1. Pricing: Understanding and Capturing Customer Value
CHAPTER 9
Pricing: Understanding and Capturing Customer Value

2. Roadmap: Previewing the Concepts
Discuss the importance of understanding customer value perceptions and company costs when setting prices.
Identify and define the other important internal and external factors affecting a firm’s pricing decisions.
Describe the major strategies for pricing imitative and new products.
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 key issues related to initiating and responding to price changes.
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3. TOYS ‘R’ US – Pricing for Success
The Past
1970s: Toys ‘R’ Us emerges as a toy retailing category killer, offering greater product selection and lower prices than its small store competition.
Explosive growth occurs.
Late 1990s: Wal-Mart uses toys as a loss leader, pricing lower than Toys ‘R’ Us and becomes the largest toy retailer.
The Present
Toys ‘R’ Us tries price matching and fails miserably, losing sales, profit, and market share.
New ownership closes stores, cut costs, and steps away from the price war.
Efforts focus on top-selling, higher margin, or exclusive items; store atmosphere; shopper experiences; and customer service.
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4. 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.
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5. Figure 9-1 Factors Affecting Pricing Decisions
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6. Customer Value Perceptions
Effective, customer-oriented pricing involves understanding how much value consumers place on the benefits they receive from the product and setting a price that captures that value.
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7. Figure 9-2 Value-Based Pricing Vs. Cost-Based Pricing
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8. Good-Value Pricing and Value-Added Pricing
Offering just the right combination of quality and good service at a fair price.
Value-Added Pricing:
Attaching value-added features and services to differentiate a marketing and offer and support higher prices, rather than cutting prices to match competitors.
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9. Value-Added Pricing Marketing in Action
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.
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10. Internal Factors Affecting Pricing Decisions
Company and Product Costs:
Fixed Costs:
Costs that do not vary with production or sales level.
Variable Costs:
Costs that vary directly with the level of production.
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11. Cost-Based Pricing Methods
Cost-plus pricing
Adding a standard markup to the cost of the product.
Break-even pricing
Target-profit pricing
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12. Figure 9-3 Break-Even Chart for Determining Price
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13. 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
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14. Product Quality Leadership
Marketing in Action
Product Quality Leadership
Buenaventura Medical Group’s mission and advertising reflect its commitment to product quality leadership in health care.
No mention is made of price Except for the statement that “most HMO and PPO plans are accepted.”
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15. 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 starts with an ideal selling price, then targets costs that will ensure that the price is met.
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16. 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.
Small organizations
Large organizations
Industrial firms
Service providers
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17. External Factors Affecting Pricing Decisions
The Market and Demand:
Costs set the lower limit of prices while the market & 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.
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18. External Factors Affecting Pricing Decisions
Types of Markets:
Pure Competition: many buyers and sellers of a uniform commodity at a uniform price.
Monopolistic Competition: many buyers and sellers of differentiated products, at different prices.
Oligopolistic Competition: a few sellers who are highly sensitive of each other’s prices. Goods may be uniform or nonuniform.
Pure Monopoly: a single government, private regulated, or private nonregulated seller.
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19. Let’s Talk! What type of market best describes the cable TV industry?
comcast.com
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20. Figure 9-4 The Demand Curve
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21. External Factors Affecting Pricing Decisions
Competitive Issues Affecting Price
What are our competitor’s costs, prices, and market offerings?
Will our pricing attract, restrict, or drive out competitors?
How does our market offering compare to the competition in terms of customer value?
How strong are current competitors and what is their pricing strategy?
How does competition influence price sensitivity?
Other External Factors
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22. New-Product Pricing Strategies
Market Skimming:
Set a high price for a new product so as to “skim” revenues layer by layer from the market.
Company makes fewer, but more profitable sales.
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.
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23. New-Product Pricing Strategies
Market Penetration:
Set a low initial price in order for the brand 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.
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24. Let’s Talk!
What type of pricing strategy is normally used when a new prescription drug is introduced in the U.S.?
Why?
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25. Product Mix Pricing Strategies
Product line pricing
Optional-product pricing
Captive-product pricing
By-product pricing
Product bundle pricing
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26. 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
Product Line Pricing: Gramophone sells a line of high-end sound systems ranging in price from $5,000 to $120,000.
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27. 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).
Video Snippet
Song Airline uses optional-product pricing to create highly successful and profitable revenue streams.
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28. 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).
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29. Product-Bundle Pricing
Marketing in Action
Product-Bundle Pricing
Travelers who book flight, hotel, and car together can save on average $ from Expedia.com
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30. Price Adjustment Strategies
Discount and allowance pricing
Segmented pricing
Psychological pricing
Promotional pricing
Geographical pricing
Dynamic pricing
International pricing
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31. Discounts and Allowances
Cash
Quantity
Functional
Seasonal
Allowances
Trade-in
Promotional
Christmas cards purchased out of season, such as in March or July, are often sold at a discount.
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32. Pricing at Walt Disney World Resorts varies by the time of year.
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
Pricing at Walt Disney World Resorts varies by the time of year.
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33. 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.
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34. Promotional Pricing Techniques
Cash Rebates
Special-Event Pricing
Loss Leaders
Low-Interest Financing
Longer Warranties
Free Maintenance
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35. Promotional Pricing Marketing in Action
Companies offer promotional pricing to create excitement and a sense of urgency.
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36. Geographical Pricing FOB-origin pricing Uniform-delivered pricing
Zone pricing
Basing-point pricing
Freight-absorption pricing
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37. Dynamic Pricing
Adjusting prices continually to meet the characteristics and needs of individual customers and situations.
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38. Dynamic Pricing Marketing in Action
Buyers benefit from dynamic pricing. Shopping sites on the Web that offer comparison services help buyers track price changes as they occur.
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39. International Pricing
Price depends on many factors, including:
Economic conditions
Competitive situations
Laws and regulations
Development of the wholesaling and retailing system
Consumer perceptions and preferences
Costs
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40. Initiating Price Changes
Price Cuts:
Excess capacity
Falling market share
Dominate market through lower costs
Price Increases:
Cost inflation
Overdemand
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41. Let’s Talk!
How would consumers likely react if Joy suddenly cut its price in half? Explain.
Can you think of any products or services where a drop in price might decrease demand for the item? Explain.
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42. Figure 9-5 Assessing and Responding to Competitor Price Changes
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43. Figure 9-6 Public Policy Issues in Pricing
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44. Rest Area: Reviewing the Concepts
Discuss the importance of understanding customer value perceptions and company costs when setting prices.
Identify and define the other important internal and external factors affecting a firm’s pricing decisions.
Describe the major strategies for pricing imitative and new products.
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 key issues related to initiating and responding to price changes.
Copyright 2007, Prentice-Hall Inc.