Price is 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.

Value-based pricing uses buyers’ perceptions of value, not the seller’s cost as the basis for setting price.

Cost-based pricing involves setting prices based on the costs of producing, distributing and selling the product plus a fair rate of return for the company’s effort and risk.

Costs take two forms, fixed and variable.

The experience curve refers to the drop in the average per-unit production cost that comes with accumulated production experience.

Cost-plus pricing
- Simplest method of pricing
- Involves adding a standard mark-up to the cost of the product
A mark-up or mark-down is the difference between the selling price and cost as a percentage of selling price or cost

Break-even pricing means setting price to break even on the costs of making and marketing a product.
A variation called target profit pricing means setting price to make a target profit.

Other factors affecting price
Internal
-Overall marketing strategy, objectives, and mix
-Organisational considerations
External
-Nature of the market and demand
-Competitors’ strategies and prices
-Environmental factors

Target costing is a technique to support pricing decision, which starts with deciding a target cost for a new product and works back to designing the product.

Pricing in different types of markets
- Pure competition
- Monopolistic competition
- Oligopolistic competition
- Pure monopoly

Price elasticity is a measure of the sensitivity of demand to changes in price
If demand hardly changes with a small change in price, we say the demand is inelastic
If demand changes greatly, we say the demand is elastic

Assessing competitors’ pricing strategies
-How does the company’s market offering compare with competitors’ offerings?
-How strong are current competitors?
-What are their current pricing strategies?
-How des the competitive landscape influence customer price sensitivity?

New-product pricing strategies
-Market skimming means setting a high price for a new product to skim maximum revenues layer by layer from the segments willing to pay the high price
-Market penetration means setting a low price for a new product to attract large numbers of buyers and a large market share

Product-mix pricing strategies
- Product line pricing
- Optional-product pricing
- Captive-product pricing
- By-product pricing
- Product-bundle pricing

Price-adjustment strategies

• Discount and allowance pricing

• Segmented pricing

• Psychological pricing

• Promotional pricing

• Geographical pricing

• Dynamic pricing

• International pricing

Types of discounts and allowances

• Cash discount

• Quantity discount

• Quantity premium

• Trade discount

• Seasonal discount

• Trade-in allowance

• Promotional allowance

Segmented pricing strategies
-Customer-segment pricing
-Product-form pricing
- Location pricing
- Time pricing

Psychological pricing is a pricing approach that considers the psychology of prices and not simply economics; the price is used to say something about the product.

Promotional pricing practices

• Loss leaders

• Special-event pricing

• Cash rebates

• Low-interest financing

• Longer warranties

• Free maintenance

• Discounts

Geographic pricing strategies

• FOB-origin pricing

• Uniform delivered pricing

• Zone pricing

• Basing-point pricing

• Freight-absorption pricing

Dynamic pricing means charging different prices depending on individual customers and situations.

Advantages to sellers

• Sellers can target offers to specific customers

• Prices can be adjusted according to changes in demand or cost

Advantages to buyers

• Instant product and price comparisons are posible

• Prices can be negotiated at online auctions and exchanges

Price changes

• Initiating price cuts

• Initiating price increases

• Buyer reactions to price changes

• Competitor reactions to price changes

Responses to competitor price changes

• Reduce price

• Raise perceived quality

• Improve quality and increase price

• Launch low-price ‘fighting brand’

• What are the differences between cost-based and value-based pricing? Why is it important for marketers to take into account customer value perceptions when setting price?

• Discuss the internal and external factors that affect price and how they might affect the pricing of a new Samsung MP3 player.

• Why would BlackBerry choose market-skimming pricing rather than market penetration pricing for a new line of smart phones? Why would Nintendo choose market-penetration rather than market skimming for its line of Wii games console?

• How is dynamic pricing used on the Internet? What are the benefits?