Chapter Nine Pricing: Understanding and Capturing Customer Value.

Chapter Nine

Pricing: Understanding and Capturing Customer Value

Copyright 2007, Prentice Hall, Inc. 9-2

What Is a Price? Narrowly, price is the amount of

money charged for a product or service.

Broadly, price is the sum of all the values that consumers exchange for the benefits of having or using the product or service.

Dynamic Pricing: charging different prices depending on individual customers and situations.


Rent Fee Rate Commission Assessment

Tuition Fare Toll Premium Retainer

• BribeBribe

• SalarySalary

• WageWage

• InterestInterest

• TaxTax

Price Has Many Price Has Many NamesNamesice?

9-4

Dynamic Pricing

The Internet is ushering in a new era of fluid pricing. www.travelocity.com is an independent site that provides price comparisons and guides, and searches all airline and hotel sites for the best prices.

http://www.travelocity/

Factors affecting price decisions



Customer Value Perceptions

Value-based pricing : Involves understanding how much value

consumers place on the benefits they receive from the product and setting a price that captures that value.

Uses buyers’ perceptions of value, not the seller’s cost, as the key to pricing.– Good value pricing– Value-added pricing

Copyright 2007, Prentice-Hall, Inc. 9-7

Value-Based Pricing Vs. Cost-Based Pricing

GOOD VALUE PRICING

Offering just the right combination of quality and good service at a fair price.– McDonald’s offer “value menus”– EDLP Strategies of Wal-Mart etc

VALUE ADDED PRICING Attaching value added features and services

to differentiate a marketing offer and support higher prices, rather than cutting prices to match competitors.


GOOD VALUE PRICING



Value-Added Pricing

Caterpillar offers dealers a wide range of value-added services, including training, investment advice, and guaranteed parts delivery. These services justify charging a higher price.


Company and Product Costs:

– Fixed Costs:• Costs that do not vary with production

or sales level.–Salary, room rent etc

– Variable Costs:• Costs that vary directly with the level of

production.–Sales commission, raw material cost etc


Cost-Based Pricing

Cost-plus pricing– The simplest pricing model every where

used– Adding a standard markup to the cost of

the productExample– Fixed cost- 100 Baht/ unit– Variable cost- 50 Baht / Unit

Total cost- 150 Baht– Profit margin – 50 Baht/ unit– Selling price – 200 Baht / Unit

Break Even Analysis Break-even pricing

– Setting price to break even on the costs of making and marketing a product or setting price to make a target profit



Break-Even Chart for Determining Price


Internal Factors Affecting Pricing Decisions

Marketing Objectives:– Company must decide on its strategy for

the product.– General pricing objectives:

• Survival• Current profit maximization• Market share leadership • Product quality leadership



Marketing Mix Strategy:– Price decisions must be coordinated with

product design, distribution, and promotion decisions to form a consistent and effective marketing program.

– Target costing:• Pricing that starts with an ideal selling

price, then targets costs that will ensure that the price is met.

Target costing


Tata Nano – Target Price- 75000 Baht



Organizational Considerations:– Must decide who within the organization

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

type of company.


External Factors Affecting Pricing Decisions

The Market and Demand:– Costs set the lower limit of prices while the

market and demand set the upper limit.– Pricing in different types of markets:

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

– Analyzing the price-demand relationship– The price elasticity of demand

Monopoly

Only one company selling product in the market

The seller may be a government monopoly or a private regulated monopoly.


Oligopoly The market consists of a few sellers who are

highly sensitive to each other’s pricing and other marketing strategies.

The product can be uniform (steel, aluminum etc) or non uniform (cars, computers etc).


monopolistic competition

Under monopolistic competition, the market consists of many buyers and sellers who trade over a range of prices rather than a single market price.

A range of prices occurs because sellers can differentiate their offers to buyers.

Any physical product can be varied in quality, features, or style or the accompanying services can be varied.



Pure competition

Under pure competition, the market consists of many buyers and sellers trading in a uniform commodity such as wheat, copper, or financial securities such as stocks or bonds.

