“Price” as one Parameter in the Marketing Mix

Term Paper, 2009

47 Pages, Grade: 1,3


Table of Contents

Executive Summary

List of Abbreviations

List of Figures

List of Tables

1. Introduction

2.1 Concept of Pricing Policy
2.2 Goals of Price Policy
2.3 What is a Price?
2.3.1 Definition of Price
2.3.2 Price and Consumer Value
2.3.3 The Drivers of Price

3. Methods of Setting Prices
3.1 Cost Orientated Pricing
3.2 Competitor Orientated Pricing
3.3 Customer Orientated Pricing

4. Price Strategies
4.1 New-Product Pricing Strategies
4.2 Price-Adjustment Strategies
4.3 Other Strategies

5. Ethical Constraints on Pricing

6. Results and Conclusion


ITM Checklist


Executive Summary

Contemporary times are characterized by quick, dynamic, and continuing changes in the market. Therefore, companies have to adapt flexibly and innovatively to these changes in order to stay competitive and cope with the increasing pressure of competition. One main possibility to compete is implementing an appropriate and effective pricing policy. Companies must face the challenge to adopt their pricing strategy with the marketing as well as the general strategy of the company by taking a various number of influencing factors into account.

The assignment focus the following questions: What is pricing and where can it be found in the marketing mix? What are the main differences between price and value? Which are the main methods of price setting and price strategies and are there any ethical constraints on pricing?

This assignment is divided into four parts which describe the fundamentals of pricing, price setting methods, pricing strategies and ethical constraints on pricing. At first the theoretical framework of pricing policy is briefly introduced when pricing is identified, beneath product, place and promotion, to be one part of the marketing mix. Furthermore the pricing policy is described by revealing its problem when it has to balance the two main interests of the company which are to satisfy the consumer’s needs and to create revenue for the company. In addition a company has to consider a numerous variety of determinants which influence prices like costs, consumers and competitors as well as further drivers like the environment or the organizational behavior.

After this short introduction on prices the main important methods of price setting are described including the cost based pricing, the competitor based pricing and the customer based pricing. Whereas the cost based pricing is based on the costs a product created during the production process, the competitor based pricing is related to the market situation as well as the overall situation of the competitor. The last part is the customer based pricing which describes mainly the importance of the perceived value to the costumer for a product and its price. Additionally the next chapter deals with the elementary price setting strategies and illustrates the newproduct and price-adjustment strategies as well as further strategies. According to a new product a company can decide whether to establish skimming or penetration pricing. The price-adjustment strategy includes that the company tries to set prices which fit a lot of individual customers. All these different pricing strategies can be very useful to establish the product in a market properly. However they can have a large impact on profit, when a higher or lower price can dramatically change both gross margins and sales volume. Pricing and especially pricing strategies might increase profit and lead to a sustainable competitive advantage.

The last chapter tries to deal with the question whether there exists an ethical pricing or not. Consequently the levels for ethical constraints have been examined to conclude that there is no single correct decision on whether the price is set up in an ethical context. The increasing impact of the ethical question of fair prices can be stated as a new challenge, companies have to cope with in an increasingly competitive, globalized and most importantly customer-driven business environment.

In conclusion pricing can be identified as an effective approach for ensuring that a company has profitable and competitive products including a variety of strategies and methods to bear the arousing challenges in today’s environment.

List of Abbreviations

illustration not visible in this excerpt

List of Figures

Figure 1: The Marketing Mix

Figure 2: Factors influencing price

Figure 3: Types of Costs

Figure 4: Thoughtfully Reacting to Price Competition

Figure 5: Options for Reacting to Price Competition

Figure 6: Value Based Pricing versus Cost Based Pricing

List of Tables

Table 1: Advantages and disadvantages of skimming pricing and penetration


Table 2: Overview of forms of discount

Table 3: Overview of forms of segmented pricing

Table 4: Overview of types of geographical pricing

Table 5: Overview of types of product-mix pricing strategies

Table 6: When is a Price ethical?

