Principles of marketing: Lecture 25

MGT301
Principles of Marketing
Lecture­25


Summary
of  
Lecture­24



Factors Affecting Price Decisions           


Internal Factors
Internal Factors

Positioning
Objectives

Pricing
Pricing
Decisions
Decisions

External Factors
External Factors

Target

Market

Today’s Topics
Setting Pricing Policy


1. Selecting the pricing objective
2. Determining demand
3. Estimating costs
4. Analyzing competitors’
costs, prices, and offers
5. Selecting a pricing method
6. Selecting final price


Pricing Objectives

Profit­
Oriented

Sales­
Oriented

Status
Quo


Pricing
Pricing Objectives
Objectives

Profit
Oriented

Pricing
Objectives

Target
Return
Maximize
Profits


Pricing
Pricing Objectives
Objectives

Profit
Oriented

Pricing
Objectives

Sales
Oriented

Target
Return
Maximize
Profits

Dollar or Unit
Sales Growth
Growth in
Market Share


Pricing
Pricing Objectives
Objectives

Profit
Oriented

Pricing
Objectives

Sales
Oriented

Status Quo
Oriented

Target
Return
Maximize
Profits
Dollar or Unit
Sales Growth
Growth in
Market Share

Meeting
Competition
Nonprice
Competition


General Pricing Approaches




Cost­based Pricing
Value­based Pricing
Competition­based Pricing


Cost-based pricing


 Cost plus pricing
– add a standard mark up to cost




Break even pricing
– total costs = total revenue

Break­even…for
Determining Target Return Price and Break­even 

Volume


1000

Total cost

Rupees (in thousands)

1200
1200

Total revenue
Target profit

800

Break-even point

600
400

Fixed cost

200
0

10

20

30

40

50

Sales volume in units (thousands)


Fixed Cost
Break­even Volume = ­­­­­­­­­­­­­­­
Price ­ Variable 
Cost


Value­Based Pricing
Uses buyer’s perceptions of value not the seller’s cost as 
the basis for pricing.
 Price is considered along with the other marketing­mix 
variables before the marketing program is set.



Cost­Based 
Pricing

Value­Based 
Pricing

Product
Product

Customer
Customer

Cost
Cost

Value
Value

Price
Price

Price
Price

Value
Value

Cost
Cost

Customers
Customers

Product
Product

Competition­based pricing


Setting
Setting Prices
Prices

Going-Rate
Going-Rate
Company
Company Sets
Sets Prices
Prices Based
Based on
on What
What
Competitors
Competitors Are
Are Charging.
Charging.

?

Sealed-Bid
Sealed-Bid
Company
Company Sets
Sets Prices
Prices Based

Based on
on
What
What They
They Think
Think Competitors
Competitors
Will
Will Charge.
Charge.


New Product Pricing Strategies


Market Skimming



Market Penetration 


Market­Skimming 


Setting a High Price for a New Product to “Skim” Maximum 
Revenues from the Target Market.



Results in Fewer, But More Profitable Sales.



I.e. Intel


Use Under These Conditions




Product’s quality and image must support its higher price.
Costs can’t be so high that they cancel the advantage of 
charging more.
Competitors shouldn’t be able to enter market easily and 
undercut the high price.


Market Penetration 


Setting a Low Price for a New Product in Order to 
“Penetrate” the Market Quickly and Deeply.



Attract a Large Number of Buyers and Win a Larger Market 
Share.



I.e. Dell


Use Under These Conditions


Market must be highly price­sensitive so a low price produces 
more market growth.



Production/distribution costs must fall as sales volume 
increases.



Must keep out competition & maintain its low price position or 
benefits may only be temporary.