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Pricing
Understanding and Capturing
Customer Value
Bluefield College
October 21, 2010
Product Life Cycle
Introduction Stage of PLC
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Sales: Low
Costs: High cost per customer
Profits: Negative or low
Customers: Innovators
Competitors: Few
Marketing objective: Create product awareness and trial.
Marketing strategies:
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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.
Growth Stage of PLC
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Sales: Rapidly rising
Costs: Average cost per customer
Profits: Rising profits
Customers: Early adopters
Competitors: Growing number
Marketing objective: Maximize market share.
Marketing strategies:
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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.
Maturity Stage of PLC
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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:
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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.
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
– How?
• 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.
– How?
• Cut prices.
• Launch a better ad campaign and move into new market channels.
Decline Stage of PLC
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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:
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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.
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.
Considerations in Setting Price
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.
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.
Chart for Determining Target-Return
Price & Break-Even Volume
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?
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:
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Pure competition.
Monopolistic competition.
Oligopolistic competition.
Pure monopoly.
– The economy.
Demand Curve
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.
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.
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.
Product Mix Pricing
Price Adjustments
Price Adjustment Strategies
 Discounts:
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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.
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:
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Discounts (loss leaders).
Special-event pricing.
Cash rebates .
Low-interest financing.
Longer warranties.
Free maintenance.
Price Adjustment Strategies
 Geographical pricing:
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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.
Price Adjustment Strategies
 Factors influence international pricing:
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Economic conditions.
Competitive situations.
Laws and regulations.
Development of the wholesaling and retailing system.
Consumer perceptions and preferences.
Different marketing objectives.
Costs.
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.
Responding to Competitor Price Changes
Public Policy and Pricing
 Pricing within channel levels:
– Price fixing.
– Predatory pricing.
 Pricing across channel levels:
– Price discrimination.
– Retail price maintenance.
– Deceptive pricing.