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Part 3: Develop the Value Proposition for the Customer
Chapter 10
Price: What is the Value Proposition Worth?
I. Chapter Overview
The chapter begins by asking the question, “What is price?” At first glance, students may
think the question has an obvious answer—the number printed on the price sticker. However,
as students explore this chapter, they will discover that price is a whole lot more. Price is a
function of demand, costs, revenue, and the environment. Pricing can be monetary or nonmonetary. Pricing decisions lead to specific pricing strategies and tactics, discussed in the
chapter. Students also learn about the psychological aspect of pricing, as well as legal, and
ethical aspects of pricing.
II. CHAPTER OBJECTIVES
1. Explain the importance of pricing and how marketers set objectives for their pricing
strategies.
2. Describe how marketers use costs, demands, revenue and the pricing environment to
make pricing decisions.
3. Understand key pricing strategies and tactics.
4. Understand the opportunities for Internet pricing strategies.
5. Describe the psychological, legal, and ethical aspects of pricing.
III. CHAPTER OUTLINE
►MARKETING MOMENT INTRODUCTION
Your job is to buy the “best” Oriental rug. One rug is priced at $800 while another is priced at
$1000. Which one is the best? How did you make that decision? This is an excellent time to
introduce the concept of price as an extrinsic cue and the price/quality relationship.
p. 279
REAL PEOPLE, REAL CHOICES—
HERE’S MY PROBLEM AT CONVERSE COLLEGE
In 2013, the administration of Converse College, a private
master’s university located in South Carolina, realized that
escalating tuition costs were creating serious problems for current
and potential students. Betsy and her staff decided to take a
serious look at the College’s pricing model. Their objective was
threefold: (1) address the affordability concerns of private higher
education within the marketplace, (2) recapture a greater portion
of the middle class market that was feeling priced out of the
private college experience, and (3) develop a more sustainable
Copyright © 2016 Pearson Education, Inc.
Chapter 10: Price: What is the Value Proposition Worth?
and transparent operating model for the college. Betsy launched a
strategic enrollment planning process that involved extensive
research to guide data-driven decisions. The working group
identified possible solutions to the high-tuition dilemma
1. Reset tuition to a significantly lower price for traditional
undergraduate students.
2. Freeze tuition for each incoming student from the time she
matriculated until she graduated.
3. Provide students with a Loan Repayment Program (LRP),
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The vignette ends by asking the student which option he/she
would choose.
 Betsy chose Option #1
1.
“YES, BUT WHAT DOES IT COST?”
The question of what to charge for a product is a central part of
marketing decision making.
1.1 What is Price?
Price is the assignment of value, or the amount the consumer
must exchange to receive the offering or product. Payment may
be in the form of money, goods, services, favors, votes, or
anything else that has value to the other party.
Other non-monetary costs often are important to marketers. It is
also important to consider an opportunity cost, or the value of
something that is given up to obtain something else.
1.2
Step 1: Develop Pricing Objectives
The first crucial step in price planning is to develop pricing
objectives. These must support the broader objectives of the firm,
such as maximizing shareholder value, as well as its overall
marketing objectives, such as increasing market share.
1.2.1 Profit Objectives
Often a firm’s overall objectives relate to a certain level of profit
it hopes to realize. This is usually the case in B2B marketing.
When pricing strategies are determined by profit objectives, the
focus is on a target level of profit growth or a desired net profit
margin. A profit objective is important to firms that believe profit
is what motivates shareholders and bankers to invest in a
company.
1.2.2 Sales or Market Share Objectives
However, lowering prices is not always necessary to increase
market share. If a company’s product has a competitive
advantage, keeping the price at the same level as other firms may
satisfy sales objectives.
►METRICS MOMENT
Copyright © 2016 Pearson Education, Inc.
The Cutting
Edge
Digital
Currencies:
Bitcoin
Figure 10.1
Elements of
Price Planning
Figure 10.2
Pricing
Objectives
Exhibit 10. 1
Airplane
passengers
Part 3: Develop the Value Proposition for the Customer
Market share is the percentage of a market (defined in terms of
Exhibit 10. 2
either sales units or revenue) accounted for by a specific firm,
Autoslash
product lines, or brands. Market share is quoted within the context
of a particular set of competitors.
Applying the Metrics
 ● Pick any industry and identify the main competitors—this can
be any type of product or service line of your choice as long as
there are several easily identified competing brands (Hint:
Publicly traded firms are easier to research then privately held
firms.)

● Do a little research to find out how their market shares stack
up. Then, for the same firms, take a look at their most recent
reported profits. Based on your findings, does a higher market
share translate into a better profit picture?
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1.2.3 Competitive Effect Objectives
Sometimes strategists design the pricing plan to dilute the
competition’s marketing efforts. In these cases, a firm may
deliberately try to preempt or reduce the impact of a rival’s
pricing changes.
1.2.4 Customer Satisfaction Objectives
Many quality-focused firms believe that profits result from
making customer satisfaction the primary objective. These firms
believe that by focusing solely on short-term profits, a company
loses sight of keeping customers for the long term.
