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

Describe the major strategies for pricing imitative and new products. 4/20/2017 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. Copyright 2005 Brainy Betty, Inc.

Toys ‘R’ Us – Pricing for Success Case Study 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. Copyright 2007, Prentice Hall, Inc.

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. Copyright 2007, Prentice Hall, Inc.

Major Considerations in Setting Price Customer perceptions of value Other internal and external considerations Marketing strategy, objectives, mix Nature of the market and demand Competitors’ strategies and prices Product costs Copyright 2007, Prentice Hall, Inc.

Customer Value Perceptions 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. Value-based pricing: 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.

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. Copyright 2007, Prentice Hall, Inc.

Cost-Based Pricing Cost-plus pricing Break-even pricing Adding a standard markup to the cost of the product Break-even pricing Target-profit pricing Copyright 2007, Prentice Hall, Inc.

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.

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.

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.

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.

External Factors Affecting Pricing Decisions Competitors’ Strategies and Prices How does the market offering compare? How strong is competition and what is their pricing strategy? How does competition influence price sensitivity? Other External Factors Copyright 2007, Prentice Hall, Inc.

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. 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.

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.

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

Product-Line Pricing Involves setting price steps between various products in a product line based on: Cost differences between products Customer evaluations of different features Competitors’ prices Copyright 2007, Prentice Hall, Inc.

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.

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.

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

Discounts and Allowances Cash Quantity Functional Seasonal Allowances Trade-in Promotional Copyright 2007, Prentice Hall, Inc.

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.

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.

Promotional Pricing Low-Interest Financing Longer Warranties Free Maintenance Cash Rebates Special-Event Pricing Loss Leaders Copyright 2007, Prentice Hall, Inc.

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

Dynamic Pricing Adjusting prices continually to meet the characteristics and needs of individual customers and situations. Copyright 2007, Prentice Hall, Inc.

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 Copyright 2007, Prentice Hall, Inc.

Initiating Price Changes Price Cuts: Excess capacity Falling market share Dominate market through lower costs Price Increases: Cost inflation Overdemand Copyright 2007, Prentice Hall, Inc.

Responses to Price Changes Buyer reactions to price changes Competitor reactions to price changes Firm responses to price changes: Reduce price to match competition Raise the perceived quality of its offer Improve quality and increase price Launch a low-price “fighting brand” Copyright 2007, Prentice Hall, Inc.

Public Policy and Pricing Price fixing Predatory pricing Price discrimination Retail price maintenance Deceptive pricing Promotion price reductions Scanner fraud Price confusion Copyright 2007, Prentice Hall, Inc.

Describe the major strategies for pricing imitative and new products. 4/20/2017 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. Copyright 2005 Brainy Betty, Inc.