1. Pricing: Understanding and Capturing Customer Value
Chapter 9

2. Rest Stop: Previewing the Concepts
Identify the three major pricing strategies and discuss the importance of understanding customer-value perceptions, company costs, and competitor strategies when setting prices
Identify and define the other important external and internal factors affecting a firm’s pricing decisions
Describe the major strategies for pricing new products

3. Rest Stop: Previewing the Concepts
Explain how companies find a set of prices that maximizes the profits from the total product mix
Discuss how companies adjust their prices to take into account different types of customers and situations
Discuss the key issues related to initiating and responding to price changes

4. First Stop: Amazon vs. Walmart: Fighting it Out Online on Price
Price war between Walmart and Amazon.com over online prices
Though Walmart’s main source of revenue is its retail outlets, online retailing is growing
Amazon.com ’s online sales are nearly 7 times greater than Walmart’s online sales
Both companies competing to be lowest-priced online retailer

5. 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

6. Price Amount of money charged for a product or service
Sum of the values that customers exchange for the benefits of having or using the product or service
Price

7. Figure 9.1 - Considerations in Setting Price
Note to Instructor: The figure summarizes the major considerations in setting price. Customer perceptions of the product’s value set the ceiling for prices. If customers perceive that the product’s price is greater than its value, they will not buy the product. Likewise, product costs set the floor for prices. If the company prices the product below its costs, the company’s profits will suffer. In setting its price between these two extremes, the company must consider several external and internal factors, including competitors’ strategies and prices, the overall marketing strategy and mix, and the nature of the market and demand.

8. Figure 9.2 - Value-Based Pricing vs. Cost-Based Pricing
Note to Instructor: The figure compares value-based pricing with cost-based pricing. Although costs are an important consideration in setting prices, cost-based pricing is often product driven. The company designs what it considers to be a good product, adds up the costs of making the product, and sets a price that covers costs plus a target profit. Value-based pricing reverses this process. The company first assesses customer needs and value perceptions. It then sets its target price based on customer perceptions of value.

9. Customer Value-Based Pricing
Setting price based on buyers’ perceptions of value rather than on the seller’s cost
Types:
Good value pricing
Value-added pricing
A Steinway piano—any Steinway piano—costs a lot. But to those who own one, price is nothing; the Steinway experience is everything

10. Good-Value Pricing
Offering the right combination of quality and good service at a fair price
Note to Instructor: More and more, marketers have adopted good-value pricing strategies—offering the right combination of quality and good service at a fair price. In many cases, this has involved introducing less-expensive versions of established, brand-name products. For example, fast-food restaurants such as Taco Bell and McDonald’s offer value menu and dollar menu items. Armani offers the less-expensive, more-casual Armani Exchange fashion line.
With its no-frills positioning and low prices, Snap Fitness is well-positioned to take advantage of either good or bad economic conditions

11. Value-Added Pricing
Attaching value-added features and services to differentiate a company’s offers while charging higher prices
Note to Instructor: Even as recession-era consumer spending habits linger, some movie theater chains are adding amenities and charging more rather than cutting services to maintain lower admission prices. Rather than cutting prices to match competitors, they attach value-added features and services to differentiate their offers and thus support their higher prices.
Rather than cutting services to maintain lower admission prices, premium theaters such as AMC’s Cinema Suites are adding amenities and charging more.

12. Marketing at Work
Panera isn’t about the lowest prices— it’s about the value customers receive
It’s value-added proposition: Good fast-casual food, outstanding service, and the experience
Panera Bread understands that, even in uncertain economic times, low prices often aren’t the best value. Says Panera CEO Ronald Shaich, “Give people something of value and they’ll happily pay for it.”

13. Setting prices based on the costs for producing, distributing, and selling the product plus a fair rate of return for effort and risk
Cost-based pricing
Note to Instructor: Some companies, such as Walmart or Southwest Airlines, work to become the low-cost producers in their industries. Companies with lower costs can set lower prices that result in smaller margins but greater sales and profits. However, other companies—such as Apple, BMW, and Steinway—intentionally pay higher costs so that they can claim higher prices and margins.

