1. Pricing: Understanding and Capturing Customer Value

2. Session Outline What Is a Price?
Factors to Consider when Setting Prices
Pricing Strategies
Pricing Process

3. What Is a Price?
The amount of money charged for a product or service, or the sum of the values that customers exchange for the benefits of having or using the product or service.

4. Factors to Consider when Setting Prices
Customer perceptions of value
Marketing strategy, objectives, and mix
Nature of the market and demand
Competitors’ strategies and prices
Product costs
Other internal and external considerations
Price Ceiling
No demand above this price
Price Floor
No profits below this price

5. Customer Perceptions of Value
In the end, the customer will decide whether a product's price is right. Pricing decisions, like other marketing mix decisions, must start with customer value.

6. Value-Based Pricing Versus Cost-Based Pricing
The Wrong Way
Cost-Based Pricing
Setting prices based on the costs for producing, distributing and selling the product plus a fair rate of return for effort and risk.
Design a good product
Determine product costs
Set price based on cost
Convince buyers of product’s value

7. Value-Based Pricing Versus Cost-Based Pricing
Setting price based on buyers’ perceptions of value rather than on the seller’s cost.
The Right Way
Assess customer needs and value perceptions
Set target price to match customer perceived value
Determine costs that can be incurred
Design product to deliver desired value at target price

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 company’s offer and charging higher prices.

9. Company and Product Costs
Cost Based Pricing
Setting prices based on the costs for producing, distributing and selling the product plus a fair rate of return for effort and risk.
Cost Plus Pricing
Adding a standard markup to the cost of the product.

10. Other Cost Considerations
Types of Costs
Costs at Different Levels of Production
Costs as a Function of Production Experience

11. Other Internal and External Considerations Affecting Price Decisions
Overall Marketing Strategy, Objectives and Mix
Organizational Considerations
The Market and Demand
Competitors Strategies and Prices

12. Pricing Strategies

13. New-Product Pricing Strategies
Market-Skimming Pricing
Setting a high price for a new product to skim maximum revenues layer by layer from the segments willing to pay the high price; the company makes fewer but more profitable sales.
Market-Penetration Pricing
Setting a low price for a new product in order to attract a large number of buyers and a large market share.

14. Skimming vs Penetration
Unit sales
Profitability
Penetration price
Penetration price
Skimming price
Skimming price
Time in local market
Time in local market

15. Pricing Process

16. Setting the Price (Pricing Process)
1. Selecting the Pricing Objective
2. Determining Demand
3. Estimating Costs
Analyzing Competitors’ Costs, Prices, and Offers
5. Selecting a Pricing Method
6. Selecting the Final Price

17. 1. Selecting the Pricing Objectives
Survival
Current Profit Maximization
Marketing
Objectives
Maximum Market Share
Maximum Market Skimming
Product Quality Leadership

18. 2. Determining Demand Price Elasticity of Demand
Inelastic Demand
Elastic Demand
105
100 10 15
Quantity Demanded
per Period
Price Rs.
150 50
Quantity Demanded
per Period 15 10
For further details about this topic see pages

19. 3. Estimating Costs
Demand sets a ceiling on the price the company can charge for its product. Costs set the floor. The company wants to charge a price that covers its cost of producing, distributing and selling the product, including a fair return for its effort and risk.

20. 4.Analyzing Competitors’ Costs, Prices and Offers
Within the range of possible prices determined by market demand and company costs, the firm must take competitors’ costs, prices and possible price reaction into account (reactions/ responses from customers, competitors, distributors, suppliers and even governments).

21. 5.Selecting a Pricing Method
High Price
Given the customers’ demand schedule, the cost function and competitors’ prices, the company can now select a price.
(No possible demand at this price)
Ceiling Price
Customers’ assessment of unique product features
Orienting point
Competitors’ prices and prices of substitutes
Costs
Floor Price
Low Price
(No possible profit at this price)

22. 6. Selecting the Final Price
Pricing methods narrow the range from which the company must select its final price. In selecting that price, the company must consider additional factors,
Impact of Other Marketing Activities
Company Pricing Policies
Gain and Risk Sharing Pricing
Impact of Price on Other Parties

23. Summary and Conclusions