1. Introduction

When it comes to making buying decision, for example to buy a new car, the consumer is facing a numerous variety of prices for only one product. He or she has to decide whether to take the newest launched model or either the traditional one, with or without an insurance package, delivery or even buy from the internet. Naturally the consumer is reluctant to buy expensive products, when the run on cheap ones are omnipresent in today’s market. Companies try to undercut one another and conduct themselves in would-be price battles. But all this is owed to the fact that on the one side the consumers have decreasing real earnings, which lead to a higher price sensibility, and on the other side the companies look at saturated markets. These markets and their exhausted possibilities to differentiate the products cause a mass competition with the active implementation of pricing as a part of the marketing mix and as a competition instrument. This trend can not only be identified in the business to consumer (B2C) market, but it can also be found in the business to business (B2B) market. In addition an increasing consolidation processes in large parts of the industry and retailing business is recognizable by applying purchasing agents to trade cheaper prices by using their power of demand. Classical examples are the two big discounters like ALDI and LIDL, when it is obvious that they pass over these good conditions to their consumers and use this advantage in competition for their own business. Furthermore the internet with an increasing number of price comparison websites also contributes to this fight for the right price by offering price and product comparisons which hamper the strategies for a better price differentiation. A company’s survival and growth in such challenging and competitive environment depends among other things on the effectiveness of its applied pricing policy.

Problem Definition

Today’s companies have to face increasing competitive and challenging conditions. The main goal is to sustain and making profit by selling the products as certain prices. Consequently the price is influenced by a numerous variety of influencing factors, also known as drivers. Consequently companies have to face the tradeoff whether to focus the cost or the consumer when setting the price. Furthermore the question of ethical constraints when setting up a price arises more often and therefore has to taken in consideration.

“Price” as one Parameter in the Marketing Mix 2


In an increasing competitive environment; many companies are already looking at extending their activities towards pricing. While there are numerous different approaches, a company has to decide which strategy to choose. This assignment tries to analyze and support this decision by answering the following questions: What is pricing and where can it be found in the marketing mix? What are the main differences between price and value? Which are the main methods of price setting and price strategies and are there any ethical constraints on pricing?


The content of this work is based on literature research, focusing on price setting methods and pricing strategies. After a short introduction of the fundamentals of pricing by analyzing the classification of pricing in the marketing mix, setting the goals for pricing policy and giving the definition of pricing and prices, the assignment will focus the methods and strategies of setting a price. The three main approaches when setting a price - cost orientated, competitor orientated and consumer orientated - will be illustrated and characterized more closely by giving an example in each case. Furthermore a selection of the main common pricing strategies will be depicted. In the end there will be an example of possible ethical constraints. Finally the results will be summarized in a conclusion.

2. Fundamentals of Policy Pricing

Considering pricing it is very important to analyze the fundamentals of pricing by illustrating the concept and goals pricing policy and by illuminating the price as the elementary part more closely.

2.1 Concept of Pricing Policy

First of all it is useful to know what the meaning of pricing is. The wordbook says that pricing means to fix or to regulate a price. But pricing is much more than this, so if one talks about pricing it should be stated where it is arranged in the marketing mix which is guided by the marketing strategy. As shown in figure 1, the marketing mix consists of the four P-words: Price, Place, Promotion and Product. Armstrong and Kotler mention that these four factors are usually under control of the company (2009, p. 79). But the price is the only factor in the mix which includes direct revenue for the company whereas the other three imply only costs and create revenue only in an indirectly way. However, all the other three parts of the marketing mix are significantly necessary to make revenue, when you cannot earn money without the product.

illustration not visible in this excerpt

Figure 1: The Marketing Mix (adapted from: Marketingteacher 2009)

Since this assignment deals with pricing it will not go in further detail of marketing strategies but introduce briefly the basics of the marketing mix. Whereas Meffert include the payment agreement and trading conditions, this assignment implies the following approach where the price deals with the money a customer has to pay for a product (Meffert et al. 2007, p. 491). Place includes all the locations where goods are distributed, stored and transported. Promotion implies all the measures to make the product accessible to the customer like e.g. advertisement. Last but not least the product, which consists of all goods and services which the company launch into the market. Looking at the marketing mix it is important not to forget the customer’s view which can be described with the four C-words: Cost, Convenience, Communication and Costumer Solution. These four words should build the basic before thinking about how to create the four P (Armstrong and Kotler 2009, p. 84).

