Download Chapter 9 slides

Pricing: Understanding and
Capturing Customer Value
Chapter 9
Rest Stop: Previewing the Concepts
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•
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Identify the three major pricing strategies and
discuss the importance of understanding
customer-value perceptions, company costs,
and competitor strategies when setting prices
Identify and define the other important external
and internal factors affecting a firm’s pricing
decisions
Describe the major strategies for pricing new
products
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Rest Stop: Previewing the Concepts
• Explain how companies find a set of prices
•
•
that maximizes the profits from the total
product mix
Discuss how companies adjust their prices to
take into account different types of
customers and situations
Discuss the key issues related to initiating
and responding to price changes
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First Stop: Amazon vs. Walmart:
Fighting it Out Online on Price
• Price war between Walmart and Amazon.com
over online prices
• Though Walmart’s main source of revenue is
its retail outlets, online retailing is growing
• Amazon.com ’s online sales are nearly 7 times
greater than Walmart’s online sales
• Both companies competing to be lowestpriced online retailer
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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
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Price
• Amount of money charged for a product
or service
• Sum of the values that customers
exchange for the benefits of having or
using the product or service
Figure 9.1 - Considerations in
Setting Price
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Figure 9.2 - Value-Based Pricing vs.
Cost-Based Pricing
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Customer Value-Based Pricing
• Setting price based
on buyers’
perceptions of value
rather than on the
seller’s cost
• Types:
• Good value pricing
• Value-added pricing
A Steinway piano—any Steinway
piano—costs a lot. But to those
who own one, price is nothing; the
Steinway experience is everything
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Good-Value Pricing
• Offering the right
combination of
quality and good
service at a fair
price
With its no-frills positioning and low
prices, Snap Fitness is well-positioned
to take advantage of either good or
bad economic conditions
Value-Added Pricing
• Attaching valueadded features and
services to
differentiate a
company’s offers
while charging
higher prices
Rather than cutting services to
maintain lower admission prices,
premium theaters such as AMC’s
Cinema Suites are adding amenities
and charging more.
Marketing at Work
• Panera isn’t about
the lowest prices—
it’s about the value
customers receive
• It’s value-added
proposition: Good
fast-casual food,
outstanding service,
and the experience
Panera Bread understands that, even
in uncertain economic times, low
prices often aren’t the best value. Says
Panera CEO Ronald Shaich, “Give
people something of value and they’ll
happily pay for it.”
Cost-based pricing
• Setting prices based on the costs for
producing, distributing, and selling the
product plus a fair rate of return for effort and
risk
Types of Costs
Fixed costs (overhead)
• Vary with production or sales level
Variable costs
• Vary directly with the level of production
Total costs
• Sum of the fixed and variable costs for any given
level of production
Types of Cost-Based Pricing
Cost-plus (markup) pricing
• Adding a standard markup to the cost of the
product
Break-even (target return) pricing
• Setting price to break even on the costs of
making and marketing a product, or setting
price to make a target return
Figure 9.3 - Break-Even Chart for Determining
Target Return Price and Break-Even Volume
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Competition-Based Pricing
• Setting prices based
on competitors’
strategies, prices,
costs, and market
offerings
Fast-growing clothing boutique Hot
Mama isn’t likely to win a price war
against giants like Macy’s or Kohl’s.
Instead, it relies on personal service,
a mom- and kid-friendly atmosphere,
and its knowledgeable staff to turn
harried moms into loyal patrons
Other Considerations Affecting Pricing
Decisions
• Internal factors:
• Overall marketing strategy, objectives, and the
marketing mix
• Organizational considerations
• External factors:
• Nature of the market and demand
• Other environmental factors
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Overall Marketing Strategy, Objectives,
and Mix
• Company must decide on its overall
marketing strategy for the product and the
role that price will play in accomplishing
objectives
• Pricing decisions need to be coordinated with
packaging, promotion, and distribution
decisions
• Positioning may be based on price
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Overall Marketing Strategy, Objectives,
and Mix
Target costing
• Pricing that starts with an ideal selling price
and then targets costs that will ensure that
the price is met
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Overall Marketing Strategy, Objectives,
and Mix
• Many companies
deemphasize price
and use other
marketing mix tools
to create nonprice
positions
Cutting-edge consumer electronics
maker Bang & Olufsen builds high
value into its products and charges
sky-high prices
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Organizational Considerations
• Must decide who within the organization
should set prices
• This will vary depending on the size and type
of company
• Some firms maintain pricing departments
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The Market and Demand
• A firm’s flexibility in setting price varies
depending on the nature of the market
• Types of markets:
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Pure competition
Monopolistic competition
Oligopolistic competition
Pure monopoly
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Demand Curve
• Shows the number
of units the market
will buy in a given
time period, at
different prices that
might be charged
The Price-Demand Curve
When ConAgra raised prices on its Banquet frozen dinners, sales fell sharply. “The key
component . . .is you’ve got to be at $1,” says CEO Gary Rodkin, pictured above. “Everything
else pales in comparison to that.”