1.2.5 Image Enhancement Objectives
Consumers often use price to make inferences about the quality of
a product. In fact, marketers know that price is often an important
means of communicating not only quality but also image to
prospective customers. The image enhancement function of
pricing is particularly important with prestige products (or
luxury products), which have a high price and appeal to statusconscious consumers.
2.
COSTS, DEMAND, REVENUE, AND THE
MARKETING ENVIRONMENT
p. 284
2.1 Step 2: Estimate Demand
The second step in price planning is to estimate demand. Demand
refers to customers’ desires for a product: How much of a product
are they willing to buy as the price of the product goes up or
down?
p. 284-
2.1.1
Demand Curves
Copyright © 2016 Pearson Education, Inc.
Figure 10.3
Factors in Price
Setting
Figure 10.4
Chapter 10: Price: What is the Value Proposition Worth?
285
Economists use a graph of a demand curve to illustrate the effect
of price on the quantity demanded of a product. The demand
curve, which can be a curved or straight line, shows the quantity
of a product that customers will buy in a market during a period at
various prices if all other factors remain the same.
Demand Curves
for Normal and
Prestige Products
The demand curve for most goods (Left side of Figure 10.2)
slopes downward and to the right. As the price of the product goes
up (P1 to P2), the number of units that customers are willing to
buy goes down (Q1 to Q2). If prices decrease, customers will buy
more. This is the law of demand. For example, if the price of
bananas goes up, customers will probably buy fewer of them.
p. 285286
There are, however, exceptions to this typical price–quantity
relationship. In fact, there are situations in which (otherwise sane)
people desire a product more as it increases in price. For prestige
products such as luxury cars or jewelry, a price hike may actually
result in an increase in the quantity consumers demand because
they see the product as more valuable. In such cases, the demand
curve slopes upward. The higher-price/higher-demand
relationship has its limits. If the firm increases the price too much,
(say from P2 to P1) making the product unaffordable for all but a
few buyers, demand will begin to decrease.
2.1.2 Shifts in Demand
The demand curves we have shown assume that all factors other
than price stay the same. However, what if they do not? What if
the company improves the product? What happens when there is a
glitzy new advertising campaign that turns a product into a “musthave” for many people? What if stealthy paparazzi catch Brad
Pitt using the product at home? Any of these things could cause
an upward shift of the demand curve. An upward shift in the
demand curve means that at any given price, demand is greater
than before the shift occurs.
Demand curves may also shift downward.
p. 286
3.1.3 Estimate Demand
Marketers predict total demand first by identifying the number of
buyers or potential buyers for their product and then multiplying
that estimate times the average amount each member of the target
market is likely to purchase.
Once the marketer estimates total demand, the next step is to
predict what the company’s market share is likely to be. The
company’s estimated demand is then its share of the whole
market. Such projections need to take into consideration other
Copyright © 2016 Pearson Education, Inc.
Figure 10.5
Shift in Demand
Curve
Table 10.1
Estimating
Demand for
Pizza
Part 3: Develop the Value Proposition for the Customer
p. 286
factors that might affect demand, such as new competitors
entering the market, the state of the economy, and changing
customer tastes.
2.1.4 Price Elasticity of Demand
Marketers also need to know how their customers are likely to
react to a price change. In particular, it is critical to understand
whether a change in price will have a large or a small impact on
demand.
Exhibit 10. 3
Couple w/iPad
p. 287
Price elasticity of demand is a measure of the sensitivity of
customers to changes in price. The word elasticity indicates that
changes in price usually cause demand to stretch or retract like a
rubber band. Some customers are very sensitive to changes in
price, and a change in price results in a substantial change in the
quantity demanded. In such instances, we have a case of elastic
demand. In other situations, we describe a change in price that
has little or no effect on the quantity that consumers are willing to
buy as inelastic demand.
Figure 10.6
Price Elasticity
of Demand
p. 288
2.1.5 Demand curves
When demand is elastic, changes in price and in total revenues
work in opposite directions. If the price is increased, revenues
decrease. If the price is decreased, total revenues increase.
Figure 10.7
Price Elastic and
Inelastic Demand
Curves
In some instances, demand is inelastic so that a change in price
results in little or no change in demand. When demand is
inelastic, price and revenue changes are in the same direction; that
is, increases in price result in increases in total revenue, while
decreases in price result in decreases in total revenue.
Elasticity of demand for a product often differs for different price
levels and with different percentages of change.
As a rule, businesses can determine the actual price elasticity only
after they have tested a pricing decision and calculated the
resulting demand. To estimate what demand is likely to be at
different prices for new or existing products, marketers often do
research.
p. 289
Other factors can affect price elasticity and sales. Consider the
availability of substitute goods or services. If a product has a
close substitute, its demand will be elastic; that is, a change in
price will result in a change in demand, as consumers move to
buy the substitute product. Marketers of products with close
substitutes are less likely to compete on price because they
Copyright © 2016 Pearson Education, Inc.
Chapter 10: Price: What is the Value Proposition Worth?
recognize that doing so could result in less profit as consumers
switch from one brand to another.
