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Price is the only one of the 4 P’s that produces revenue, all over elements produce costs. Price is also the easiest element of the marketing mix to adjust, and communicates the intended value of the offering.

Holistic marketers take into account the company, their customers, the competition, and the marketing environment in determine prices. Pricing decisions must be consistent with the firm’s marketing strategy and its target market and brand positioning's.

Pricing takes many forms and performs many functions. Rent, tuition, fares, fees, rates, tolls, retainers, wages, and commissions are all the price people pay for some good or service.

Price also has many components. Prices can be altered through rebates and incentives, and payment can be made with more than cash, such as through the use of frequent flyer miles.

Instant price comparisons: mySimon.com. PriceSCAN.com, Intelligent shopping agents (“bots”).

Name your own price: Priceline.com.

Free products: Open Source, the free software movement.

Effectively designing and implementing pricing strategies requires a thorough understanding of consumer pricing psychology and a systematic approach to setting, adapting, and changing prices.

Purchase decisions are based on how consumers perceive prices and what they consider the current actual price to be—not on the marketer’s stated price.

Reference prices: consumers compare an observed price to an internal reference price they remember or an external frame of reference such as a posted “regular retail price.”

Price-quality inferences: consumers use price as an indicator of quality. Image pricing is especially effective with ego-sensitive products such as perfumes, expensive cars, and designer clothing.

Price endings: Many sellers believe prices should end in an odd number. Customers see an item priced at $299 as being in the $200 rather than the $300 range; they tend to process prices “left-to-right” rather than by rounding. Another explanation for the popularity of “9” endings is that they suggest a discount or bargain. Prices that end with 0 and 5 are also popular and are thought to be easier for consumers to process and retrieve from memory.

“A Black T-Shirt” example illustrates the large part consumer psychology plays in determining three different prices for essentially the same item.

A firm must consider many factors in setting its pricing policy.31 The chart above summarizes the six steps in the process.

Survival is a short-run objective for firms  to deal with overcapacity, intense competition, or changing consumer wants.

Maximize current profits emphasis current performance . But firms may sacrifice long-run performance by ignoring the effects of other marketing variables, competitors’ reactions, and legal restraints on price.

Maximum market share utilizes a market-penetration pricing strategy, in which a higher sales volume will lead to lower unit costs and higher long-run profit.

Maximum market skimming utilizes a market-skimming pricing strategy, in which prices start high and slowly drip over time. This strategy can be fatal if competitors price low.

A firm striving to be a product-quality leader offers brands that are “affordable luxuries” –products or services characterized by high levels of perceived quality, taste, and status with a price just high enough not to be out of consumers’ reach.

Other objectives: Nonprofit and public organizations may have other pricing objectives.

The demand curve sums the reactions of many individuals with different price sensitivities.

Customers are less price sensitive to low-cost items or items they buy infrequently. They are also less price sensitive when (1) there are few or no substitutes or competitors; (2) they do not readily notice the higher price; (3) they are slow to change their buying habits; (4) they think the higher prices are justified; and (5) price is only a small part of the total cost of obtaining, operating, and servicing the product over its lifetime.

Firms estimate demand curves using: surveys, price experiments, and statistical analysis.

Marketers need to know how responsive, or elastic, demand is to a change in price. Research findings show that  (1) The average price elasticity across all products, markets, and time periods studied was –2.62. (2)  Price elasticity magnitudes were higher for durable goods than for other goods, and higher for products in the introduction/growth stages of the product life cycle than in the mature/decline stages. (3) Inflation led to substantially higher price elasticities, especially in the short run. (4) Promotional price elasticities were higher than actual price elasticities in the short run (although the reverse was true in the long run). (5) Price elasticities were higher at the individual item or SKU level than at the overall brand level.

The normally inverse relationship between price and demand is captured in a demand curve shown above: The higher the price, the lower the demand. For prestige goods, the demand curve sometimes slopes upward.

Demand sets the price ceiling while costs set the floor. Costs include production, distribution, and selling expenses, plus a fair return (profit) to cover effort and risk. The company wants to charge a price that covers its cost of producing, distributing, and selling the product, including a fair return for its effort and risk. Yet when companies price products to cover their full costs, profitability isn’t always the net result.

Fixed costs, also known as overhead, are costs that do not vary with production level or sales revenue. Variable costs vary directly with the level of production. Total costs consist of the sum of the fixed and variable costs for any given level of production. Average cost is the cost per unit at that level of production; it equals total costs divided by production.

