Download Chapter 10 – Pricing, understanding and capturing

Chapter 10 – Pricing, understanding and capturing customer value
WHAT IS PRICE
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Price is the amount of money charged for a product or a service
Sum of all the values that customers give up to gain the benefits of having or using a
product or service
Major factor affecting buyer choice
Non-price factors have gained increasing importance
Remains one of the most important elements that determines a firm’s market share
and profitability
Only element in the marketing mix that produces revenues
 Others represent costs
Most flexible marketing mix elements
Can be changed quickly
Number one problem facing marketing executives
Direct impact on a firm’s bottom line
Key role in creating customer value and building customer relationships
MAJOR PRICING STRATEGIES
Customer Value-based price
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Uses buyers’ perceptions of value, not the seller’s cost as the key to pricing
Marketer cannot design a product and marketing program and then set the price
Price is considered along with all other marketing mix variables before the marketing
program is set
First assesses customer needs and value perceptions
Then sets a target price based on customer perceptions of value
Pricing begins with analysing consumer needs and value perceptions
Cost-based pricing
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Product driven
Company designs what it considers to be a good product, adds up the costs of making
it and sets a price that covers those costs + a target profit
Marketing must then convince buyers that the product’s value at that price justifies
its purchase
If price is too high  company must settle for lower mark-ups or lower sales
Good-value pricing
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Combination of quality and good service at a fair price
Involved introducing less-expensive versions of established brand name products
Involves redesigning existing brands to offer more quality for a given price or the same
quality for less
Some companies also succeed in offering less value but at rock-bottom prices (ie
Ryanair)
Everyday low pricing (EDLP) – involves charging a constant, everyday low price with a
few or no temporary price discounts
High low pricing – involves charging higher prices on an everyday basis but running
frequent promotions to lower prices temporarily on selected items.
Value-Added pricing
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Doesn’t mean simply charging what customers want to pay or setting low prices to
meet competition
Rather than cutting prices to match competitors, they attach value-added features
and services to differentiate their offers and thus support higher prices
Types of costs
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Two forms: Fixed (overhead) and variable
Fixed
 Do not vary with production or sales level
Variable
 Varies directly with the level of production
 Total varies with the number of units produced
Total costs:
 Sum of the fixed and variable costs for any given level of production
Costs at different levels of production
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To price wisely, management needs to know how its costs vary with different levels of
production
Figures below show the typical short-run average cost curve (SRAC)
If production moves up per day, the average cost per unit decreases
 Fixed costs are spread over more units with each one bearing a smaller share
of the fixed cost
If they increase their production per day too much, the average cost per unit will
increase because their plant will be too small
Costs as a function of production experience
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As a company gains experience in producing a product, it learns how to do it better
Workers learn shortcuts and become more familiar with their equipment
Work becomes better organized
They find better equipment and production processes
Becomes more efficient and gains economies of scale
Result: average cost tends to decrease with accumulated production experience
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The drop in the average cost with accumulated production experience is called the
experience curve or the learning curve
If a downward-sloping curve exists, this is highly significant for the company
 Company’s unit production cost fall  will fall faster if the company makes and
sells more during a given time period
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Cost-Plus Pricing
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The simplest pricing method is cost-plus pricing
Adding a standard mark-up to the cost of the product
Unit cost = variable cost +
fixed costs
unit sales
unit cost
Mark up price = 1−desired return on sales
Break-even analysis and target profit pricing
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Cost-oriented pricing approach is break-even pricing
Firm tries to determine the price at which it will break even or make the target return
it is seeking
Target return pricing uses the concept of a break-even chart, which shows the total
cost and total revenue expected at different sales volume levels
fixed cost
Break even volume = price−variable cost
Competition-based pricing
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Setting prices based on competitors’ strategies, costs, prices and market offerings
Consumers will base their judgements of a product’s value on the prices that
competitors charge for similar products
Consumers perceive that the company’s product or service provides greater value the
company can charge a higher price
Consumers perceived less value relative to competing products, the company must
either charge a lower price or change customer perceptions to justify a higher price
If the company faces a host of smaller competitors, charging high prices relative to the
value they deliver, it might charge lower prices to drive weaker competitors from the
market.