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Changes in prices of other products also affect the demand for an
item, a phenomenon we label cross-elasticity of demand. When
products are substitutes for each other, an increase in the price of
one will increase the demand for the other. For example, if the
price of bananas goes up, consumers may instead buy more
strawberries, blueberries, or apples. However, when products are
complements—that is, when one product is essential to the use of
a second—an increase in the price of one decreases the demand
for the second.
2.2
Step 3: Determine Costs
Estimating demand helps marketers determine possible prices to
charge for a product. It tells them how much of the product they
think they will be able to sell at different prices. Knowing this
brings them to the third step in determining a product’s price:
making sure the price will cover costs. Before marketers can
determine price, they must understand the relationship of cost,
demand, and revenue for their product.
2.2.1 Variable and Fixed Costs
First, a firm incurs variable costs—the per-unit costs of
production that will fluctuate depending on how many units or
individual products a firm produces. Variable costs can go down
with higher levels of production but do not always do so.
p. 290
Fixed costs are costs that do not vary with the number of units
produced—the costs that remain the same whether the firm
produces 1,000 bookcases this month or only 10. Fixed costs
include rent or the cost of owning and maintaining the factory,
utilities to heat or cool the factory, and the costs of equipment
such as hammers, saws, and paint sprayers used in the production
of the product.
p. 290
Average fixed cost is the fixed cost per unit produced, that is, the
total fixed costs divided by the number of units produced.
Although total fixed costs remain the same no matter how many
units are produced, the average fixed cost will decrease as the
number of units produced increases. As we produce more and
more units, average fixed costs go down, and so does the price we
must charge to cover fixed costs.
In the long term, total fixed costs may change.
p. 290
Combining variable costs and fixed costs yields total costs for a
given level of production. As a company produces more and more
Copyright © 2016 Pearson Education, Inc.
Figure 10.8
Variable Costs at
Different Levels
of Production
Part 3: Develop the Value Proposition for the Customer
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of a product, both average fixed costs and average variable costs
may decrease. Average total costs may decrease, too, up to a
point. As output continues to increase, average variable costs may
start to increase. These variable costs ultimately rise faster than
average fixed costs decline, resulting in an increase to average
total cost. As total cost fluctuates with differing levels of
production, the price that producers have to charge to cover those
costs changes accordingly. Therefore, marketers need to calculate
the minimum price necessary to cover all costs—the break-even
price.
2.2.2 Break-Even Analysis
Break-even analysis is a technique marketers use to examine the
relationship between cost and price and to determine what sales
volume must be reached at a given price before the company will
completely cover its total cost and past which it will begin making
a profit. Simply put, the break-even point is the point at with the
company does not lose any money and does not make any profit.
A break-even analysis allows marketers to identify how many
units of a product they will have to sell at a given price to be
profitable.
p. 291
To determine the break-even point, the firm first needs to
calculate the contribution per unit, or the difference between the
prices the firm charges for a product (the revenue per unit) and the
variable costs. This figure is the amount the firm has after paying
for the goods that contribute to meeting the fixed costs of
production.
p. 292
Often a firm will set a profit goal, which is the dollar profit figure
it desires to earn. The break-even point may be calculated with
that dollar goal included in the figures.
Sometimes the target return or profit goal is expressed as a
percentage of sales. For example, a firm may say that it wants to
make a profit of at least 10 percent on sales. In such cases, this
profit is added to the variable cost in calculating the break-even
point.
Break-even analysis does not provide an easy answer for pricing
decisions. It provides answers about how many units the firm
must sell to break even and to make a profit, but without knowing
whether demand will equal the quantity at that price, companies
can make big mistakes. It is, therefore, useful for marketers to
estimate the demand for their product and then perform a
marginal analysis.
Copyright © 2016 Pearson Education, Inc.
Figure 10.9
Break-Even
Analysis
Assuming a Price
of $100
Chapter 10: Price: What is the Value Proposition Worth?
p. 292
2.2.3 Markups and Margins: Pricing Through the Channel
So far, we have talked about costs simply from the manufacturer’s
perspective. However, in reality, most products are not sold
directly to the consumers or business buyers of the product.
Instead, a manufacturer sells to a wholesaler, distributor, or jobber
who in turn sells to a retailer who finally sells the product to the
ultimate consumer. Setting prices means considering all of these
steps.
Each member of the channel of distribution buys a product for a
certain amount and adds a markup amount to create the price at
which they will sell a product. This markup amount is the gross
margin, also referred to as the retailer margin or the wholesaler
margin. The margin must be great enough to cover the fixed
costs of the retailer or wholesaler and leave an amount for a
profit. When a manufacturer sets a price, he or she must consider
these margins. Many times, a manufacturer builds its pricing
structure around list prices. A list price, which we also refer to as
a manufacturer’s suggested retail price (MSRP), is the price
that the manufacturer sets as the appropriate price for the end
consumer to pay.
p. 293
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2.3
Step 4: Evaluate The Pricing Environment
Marketers look at factors in the firm’s external environment when
they make pricing decisions. The fourth step in developing
pricing strategies is to examine and evaluate the pricing
environment. Only then can marketers set a price that not only
covers costs but also provides a competitive advantage—a price
that meets the needs of customers better than the competition.
