the goods are actually shipped

73. Price-Adjustment Strategies
• Freight-absorption pricing means the
seller absorbs all or part of the actual
freight charge as an incentive to attract
business in competitive markets

74. Price-Adjustment Strategies
Dynamic pricing is when
prices are adjusted
continually to meet the
characteristics and needs
of the individual
customer and situations Ex. Alaska airlines creates unique
prices and advertisements for
people as they surf the web

75. Price Adjustment Strategies
International pricing is when prices are set in a specific
country based on country-specific factors
• Economic conditions
• Competitive conditions
• Laws and regulations
• Infrastructure
• Company marketing
objective

76. International pricing
• For example : Boeing sells its jetliners at about
the same price everywhere, whether in the
United states , Europe or the third world
• A pair of Levi’s selling for $30 in Canada might
go for $ 63 in Tokyo and $ 88 in Paris
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77. Discount and allowance pricing
Discount and allowance pricing reduces
prices to reward customer responses
such as paying early or promoting
the product
• Discounts
• Allowances

78. Price-Adjustment Strategies
Price Discounts and Allowances
Quantity discount: The more you buy, the
cheaper it becomes-- cumulative and non-
cumulative.
Trade discounts” functional”: Reductions from
list for functions performed-- storage, promotion.
Cash discount: A deduction granted to buyers
for paying their bills within a specified period of
time, (after first deducting trade and quantity
discounts from the base price)
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79. Price Adjustment Strategies
Functional discount: discount offered by a manufacturer
to trade-channel members if they will perform certain
functions.
Seasonal discount: a price reduction to those who buy
out of season.
Allowance: an extra payment designed to gain reseller
participation in special programs.
a) Trade in allowances: are price reductions given for
turning in an old item when buying a new one (
Automobiles industry)
b) Promotional allowances: are payments or price
reductions to reward dealer for participating in
advertising and sales support program
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80. Promotional Pricing Tactics
• Loss-leader pricing
• Special-event pricing
• Cash rebates
• Low-interest financing
• Longer payment terms
• Warranties and service
contracts
• Psychological discounting

81. Price-Adjustment Strategies
Promotional pricing is when prices are temporarily
priced below list price or cost to increase demand
• Loss leaders
• Special event pricing
• Cash rebates
• Low-interest financing
• Longer warrantees
• Free maintenance

82. Price-Adjustment strategies
Promotional Pricing
• Loss-leader pricing: supermarkets and department stores
often drop the price on well known brands to stimulate
additional store traffic
• Special-event pricing: sellers well establish special pricing in
certain seasons to draw in more customers
• Cash rebates: companies offer cash rebates to encourage
purchase of the manufacturers products within a specified
time period
• Low-interest financing: the company can offer customers low-
interest financing
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83. Price-Adjustment strategies
• Longer payment terms: sellers especially
mortgage banks and auto companies stretch
loans over longer periods and thus lower the
monthly payment
• Warranties and service contracts: companies
can promote sales by adding a free or low cost
warranty or service contract
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84. Price-Adjustment Strategies
Risks of promotional pricing
• Used too frequently, and copies by
competitors can create “deal-prone”
customers who will wait for promotions
and avoid buying at regular price
• Creates price wars

85. Differentiated/segmented Pricing
• Customer-segment pricing
• Product-form pricing
• Image pricing
• Channel pricing
• Location pricing
• Time pricing
• Yield pricing
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86. Price-Adjustment Strategies
Segmented pricing is used
when a company sells a
product at two or more
prices even though the
difference is not based
on cost

87. Segmented pricing
a) Customer segment pricing: different customers pay
different prices for the same product or service . For
ex. Museums charge a lower admission for students .
b) Product from pricing: different versions of the product
are priced differently but not according to differences
in their costs
c) Location pricing: company charges different prices for
different locations
d) Time pricing : a firm varies it prices by the season , the
month , the day and even the hour
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88. Price-Adjustment Strategies
Segmented Pricing
To be effective:
• Market must be segmentable
• Segments must show different degrees of
demand
• Watching the market cannot exceed the extra
revenue obtained from the price difference
• Must be legal

89. Price-Adjustment Strategies
Psychological pricing occurs when sellers consider the
psychology of prices and not simply the economics”
the price is used to say something about the product”
Reference prices are prices that buyers carry in their
minds and refer to when looking at a given product
– Noting current prices
– Remembering past prices
– Assessing the buying situations
– For example : a company could display its product
next to more expensive ones in order to imply that
it belongs in the same class

90. Initiating and Responding to Price Changes
Competitor
Reactions
to Initiating
Price Price Cuts
Changes
Price
Changes
Buyer
Reactions Initiating
to Price
Price Increases
Changes
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91. Traps in Price Cutting Strategies
• Low-quality trap
• Fragile-market-share trap
• Shallow-pockets trap
• Price-war trap
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92. Should We Raise Prices?
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93. Methods for Increasing Prices
• Delayed quotation pricing
• Escalator clauses
• Unbundling
• Reduction of discounts
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94. Price Changes
Initiating Pricing Changes
Price cuts occur due to:
• Excess capacity
• Increased market share
Price increase from:
• Cost inflation
• Increased demand
• Lack of supply

95. Price Changes contd..
Buyer Reactions to Pricing Changes
Price increases Price cuts
• Product is “hot” • New models will
that means be available
better made • Models are not
• Company is selling well
greedy • Quality issues

96. Price Changes
Responding to Price Changes
Questions
– Why did the competitor change the price?
– Is the price cut permanent or temporary?
– What is the effect on market share and profits?
– Will competitors respond?

