Chapter 9 Pricing Understanding and Capturing Customer Value.

Chapter 9

Pricing Pricing

Understanding and Capturing Understanding and Capturing Customer ValueCustomer Value

Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall 9 - 2

1. Identify the three major pricing strategies and discuss the importance of understanding customer-value perceptions, company costs, and competitor strategies when setting prices.

2. Identify and define the other important internal and external factors affecting a firm’s pricing decisions.

3. Describe the major strategies for pricing imitative and new products.

4. Explain how companies find a set of prices that maximize the profits from the total product mix.

5. Discuss how companies adjust their prices to take into account different types of customers and situations.

6. Discuss the key issues related to initiating and responding to price changes.

Rest Stop:Rest Stop: Previewing the ConceptsPreviewing the Concepts


What They Offer• Trader Joe’s Niche: Offers

gourmet-caliber, one-of-a-kind products at impossibly low prices. Limited product assortment of 2,000 specialty items unique to Trader Joe’s. 80% of items are store brands (private label goods).

• Retail Atmosphere & Staff: Festive, vacation-like atmosphere that makes shopping fun provides Trader Joe’s with a cool edge. Associates wear Hawaiian shirts and consult with customers.

Trader Joe’s Price Value EquationFirst Stop

Keeping Prices Low

• Cost Control is Key: Locates stores in low-rent and out-of-the-way areas; small store size and limited assortment reduces facility and inventory costs. Buys private label goods direct from suppliers and negotiates price heavily. Spends little on advertising; relies primarily on word-of-mouth.

• Results: Trader Joe’s is fastest growing food store. Chain has expanded to 330 stores in 25 states with annual sales in excess of $7.2 billion, a growth of 60% in just 3 years.


Price vs. Value

• Cutting cost in tough economic times isn’t always the answer. Companies should sell value, not price.

• Price reductions can:Cut profits and initiate price wars.Cheapen perceptions of brand quality.

• Marketers should strive to convince consumers that price is justified by value provided.


What Is a Price?

• Narrowly defined, price is the amount of money charged for a product or service.

• Broadly defined, price is the sum of all of the values that consumers give up in order to gain the benefits of having or using the product or service.


Factors to Consider When Setting Price

• Customer perceptions of value:No demand exists above price ceiling.

• Other internal and external considerations:Marketing strategy, objectives, mix.Nature of the market and demand.Competitors’ strategies and prices.

• Product costs:No profits are available below the price floor.


Major Pricing Strategies

• Customer value-based pricing:Setting prices based on buyers’ perceptions

of value rather than the seller’s cost.

• Cost-based pricing:Setting prices based on the cost of producing,

distributing, and selling product at a fair rate of return.

• Competition-based pricing:Setting prices based on competitors’

strategies, costs, prices, and market offerings.


Customer Value-Based Pricing

• Customer value-based pricing:Price is considered along with the other

marketing mix variables before the marketing program is set.

• Customer needs and value perceptions are assessed.

• Target price is based on value perception.

Types of value-based pricing:• Good value pricing.• Value-added pricing.


Cost-Based Pricing

• Cost-based pricing:Costs set the floor for the price that the

company can charge.Product-driven, rather than value-driven.

• Types of costs:Fixed costs:

• Do not vary with production or sales level.

Variable costs:• Vary directly with the level of production.


Cost-Based Pricing

• Types of cost-based pricing:Cost-plus (markup) pricing:

• Adding a standard markup to the cost of the product.

Break-even pricing.Target return pricing.


Competition-Based Pricing

• Assumes consumers base their judgments of a product’s value on the prices charged by competitors for similar products.

• Assessing competitors’ pricing strategies:How does the firm’s offering compare in terms

of customer value?How strong are competitors; what are their

pricing strategies?What principle should guide pricing decisions

relative to those of the competition?


Other Factors Affecting Pricing Decisions

• Internal factors:Overall marketing strategy, objectives,

and the marketing mix.Organizational considerations.

• External factors:The market and demand.The economy.Other external factors.


Internal Factors Affecting Pricing Decisions

• Overall marketing strategy, objectives, and the marketing mix:Company must decide on its overall

marketing strategy for the product and the role that price will play in accomplishing objectives.

Pricing decisions need to be coordinated with packaging, promotion, and distribution decisions.

Positioning may be based on price.



• Overall marketing strategy, objectives, and the marketing mix:Target costing supports price-based

positioning strategies:• Pricing starts with an ideal selling price, then

targets costs that will ensure that the price is met.

Other firms choose not to position on price, or select high price strategies to enhance product prestige.



• Organizational considerations:Must decide who within the organization

should set prices.This will vary depending on the size and

type of company.Some firms maintain pricing

departments.


External Factors Affecting Pricing Decisions

• The market and demand:A firm’s flexibility in setting price varies

depending on the nature of the market.Four types of markets exist:

• Pure competition.• Monopolistic competition.• Oligopolistic competition.• Pure monopoly.



