1. Prentice Hall, Copyright 2009 1 Pricing: Understanding and Capturing Customer Value Chapter 9 Next Exit

2. 9-2 2 Prentice Hall, Copyright 2009 Rest Stop: Previewing the Concepts 1. Discuss the importance of understanding customer-value perceptions and company costs when setting prices. 2. Identify and define the other important internal and external factors affecting a firm’s pricing decisions. 3. Describe the major strategies for pricing imitative and new products. 4. Explain how companies find a set of prices that maximize the profits from the total product mix. 5. Discuss how companies adjust their prices to take into account different types of customers and situations. 6. Discuss key issues related to initiating and responding to price changes.

3. 9-3Prentice Hall, Copyright 2009 Background Company: Ryanair is one of Europe’s most popular carriers, flying 42.5 million passengers to 100+ European destinations. Profitability: Profits have increased at double-digit rates for the past 3 years; average fare is $53 and profit margin is 17% compared to Southwest’s $92 and 7%. Future Goal: CEO Michael O’Leary says that more than half of Ryanair’s customers will fly free by 2010. Ryanair – FREE Air Travel? Case Study How Can They Do This? Frugal Cost Structure: Constantly looking for new ways to cut costs— removed seat back pockets to reduce weight and cleaning costs. Sells 98% of tickets online, reducing commissions. Flight crews buy their own uniforms. Charges for Amenities: Customers pay for refreshments, snacks, and baggage check-in services. Generates Revenue Creatively: Planes serve as giant billboards; sells in-plane seatback advertising; merchandising in-flight. In the future, in-flight gaming is planned.

4. 9-4Prentice Hall, Copyright 2009 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 having or using the product or service.

5. Prentice Hall, Copyright 20099-5 Figure 9.1 Considerations in Setting Price

6. 9-6Prentice Hall, Copyright 2009 Quick Flick Setting Prices at Wellbeing Click to play video

7. 9-7 7 Prentice Hall, Copyright 2009 Value-based Pricing Setting prices based on buyers’ perceptions of value rather than on seller’s costs.

8. 9-8Prentice Hall, Copyright 2009 Customer Perceptions of Value  Value-based pricing: –Price is considered along with the other marketing mix variables before the marketing program is set. –Types of value-based pricing: Good value pricing Value-added pricing

9. 9-9 Prentice Hall, Copyright 2009 Good-Value Pricing Don’t confuse “good value” with “low price.” Some car buyers consider the luxurious Bentley Continental GT automobile a real value, even though it carries a hefty price tag of $ 150,000. Marketing in Action

10. 9-10 Prentice Hall, Copyright 2009 Value-added Pricing Many consumers believe that customization and personalization adds value to products, and are willing to pay the price! The mymms.com Web site lets consumers select their own M&M color and message. A 7-ounce bag costs $13.99, with a minimum order of three bags required.mymms.com Consumers are eating it up to the point where Dove chocolate now offers custom messages for foil wrappings as well.Dove chocolate Marketing in Action

11. 9-11 11 Prentice Hall, Copyright 2009 Cost-based Pricing Setting prices based on the costs for producing, distributing, and selling the product plus a fair rate of return for its effort and risk.

12. Prentice Hall, Copyright 20099-12 Figure 9.2 Value-based Pricing vs. Cost-based Pricing

13. 9-13Prentice Hall, Copyright 2009 Internal Factors Affecting Pricing Decisions  Cost-based pricing: –Fixed costs: Costs that do not vary with production or sales level. –Variable costs: Costs that vary directly with the level of production.