14. Types of Costs Fixed costs (overhead) Variable costs Total costs
Vary with production or sales level
Fixed costs (overhead)
Vary directly with the level of production
Variable costs
Sum of the fixed and variable costs for any given level of production
Total costs

15. Types of Cost-Based Pricing
Adding a standard markup to the cost of the product
Cost-plus (markup) pricing
Setting price to break even on the costs of making and marketing a product, or setting price to make a target return
Break-even (target return) pricing

16. Figure 9.3 - Break-Even Chart for Determining Target Return Price and Break-Even Volume
Note to Instructor: At the break-even point, here 600,000 units, total revenue equals total cost. To make a target return of $2 million, the company must sell 800,000 units. But will customers buy that many units at the $15 price?
The major problem with this analysis is that it fails to consider customer value and the relationship between price and demand. As the price increases, demand decreases. When that happens, the market may not buy even the lower volume needed to break even at the higher price.

17. Competition-Based Pricing
Setting prices based on competitors’ strategies, prices, costs, and market offerings
Note to Instructor: If consumers perceive that the company’s product or service provides greater value, the company can charge a higher price. If consumers perceive less value relative to competing products, the company must either charge a lower price or change customer perceptions to justify a higher price. If the company faces a host of smaller competitors charging high prices relative to the value they deliver, it might charge lower prices to drive weaker competitors from the market. If the market is dominated by larger, lower-price competitors, the company may decide to target unserved market niches with value-added products at higher prices.
Fast-growing clothing boutique Hot Mama isn’t likely to win a price war against giants like Macy’s or Kohl’s. Instead, it relies on personal service, a mom- and kid-friendly atmosphere, and its knowledgeable staff to turn harried moms into loyal patrons

18. Other Considerations Affecting Pricing Decisions
Internal factors:
Overall marketing strategy, objectives, and the marketing mix
Organizational considerations
External factors:
Nature of the market and demand
Other environmental factors

19. Overall Marketing Strategy, Objectives, and 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

20. Overall Marketing Strategy, Objectives, and Mix
Pricing that starts with an ideal selling price and then targets costs that will ensure that the price is met
Target costing
Note to Instructor: Target costing reverses the usual process of first designing a new product, determining its cost, and then asking, “Can we sell it for that?” Instead, it starts with an ideal selling price based on customer-value considerations and then targets costs that will ensure that the price is met.

21. Overall Marketing Strategy, Objectives, and Mix
Many companies deemphasize price and use other marketing mix tools to create nonprice positions
Cutting-edge consumer electronics maker Bang & Olufsen builds high value into its products and charges sky-high prices

22. 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

23. The Market and Demand
A firm’s flexibility in setting price varies depending on the nature of the market
Types of markets:
Pure competition
Monopolistic competition
Oligopolistic competition
Pure monopoly
Note to Instructor: Under pure competition, the market consists of many buyers and sellers trading in a uniform commodity, such as wheat, copper, or financial securities. Under monopolistic competition, the market consists of many buyers and sellers who trade over a range of prices rather than a single market price. Under oligopolistic competition, the market consists of only a few large sellers. In a pure monopoly, the market is dominated by one seller.

24. Demand Curve
Shows the number of units the market will buy in a given time period, at different prices that might be charged
Note to Instructor: The demand curve shows the number of units the market will buy in a given time period at different prices that might be charged. In the normal case, demand and price are inversely related—that is, the higher the price, the lower the demand. Thus, the company would sell less if it raised its price from P1 to P2 . In short, consumers with limited budgets probably will buy less of something if its price is too high.

25. The Price-Demand Curve
When ConAgra raised prices on its Banquet frozen dinners, sales fell sharply. “The key component . . .is you’ve got to be at $1,” says CEO Gary Rodkin, pictured above. “Everything else pales in comparison to that.”