2.3.1 The Economy
Broad economic trends tend to direct pricing strategies. The
business cycle, inflation, economic growth, and consumer
confidence all help to determine whether one pricing strategy or
another will succeed.
Exhibit 10. 4
Progressive
Exhibit 10. 5
ForceFlex
Garbage Bag ad
During recessions, consumers grow more price sensitive. Many
firms find it necessary to cut prices to levels at which costs are
covered but the company does not make a profit to keep factories
in operation.
Inflation may give marketers cause to either increase or decrease
prices. First, inflation gets customers used to price increases.
They may remain insensitive to price increases, even when
inflation goes away, allowing marketers to make real price
increases. In periods of recession, inflation may cause marketers
to lower prices and temporarily sacrifice profits in order to
Copyright © 2016 Pearson Education, Inc.
Exhibit 10. 7
P&G Pampers
ad
Part 3: Develop the Value Proposition for the Customer
p. 294295
maintain sales levels.
2.3.2 The Competition
Marketers try to anticipate how the competition will respond to
their pricing actions. It is not always a good idea to fight the
competition with lower prices. Pricing wars can change
consumers’ perceptions of what is a “fair” price, leaving them
unwilling to buy at previous price levels.
Exhibit 10. 8
Starbuck Coffee
Store Photo
Generally, firms that do business in an oligopoly (in which the
market has few sellers and many buyers) are more likely to adopt
status quo pricing objectives in which the pricing of all
competitors is similar. Avoiding price competition allows all
players in the industry to remain profitable.
p. 295
Firms in a purely competitive market have little opportunity to
raise or lower prices. Price is directly influenced by supply and
demand.
2.3.3 Government Regulation
Governments in the U.S. and other countries develop two
different types of regulations, which have an effect on pricing.
First, a large number of regulations increase the costs of
production. Regulations for health care, environmental protection,
occupational safety, and highway safety, just to mention a few,
cause the costs of producing many products to increase. Other
regulations of specific industries such as those imposed by the
Food and Drug Administration (FD) on the production of food
and pharmaceuticals increase the costs of developing and
producing those products. In addition, some regulations directly
address prices.
p. 296
2.3.4 Consumer Trends
Consumer trends also can strongly influence prices. Culture and
demographics determine how consumers think and behave and so
these factors have a large impact on all marketing decisions.
p. 296
2.3.5 The International Environment
The marketing environment often varies widely from country to
country. This can have important consequences in developing
pricing strategies.
3. IDENTIFY STRATEGIES AND TACTICS TO PRICE
THE PRODUCT
In modern business, there seldom is any one-and-only, now-andforever, and best pricing strategy. Like playing a game of chess,
making pricing moves and countermoves requires thinking two
and three moves ahead.
p. 297
Copyright © 2016 Pearson Education, Inc.
Figure 10.10:
Pricing Strategies
and Tactics
Chapter 10: Price: What is the Value Proposition Worth?
p. 297
3.1
Step 5: Choose a Pricing Strategy
The next step in price planning is to choose a pricing strategy.
p. 297
3.1.1 Pricing Strategies Based on Cost
Marketing planners often choose cost-based strategies because
they are simple to calculate and relatively risk free. They promise
that the price will at least cover the costs the company incurs in
producing and marketing the product.
Cost-based pricing methods have drawbacks, however. They do
not consider such factors as the nature of the target market,
demand, competition, the product life cycle, and the product’s
image. The calculations for setting the price may be simple and
straightforward but accurate cost estimating may prove difficult.
p. 298
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The most common cost-based approach to pricing a product is
cost-plus pricing in which the marketer totals all the costs for the
product and then adds an amount (or marks up the cost of the
item) to arrive at the selling price. Many marketers use cost-plus
pricing because of its simplicity—users need only estimate the
unit cost and add the markup. To calculate cost-plus pricing,
marketers usually calculate either a markup on cost or a markup
on selling price.
3.1.2 Pricing Strategies Based on Demand
Demand-based pricing means that the firm bases the selling
price on an estimate of volume or quantity that it can sell in
different markets at different prices. Firms must determine how
much product they can sell in each market and at what price.
Today, firms find that they can be more successful if they match
price with demand using a target costing process. They first
determine the price at which customers would be willing to buy
the product and then works backward to design the product in
such a way that it can produce and sell the product at a profit.
With target costing, firms first use marketing research to identify
the quality and functionality needed to satisfy attractive market
segments and what price they are willing to pay before the
product is designed. The next step is to determine what margin
retailers and dealers require as well as the profit margin the
company requires. Based on this information, managers can
calculate the target cost—the maximum it will cost the firm to
manufacture the product. If the firm can meet customer quality
and functionality requirements and control costs to meet the
required price, it will manufacture the product.
Copyright © 2016 Pearson Education, Inc.
