PRICING

1. Topic 6

2. You pay rent for
your apartment,
tuition for your
education and a fee
to your physician or
dentist
The airline,
railway, taxi and
bus companies
charge you a
fare
Local bank charge
you interest for
the money you
borrow
The price for
driving
your car
is a toll

4. The amount of money
charged for a product
or service, or the sum
of the values that
consumers exchange
for the benefits of
having or using the
product or service

5. COST
is the total of the fixed and
variable expenses (costs to you)
to manufacturer or offer your
product or service.
PRICE
is the selling price per unit
customers pay for your product
or service.
So, the price you set is the cost to the customer. Ideally, it should
be higher than the costs you incurred in producing the product.

6. 6.2 : 3 MAJOR PRICING STRATEGIES
• Good-Value Pricing
• Value-Added Pricing
i. Customer Value-Based
Pricing
• Incremental-Cost Pricing
• Break Even Analysis and Target
Profit Pricing
ii. Cost-Based Pricing
• Pricing Current Rate
• Pricing Closed Bid
iii. Competitive-Based
Pricing

7. i. Customer Value-Based Pricing
 Value-based pricing is a strategy of setting prices primarily based on a consumer's
perceived value of the product or service.
 Meaning, companies base their pricing on how much the customer believes a
product is worth.
 For example the price of a plate of fried noodles that are enjoyed in different
places.
• A plate of fried noodles probably worth RM2.50 in the shop, in the air-
conditioned restaurant RM4.00 and RM15.00 in the hotel restaurant.
• Any restaurant that can put a higher price because of the increased
atmosphere enjoyed by the purchaser.

8. Good-Value Pricing Value-Added Pricing
• Marketers offering the right
combination of quality and good
service at a fair price .
• Mainly used for less-expensive
products
• Marketers offer much less value – but
at even lower prices
• Example: Air Asia
• Passengers flying the low-cost
airlines won’t get much value,
but pay a price matching that
value.
• Marketers highlight the added value
and services to a product and charge a
higher price than competitors’
offerings.
• Marketers add features and in return
marketers charge more for the value-
added product.
• Example: Malaysia Airlines (MAS)
• Flying with MAS airlines will cost
customers much more but
customers are willing to spend
that additional price because
they will get more value in terms
of comfort, luxury, premium
service and so further.
There are two types of customer value-based pricing

9. ii. Cost-Based Pricing
 Cost-based pricing is the practice of setting prices based on the cost
of the goods or services being sold.
 A profit percentage or fixed profit figure is added to the cost of an
item, which results in the price at which it will be sold.
 Two types of cost-based pricing
1. Incremental-Cost Pricing
2. Break Even Analysis and Target Profit Pricing

10. Incremental-Cost Pricing Break Even Analysis and Target Profit Pricing
• The simplest pricing method.
• Adding a standard markup to the cost of the
product.
• Example : Toaster manufacturer had the following
costs and expected sales :
Variable costs (VC) : RM10
Fixed costs (FC) : RM300,000
Expected Unit Sales (US) : 50,000 unit
Unit Cost = VC + FC
US
= RM10 + RM300,000 = RM16
50,000
 Manufacturer wants earn a 20% markup on sales :
Markup Price = ____Unit Cost___________
(1 - Desired Return on Sales)
= _RM16_
(1 - 0.2)
= RM20
Hence, profit of RM4 per unit
• The company determines the price at which it will
break even or make the target return.
Break-even Volume = __FC____
Price - VC
• Example : Toaster manufacturer had the following
costs and expected sales :
Fixed Cost : RM300,000 (regardless of sales
volume)
Variable Cost : RM10 (will rise with volume)
Price : RM20
Toaster break event volume
= RM300,000
RM20 - RM10
= 30,000 unit
That means, the company must sell 30,000 units at
RM20 each to breakeven. If it wants to make a profit,
it needs to sell more than 30,000 units.

