Chapter 10

Pricing Products:Understanding and Capturing Customer Value1010Principles of Marketing Learning ObjectivesAfter studying this chapter, you should be able to:1. Answer the question What is price? and discuss the importance of pricing in todays fast!changing en"ironment#. $iscuss the importance of understanding customer "alue perceptions when setting prices%. $iscuss the importance of company and product costs in setting prices&. 'dentify and de(ne the other important internal and e)ternal factors a*ecting a (rms pricing decisions1+!# Chapter Outline1 !hat "s Price#$ %actors to Consider !hen &etting Prices1+!% !hat "s Price#Price is the amount of money charged for a product or ser"ice. 't is the sum of all the "alues that consumers gi"e up in order to gain the bene(ts of ha"ing or using a product or ser"ice.Price is the only element in the mar,eting mi) that produces re"enue- all other elements represent costs1+!& %actors to Consider !hen&etting Prices.*ecti"e customer!oriented pricing in"ol"es understanding how much "alue consumers place on the bene(ts they recei"e from the product and setting a price that captures that "alue1+!/Customer Perception of Value %actors to Consider !hen &etting PricesCustomer Perception of ValueValue'based pricing uses the buyers perceptions of "alue, not the sellers cost, as the ,ey to pricing. 0rice is considered before the mar,eting program is set.12alue!based pricing is customer dri"en13ost!based pricing is product dri"en1+!4 %actors to Consider !hen&etting PricesCustomer Perception of Value2alue!based pricing15ood!"alue pricing12alue!added pricing1+!6 %actors to Consider !hen&etting PricesCustomer Perception of Value(ood'value pricing o*ers the right combination of quality and good ser"ice to fair price.)isting brands are being redesigned to o*er more quality for a gi"en price or the same quality for less price1+!7 %actors to Consider !hen&etting PricesCustomer Perception of Value)ver*da* lo+ pricing ,)-LP. in"ol"es charging a constant e"eryday low price with few or no temporary price discounts/igh'lo+ pricing in"ol"es charging higher prices on an e"eryday basis but running frequent promotion to lower prices temporarily on selected items1+!8 %actors to Consider !hen&etting PricesCustomer Perception of ValueValue'added pricing attaches "alue!added features and ser"ices to di*erentiate o*ers, support higher prices, and build pricing powerPricing po+er is the ability to escape price competition and to 9ustify higher prices and margins without losing mar,et share1+!1+ %actors to Consider !hen&etting PricesCompany and Product CostsCost'based pricing in"ol"es setting prices based on the costs for producing, distributing, and selling the product plus a fair rate of return for its e*ort and ris,1+!11 %actors to Consider !hen&etting PricesCompany and Product Costs:ypes of costs1;i)ed costs12ariable costs1:otal costs1+!1# %actors to Consider !hen&etting PricesCompany and Product Costs%i0ed costs are the costs that do not "ary with production or sales le"el 1 unit cost ?1!desired rate of return@1+!17 %actors to Consider !hen&etting PricesBreak-Even Analysis and Target Profit Pricing3reak'even pricing is the price at which total costs are equal to total re"enue and there is no pro(t1arget pro4t pricing is the price at which the (rm will brea, e"en or ma,e the pro(t its see,ing1+!18 %actors to Consider !hen &etting Prices break'even5 40ed cost volume,price'variable cost. 1+!#+Break-Even Analysis and Target Profit Pricing %actors to Consider !hen&etting PricesOther Internal and Eternal Considerations Affecting Price !ecisions3ustomer perceptions of "alue set the upper limit for prices, and costs set the lower limit3ompanies must consider internal and e)ternal factors when setting prices1+!#1 %actors to Consider !hen&etting PricesOther Internal and Eternal Considerations Affecting Price !ecisions'nternal factors1Aar,eting strategies1Bb9ecti"es1Aar,eting mi).)ternal factors1Aar,et demand13ompetitors strategies and prices1+!## %actors to Consider !hen&etting PricesOther Internal and Eternal Considerations Affecting Price !ecisions0ricing ob9ecti"es include:1Cur"i"al10ro(t ma)imiDation1Aar,et share leadership13ustomer retention and relationship building1Attracting new customers1Bpposing competiti"e threats1'ncreasing product e)citement1+!#% %actors to Consider !hen&etting PricesOther Internal and Eternal Considerations Affecting Price !ecisions1arget costing starts with an ideal selling price based on consumer "alue considerations and then targets costs that will ensure that the price is met1+!#& %actors to Consider !hen&etting PricesOther Internal and Eternal Considerations Affecting Price !ecisions6on'price strategies di*erentiate the mar,eting o*er to ma,e it worth a higher price1+!#/ %actors to Consider !hen &etting PricesOther Internal and Eternal Considerations Affecting Price !ecisionsBrganiDational considerations include:1Who should set the price1Who can inEuence the prices1+!#4 %actors to Consider !hen&etting PricesOther Internal and Eternal Considerations Affecting Price !ecisionsThe "arket and !emandFefore setting prices, the mar,eter must understand the relationship between price and demand for its products1+!#6 %actors to Consider !hen&etting PricesOther Internal and Eternal Considerations Affecting Price !ecisions:ypes of mar,ets10ure competition1Aonopolistic competition1Bligopolistic competition10ure monopoly1+!#7 %actors to Consider !hen &etting PricesOther Internal and Eternal Considerations Affecting Price !ecisionsPure competition is a mar,et with few many buyers and sellers trading uniform commodities where no single buyer or seller has much e*ect on mar,et priceMonopolistic competition is a mar,et with many buyers and sellers who trade o"er a range of prices rather than a single mar,et price with di*erentiated o*ers.1+!#8 %actors to Consider !hen&etting PricesOther Internal and Eternal Considerations Affecting Price !ecisionsOligopolistic competition is a mar,et with few sellers because it is diGcult for sellers to enter who are highly sensiti"e to each others pricing and mar,eting strategiesPure monopol* is a mar,et with only one seller. 'n a regulated monopoly, the go"ernment permits a price that will yield a fair return. 'n a non!regulated monopoly, companies are free to set a mar,et price.1+!%+ %actors to Consider !hen&etting PricesOther Internal and Eternal Considerations Affecting Price !ecisions1he demand curve shows the number of units the mar,et will buy in a gi"en period at di*erent prices1Hormally, demand and price are in"ersely related1=igher price > lower demand1;or prestige ?lu)ury@ goods, higher price can equal higher demand when consumers percei"e higher prices as higher quality1+!%1 %actors to Consider !hen&etting PricesOther Internal and Eternal Considerations Affecting Price !ecisionsPrice elasticit* of demand illustrates the response of demand to a change in price"nelastic demand occurs when demand hardly changes when there is a small change in price )lastic demand occurs when demand changes greatly for a small change in priceprice elasticity of demand> I change in quantity demandI change in price1+!%# %actors to Consider !hen&etting PricesOther Internal and Eternal Considerations Affecting Price !ecisions;actors a*ecting price elasticity of demand1Jnique product1Kuality10restige1Cubstitute products13ost relati"e to income1+!%% %actors to Consider !hen&etting PricesOther Internal and Eternal Considerations Affecting Price !ecisionsCompetition strategies and prices;actors to consider13omparison of o*ering in terms of customer "alue1Ctrength of competitors13ompetition pricing strategies13ustomer price sensiti"ity1+!%& %actors to Consider !hen&etting PricesOther Internal and Eternal Considerations Affecting Price !ecisionsBther e)ternal factors1.conomic conditions1