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Price Elasticity of Demand
• Measure of the sensitivity of demand to
changes in price
• Inelastic demand – Demand hardly changes with
a small change in price
• Elastic demand – Demand changes greatly with a
small change in price
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The Economy: Impact on Pricing
• Economic factors have a strong impact on
pricing strategies
• The recent recession has led to many
consumers becoming more value-conscious
• While some firms have cut price, others have
shifted to featuring more affordable items
• Some firms have held price, but repositioned
brands to enhance their value
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Marketing at Work
• When the economy
dipped, rather than
cutting everyday
prices, Whole Foods
set out to convince
shoppers that it was,
in fact, an affordable
place to shop
Whole Foods assigned workers
to serve as “value tour guides,”
like the one above, to escort
shoppers around stores pointing
out value items
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New-Product Pricing Strategies
Market-skimming pricing
• Setting a high price for a new product to skim
maximum revenues layer by layer from the segments
willing to pay the high price
• Company makes fewer but more profitable sales
Market-penetration pricing
• Setting a low price for a new product to attract a large
number of buyers and a large market share
When to Use Market-Skimming Pricing
• Product’s quality and image supports
its higher price
• Costs of low volume cannot be so high that
they cancel out the benefit of higher price
• Competitors should not be able to enter
market easily and undercut price
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When to Use Market-Penetration Pricing
• Market is highly price sensitive so a low price
produces more growth
• Production and distribution costs decrease as
sales volume increases
• Low price can help keep out the competition,
and the penetration pricer can maintain its
low-price position
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Product Mix Pricing Strategies
Product line pricing
• Setting the price steps between various
products in a product line based on cost
differences between the products, customer
evaluations of different features, and
competitors’ prices
Optional product pricing
• Pricing of optional or accessory products along
with a main product
Product Mix Pricing Strategies
Captive product pricing
• Setting a price for products that must be used
along with a main product
By-product pricing
• Setting a price for by-products to make the
main product’s price more competitive
Product bundle pricing
• Combining several products and offering the
bundle at a reduced price
Price Adjustment Strategies –
Discounts
• A straight reduction in price on purchases
made during a stated period of time or in
larger quantities
• Forms:
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Cash discount
Quantity discount
Functional discount
Seasonal discount
Price Adjustment Strategies –
Allowances
• Reduction from the list price for buyer actions
such as trade-ins or promotional and sales
support
• Forms:
• Trade-in allowances – Price reductions given for
turning in an old item when buying a new one
• Promotional allowances – Payments or price
reductions that reward dealers for participating
in advertising and sales support programs
Price Adjustment Strategies –
Segmented Pricing
• Selling a product or service at two or more
prices, where the difference in prices is not
based on differences in costs
• Forms:
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Customer-segment pricing
Product-form pricing
Location-based pricing
Time-based pricing
Price Adjustment Strategies –
Psychological Pricing
• Pricing that considers the psychology of
prices, not simply the economics; the price
says something about the product
• Reference pricing: Prices that buyers carry in
their minds and refer to when they look at a
given product
Price Adjustment Strategies –
Promotional Pricing
• Discounts
• Special-event
pricing
• Cash rebates
• Low-interest
financing
• Longer warranties
• Free maintenance
Firms offer promotional prices to create
buying excitement and urgency
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Price Adjustment Strategies –
Geographical Pricing
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FOB-origin pricing
Uniform-delivered pricing
Zone pricing
Basing-point pricing
Freight-absorption pricing
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Price Adjustment Strategies – Dynamic
Pricing
• Adjusting prices
continually to meet
the characteristics
and needs of
individual customers
and situations
• Especially prevalent
online
The Web seems to be taking us
back in time to a new age of fluid
pricing. At Priceline.com, you can
“name your own price
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Factors Influencing International Pricing
• The price that a
company should
charge in a specific
country depends on
economic
conditions, laws and
regulations,
competitive
situations, etc
To lower prices in developing countries,
Unilever developed smaller, more
affordable packages that put the
company’s premier brands within the
reach of cash-strapped customers
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Price Changes: Initiating Price Cuts
• Reasons for price cuts
• Excess capacity
• Falling demand in face of strong competitive
price or a weakened economy
• Attempt to dominate market through lower costs
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Price Increases
• Can greatly
improve profits
and may be
initiated due to:
• Cost inflation
• Overdemand
When gasoline prices rise rapidly, angry
consumers often accuse the major oil companies
of enriching themselves by gouging customers
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Figure 9.5 - Assessing and Responding
to Competitor Price Changes
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Fighter Brands
Starbucks has positioned its Seattle’s Best Coffee unit to compete more directly with the
“mass-premium” brands sold by Dunkin’ Donuts, McDonald’s, and other lower-priced
competitors
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Figure 9.6 - Public Policy Issues
in Pricing
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Public Policy and Pricing
• Pricing within channel levels:
• Price fixing
• Predatory pricing
• Pricing across channel levels:
• Price discrimination
• Retail (or resale) price maintenance
• Deceptive pricing
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Rest Stop: Reviewing the Concepts
•
•
•
Identify the three major pricing strategies and
discuss the importance of understanding
customer-value perceptions, company costs,
and competitor strategies when setting prices
Identify and define the other important external
and internal factors affecting a firm’s pricing
decisions
Describe the major strategies for pricing new
products
9 - 48
Rest Stop: Reviewing the Concepts
• Explain how companies find a set of prices
•
•
that maximizes the profits from the total
product mix
Discuss how companies adjust their prices to
take into account different types of
customers and situations
Discuss the key issues related to initiating
and responding to price changes
9 - 49
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mechanical, photocopying, recording, or otherwise, without the prior written
permission of the publisher. Printed in the United States of America.
Copyright © 2013 Pearson Education, Inc.
Publishing as Prentice Hall
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