Figure 10.11
Target Costing
Using a Jeans
Example
Part 3: Develop the Value Proposition for the Customer
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Yield management pricing, another type of demand-based
pricing, is a pricing strategy used by airlines, hotels, and cruise
lines. Firms charge different prices to different customers in order
to manage capacity while maximizing revenue. This strategy
works because different customers have different sensitivities to
price. The goal of yield management pricing is to accurately
predict the proportion of customers who fall into each category
and allocate the percentage of the airline or hotel’s capacity
accordingly so that no product goes unsold.
3.1.3 Pricing Strategies Based on the Competition
Sometimes a firm’s pricing strategy involves pricing its wares
near, at, above, or below the competition. A price leadership
strategy, which usually is the rule in an industry dominated by
few firms and called an oligopoly, may be in the best interest of
all firms because it minimizes price competition. Price leadership
strategies are popular because they provide an acceptable and
legal way for firms to agree on prices without ever talking with
each other.
3.1.4 Pricing Strategies Based on Customers’ Needs
When firms develop pricing strategies that cater to customers,
they are less concerned with short-term results than with keeping
customers for the long term.
Exhibit 10. 6
Priceline
Firms that practice value pricing or everyday low pricing
(EDLP), develop a pricing strategy that promises ultimate value
to consumers. What this means is that, in the customer’s eyes, the
price is justified by what they receive.
When firms base price strategies solely or mainly on cost, they
are operating under the old production orientation and not a
customer orientation. Value-based pricing begins with customer,
then considers the competition, and then determines the best
pricing strategy.
3.1.5 New Product Pricing
When a product is new to the market or when there is no
established industry price norm, marketers may use a skimming
price strategy, a penetration pricing strategy, or trial pricing when
they first introduce the item to the market.
Setting a skimming price means that the firm charges a high,
premium price for its new product with the intention of reducing
it in future response to market pressure.
If a product is highly desirable and it offers unique benefits,
Copyright © 2016 Pearson Education, Inc.
Exhibit 10. 10
Dank Furniture
ad
Chapter 10: Price: What is the Value Proposition Worth?
demand is price inelastic during the introductory stage of the
product life cycle, allowing a company to recover research-anddevelopment and promotion costs. When rival products enter the
market, the price is lowered in order for the firm to remain
competitive. Firms focusing on profit objectives in developing
their pricing strategies often set skimming prices for new
products.
A skimming price is more likely to succeed if the product
provides some important benefits to the target market that make
customers feel they must have it no matter what the cost.
For a skimming price to be successful there should also be little
chance that competition can get into the market quickly. In
addition, the market should consist of several customer segments
with different levels of price sensitivity.
p. 300
Penetration pricing is the opposite of skimming pricing. In this
situation, the company prices a new product very low to sell more
in a short time and gain market share early on. One reason
marketers use penetration pricing is to discourage competitors
from entering the market. The firm first out with a new product
has an important advantage. Experience shows that a pioneering
brand often is able to maintain dominant market share for long
periods. Penetration pricing may act as a barrier-to-entry for
competitors if the prices the market will bear are so low that the
company will not be able to recover development and
manufacturing costs.
p. 300
Trial pricing means that a new product carries a low price for a
limited time to generate a high level of customer interest. Unlike
penetration pricing, in which the company maintains the low
price, in this case it increases the trial price after the introductory
period. The idea is to win customer acceptance first and make
profits later
3.2 Step 6: Develop Pricing Tactics
Once marketers have developed pricing strategies, the last step in
price planning is to implement them. The methods companies use
to set their strategies in motion are their pricing tactics.
3.2.1 Pricing for Individual Products
The way marketers present a product’s price to a market can make
a big difference. The following are two examples:
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p. 301
Two-part pricing requires two separate types of payments to
purchase the product. Payment pricing makes the consumer think
the price is “do-able” by breaking up the total price into smaller
Copyright © 2016 Pearson Education, Inc.
Part 3: Develop the Value Proposition for the Customer
amounts payable over time.
►Marketing Moment In-Class Activity
Ask students to think of examples of products (besides cars) that use payment pricing. Who is the
target market (people who may not be able to afford the product)? Are there any ethical concerns
to this tactic? How would you advertise the price?
p. 301
3.2.2 Pricing for Multiple Products
A firm may sell several products that consumers typically buy at
one time. Price bundling means selling two or more goods or
services as a single package for one price—a price that is often
less than the total price of the items if bought individually.
Captive pricing is a pricing tactic a firm uses when it has two
products that work only when used together. The firm sells one
item at a very low price and then makes its profit on the second
high-margin item.
Marketing Moment In-Class Activity
Identify how fast food restaurants use product bundling? (Example: Happy Meal) Are there any
ethical concerns (i.e., people eating more because they ‘get a deal’)?
p. 301
3.2.3 Distribution-Based Pricing
Distribution-based pricing is a tactic that establishes how firms
handle the cost of shipping products to customers near as well as
far.
F.O.B. pricing is a tactic used in business-to-business marketing.
Often
a company states a price as F.O.B. factory or F.O.B. delivered.