2.2 Goals of Price Policy

Setting prices is not just a reaction to special circumstances in the market. It should be rather the anticipatory managing of prices (Nagle and Holden 2002, p. 1). The price policy determines the company’s organization of the whole price building process. This includes also the relation to other departments like finance (ibid 2002, p.1). So one can say that the policy of pricing means the balance between the two main interests of a company which are: to satisfy the customers’ needs and to work cost-effective. Nagle and Holden mention that this is one of the most difficult tasks because pricing is often determined by disputes between these two interests (2002, p. 2). Anyway the pricing policy becomes more important to a company competing with market rivals. It decides over the rapidness, the quality and the frequency of pricing decisions which improve the competitiveness of the company.

2.3 What is a Price?

One of the most important and complex decisions a company has to make relates to the pricing of its products and services. The price influences the buying decision of the customer tremendously. Therefore it is important to examine the price with its types and its drivers more closely.

2.3.1 Definition of Price

It has been made clear through several articles, books, and other research that a price can be analyzed from different point of views. As for the economist’s view a price is equilibrium by the forces of supply and demand in the market, whereas the accountant’s point of view includes the aspects, that a price should cover costs so that the company can make profit. Considering the customer, a price is the amount of money the consumer has to pay and therefore it has to represent good value. Otherwise from the point of the marketing perspective, a price is an opportunity to gain competitive advantage and even to increase market share (Simon and Dolan 1997, pp. 10-14). According to Kotler and Armstrong (2009, p. 263) the price is “the amount of money charged for a product or service, or the sum of all the values that customers give up in order to gain the benefit of having or using a product or service.”

As price is the only element in the marketing mix that produces revenue; all other elements represents costs. Furthermore the price is one of the most flexible elements in the marketing mix, as unlike distribution channel or product feature, prices can be changed quickly (Kotler and Armstrong 2009, pp. 261-263). As companies today face a fierce and fast-changing price-environment, increasing customer price-consciousness companies may have to adapt quickly to price changes or may suffer from losing market share (Kuß 2006, p. 264). This customer price-consciousness leads to the question how the customer perceives the value of the product or service according to the price, which will be discussed in the following subchapter.

2.3.2 Price and Consumer Value

According to the customer the price for a product is the victim to be taken, to get the product. Therefore the net benefit for the customer is the benefit from the product deducted by the price (Kuß 2006, p. 268). But however, through buying the product or service the customer perceives a value. This includes all connected advantages for the customer (e.g. like reliability, punctuality at the delivery, durability) and additional value (e.g. guarantee, service). According to the company, it has to create the customer value with the product and then capture this value in the price. Consequently a company should persuade its customers to pay a higher price for the company’s brand, because it is justified by the greater value they gain. To put it like Kotler and Armstrong (2009, p. 262) the companies should “sell value, not price”. The challenge for the company is to find the price which meets the value perception of the customers. Finally the customer will decide whether the product is worth its price. Consequently the customer value should be considered when setting the price for a good or service. This process commonly known as pricing is a very important decision for the company. If consumers, whether private or organizational, perceives a price to be too high, they may purchase competitive brands or substitute products, leading to a loss of sales and profit for the company. If the price is too low, sales might increase, while profitability suffers. Thus pricing decision must be given a high attention and careful consideration when a company is launching a new product or even is establishing a change in price. Consequently it is very import to examine the different factors influencing and affecting pricing, illustrated in the next subchapter.