97. Price Changes contd…
Responding to Price Changes
Solutions
– Reduce price to match competition
– Maintain price but raise the perceived value
through communications
– Improve quality and increase price
– Launch a lower-price “fighting” brand

98. Brand Leader Responses to Competitive Price Changes
Has Competitor Cut No Hold Current Price;
Price? Continue to Monitor
Competitor’s Price.
Will Lower Price
Negatively Affect Our No
Market Share & Profits?
Reduce Price
No Raise Perceived
Can/ Should Effective Quality
Action be Taken?
Yes Improve Quality
& Increase Price
Launch Low-Price
“Fighting Brand”
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98

99. A frame work for responding to Low-Cost Rivals

100. Public Policy and Pricing
Pricing Within Channel Levels
Price fixing: Sellers must set prices without
talking to competitors
Predatory pricing: Selling below cost with the
intention of punishing a competitor or
gaining higher long-term profits by putting
competitors out of business , this will protect
small sellers from larger ones

101. Public Policy and Pricing contd..
Pricing Across Channel Levels
Robinson-Patman Act prevents unfair price
discrimination by ensuring that the seller
offer the same price terms to customers at a
given level of trade

102. Public Policy and Pricing contd…
Pricing Across Channel Levels
Robinson-Patman Act
• Price discrimination is allowed:
– If the seller can prove that costs differ when
selling to different retailers
– If the seller manufactures different qualities of
the same product for different retailers

103. Public Policy and Pricing
Retail (or resale) price
maintenance is when a
manufacturer requires a
dealer to charge a specific
retail price for its products

104. Public Policy and Pricing contd…
Pricing Across Channel Levels
Deceptive pricing occurs when a seller states prices or
price savings that mislead consumers or are not
actually available to consumers
• Scanner fraud failure of the seller to enter current
or sale prices into the computer system
• Price confusion results when firms employ pricing
methods that make it difficult for consumers to
understand what price they are really paying

105. Loss Leader
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106. Loss Leader contd..
• Goods/services deliberately sold below cost to
encourage sales elsewhere
• Typical in supermarkets, e.g. at Christmas, selling
bottles of gin at £3 in the hope that people will be
attracted to the store and buy other things
• Purchases of other items more than covers ‘loss’ on
item sold
• e.g. ‘Free’ mobile phone when taking on contract
package
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107. Psychological Pricing
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108. Psychological Pricing contd..
• Used to play on consumer perceptions
• Classic example - £9.99 instead of £10.99!
• Links with value pricing – high value goods
priced according to what consumers THINK
should be the price
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109. Price Discrimination
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110. Price Discrimination contd..
• Charging a different price
for the same good/service
in different markets
• Requires each market to
be impenetrable
• Requires different price
elasticity of demand in
each market
Prices for rail travel differ for the same journey at
different times of the day
Copyright: iStock.com
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111. Destroyer Pricing/Predatory Pricing
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112. Destroyer/Predatory Pricing
• Deliberate price cutting or offer of ‘free
gifts/products’ to force rivals (normally smaller
and weaker) out of business or prevent new
entrants
• Anti-competitive and illegal if it can be proved
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113. Absorption/Full Cost Pricing
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114. Absorption/Full Cost Pricing contd..
• Full Cost Pricing – attempting to set price to
cover both fixed and variable costs
• Absorption Cost Pricing – Price set to ‘absorb’
some of the fixed costs of production
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115. Marginal Cost Pricing
- - . PM 115

116. Marginal Cost Pricing contd..
• Marginal cost – the cost of producing ONE extra or ONE fewer
item of production
• MC pricing – allows flexibility
• Particularly relevant in transport where fixed costs may be
relatively high
• Allows variable pricing structure – e.g. on a flight from London
to New York – providing the cost of the extra passenger is
covered, the price could be varied a good deal to attract
customers and fill the aircraft
- - . PM 116

117. Marginal Cost Pricing contd...
• Example:
Aircraft flying from Bristol to Edinburgh – Total Cost (including normal profit) =
£15,000 of which £13,000 is fixed cost*
Number of seats = 160, average price = £93.75
MC of each passenger = 2000/160 = £12.50
If flight not full, better to offer passengers chance of flying at £12.50 and fill the
seat than not fill it at all!
*All figures are estimates only
- - . PM 117

118. Contribution Pricing
- - . PM 118

119. Contribution Pricing contd..
• Contribution = Selling Price – Variable (direct costs)
• Prices set to ensure coverage of variable costs and a
‘contribution’ to the fixed costs
• Similar in principle to marginal cost pricing
• Break-even analysis might be useful in such
circumstances
- - . PM 119

120. Target Pricing
- - . PM 120

121. Target Pricing contd..
• Setting price to ‘target’ a specified profit
level
• Estimates of the cost and potential revenue
at different prices, and thus the break-even
have to be made, to determine the mark-
up
• Mark-up = Profit/Cost x 100
- - . PM 121

122. Chapter Questions
• How do consumers process and evaluate prices?
• How should a company set prices initially for products
or services?
• How should a company adapt prices to meet varying
circumstances and opportunities?
• When should a company initiate a price change?
• How should a company respond to a competitor’s
price challenge?
- - . PM 122

123. One Final Word
“ A product is not a product unless it sells.
Otherwise, it’s just a museum piece…”
Ted Levitt

124. Marketing Debate
 Is the right price a fair price?
Take a position:
1. Prices should reflect the value that
consumers are willing to pay.
or
2. Prices should primarily just reflect the cost
involved in making a product.

125. Marketing Discussion
 Think of all the pricing methods
described in the chapter.
 As a consumer, which pricing method
do you personally prefer to deal with?
 Why?

126. Reference
• Kotler, Kelly, Koshy and Jha (2009) Marketing Management: A South
Asian Perspective, 14th ed. Pearson Prentice Hall, pp.368-99