26. Price Elasticity of Demand
Measure of the sensitivity of demand to changes in price
Inelastic demand – Demand hardly changes with a small change in price
Elastic demand – Demand changes greatly with a small change in price

27. The Economy: Impact on Pricing
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
Some firms have held price, but repositioned brands to enhance their value

28. Marketing at Work
When the economy dipped, rather than cutting everyday prices, Whole Foods set out to convince shoppers that it was, in fact, an affordable place to shop
Whole Foods assigned workers to serve as “value tour guides,” like the one above, to escort shoppers around stores pointing out value items

29. New-Product Pricing Strategies
Setting a high price for a new product to skim maximum revenues layer by layer from the segments willing to pay the high price
Company makes fewer but more profitable sales
Market-skimming pricing
Setting a low price for a new product to attract a large number of buyers and a large market share
Market-penetration pricing

30. When to Use Market-Skimming Pricing
Product’s quality and image supports its higher price
Costs of low volume cannot be so high that they cancel out the benefit of higher price
Competitors should not be able to enter market easily and undercut price
Note to Instructor: Many companies that invent new products set high initial prices to skim revenues layer by layer from the market. Apple frequently uses this strategy, called market-skimming pricing (or price skimming). When Apple first introduced the iPhone, its initial price was as much as $599 per phone. The phones were purchased only by customers who really wanted the sleek new gadget and could afford to pay a high price for it. Six months later, Apple dropped the price to $399 for an 8GB model and $499 for the 16GB model to attract new buyers. Within a year, it dropped prices again to $199 and $299, respectively, and customers can now buy an 8GB model for $49. In this way, Apple skimmed the maximum amount of revenue from the various segments of the market.

31. When to Use Market-Penetration Pricing
Market is highly price sensitive so a low price produces more growth
Production and distribution costs decrease as sales volume increases
Low price can help keep out the competition, and the penetration pricer can maintain its low-price position

32. Product Mix Pricing Strategies
Setting the price steps between various products in a product line based on cost differences between the products, customer evaluations of different features, and competitors’ prices
Product line pricing
Pricing of optional or accessory products along with a main product
Optional product pricing

33. Product Mix Pricing Strategies
Setting a price for products that must be used along with a main product
Captive product pricing
Setting a price for by-products to make the main product’s price more competitive
By-product pricing
Combining several products and offering the bundle at a reduced price
Product bundle pricing
Note to Instructor: In the case of services, captive product pricing is called two-part pricing. The price of the service is broken into a fixed fee plus a variable usage rate. Thus, at Six Flags and other amusement parks, you pay a daily ticket or season pass charge plus additional fees for food and other in-park features.

34. Price Adjustment Strategies – Discounts
A straight reduction in price on purchases made during a stated period of time or in larger quantities
Forms:
Cash discount
Quantity discount
Functional discount
Seasonal discount
Note to Instructor: A cash discount is a price reduction to buyers who pay their bills promptly. A quantity discount is a price reduction to buyers who buy large volumes. A seller offers a functional discount (also called a trade discount) to trade-channel members who perform certain functions, such as selling, storing, and record keeping. A seasonal discount is a price reduction to buyers who buy merchandise or services out of season.

35. Price Adjustment Strategies – Allowances
Reduction from the list price for buyer actions such as trade-ins or promotional and sales support
Forms:
Trade-in allowances – Price reductions given for turning in an old item when buying a new one
Promotional allowances – Payments or price reductions that reward dealers for participating in advertising and sales support programs

36. Price Adjustment Strategies – Segmented Pricing
Selling a product or service at two or more prices, where the difference in prices is not based on differences in costs
Forms:
Customer-segment pricing
Product-form pricing
Location-based pricing
Time-based pricing
Notes to Instructor: Under customer-segment pricing, different customers pay different prices for the same product or service. Under product-form pricing, different versions of the product are priced differently but not according to differences in their costs. Using location-based pricing, a company charges different prices for different locations, even though the cost of offering each location is the same. Using time-based pricing, a firm varies its price by the season, the month, the day, and even the hour.