F.O.B. stands for “free on board,” which means the supplier pays
to have the product loaded onto a truck or some other carrier.
Also—and this is important—title passes to the buyer at the
F.O.B. location. F.O.B. factory or F.O.B. origin pricing means
that the cost of transporting the product from the factory to the
customer’s location is the responsibility of the customer. F.O.B.
delivered pricing means that the seller pays both the cost of
loading and the cost of transporting to the customer, amounts it
includes in the selling price.
p. 302
International Delivery Pricing Terms of Sale
 CIF (cost, insurance, freight) is used for ocean
shipments. It means the seller quotes a price for the
goods (including insurance), all transportation, and
miscellaneous charges to the point of debarkation from
the vessel.
 CFR (cost and freight) means the quoted price covers
the goods and the cost of transportation to the named
Copyright © 2016 Pearson Education, Inc.
Chapter 10: Price: What is the Value Proposition Worth?
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point of debarkation but the buyer must pay the cost of
insurance. This term is typically used only for ocean
shipments.
 CIP (carriage and insurance paid to) and CPT
(carriage paid to) include the same provisions as CIF
and CFR. However, they are used for shipment by
modes other than water.
When a firm uses uniform delivered pricing, it adds an average
shipping cost to the price, no matter what the distance from the
manufacturer’s plant—within reason.
Freight absorption pricing means the seller takes on part or all
of the cost of shipping. This policy works well for high-ticket
items, for which the cost of shipping is a negligible part of the
sales price and the profit margin.
3.2.4 Discounting for Channel Members
A list price, also referred to as a suggested retail price, is the
price that the manufacturer sets as the appropriate price for the
end consumer to pay. In pricing for members of the channel,
marketers recognize that retailers and wholesalers have costs to
cover and profit targets to reach as well. They often begin with
the list price and then use a number of discounting tactics to
implement pricing to members of the channel of distribution.
Such tactics include the following:
 Trade or functional discounts: Because the channel
members perform selling, credit, storage, and
transportation services that the manufacturer would
otherwise have to provide, manufacturers normally
offer trade or functional discounts to channel
intermediaries. These discounts are usually set
percentage discounts off the suggested retail or list
price for each channel level.
 Quantity discounts: To encourage larger purchases
from distribution channel partners or from large
organizational customers, marketers may offer
quantity discounts, or reduced prices for purchases of
larger quantities. Cumulative quantity discounts are
based on a total quantity bought within a specified
time, often a year/. They encourage a buyer to stick
with a single seller instead of moving from one
supplier to another. Cumulative quantity discounts
often take the form of rebates, in which case the firm
sends the buyer a rebate check at the end of the
discount period or, alternatively, gives the buyer credit
against future orders. Non-cumulative quantity
discounts are based only on the quantity purchased
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Part 3: Develop the Value Proposition for the Customer
p. 303
with each individual order and encourage larger single
orders but do little to tie the buyer and the seller
together.
 Cash discounts: Many firms try to entice their
customers to pay their bills quickly by offering cash
discounts.
 Seasonal discounts: Seasonal discounts are price
reductions offered only during certain times of the year.
4.
PRICING AND ELECTRONIC COMMERCE
Because sellers are connected to buyers around the globe as never
before through the Internet, corporate networks, wireless setups,
and marketers can offer deals tailored to a single person at a
single moment. Many experts suggest that technology is creating
a consumer revolution that might change pricing forever—and
perhaps create the most efficient market ever. The Internet also
enables firms that sell to other businesses (B2B firms) to change
their prices rapidly as they adapt to changing costs.
p. 303
4.1
Dynamic Pricing Strategies
One of the most important opportunities the Internet offers is
dynamic pricing, in which the seller can easily adjust the price to
meet changes in the marketplace.
p. 303
4.2 Internet Price Discrimination
Internet price discrimination is an Internet pricing strategy that
charges different prices to different customers for the same
product. Is price discrimination illegal? As long as the company
doesn’t charge different prices based on a demographic
characteristic such as gender or race, it is not. Whether it is
ethical, however, is debatable.
p. 304
4.3 Online Auctions
On-line auctions allow shoppers to bid on everything from
bobbleheads to health-and-fitness equipment to a Sammy Sosa
home-run ball. Auctions provide a second Internet pricing
strategy. Perhaps the most popular auctions are the C2C auctions
such as those on eBay. The eBay auction is an open auction,
meaning that all the buyers know the highest price bid at any
point in time. On many Internet auction sites, the seller can set a
reserve price, a price below which the item will not be sold.
A reverse auction is a tool used by firms to manage their costs in
business-to-business buying. While in a typical auction, buyers
compete to purchase a product, in reverse auctions; sellers
compete for the right to provide a product at, hopefully, a low
price.
Copyright © 2016 Pearson Education, Inc.
