Page 374 - Foundations of Marketing

Pricing Concepts and Management | Chapter 12 341

prevails, a marketer needs competitive price information to ensure that a firm’s prices are the
same as, or slightly lower than, competitors’. In some instances, an organization’s prices are
designed to be slightly above competitors’ prices, such as with Apple brand products, to lend
an exclusive image.

SELECTION OF A BASIS FOR PRICING LO 6 . Describe the bases used
for setting prices.
The sixth step in establishing prices involves selecting a basis for pricing: cost, demand, and/
or competition. The appropriate pricing basis is affected by the type of product, the market
structure of the industry, the brand’s market share position relative to competing brands, and
customer characteristics. Although we discuss each basis separately in this section, an orga-
nization generally considers at least two, or perhaps all three, dimensions. For example, if a
company uses cost as a primary basis for setting prices, its marketers are still aware of and con-
cerned about competitors’ prices. If a company uses demand as a basis for pricing, marketers
still must consider costs and competitors’ prices. Indeed, cost is a factor in every pricing deci-
sion because it establishes a price minimum below which the firm will not be able to recoup its
production and other costs. Demand, likewise, sets an effective price maximum above which
customers are unlikely to buy the product. Setting appropriate prices can be a difficult balance
for firms. A high price may reduce demand for the product, but a low price will hurt profit
margins and may instill in customers a perception that the product is low quality. Firms must
weigh many different factors when setting prices, including costs, competition, customer buy-
ing behavior and price sensitivity, manufacturing capacity, and product life cycles.

Cost-Based Pricing

With cost-based pricing , a flat dollar amount or percentage is added to the cost of the
product, which means marketers apply a desired level of profit to the cost of the product.
Cost-based pricing does not necessarily take into account the economic aspects of supply and
demand, nor must it relate to just one pricing strategy or pricing objective. It is a straightfor- cost-based pricing Adding a
ward and easy-to-implement method. Two common forms of cost-based pricing are cost-plus dollar amount or percentage to
and markup pricing. the cost of the product

Going Green

Can a Nickel Change Behavior?

Can a few cents make a big difference to the environ- each paper bag, part of the city’s push for zero waste
ment? When Ireland passed a law requiring shoppers to by 2020. Other cities have also imposed bans or bag
pay about 20 cents for each plastic bag, usage plummeted charges or both.
by 94 percent in a matter of months. Similarly, demand Meanwhile, retailers are taking the initiative to get rid
dropped dramatically in India when retailers began charg- of plastic bags or discourage use by charging customers.
ing a few rupees per plastic bag. Now some U.S. cities are Metro, a Canadian supermarket chain, began charging a
stepping up efforts to reduce litter and keep bags out of nickel per bag in 2009. Within a month, bag usage had
landfills, with retailers doing their part as well. fallen by half—and within 18 months, bag usage was
For example, although San Francisco stopped down by 80 percent. “Five cents might not be a lot of
supermarkets from using plastic bags for customer money, but it seems to be enough to make people change
c
purchases in 2007, stores must charge 10 cents for their habits,” says a Metro manager.

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