12. iii. Competition-Based Pricing
 This method lets a firm consider the price of competing products before setting the
initial price.
 There are two types of Competitive-Based Pricing :
Pricing Current Rate Pricing Closed Bid
• Firms bases its price largely on following
competitors’ prices rather than on company
costs or demand
• Firms might charge the same, more or less than
its competitors.
• Firms that are smaller will follow the market
leader. When leaders change market prices, they
also change their prices.
• Some firms may charge a bit more or less from
their competitors, but they hold the amount of
difference constant
• The pricing is quite popular in the industrial
market.
• Setting price based on how the firm thinks
competitors will price rather than on its own
coast or demand
• Used when a company bids for jobs
• When a firm wants to win a contract, it should
put a lower price than competitors.
• But firms cannot set prices below cost because it
would threaten the company's position.
• It also cannot put too high a price on the cost of
which will reduce the chances of winning the
contract.

13. MARKET-SKIMMING
PRICING
MARKET-PENETRATION
PRICING
• Setting a high price for a new
product to skim maximum
revenues layer by layer from the
segments willing to pay the high
price; then reducing the price
later.
• Setting a low price for a new
product in order to attract a
large number of buyers and a
large market share; the price is
then increased

14.  To receive maximum profit
 High price helps in covering the cost
of production.
 This is a good strategy to use if there
are few competitors for the
company’s product
 Production is limited due to
technological difficulties or lack of
skilled craft people
 Profits are high but there is a risk - if
people don't want to pay high prices
the company may lose out.

15.  There are a lot of competitors who
control a large portion of the market
 To penetrate the market quickly.
 To attract more and more
customers
 Can help in increasing sales of the
product in short period.
 Build brand loyalty

16. 6.4 : PRODUCT MIX PRICING
STRATEGIES

17. PRODUCT LINE PRICING
 Firm decide on the price steps to set between the various products in line
 The price steps should take into account:
 cost differences between the products in the line,
 customer evaluation of different features, and
 competitors’ prices
 If the price difference between products is small, buyers usually will buy
the more advanced product.
 If the price difference is large, customers will generally buy the less
advanced products
PRODUCT LINE PRICING

19. OPTIONAL FEATURES PRICING
 Pricing optional or accessory products sold with the main
product
 an organisation charges extra for an added feature that it
provides and the prices are kept on the basis of the feature
which is being provided.
 Eg.
 Hotels and resorts will charge more for scenery facing
views.
 Cars and accessories

20. Honda Civic 1.8
Main product :
Basic actual vehicle equipment
offers 1.8vtec engine, body, tires,
door, headlights etc.
Optional product :
Pricing can order in addition such
as modulo package included
skirting, spoiler, door visors, sport
pedal etc.

21. CAPTIVE-PRODUCT PRICING
 Pricing products that must be used with the main
product
 Companies introduced the main product at very low
cost (printers) and they are selling the supporting
products or the ancillary products at a good margin.
 For example:
 Gillette will often price the razor at or below cost and make the
profit on the blades
 Manufacturers of printers often price them low and set high mark-
ups on printer cartridges.

22.  Epson
Main product – printer
Captive product – cartridges
Gillette
Main product – Razor
Captive product – Blades

23. BY-PRODUCT PRICING
By-product pricing refers to setting a price for by-products to
make the main product's price more competitive
Pricing of low-values of by-products in order to get rid of
them or to earn extra margin in profits that covers the cost of
storing or delivering them
For example; - Zoo sells manure to farmers

24. Sugar cane with husk
 Sugarcane is used to make sugar but after making sugar, the
cane is sold off to building material manufacturers and sold off
as wood material.

25. PRODUCT BUNDLE PRICING
 Sellers often bundle their
products and features at a set
price
 Used to push more product in the
market at a lower price point.
 This strategy helps many
companies to increase sales, and
to get rid of the unused products.
 This bundle pricing strategy also
attracts the price conscious
consumer
 It is a favorite tactic of start-up
brands.

26. Acer
Main Product : computer
Bundle : offer a computer
package for their customers
that includes:
 a computer
 a printer
 a mouse pad
 a scanner

27. HIGHLIGHT!!!