14. Prentice Hall, Copyright 20099-14 Figure 9.3 Break-Even Chart for Determining Price

15. 9-15Prentice Hall, Copyright 2009  Types of cost-based pricing: –Cost-plus pricing: Adding a standard markup to the cost of the product. –Break-even pricing –Target-profit pricing Internal Factors Affecting Pricing Decisions

16. 9-16Prentice Hall, Copyright 2009  Overall marketing strategy, objectives, and the marketing mix: –Company must decide on its overall marketing strategy for the product. –General pricing objectives: Survival Current profit maximization Market share leadership Product quality leadership Internal Factors Affecting Pricing Decisions

17. 9-17Prentice Hall, Copyright 2009  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. Internal Factors Affecting Pricing Decisions

18. 9-18Prentice Hall, Copyright 2009  Organizational considerations: –Must decide who within the organization should set prices. –This will vary depending on the size and type of company. Internal Factors Affecting Pricing Decisions

19. 9-19Prentice Hall, Copyright 2009 External Factors Affecting Pricing Decisions  The market and demand: –Costs set the lower limit of prices while the market and demand sets the upper limit. –Pricing in different types of markets: Pure competition Monopolistic competition Oligopolistic competition Pure monopoly

20. 9-20 Prentice Hall, Copyright 2009 Monopolistic Competition In a monopolistic competitive market, many different sellers offer products over a wide range prices. Moen sets its bath fixtures apart through strong branding and advertising, reducing the impact of price. Marketing in Action

21. Prentice Hall, Copyright 20099-21 Figure 9.4 Demand Curve

22. 9-22 Prentice Hall, Copyright 2009 Upwards Sloping Demand Gibson was surprised to learn that its high- quality instruments didn’t sell as well at lower prices, indicating that their demand curve runs counter to the norm and slopes upward. Marketing in Action

23. 9-23Prentice Hall, Copyright 2009  The market and demand: –The price elasticity of demand refers to how responsive demand will be to a change in price. Demand may be characterized as: Inelastic Elastic External Factors Affecting Pricing Decisions

24. 9-24Prentice Hall, Copyright 2009  Competitors’ Strategies and Prices: –How does the market offering compare to competitive products in terms of value? –How strong is the competition and what is their pricing strategy? –How does the competitive landscape influence customer price sensitivity?  Other External Factors External Factors Affecting Pricing Decisions

25. 9-25Prentice Hall, Copyright 2009 Market Skimming  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  Product’s quality and image must support its higher price.  Costs of low volume can’t be so high they cancel the advantage of charging more.  Competitors should not be able to enter market easily and undercut price. New-Product Pricing Strategies

26. 9-26 Prentice Hall, Copyright 2009 Skimming Pricing Strategy Electronics often use a skimming pricing strategy. The first VCRs cost in excess of $1,500 and declined to as low as $49 at the end of their life cycle. HDTVs originally cost $43,000 in 1990, yet many are now priced around $500. Marketing in Action

27. 9-27Prentice Hall, Copyright 2009 Market Penetration  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  Market is highly price sensitive so a low price produces more growth.  Costs must fall as sales volume rises.  Competition must be kept out of the market or the effects will be only temporary. New-Product Pricing Strategies

28. Fuel for Thought 9-28 Prentice Hall, Copyright 2009 Suppose that your firm implements a penetration pricing strategy while costs are increasing, only to find that demand is insufficient at the price set. How likely is it that you will be able to successfully raise your price to offset the increase in costs? Or would it be would be better to decrease price further? Would your answer depend on the elasticity of demand? Explain!

29. 9-29Prentice Hall, Copyright 2009  Product line pricing  Optional-product pricing  Captive-product pricing  By-product pricing  Product bundle pricing Product Mix Pricing Strategies

30. 9-30Prentice Hall, Copyright 2009 Product Mix Pricing Strategies  Product-line pricing: –Involves setting price steps between products in a product line based on cost differences between products and customer perceptions of value.

31. 9-31Prentice Hall, Copyright 2009 Product Mix Pricing Strategies  Optional-product pricing: –Pricing of optional or accessory products sold with the main product (e.g., printers, USB flash drives, or digital cameras with computers).

32. 9-32Prentice Hall, Copyright 2009 Product Mix Pricing Strategies  Captive-product pricing: –Pricing products that must be used with the main product. –Kodak is planning to buck the industry trend by selling their printers without discounts but pricing their ink cartridges inexpensively.

