1. Pricing: Understanding and Capturing Customer Value
Chapter Nine
Pricing: Understanding and Capturing Customer Value

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.
Copyright 2007, Prentice Hall, Inc.

3. Price Has Many Names ice?
Rent
Fee
Rate
Commission
Assessment
Tuition
Fare
Toll
Premium
Retainer
Bribe
Salary
Wage
Interest
Tax
Copyright 2007, Prentice Hall, Inc.

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

5. Factors affecting price decisions
Copyright 2007, Prentice Hall, Inc.

6. 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.

7. Value-Based Pricing Vs. Cost-Based Pricing
Copyright 2007, Prentice-Hall, Inc.

8. 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.
Copyright 2007, Prentice Hall, Inc.

9. GOOD VALUE PRICING
Copyright 2007, Prentice Hall, Inc.

10. 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.
Copyright 2007, Prentice-Hall, Inc.

11. 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
Copyright 2007, Prentice Hall, Inc.

12. Cost-Based Pricing Cost-plus pricing
The simplest pricing model every where used
Adding a standard markup to the cost of the product
Example
Fixed cost- 100 Baht/ unit
Variable cost- 50 Baht / Unit
Total cost- 150 Baht
Profit margin – 50 Baht/ unit
Selling price – 200 Baht / Unit
Copyright 2007, Prentice Hall, Inc.

13. 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
Copyright 2007, Prentice Hall, Inc.

14. Break-Even Chart for Determining Price
Copyright 2007, Prentice-Hall, Inc.

15. 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
Copyright 2007, Prentice Hall, Inc.

16. Internal Factors Affecting Pricing Decisions
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.
Copyright 2007, Prentice Hall, Inc.

17. Target costing Tata Nano – Target Price- 75000 Baht
Copyright 2007, Prentice Hall, Inc.

18. Internal Factors Affecting Pricing Decisions
Organizational Considerations:
Must decide who within the organization should set prices.
This will vary depending on the size and type of company.
Copyright 2007, Prentice Hall, Inc.

19. 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
Copyright 2007, Prentice Hall, Inc.

20. Monopoly Only one company selling product in the market
The seller may be a government monopoly or a private regulated monopoly.
Copyright 2007, Prentice Hall, Inc.

21. 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).
Copyright 2007, Prentice Hall, Inc.

22. 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.
Copyright 2007, Prentice Hall, Inc.

23. Copyright 2007, Prentice Hall, Inc.

24. 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.
Copyright 2007, Prentice Hall, Inc.

25. Perfect Competition ตลาดแข่งขันสมบูรณ์
Many sellers offer many buyers an identical (homogeneous) product;
no seller can influence price

26. 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.
Copyright 2007, Prentice Hall, Inc.

27. 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.
Copyright 2007, Prentice Hall, Inc.

28. New-Product Pricing Strategies
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.
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.
Copyright 2007, Prentice Hall, Inc.

29. Product Mix Pricing Strategies
Product line pricing
Optional-product pricing
Captive-product pricing
By-product pricing
Product bundle pricing
Copyright 2007, Prentice Hall, Inc.

30. 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
Copyright 2007, Prentice-Hall, Inc.

31. 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).
Copyright 2007, Prentice Hall, Inc.

32. 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).
Copyright 2007, Prentice Hall, Inc.

33. Copyright 2007, Prentice Hall, Inc.

34. Product-Bundle Pricing
Marketing in Action
Product-Bundle Pricing
Travelers who book flight, hotel, and car together can save on average $ from Expedia.com
Copyright 2007, Prentice-Hall, Inc.

35. Price Adjustment Strategies
Discount and allowance pricing
Segmented pricing
Psychological pricing
Promotional pricing
Geographical pricing
Dynamic pricing
International pricing
Copyright 2007, Prentice Hall, Inc.

36. Discounts and Allowances
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.
Copyright 2007, Prentice-Hall, Inc.

37. 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:
Customer-segment
Product-form
Location pricing
Time pricing
Copyright 2007, Prentice Hall, Inc.

38. 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.
Copyright 2007, Prentice Hall, Inc.

39. Promotional Pricing
Companies offer promotional pricing to create excitement and a sense of urgency.
Copyright 2007, Prentice-Hall, Inc.

40. Geographical Pricing FOB-origin pricing Uniform-delivered pricing
Zone pricing
Basing-point pricing
Freight-absorption pricing
Copyright 2007, Prentice Hall, Inc.

41. 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 Board means it is the buyer’s responsibility to select the mode of transportation, choose the specific carrier, handle any damage claims, and pay all shipping charges
Copyright 2007, Prentice Hall, Inc.

42. 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.
Copyright 2007, Prentice Hall, Inc.

43. 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.
Copyright 2007, Prentice Hall, Inc.

44. 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.
Copyright 2007, Prentice Hall, Inc.

45. Basing-Point Pricing System
Product Price = $100
Basing-Point Pricing System
Base
Mill X
$20
Actual Freight
Customer
pays
$120
$30
Actual Freight
Mill Y
$10
Actual Freight
Mill Z
$10 Freight Absorption
$10 Phantom Freight
Adopted from: Monroe (1990), Pricing: Making Profitable Decisions, 2 ed.,
New York: McGraw-Hill Publishing Company.

46. Freight-absorption pricing
Using this strategy, the seller absorbs all or part of the actual freight charges in order to get the desired business
Copyright 2007, Prentice Hall, Inc.