Download 10. Pricing

Pricing: Understanding and
Capturing Customer Value
What Is a Price?
 Narrowly,
price is the amount of money
charged for a product or service.
 Broadly,
price is the sum of all the values
that consumers exchange for the benefits of
having or using the product or service.
Factors Affecting Pricing Decisions
Customer Value Perceptions
Effective, customer-oriented
pricing involves understanding how
much value consumers place on
the benefits they receive from the
product and setting a price that
captures that value.
Value-Based Pricing Vs. Cost-Based Pricing
Good-Value Pricing and
Value-Added Pricing
 Good-Value
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 marketing and offer and support
higher prices, rather than cutting prices to
match competitors.
Value-Added Pricing
Caterpillar offers dealers a wide range of value-added services, including
training, investment advice, and guaranteed parts delivery. These services
justify charging a higher price.
Internal Factors Affecting Pricing
Decisions
 Company
and Product Costs:
– Fixed Costs:
 Costs
that do not vary with production or sales level.
– Variable Costs:
 Costs
that vary directly with the level of production.
Cost-Based Pricing Methods
 Cost-plus
pricing
– Adding a standard markup to the cost of the
product.
 Break-even
pricing
 Target-profit pricing
Break-Even Chart for Determining Price
Internal Factors Affecting Pricing
Decisions
 Marketing
Objectives:
– Company must decide on its strategy for the
product.
– General pricing objectives:
 Survival
 Current
profit maximization
 Market share leadership
 Product quality leadership
Internal Factors Affecting Pricing
Decisions
 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
starts with an ideal selling price, then targets
costs that will ensure that the price is met.
Internal Factors Affecting Pricing
Decisions
 Organizational
Considerations:
– Must decide who within the organization should
set prices.
– This will vary depending on the size and type of
company.
 Small
organizations
 Large organizations
 Industrial firms
 Service providers
External Factors Affecting Pricing
Decisions
 The
Market and Demand:
– Costs set the lower limit of prices while the
market & demand set the upper limit.
– Pricing in different types of markets:
 Pure
competition
 Monopolistic competition
 Oligopolistic competition
 Pure monopoly
– Analyzing the price-demand relationship.
– The price elasticity of demand.
External Factors Affecting Pricing
Decisions
 Types
of Markets:
– Pure Competition: many buyers and sellers of a
uniform commodity at a uniform price.
– Monopolistic Competition: many buyers and sellers of
differentiated products, at different prices.
– Oligopolistic Competition: a few sellers who are
highly sensitive of each other’s prices. Goods may be
uniform or nonuniform.
– Pure Monopoly: a single government, private regulated,
or private nonregulated seller.
The Demand Curve
External Factors Affecting Pricing
Decisions
 Competitive
Issues Affecting Price
– What are our competitor’s costs, prices, and market
offerings?
– Will our pricing attract, restrict, or drive out
competitors?
– How does our market offering compare to the
competition in terms of customer value?
– How strong are current competitors and what is their
pricing strategy?
– How does competition influence price sensitivity?
 Other
External Factors
New-Product Pricing Strategies
 Market
Skimming:
– Set a high price for a
new product so as to
“skim” revenues layer
by layer from the
market.
– Company makes
fewer, but more
profitable sales.
 When
to Use:
– Product’s quality and
image must support its
higher price.
– Costs of low volume
cannot be so high they
cancel the advantage of
charging more.
– Competitors should not be
able to enter market easily
and undercut the price.
New-Product Pricing Strategies
 Market
Penetration:
– Set a low initial price
in order for the brand
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 increases.
– Need to keep
competition out or
effects are only
temporary.
Product Mix Pricing Strategies
 Product
line pricing
 Optional-product
pricing
 Captive-product pricing
 By-product pricing
 Product bundle pricing
Product Line Pricing
 Sets
price steps between
various items in a
product line based on:
– Cost differences
between products
– Customer evaluations of
different features
– Competitors’ prices
Product Line Pricing:
Gramophone sells a line of highend sound systems ranging in
price from
$5,000 to $120,000.
Optional- and Captive-Product Pricing
 Optional-Product
– Pricing optional or
accessory products
sold with the main
product (e.g., ice
maker with the
refrigerator).
 Captive-Product
– Pricing products that must be used with the main
product (e.g., replacement cartridges for Gillette
razors).
By-Product and Product Bundle 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).
Product-Bundle Pricing
Travelers who book flight, hotel, and car together can save
on average $189.00 from Expedia.com
Price Adjustment Strategies
 Discount
and allowance pricing
 Segmented pricing
 Psychological pricing
 Promotional pricing
 Geographical pricing
 Dynamic pricing
 International pricing
Discounts and Allowances
 Discounts
–
–
–
–
Cash
Quantity
Functional
Seasonal
 Allowances
– Trade-in
– Promotional
Christmas cards purchased out of
season, such as in March or July,
are often sold at a discount.
Segmented Pricing
 Selling
a product or service at two or more
prices, where the difference in prices is not
based on differences in
costs.
 Types:
1.
2.
3.
4.
Customer-segment
Product-form
Location pricing
Time pricing
Pricing at Walt Disney World
Resorts varies by the time of
year.
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 when they can
judge the quality of a product by examining
it or recalling experiences.
Promotional Pricing
Techniques
 Cash
Rebates
 Special-Event
Pricing
 Loss Leaders
 Low-Interest
Financing
 Longer Warranties
 Free Maintenance
Promotional Pricing
Companies offer promotional pricing to create
excitement and a sense of urgency.
Dynamic Pricing
Adjusting prices continually to
meet the characteristics and
needs of individual customers
and situations.
Dynamic Pricing
Buyers benefit from
dynamic pricing.
Shopping sites on the
Web that offer
comparison services
help buyers track price
changes as they occur.