2.3.3 The Drivers of Price

Experts have identified numerous factors that influence pricing. Many of them have based their findings on Schmalen’s magical triangle of pricing (Schmalen 2001, pp. 431-432). Schmalen points out three main factors that need to be taken into account when speaking of pricing: costs, competitors and demands.

Prices should exceed the costs on the long-run, whereas it could be necessary for a company to reduce a price below the costs when trying to access a new market or to build up a strong position in a promising market (Kotler and Armstrong 2009, p. 266). The demand of the customer influences on the pricing decisions concern primarily the nature of the target market and expected reactions of the customers to a given price or change in price. There is definitely a tradeoff as the company wants to maximize profit whereas the customer wants to pay the price the good is worth or even the lowest possible price. Furthermore the prices and products of the competitors should be considered by analyzing the quality of the product and the intended position in the market (Kuß 2006, p. 267).

In addition these three influencing factors are the base for the distinct of methods to set prices, which will be illuminated in chapter 3.

According to Kotler and Armstrong (2009, pp. 263-274) further factors have been identified that overlap with the factors introduced by Schmalen but which give a more detailed view as regards to pricing. They are explained in the following: company strategy or objectives, organizational consideration, environment, market and product or substitute. Whereas costs, company strategy or objectives and organizational consideration are internal factors which can be influenced by the company; competitor, consumer, environment, market and product or substitute are more closely to be external factors (Peter and Donnelly 2004, pp. 162-168). An overview of the main influencing factors is given in figure 2.

illustration not visible in this excerpt

Figure 2: Factors influencing price (own illustration based on the magical triangle of Schmalen 2001, pp. 431-432)

Company strategy or objectives

Pricing also has to be consistent to the objectives of the company. The company may also seek a particular image through its pricing policies. Consequently pricing strategy also has to fit the overall marketing strategy of the company. For example as Porsche is widely known for premium cars of high quality, the company presents their products with a high value in advertisement1 and therefore tries to deemphasize the price. Consequently the pricing should fit into the whole marketing strategy and the company objectives (Meffert et al. 2007, p. 482).

Organizational consideration

As for the process of pricing management has to decide which department in the company should set the price. This can be established in different ways. Whereas in small companies the price is often set by the top management, in large international companies there are departments like product-line managers which are responsible for the pricing. In a retail organization the price often is negotiated at the point of sales between the customer and the salesman. A common known method of setting price is the integral approach when different departments like marketing, accounting, management and production management are involved in the process of pricing. However, the management has to set the pricing objectives and the general policies towards pricing (Kotler and Armstrong 2009, pp. 269-270).


The pricing is influenced by the environment, as the economic conditions have a strong impact on the price (Kuß 2006, p. 266). The current situation on the automotive market is a classical example. On the account of the recession and the economic crises prices of cars drop to a very low level, as the competitors intent to survive under these circumstances. But however there are other factors of the environment which influences pricing. In the case of Germany the government has introduced the so called “scrabbage premium” and contemplates to support the demand of cars. Furthermore the government can implement other regulations, e.g. minimum price for wages. All these factors influence the pricing of a company (BaFa 2009).


On the economists point of view the price is a result of the negotiation of supplier and demander on the market. Understanding the characteristics of the marketplace2 is an essential factor in establishing a price for offering. The market with its amount of suppliers and demanders determines the pricing strategy (Olbricht and Battenfeld 2007, p. 19). E.g. Microsoft a software producing and selling company tried to maintain their quasi-monopoly by establishing incapability to non-Microsoft software products (ThisNation 2008). Microsoft therefore was free to put a price the market can bear.

Product or substitute

The stage of life cycle of the product is very important. Is the product a relatively new one, launched only a few weeks ago? According to this question two main pricing strategies have to be mentioned: the skimming and the penetration strategy, which will both be examined in subchapter 4.1. Furthermore the characteristics of the product including its level of substitutability as well as of complementarily high influence the pricing (Kuß 2006, p. 268).