To price intelligently, management needs to know how its costs vary with different levels of production. Figure 14.2 provides an example of choosing optimal size for a production plant at TI. 

Experience curve or learning curve refers to the decline in the average cost with accumulated production experience.

Costs can also change as a result of a concentrated effort by designers, engineers, and purchasing agents to reduce them through target costing. Market research establishes a new product’s desired functions and the price at which it will sell, given its appeal and competitors’ prices. This price less desired profit margin leaves the target cost the marketer must achieve.

Figure 14.3 shows that average cost falls with accumulated production experience.

Within the range of possible prices determined by market demand and company costs, the firm must take competitors’ costs, prices, and possible price reactions into account. If the firm’s offer contains features not offered by the nearest competitor, it should evaluate their worth to the customer and add that value to the competitor’s price. If the competitor’s offer contains some features not offered by the firm, the firm should subtract their value from its own price. Now the firm can decide whether it can charge more, the same, or less than the competitor.

Prices fall between the price floor (costs) and price ceiling (customer demand based on their assessment of unique features). The price of competitive offerings and substitute goods serve as an orientation point.

Figure 14.4 summarizes the three major considerations in price setting. Companies select a pricing method that includes one or more of these three considerations. 

Standard markup is the most basic method used to calculate price, used by construction companies, lawyers, and accountants. This method does not take into account current demand, perceived value, or competition.

In target-return pricing, the firm determines the price that yields its target rate of return on investment. Public utilities, which need to make a fair return on investment, often use this method.

Break-Even Chart for Determining Target- Return Price and Break-Even Volume.

Customer’s perceived value is determined by the buyer’s image of the product performance, the channel deliverables, the warranty quality, customer support, and softer attributes such as the supplier’s reputation, trustworthiness, and esteem. Companies must deliver the value promised by their value proposition, and the customer must perceive this value. Firms use the other marketing program elements, such as advertising, sales force, and the Internet, to communicate and enhance perceived value in buyers’ minds.

Value pricing is not just setting lower prices; it is a matter of reengineering the company’s operations to become a low-cost producer without sacrificing quality. As shown in the graph, the company reduces costs from C1 to C2, while maintaining the same level of quality. Prices are reduced giving buyers greater value.

EDLP – Retailers that maintains an everyday low price policy charges a constant price with little or no price promotions and special sales. Consistent prices eliminates week-to-week price uncertainty. Retailers adopt an EDLP is that constant sales and promotions are costly and have eroded consumer confidence in everyday shelf prices.

High-low pricing is where the retailer charges higher prices on an everyday basis but runs frequent promotions with prices temporarily lower than the EDLP level.

Going-rate pricing is popular for commodities such as steel, paper, and fertilizer as all firms normally charge the same price. Small firms follow the leader, changing prices when the market leader prices change.

Auction-type pricing is growing more popular in the electronic marketplaces.

English auctions (ascending bids) have one seller and many buyers. E.g., eBay, Amazon.com.

Dutch auctions (descending bids) feature one seller and many buyers (an auctioneer announces a high price for a product and then slowly decreases the price until a bidder accepts) , or one buyer and many sellers (the buyer announces something he or she wants to buy, and potential sellers compete to offer the lowest price. E.g., FreeMarkets.com.

Sealed-bid auctions let would-be suppliers submit only one bid; they cannot know the other bids. The U.S. government often uses this method to procure supplies.

In selecting the final price, firms must consider factors including impact of other marketing activities, company pricing policies, gain-and-risk-sharing pricing, and the impact of price on other parties.

Companies rarely realize the same profit from each unit of a product that it sells due to variations in geographical demand and costs, market-segment requirements, purchase timing, order levels, delivery frequency, guarantees, service contracts, and other factors.

Several price-adaptation strategies company usually use are: geographical pricing, price discounts and allowances, promotional pricing, and differentiated pricing.

Companies increase prices to raise profits,  to reduce rising cost due to cost inflation, or when facing overdemand. Companies must carefully manage customer perceptions when raising prices.

Companies cut prices to utilize excess plant capacity,  to dominate the market through lower costs, or to deal with declining market share or economic recession.

Companies must anticipate competitor price changes and prepare contingent responses. The firm facing a competitor’s price change must try to understand the competitor’s intent and the likely duration of the change. Strategy often depends on whether a firm is producing homogeneous or nonhomogeneous products. A market leader attacked by lower-priced competitors can seek to better differentiate itself, introduce its own low-cost competitor, or transform itself more completely.