37. Price Adjustment Strategies – Psychological Pricing
Pricing that considers the psychology of prices, not simply the economics; the price says something about the product
Reference pricing: Prices that buyers carry in their minds and refer to when they look at a given product

38. Price Adjustment Strategies – Promotional Pricing
Discounts
Special-event pricing
Cash rebates
Low-interest financing
Longer warranties
Free maintenance
Firms offer promotional prices to create buying excitement and urgency

39. Price Adjustment Strategies – Geographical Pricing
FOB-origin pricing
Uniform-delivered pricing
Zone pricing
Basing-point pricing
Freight-absorption pricing
Note to Instructor: FOB-origin pricing practice means that the goods are placed free on board (hence, FOB ) a carrier.
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. Zone pricing falls between FOB-origin pricing and uniform-delivered pricing. The company sets up two or more zones. All customers within a given zone pay a single total price; the more distant the zone, the higher the price. Using basing-point pricing, the seller selects a given city as a “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. Using freight-absorption pricing the seller absorbs all or part of the actual freight charges to get the desired business.

40. Price Adjustment Strategies – Dynamic Pricing
Adjusting prices continually to meet the characteristics and needs of individual customers and situations
Especially prevalent online
Note to Instructor: The Internet seems to be taking us back to a new age of fluid pricing. They can change prices on the f y according to changes in demand or costs, adjusting what they charge for specific items on a day-by-day or even hour-by-hour basis. And many direct marketers monitor inventories, costs, and demand at any given moment and adjust prices instantly.
The Web seems to be taking us back in time to a new age of fluid pricing. At Priceline.com, you can “name your own price

41. Factors Influencing International Pricing
The price that a company should charge in a specific country depends on economic conditions, laws and regulations, competitive situations, etc
To lower prices in developing countries,
Unilever developed smaller, more affordable packages that put the company’s premier brands within the reach of cash-strapped customers

42. Price Changes: Initiating Price Cuts
Reasons for price cuts
Excess capacity
Falling demand in face of strong competitive price or a weakened economy
Attempt to dominate market through lower costs

43. Price Increases
Can greatly improve profits and may be initiated due to:
Cost inflation
Overdemand
Note to Instructor: Marketers should avoid the practice of price gouging.
When gasoline prices rise rapidly, angry consumers often accuse the major oil companies of enriching themselves by gouging customers

44. Figure 9.5 - Assessing and Responding to Competitor Price Changes
Note to Instructor: The figure shows the ways a company might assess and respond to a competitor’s price cut. First, it could reduce its price to match the competitor’s price. Alternatively, the company might maintain its price but raise the perceived value of its offer. Or, the company might improve quality and increase price, moving its brand into a higher price-value position. Finally, the company might launch a low-price “fighter brand ”—adding a lower-price item to the line or creating a separate lower-price brand.

45. Fighter Brands
Starbucks has positioned its Seattle’s Best Coffee unit to compete more directly with the “mass-premium” brands sold by Dunkin’ Donuts, McDonald’s, and other lower-priced competitors

46. Figure 9.6 - Public Policy Issues in Pricing
Note to Instructor: Major public policy issues in pricing take place at two levels: Pricing practices within a given channel level and pricing practices across channel levels.

47. Public Policy and Pricing
Pricing within channel levels:
Price fixing
Predatory pricing
Pricing across channel levels:
Price discrimination
Retail (or resale) price maintenance
Deceptive pricing
Note to Instructor: Federal legislation on price-fixing states that sellers must set prices without talking to competitors. Sellers are also prohibited from using predatory pricing —selling below cost with the intention of punishing a competitor or gaining higher long-run profits by putting competitors out of business. The Robinson-Patman Act seeks to prevent unfair price discrimination by ensuring that sellers offer the same price terms to customers at a given level of trade. Laws also prohibit retail (or resale ) price maintenance —a manufacturer cannot require dealers to charge a specified retail price for its product. Deceptive pricing occurs when a seller states prices or price savings that mislead consumers or are not actually available to consumers.

48. Rest Stop: Reviewing the Concepts
Identify the three major pricing strategies and discuss the importance of understanding customer-value perceptions, company costs, and competitor strategies when setting prices
Identify and define the other important external and internal factors affecting a firm’s pricing decisions
Describe the major strategies for pricing new products

49. Rest Stop: Reviewing the Concepts
Explain how companies find a set of prices that maximizes the profits from the total product mix
Discuss how companies adjust their prices to take into account different types of customers and situations
Discuss the key issues related to initiating and responding to price changes

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Copyright © 2013 Pearson Education, Inc.
Publishing as Prentice Hall