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Pricing: Understanding and Capturing Customer Value Chapter 9.

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Presentation on theme: "Pricing: Understanding and Capturing Customer Value Chapter 9."— Presentation transcript:

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 firms pricing decisions Describe the major strategies for pricing new products 9 - 2

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 9 - 3

4 First Stop: Amazon vs. Walmart: Fighting it Out Online on Price Price war between Walmart and Amazon.com over online prices Though Walmarts main source of revenue is its retail outlets, online retailing is growing Amazon.com s online sales are nearly 7 times greater than Walmarts online sales Both companies competing to be lowest- priced online retailer 9 - 4

5 Price vs. Value Cutting cost in tough economic times isnt 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 9 - 5

6 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 Considerations in Setting Price 9 - 7

8 Figure Value-Based Pricing vs. Cost-Based Pricing 9 - 8

9 Customer Value-Based Pricing Setting price based on buyers perceptions of value rather than on the sellers cost Types: Good value pricing Value-added pricing A Steinway pianoany Steinway pianocosts 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 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 companys offers while charging higher prices Rather than cutting services to maintain lower admission prices, premium theaters such as AMCs Cinema Suites are adding amenities and charging more.

12 Marketing at Work Panera isnt about the lowest prices its about the value customers receive Its value-added proposition: Good fast-casual food, outstanding service, and the experience Panera Bread understands that, even in uncertain economic times, low prices often arent the best value. Says Panera CEO Ronald Shaich, Give people something of value and theyll 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

14 Types of 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 Break-Even Chart for Determining Target Return Price and Break-Even Volume

17 Competition-Based Pricing Setting prices based on competitors strategies, prices, costs, and market offerings Fast-growing clothing boutique Hot Mama isnt likely to win a price war against giants like Macys or Kohls. 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

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 firms flexibility in setting price varies depending on the nature of the market Types of markets: Pure competition Monopolistic competition Oligopolistic competition Pure monopoly

24 Demand Curve Shows the number of units the market will buy in a given time period, at different prices that might be charged

25 The Price-Demand Curve When ConAgra raised prices on its Banquet frozen dinners, sales fell sharply. The key component...is youve 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 Products 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

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 products price more competitive By-product pricing Combining several products and offering the bundle at a reduced price Product bundle pricing

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

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

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

40 Price Adjustment Strategies – Dynamic Pricing Adjusting prices continually to meet the characteristics and needs of individual customers and situations Especially prevalent online 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 companys 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 When gasoline prices rise rapidly, angry consumers often accuse the major oil companies of enriching themselves by gouging customers

44 Figure Assessing and Responding to Competitor Price Changes

45 Fighter Brands Starbucks has positioned its Seattles Best Coffee unit to compete more directly with the mass-premium brands sold by Dunkin Donuts, McDonalds, and other lower-priced competitors

46 Figure Public Policy Issues in Pricing

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

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 firms 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

50 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall


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