Chapter 10: Price: What is the Value Proposition Worth?
p. 304
4.4 Freemium Pricing Strategies
A freemium strategy is a business strategy in which a product in
its most basic version is provided free of charge but the company
charges money (the premium) for upgraded versions of the
product with more features, greater functionality, or greater. The
freemium pricing strategy has been most popular in digital
offerings such as software media, games, or Web services where
the cost of one additional copy of the product is negligible.
p. 304
4.5 Pricing Advantages for Online Shoppers
The Internet creates unique pricing challenges for marketers
because consumers and business customers are gaining more
control over the buying process. Consumers have become more
price sensitive.
►Marketing Moment In-Class Activity
Ask if a student or someone the student knows participated in an e-bay auction. How is it
emotionally different from just going to the store and paying the price on the price tag (emotional
excitement)? How does this kind of consumer behavior exemplify the “experience economy?”
p. 305
5. PSYCHOLOGICAL, LEGAL AND ETHICAL
ASPECTS OF PRICING
p. 305
5.1 Psychological Issues in Setting Prices
Much of what we’ve said about pricing depends on economists’
notion of a customer who evaluates price in a logical, rational
manner.
Figure 10.12
Psychological,
Legal, and
Ethical Aspects
of Pricing
5.1.1 Buyers’ Pricing Expectation
Often consumers base their perceptions of price on what they
perceive to be the customary or fair price. When the price of a
product is above or sometimes even when it is below what
consumers expect they are less willing to purchase the product.
►Marketing Moment In-Class Activity
Write down your “internal reference price” for products you are likely to purchase (i.e., CD, can
of pop, fast food dinner, computer, jeans, shoes). Why are some internal reference prices
consistent while others are different?
p. 306
5.1.2 Internal Reference Prices
Sometimes consumers’ perceptions of the customary price of a
product depend on their internal reference price. That is, based
on experience, consumers have a set price or a price range in
mind that they refer to in evaluating a product’s cost.
p. 305
In some cases, marketers try to influence consumers’ expectations
of what a product should cost when they use reference-pricing
strategies. For example, manufacturers may compare their price to
competitors’ prices when they advertise. Similarly, a retailer may
Copyright © 2016 Pearson Education, Inc.
Part 3: Develop the Value Proposition for the Customer
display a product next to a higher-priced version of the same or a
different brand.
p. 306
p. 307
p. 307
Two results are likely: On the one hand, if the prices (and other
characteristics) of the two products are close, the consumer will
probably feel the product quality is similar. This is an assimilation
effect. On the other hand, if the prices of the two products are too
far apart, a contrast effect may result, in which the customer
equates the gap with a big difference in quality.
5.1.3 Price-Quality Inferences
Consumers make price-quality inferences about a product when
they use price as a cue or an indicator of quality. If consumers are
unable to judge the quality of a product through examination or
prior experience, they usually will assume that the higher-price
product is the higher-quality product.
Brain scans show that—contrary to conventional wisdom—
consumers who buy something at a discount experience less
satisfaction than people who pay full price for the very same
thing. Researchers call this the price-placebo effect.
5.2
Psychological Pricing Strategies
Setting a price is part science, part art. Marketers must understand
psychological aspects of pricing when they decide what to charge
for their products or services.
5.2.1 Odd-Even Pricing
Marketers have assumed that there is a psychological response to
odd prices that differ from the responses to even prices. Habit
may also play a role. Research on the difference in perceptions of
odd versus even prices indeed supports the argument that prices
ending in 99 rather than 00 lead to increased sales.
Some prices are set at even numbers because of necessity. Lottery
tickets and admission to sporting events are two examples. Many
luxury items such as jewelry, golf course fees, and resort
accommodations use even dollar prices to set them apart. When
prices are given with dollar signs or even the word dollar,
customers spend less.
p. 307
5.2.2 Price Lining
Marketers often apply their understanding of the psychological
aspects of pricing in a practice they call price lining, whereby
items in a product line sell at different prices, or price points. If
you want to buy a new digital camera, you will find that most
manufacturers have one “stripped-down” model for $100 or less.
Copyright © 2016 Pearson Education, Inc.
Chapter 10: Price: What is the Value Proposition Worth?
A better-quality but still moderately priced model likely will be
around $200, while a professional quality camera with multiple
lenses might set you back $1,000 or more. Price lining provides
the different ranges necessary to satisfy each segment of the
market.
For marketers this technique is a way to maximize profits. A firm
charges each customer the highest price the he is willing to pay.
p. 308
5.2.3 Prestige Pricing
Sometimes luxury goods marketers use a prestige pricing strategy
that turns the typical assumption about price-demand relationships
on its head: Contrary to the “rational” assumption that we value a
product or service more as the price goes down, in these cases,
believe it or not, people tend to buy more as the price goes up!