• The market and demand:Analyzing the price-demand

relationship:• Different prices result in different levels of

demand, as shown by the demand curve.Price elasticity of demand:

• Refers to how responsive changes in demand will be to a change in price.

• Small demand change = inelastic demand.• Large demand change = elastic demand.



• The economy:Economic factors have a strong impact on

pricing strategies.The recent recession has led to many

consumers becoming more value-conscious.While some firms have cut price, others have

shifted to featuring more affordable items in the marketing mix.

Some firms have held price, but repositioned brands to enhance their value.



• Other external factors:Channel member reaction to price.Governmental reaction or pricing

controls.Social concerns.


• When to use:Product’s quality and

image must support its higher price.

Costs of low volume cannot be so high they cancel out the benefit of higher price.

Competitors should not be able to enter market easily and undercut price.

• Market skimming:Setting a high

price for a new product to “skim” revenues layer-by-layer from those willing to pay the high price.

Company makes fewer, but more profitable sales.

New-Product Pricing Strategies


• When to use:Market is highly price-

sensitive so a low price produces more growth.

Costs fall as sales volume increases.

Competition must be kept out of the market or the effects will be only temporary.

• Market penetration:Setting a low initial

price in order to “penetrate” the market quickly and deeply.

Can attract a large number of buyers quickly and win a large market share.

New-Product Pricing Strategies


Product Mix Pricing Strategies

• Product-line pricing:Setting the price steps between various

products in a product line based on cost differences between products, customer evaluations of different features, and competitors’ prices (e.g., various Quicken products).

• Optional-product pricing:Pricing optional or accessory products sold

with the main product (e.g., ice maker with the refrigerator).


Product Mix Pricing Strategies

• Captive-product pricing:Pricing products that must be used with the

main product (e.g., replacement cartridges for Gillette razors).

• By-product pricing:Pricing by-products in order to make the main

product’s price more attractive (e.g., wood by-products used to create useful chemicals).

• Product bundle pricing:Combining several products and offering the

bundle at a reduced price (e.g., fast food combo meals).


Price Adjustment Strategies

• Discount and allowance pricing.

• Segmented pricing.

• Psychological pricing.

• Promotional pricing.

• Geographical pricing.

• Dynamic pricing.

• International pricing.



• Discounts:CashQuantityFunctionalSeasonal

• Allowances:Trade-inPromotional



• Segmented pricing:Selling a product or service at two or more

prices, where the difference in prices is not based on differences in costs.

• Types:1. Customer-segment.2. Product-form.3. Location-based pricing.4. Time-based pricing.



• Psychological pricing:Considers the psychology of prices and

not simply the economics; the price is used to say something about product.• Price can often influence perceptions of

quality.• Reference prices are important.



• Geographical pricing: FOB-origin pricing Uniform-delivered

pricing Zone pricing Basing-point pricing Freight-absorption

pricing

• Promotional pricing: Discounts (loss

leaders) Special-event pricing Cash rebates Low-interest

financing Longer warranties Free maintenance



• Dynamic pricing:Adjusting prices continually to meet the

characteristics and needs of individual customers and situations.

• International pricing:Adjusting prices for international

markets requires consideration of many factors.



• Factors influence international pricing:Economic conditions.Competitive situations.Laws and regulations.Development of the wholesaling and retailing

system.Consumer perceptions and preferences.Different marketing objectives.Costs.


Price Changes

• Price cuts may be initiated due to:Excess capacity.Falling demand in face of strong competitive

price or a weakened economy.Attempt to dominate market through lower

costs.

• Price increases can greatly improve profits and may be initiated due to:Cost inflation.Overdemand.

• Marketers should avoid price gouging.


Responses to Price Changes

• Buyer reactions to price changes.

• Competitor reactions to price changes.

• Firm responses to price changes by competition:Reduce price to match competition.Raise the perceived value of its offer.Improve quality and increase price.Launch a low-price “fighting brand.”


Public Policy and Pricing

• Pricing within channel levels:Price fixing.Predatory pricing.

• Pricing across channel levels:Price discrimination.Retail price maintenance.Deceptive pricing.


1. Identify the three major pricing strategies and discuss the importance of understanding customer-value perceptions, company costs, and competitor strategies when setting prices.

2. Identify and define the other important internal and external factors affecting a firm’s pricing decisions.

3. Describe the major strategies for pricing imitative and new products.

4. Explain how companies find a set of prices that maximize the profits from the total product mix.

5. Discuss how companies adjust their prices to take into account different types of customers and situations.

6. Discuss the key issues related to initiating and responding to price changes.

Rest Stop: Reviewing the Concepts

Chapter 9 Pricing Understanding and Capturing Customer Value.

Documents

price reductions

price floor

price ceiling

price changes

customer value slide

pearson education

initiate price wars

low prices