No single buyer or seller has much effect on the going market place.


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• Many sellers offer many buyers an identical (homogeneous) product; no seller can influence price


New-Product Pricing Strategies

Market Skimming:– Set a high price for a

new product to “skim” revenues layer by layer from the market.

– Company makes fewer, but more profitable sales.

Price Skimming When to Use:

– Product’s quality and image must support its higher price.

– Costs of low volume cannot be so high they cancel the advantage of charging more.

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



New-Product Pricing Strategies

When to Use:– Market is highly

price sensitive so a low price produces more growth.

– Costs must fall as sales volume increases.

– Need to keep competition out or effects are only temporary.

Market Penetration:– Set 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.


Product Mix Pricing Strategies

Product line pricing Optional-product pricing Captive-product pricing By-product pricing Product bundle pricing


Product Line Pricing

Sets price steps between various items in a product line based on:– Cost differences

between products– Customer

evaluations of different features

– Competitors’ prices


Optional- and Captive-Product Pricing

Optional-Product– Pricing optional or accessory products

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

Captive-Product– Pricing products that must be used with

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


By-Product and Product Bundle Pricing Strategies

By-Product Pricing– Pricing low-value by-products to get rid of

them (e.g., animal manure from zoo).

Product Bundle Pricing– Pricing bundles of products sold together

(software, monitor, PC, and printer).



Product-Bundle Pricing

Travelers who book flight, hotel, and car together can save on average $189.00 from Expedia.com

Marketing in Action

http://www.expedia.com/Default.asp?CCheck=1&

http://www.expedia.com/Default.asp?CCheck=1&


Price Adjustment Strategies

Discount and allowance pricing Segmented pricing Psychological pricing Promotional pricing Geographical pricing Dynamic pricing International pricing


Discounts and Allowances

Discounts– Cash– Quantity– Seasonal

Allowances– Trade-in– Promotional

Christmas cards purchased out of season, such as in March or July, are

often sold at a discount.


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-segment2. Product-form3. Location pricing4. Time pricing


Psychological Pricing

Considers the psychology of prices and not simply the economics.

Consumers usually perceive higher-priced products as having higher quality.

Consumers use price less when they can judge the quality of a product by examining it or recalling experiences.


Promotional Pricing

Companies offer promotional pricing to create excitement and a sense of urgency.


Geographical Pricing

FOB-origin pricing Uniform-delivered pricing Zone pricing Basing-point pricing Freight-absorption pricing

FOB-origin pricing

This practice means that the goods are placed free on board a carrier.

At that point the title and responsibility pass to the customer, who pays the freight from the factory to the destination.

Free On BoardFree On Board means it is the buyerbuyer’’ss responsibility to select the mode of transportation, choose the specific carrier, handle any damage claims, and pay all shipping charges


Uniform-delivered pricing

Uniform delivered pricing is the opposite of FOB pricing.

Here the company charges the same price plus freight to all customers, regardless of their location.

The freight charge is set at the average freight cost.


Zone pricing

Zone pricing falls between FOB origin pricing and uniform delivered pricing. The company sets two or more zones. All customers within a given zone pay a single total price, the more distant the zone, the higher the price.


Basing-point pricing

Using the basing point pricing, the seller selects a given city as basing point and charges all customers the freight cost from that city to the customer location regardless of the city from which the goods are actually shipped.


Customerpays$120

BaseMill X

MillY

MillZ

Product Price = $100

$20Actual Freight

$30Actual Freight

$10Actual Freight

$10 Freight Absorption

$10 Phantom Freight

Adopted from: Monroe (1990), Pricing: Making Profitable Decisions, 2 ed., New York: McGraw-Hill Publishing Company.

Basing-Point Pricing System

Freight-absorption pricing

Using this strategy, the seller absorbs all or part of the actual freight charges in order to get the desired business


Chapter Nine Pricing: Understanding and Capturing Customer Value.

Documents

price slide

prentice hall

price decisions copyright

good value pricing copyright

costbased pricing slide

dynamic pricing

pricing attaching value

customer value slide