33. 9-33Prentice Hall, Copyright 2009 Product Mix 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).

34. 9-34Prentice Hall, Copyright 2009 Price Adjustment Strategies  Discount and allowance pricing  Segmented pricing  Psychological pricing  Promotional pricing  Geographical pricing  Dynamic pricing  International pricing

35. 9-35Prentice Hall, Copyright 2009 Price Adjustment Strategies  Discounts –Cash –Quantity –Functional –Seasonal  Allowances –Trade-in –Promotional

36. 9-36 36 Prentice Hall, Copyright 2009 Segmented Pricing Selling a product or service at two or more prices, where the difference in prices is not based on differences in costs.

37. 9-37Prentice Hall, Copyright 2009 Price Adjustment Strategies  Types of segmented pricing: 1.Customer-segment: different customers pay different prices for the same good. 2.Product-form: different versions are priced differently but not according to cost. 3.Location pricing: different prices are charged for each location even when the cost of offering the good is the same. 4.Time pricing: price is varied according to time of year, season, month, day, or hour.

38. 9-38 Prentice Hall, Copyright 2009 Product-Form Pricing Evian water in a 1-liter bottle might cost you 5 cents an ounce at the supermarket, whereas the same water may run $2.28 an ounce when sold in 5-ounce cans as Brumisateur Mineral Water Spray Moisturizer. Marketing in Action

39. 9-39Prentice Hall, Copyright 2009 Price Adjustment Strategies  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 during product evaluation when they can judge the quality of a product by examining it or recalling experiences.

40. 9-40 Prentice Hall, Copyright 2009 Psychological Pricing Reference prices are those prices that buyers carry in their minds and refer to when evaluating a given product. The tag at right offers a suggested retail price for reference. Marketing in Action

41. 9-41Prentice Hall, Copyright 2009 Price Adjustment Strategies  Geographical pricing: –FOB-origin pricing –Uniform-delivered pricing –Zone pricing –Basing-point pricing –Freight-absorption pricing  Promotional pricing: –Loss leaders –Special-event pricing –Low-interest financing –Longer warranties –Free maintenance –Discounts

42. 9-42Prentice Hall, Copyright 2009 Price Adjustment Strategies  Dynamic pricing: –Adjusting prices continually to meet the characteristics and needs of individual customers and situations.

43. 9-43Prentice Hall, Copyright 2009 Price Adjustment Strategies  International pricing: –Adjusting prices for international markets requires consideration of many factors.

44. 9-44Prentice Hall, Copyright 2009 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

45. 9-45Prentice Hall, Copyright 2009 Price Changes  Price cuts may be initiated due to: –Excess capacity –Falling demand in face of strong competitive price –Dominate market through lower costs  Price increases may be initiated due to: –Cost inflation –Overdemand

46. Prentice Hall, Copyright 20099-46 Figure 9.5 Assessing and Responding to Competitor Price Changes

47. 9-47 Prentice Hall, Copyright 2009 Responding to Price Changes Fighting brands include budget-priced Basic versions of products such as Bounty Basic.

48. 9-48Prentice Hall, Copyright 2009 Public Policy and Pricing  Price fixing  Predatory pricing  Price discrimination  Retail price maintenance  Deceptive pricing: –Promoted price reductions –Scanner fraud –Price confusion

49. 9-49 49 Prentice Hall, Copyright 2009 Rest Stop: Reviewing the Concepts 1. Discuss the importance of understanding customer-value perceptions and company costs when setting prices. 2. Identify and define the other important internal and external factors affecting a firm’s pricing decisions. 3. Describe the major strategies for pricing imitative and new products. 4. Explain how companies find a set of prices that maximize the profits from the total product mix. 5. Discuss how companies adjust their prices to take into account different types of customers and situations. 6. Discuss key issues related to initiating and responding to price changes.

50. 9-50 50 Prentice Hall, Copyright 2009 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. Copyright © 2009 Pearson Education, Inc. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall