Chapter Nine Pricing: Understanding and Capturing Customer Value

Copyright 2007, Prentice Hall, Inc.9-2 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.

Copyright 2007, Prentice Hall, Inc.9-3 Major Considerations in Setting Price 1.Customer perceptions of value 2.Product Costs 3. Other internal and external considerations –Marketing strategy, objectives, mix –Nature of the market and demand –Competitors’ strategies and prices

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 Product Costs  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.9-6 Cost-Based Pricing  Cost-plus pricing –Adding a standard markup to the cost of the product  Break-even pricing ( Target Profit Pricing) See Fig. 9.3 Page 267

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.9-8 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.9-9 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.9-11 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.9-12 New-Product Pricing Strategies  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.  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.9-13 New-Product Pricing Strategies  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.  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.

Copyright 2007, Prentice Hall, Inc.9-14 Product Mix Pricing Strategies 1.Product line pricing 2.Optional-product pricing 3.Captive-product pricing 4.By-product pricing 5.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 Product Pricing  Optional-Product –Pricing optional or accessory products sold with the main product (e.g., ice maker with the refrigerator).

Copyright 2007, Prentice Hall, Inc Captive-Product Pricing  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 Pricing Strategies  By-Product Pricing –Pricing low-value by-products to get rid of them (e.g., animal manure from zoo).

Copyright 2007, Prentice Hall, Inc Product Bundle Pricing Strategies  Product Bundle Pricing –Pricing bundles of products sold together (software, monitor, PC, and printer).