Use Website Here-- www.landsend.com Lands’ End website
p. 308
5.3
Legal and Ethical Considerations in B2C Pricing
The free enterprise system is founded on the idea that the
marketplace will regulate itself. Unfortunately, the business world
includes the greedy and unscrupulous. Government has found it
necessary to enact legislation to protect consumers and to protect
businesses from predatory rivals.
p. 308
5.3.1 Deceptive Pricing Practices
Unscrupulous businesses may advertise or promote prices in a
deceptive way. The Federal Trade Commission (FTC), state
lawmakers, and private bodies such as the Better Business Bureau
have developed pricing rules and guidelines to meet the
challenge.
p. 308
Another deceptive pricing practice is the bait-and-switch tactic,
whereby a retailer will advertise an item at a very low price—the
bait—to lure customers into the store. However, it is almost
impossible to buy the advertised item—salespeople like to say
(privately) that the item is “nailed to the floor.” The salespeople
do everything possible to get the unsuspecting customers to buy a
different, more expensive, item—the switch.
It is complicated to enforce laws against bait-and-switch tactics
because these practices are similar to the legal sales technique of
“trading up.” Simply encouraging consumers to purchase a
higher-priced item is acceptable, but it is illegal to advertise a
lower-priced item when it’s not a legitimate, bona fide offer that
is available if the customer demands it. The FTC may determine
if an ad is a bait-and-switch scheme or a legitimate offer by
checking to see if a firm refuses to show, demonstrate, or sell the
Copyright © 2016 Pearson Education, Inc.
Part 3: Develop the Value Proposition for the Customer
p. 308
advertised product; disparages it; or penalizes salespeople who do
sell it.
5.3.2 Loss-Leader Pricing and Unfair Sales Acts
Some retailers advertise items at very low prices or even below
cost and are glad to sell them at that price because they know that
once in the store, customers may buy other items at regular prices.
Marketers call this loss leader pricing; they do it to build store
traffic and sales volume.
Some states frown on loss leader practices so they have passed
legislation called unfair sales acts (also called unfair trade
practices acts). These laws or regulations prohibit wholesalers
and retailers from selling products below cost. These laws aim to
protect small wholesalers and retailers from larger competitors
because the “big fish” have the financial resources that allow
them to offer loss leaders or products at very low prices—they
know that the smaller firms can’t match these bargain prices.
p. 309
5.4 Legal Issues in B2B Pricing
Some of the more significant illegal B2B pricing activities include
price discrimination, price fixing, and predatory pricing.
5.4.1 Illegal Business-to-Business Price Discrimination
The Robinson-Patman Act includes regulations against price
discrimination in interstate commerce. Price discrimination
regulations prevent firms from selling the same product to
different retailers and wholesalers at different prices if such
practices lessen competition.
p. 309
p. 310
5.4.2 Price-Fixing
Price fixing occurs when two or more companies conspire to
keep prices at a certain level. Horizontal price-fixing occurs when
competitors making the same product jointly determine what
price they each will charge. Sometimes manufacturers or
wholesalers attempt to force retailers to charge a certain price for
their product. When vertical price-fixing occurs, the retailer that
wants to carry the product has to charge the “suggested” retail
price.
►ETHICS CHECK
If you were advising Uber’s executives, would you encourage
them to end the service’s surge pricing strategy to prevent the
company from losing customers who are angry about such price
hikes?
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Ripped From the
Headlines:
Ethical/
Sustainable
Decisions in the
Real World
Chapter 10: Price: What is the Value Proposition Worth?
p. 310
p. 310
5.4.3 Predatory Pricing
Predatory pricing means that a company sets a very low price
for the purpose of driving competitors out of business. Later,
when they have a monopoly, they turn around and increase prices.
Real People, Real Choices: Here’s My Choice at Converse
Betsy chose option #1.
►MARKETING METRICS: HOW CONVERSE
MEASURES SUCCESS
Converse received immediate increased interest from prospective
students, and recruitment numbers are significantly ahead of
previous years. The school showed a 6 percent increase in
applications and an 11 percent increase in the number of
prospective students who visited the campus and is projecting an
increase of 5 percent in undergraduate enrollment for the first
year. More broadly, here are some important measures the school
uses to determine how its new pricing model is working:
● Enrollment funnel.
●Retention numbers.
●Revenue generation.
●Student billing.
●Demographic shifts in student body makeup that may be
attributed to the tuition reset.
Exhibit 10.11
Converse
College Chart
Brand You: Do you know how much you are worth? The first
step in getting the salary you want, is knowing how much you are
worth. Find out the latest in salary trends, how and when to
negotiate your offer and what else you can ask for as part of your
compensation in Chapter 10 in Brand You.
WEB RESOURCES
Pearson Education, Inc: www.mymktlab.com
Converse College: www.converse.edu
Accenture (global management consulting, technology services and outsourcing company
website): www.newsroom.accenture.com
Proctor & Gamble; www.p&G.com
Saturn website: www.saturn.com
Bitcoins: www.thebitcoinsecrets.com/
Wal-Mart website: www.walmart.com
Copyright © 2016 Pearson Education, Inc.
Part 3: Develop the Value Proposition for the Customer
Priceline ticket sales: www.priceline.com
iTunes website: www.apple.com/itunes
Online tickets website: www.tickets.com
Consumer Reports website: www.consumerreports.org
Better Business Bureau website: www.welcome.bbb.org
Lands End website: www.landsend.com
National Association of Trade Exchanges website: www.nate.org
Copyright © 2016 Pearson Education, Inc.