Price influenced by all these described drivers, is essential to the company. As it is elementary to make revenue and therefore earn profit. As mentioned before, according to the magical triangle of pricing the three major drivers: costs, competitors and demands intend to be an orientation to distinct between the methods of setting prices, which will be revealed more closely in the following chapter.

3. Methods of Setting Prices

The methods of setting a price can be classified into three main approaches - the cost orientated, the competitor orientated and the consumer orientated approach which will be analyzed in the following subchapters.

3.1 Cost Orientated Pricing

Cost-plus pricing is a part of the cost-based pricing which means that the costs of a product set the bottom of the possible price for a good (Armstrong and Kotler 2009, p. 294). To understand the cost-plus pricing it makes sense to have a brief look at the most important types of cost at first. The most common differentiation of costs is the classification of fixed, variable and total costs. Fixed costs do not change with the amount of produced goods e.g. rent or interest bills. Variable costs change with the produced amount e.g. a company which produces more cars need more raw materials. Total costs are the sum of fixed and variable costs. Once a company has identified its cost, it can start with pricing.

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Figure 3: Types of Costs (illustration adapted from: Schmalen 2000, p. 237)

The cost-plus pricing is, according to Nagle and Holden, “the most common pricing procedure” (2002, p. 2) but at the same time the key to a middle-rate performance because it excludes the consumer and competitor view. Dolan and Simon also mention that this method is the most popular one (1996, p. 37). It is also the simplest method of price setting because the company just has to calculate the costs of a product and add a markup e.g. 50%. Markups can be made in different ways e.g. absolute markups or a certain percentage of the total costs. But as mentioned before, this method does not work very well because it is not geared to customers or competitors (Armstrong and Kotler 2009, p. 295). So one could ask the question why the cost-plus pricing is so favored. Armstrong and Kotler mention three simple reasons why this method is used by so many companies (ibid 2009, p. 295).

Firstly it is much easier to analyze how much a product costs than to identify the demand for a good. Focusing the costs the company does not have to change the price whether the demand is changing or not.

The second reason includes that the cost-plus pricing is decreasing competition between companies with similar products because usually the costs are similar to each other.

The last reason for using this method is that the company feels like a fair trader because it does not use a high demand or different demands in some areas for setting higher prices.

After having illustrated the basic motivation of cost-plus pricing, two different types will be explained. As mentioned before, there are different types of costs. The first method of cost-plus pricing is using the full cost which means to take the total costs and add the markup. The second method uses the partial costs of each product (Peters et al. 2005, p. 145). This means that the company calculates the variable costs of the product and takes this as basic for the price. In addition to that the company takes a markup on the product which covers the fixed costs and the aimed profit. An import aspect of this calculation is that the company has to think about the bottom price of a product, which means the lowest price the company is willing to sell its products on the market (ibid 2005, p. 145). Peters et al. differentiate two forms of bottom pricing: the short term and the long term bottom price. Whereas the long term bottom price is the price which covers the overall costs of a product without markups, the short term bottom price is a price which can lie below the full costs of the product and covers at least the variable costs (Peters et al. 2005, p. 145).

If the company decides to build its prices based on costs, numerous mistakes can be made. Some examples of these mistakes should be considered. The most relevant mistake includes that the company builds the price and selects the quantities of the product before knowing what the customer is willing to pay for the product (Nagle and Holden 2002, p. 15).


1 Appendix 1 shows an advertisement of Porsche which displays the exclusivity of the brand and therefore the high value the customer shall adapt.

2 Appendix 2 reveals a simple concept of market types.

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“Price” as one Parameter in the Marketing Mix
University of Applied Sciences Berlin
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price”, parameter, marketing
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Michael Kemmer (Author)Antje Boden (Author), 2009, “Price” as one Parameter in the Marketing Mix, Munich, GRIN Verlag, https://www.grin.com/document/197106


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