1. Pricing Understanding and Capturing Customer Value
Bluefield College
October 21, 2010

2. Product Life Cycle

3. Introduction Stage of PLC
Sales: Low
Costs: High cost per customer
Profits: Negative or low
Customers: Innovators
Competitors: Few
Marketing objective: Create product awareness and trial.
Marketing strategies:
Product: Offer a basic product.
Price: Use cost-plus pricing.
Distribution: Build selective distribution.
Advertising: Build product awareness among early adopters and dealers.
Promotion: Use heavy promotion to entice product trial.

4. Growth Stage of PLC Sales: Rapidly rising
Costs: Average cost per customer
Profits: Rising profits
Customers: Early adopters
Competitors: Growing number
Marketing objective: Maximize market share.
Marketing strategies:
Product: Offer product extensions, service, warranty.
Price: Price to penetrate the market.
Distribution: Build intensive distribution.
Advertising: Build awareness and interest in the mass market.
Promotion: Reduce to take advantage of heavy consumer demand.

5. Maturity Stage of PLC Sales: Peak sales Costs: Low cost per customer
Profits: High profits
Customers: Middle majority
Competitors: Stable number beginning to decline
Marketing objective: Maximize profits while defending market share.
Marketing strategies:
Product: Diversify brand and models.
Price: Match or best competitors.
Distribution: Build more intensive distribution.
Advertising: Stress brand differences and benefits.
Promotion: Increase to encourage brand switching.

6. Maturity Stage of the PLC
Modifying the market:
Increase the consumption of the current product.
How?
Look for new users and market segments.
Reposition the brand to appeal to larger or faster-growing segment.
Modifying the product:
Changing characteristics such as quality, features, or style
Improve durability, reliability, speed, taste.
Improve styling and attractiveness or add new features
Modifying the marketing mix:
Improving sales by changing one or more marketing mix elements.
Cut prices.
Launch a better ad campaign and move into new market channels.

7. Decline Stage of PLC Sales: Declining sales
Costs: Low cost per customer
Profits: Declining profits
Customers: Laggards
Competition: Declining number
Marketing objective: Reduce expenditures and milk the brand.
Marketing strategies:
Product: Phase out weak items.
Price: Cut price.
Distribution: Go selective—phase out unprofitable outlets.
Advertising: Reduce to level needed to retain hard-core loyals.
Promotion: Reduce to minimal level.

8. What Is a Price?
Narrowly defined, price is the amount of money charged for a product or service.
Broadly defined, price is the sum of all of the values that consumers give up in order to gain the benefits of using the product or service.
Price vs. Value
Cutting cost in tough economic times isn’t 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. Considerations in Setting Price

10. Value-Based Pricing
Setting prices based on buyers’ perceptions of value rather than the seller’s cost.
When using a value-based pricing strategy, marketers first assess customer needs and value perceptions, then set the product’s price.
Customer value-based pricing:
Price is considered along with the other marketing mix variables before the marketing program is set.
Customer needs and value perceptions are assessed.
Target price is based on value perception.
Types of value-based pricing:
Good value pricing.
Value-added pricing.

11. Cost Pricing
Setting prices based on the cost of producing, distributing, and selling product at a fair rate of return.
Cost-based pricing:
Costs set the floor for the price that the company can charge.
Product-driven, rather than value-driven.
Types of costs:
Fixed costs:
Do not vary with production or sales level.
Variable costs:
Vary directly with the level of production.
Types of cost-based pricing:
Cost-plus (markup) pricing:
Adding a standard markup to the cost of the product.
Break-even pricing.
Target return pricing.

12. Chart for Determining Target-Return Price & Break-Even Volume

13. Competition-Based Pricing
Setting prices based on competitors’ strategies, costs, prices, and market offerings.
Assumes consumers base their judgments of a product’s value on the prices charged by competitors for similar products.
Assessing competitors’ pricing strategies:
How does the firm’s offering compare in terms of customer value?
How strong are competitors, what are their pricing strategies?
What principle should guide pricing decisions relative to those of the competition?

14. Other Factors Affecting Pricing Decisions
Internal factors:
Overall marketing strategy, objectives, and the marketing mix.
Organizational considerations.
External factors:
The market and demand.
Four types of markets exist:
Pure competition.
Monopolistic competition.
Oligopolistic competition.
Pure monopoly.
The economy.

15. Demand Curve

16. External Factors Affecting Pricing Decisions
The market and demand:
Analyzing the price-demand relationship:
Different prices result in different levels of demand, as shown by the demand curve.
Price elasticity of demand:
Refers to how responsive changes in demand will be to a change in price.
Small demand change = inelastic demand.
Large demand change = elastic demand.

17. Market-Skimming Pricing
Setting a high price for a new product to “skim” revenues layer-by-layer from those willing to pay the high price.
Company makes fewer, but more profitable sales.
When to use a market-skimming strategy:
Product’s quality and image must support its higher price.
Costs of low volume cannot be so high they cancel out the benefit of higher price.
Competitors should not be able to enter market easily and undercut price.

18. Market-Penetration Pricing
Setting 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 a market-penetration pricing strategy:
Market is highly price sensitive so a low price produces more growth.
Costs fall as sales volume increases.
Competition must be kept out of the market or the effects will be only temporary.

19. Product Mix Pricing

20. Price Adjustments

21. Price Adjustment Strategies
Discounts:
Cash
Quantity
Functional
Seasonal
Allowances:
Trade-in
Promotional
Types of segmented pricing:
Customer-segment: different customers pay different prices for the same good.
Product-form: different versions are priced differently but not according to cost.
Location pricing: different prices are charged for each location even when the cost of offering the good is the same.
Time pricing: price is varied according to time of year, season, month, day, or hour.

22. Price Adjustment Strategies
Psychological pricing:
Considers the psychology of prices and not simply the economics; the price is used to say something about product.
Price can often influence perceptions of quality.
Reference prices are important.
Promotional pricing:
Discounts (loss leaders).
Special-event pricing.
Cash rebates .
Low-interest financing.
Longer warranties.
Free maintenance.

23. Price Adjustment Strategies
Geographical pricing:
FOB-origin pricing.
Uniform-delivered pricing.
Zone pricing.
Basing-point pricing.
Freight-absorption pricing.
Dynamic pricing:
Adjusting prices continually to meet the characteristics and needs of individual customers and situations.

24. Price Adjustment Strategies
Factors influence international pricing:
Economic conditions.
Competitive situations.
Laws and regulations.
Development of the wholesaling and retailing system.
Consumer perceptions and preferences.
Different marketing objectives.
Costs.

25. Price Changes Price cuts may be initiated due to:
Excess capacity.
Falling demand in face of strong competitive price or a weakened economy.
Attempt to dominate market through lower costs.
Price increases can greatly improve profits and may be initiated due to:
Cost inflation.
Overdemand.
Marketers should avoid the practice (or appearance) of price gouging.

26. Responding to Competitor Price Changes

27. Public Policy and Pricing
Pricing within channel levels:
Price fixing.
Predatory pricing.
Pricing across channel levels:
Price discrimination.
Retail price maintenance.
Deceptive pricing.