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If the market is dominated by larger, low price competitors, the company may decide
to target unserved market niches with value-added products at higher prices
OTHER INTERNAL AND EXTERNAL CONSIDERATIONS AFFECTING PRICE DECISIONS
Overall marketing strategy, objectives and mix
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Before setting a price, the company must decide on its overall marketing strategy for
the product or service
Important role in helping to accomplish company objectives at many levels.
Firm can set prices to attract new customers or profitably retain exisiting ones
Set prices low to prevent competitions from entering the market or set prices at
competitors’ levels to stabilize the market
It can price to keep the loyalty and support of resellers or avoid government
intervention
Prices can be reduced temporarily to create excitement for a brand
One product may be priced to help the sales of other products in the company’s line
Price decisions must be coordinated with product design, distribution and promotion
decisions to form a consistent and effective integrated marketing program
Companies often position their products on price and then tailor other marketing mix
decisions to the prices they want to charge
Target costing reverses the usual process of first designing a new product, determining
its cost and then setting a price.  starts with an ideal selling price based on customer
value considerations and then targets costs that will ensure that the price is met
Organizational considerations
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Managers must decide who within the organization should set prices
Companies handle pricing in a variety of ways:
 Small companies: prices are set by top management
 Large companies: prices are set by divisional or product line managers
 Industrial markets: salespeople may be allowed to negotiate with customers
within certain price ranges
 Industries like airlines etc.: they have their own pricing department to set the
best prices or help others in setting them
THE MARKET AND DEMAND
Pricing in different types of markets
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Pure competition
 The market consists of many buyers and sellers trading in a uniform
commodity, such as wheat, copper or financial securities
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No single buyer or seller has much effect on the going market price
Purely competitive market: marketing research, product development, pricing,
advertising, and sales promotion play little or no role  sellers in these
markets do not spend much time on marketing strategy
Monopolistic competition
 The market consists of many buyers and sellers who trade over a range of
prices rather than a single market price
 A range of prices occurs because sellers can differentiate their offers to buyers
 Sellers try to develop differentiated offers for different customer segments
and, in addition to price, freely use branding, advertising and personal selling
to set their offers apart
Oligopolistic competition
 The market consists of a few sellers who are highly sensitive to each other’s
pricing and marketing strategies. Because there are few sellers, each seller is
alert and responsive to competitors’ pricing strategies and moves
Pure monopoly
 Market consists of one seller
 The seller may be government monopoly, a private regulated monopoly or a
private non-regulated monopoly
 Pricing is handled differently in each case
Analysing the price-demand relationship
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Each price the company might charge will lead to a different level of demand
Relationship between the price charged and the resulting demand level is shown in
the demand curves (below)
 It shows that the number of units the market will buy in a given time period at
different prices that might be charged
In the normal case, demand and price are inversely related  the higher the price,
the lower the demand
Companies try to measure their demand curves by estimating demand at different
prices  type of market makes a difference
Monopoly: the demand curve shows the total market demand resulting from different
prices
With competition: its demand at different prices will depend on whether competitors’
prices stay constant or change with the company’s own prices.
Elasticity of demand
% change in quantity demanded
% change in price
The economy
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Strong impact on the firm’s pricing strategies
Economic factors such as a boom or recession, inflation and interest rates affect
pricing decisions because they affect:
 consumer spending
 consumer perceptions of the product’s price and value
 the company’s costs of producing and selling a product
lowering prices make products more affordable and help spurt short-term sales
undesirable long-term consequences  Lower prices = lower margins
Deep discounts cheapen a brand in consumers’ eyes
If prices are cut it is different to raise them again when the economy recovers
Rather than cutting prices companies are shifting their marketing focus to more
affordable items in their product mixes
Others are redefining the value in their value propositions
Other external factors
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Impact prices will have on other parties in its environment  how will resellers react
to various prices?
Company should set prices that give resellers a fair profit, encourage their support and
help them to sell the product effectively
Government
Social concerns