Download Pricing: Understanding and Capturing Customer

CHAPTER 9
Pricing:
Understanding and
Capturing Customer
Value
Roadmap: Previewing the Concepts
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Discuss the importance of understanding customer
value perceptions and company costs when setting
prices.
Identify and define the other important internal and
external factors affecting a firm’s pricing decisions.
Describe the major strategies for pricing imitative and
new products.
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 key issues related to initiating and responding
to price changes.
Copyright 2007, Prentice-Hall Inc.
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TOYS ‘R’ US – Pricing for Success
The Past
 1970s: Toys ‘R’ Us


emerges as a toy retailing
category killer, offering
greater product selection
and lower prices than its
small store competition.
Explosive growth occurs.
Late 1990s: Wal-Mart
uses toys as a loss leader,
pricing lower than Toys ‘R’
Us and becomes the
largest toy retailer.
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The Present
 Toys ‘R’ Us tries price
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
matching and fails
miserably, losing sales,
profit, and market share.
New ownership closes
stores, cut costs, and steps
away from the price war.
Efforts focus on top-selling,
higher margin, or exclusive
items; store atmosphere;
shopper experiences; and
customer service.
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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.
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Figure 9-1
Factors Affecting Pricing Decisions
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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.
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Figure 9-2
Value-Based Pricing Vs. Cost-Based Pricing
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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.
Copyright 2007, Prentice-Hall Inc.
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Marketing in Action
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.
Copyright 2007, Prentice-Hall Inc.
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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.
Copyright 2007, Prentice-Hall Inc.
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Cost-Based Pricing Methods
 Cost-plus pricing
– Adding a standard markup to the cost of
the product.
 Break-even pricing
 Target-profit pricing
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Figure 9-3
Break-Even Chart for Determining Price
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9-12
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
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9-13
Marketing in Action
Product Quality Leadership
Buenaventura Medical
Group’s mission and
advertising reflect its
commitment to product
quality leadership in
health care.
No mention is made of
price . . . Except for the
statement that “most
HMO and PPO plans are
accepted.”
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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.
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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
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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.
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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.
Copyright 2007, Prentice-Hall Inc.
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Let’s Talk!
What type
of market
best
describes
the cable TV
industry?
comcast.com
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Figure 9-4
The Demand Curve
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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
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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.
Copyright 2007, Prentice-Hall Inc.
 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.
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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.
Copyright 2007, Prentice-Hall Inc.
 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.
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Let’s Talk!
What type of pricing strategy
is normally used when a new
prescription drug is
introduced in the U.S.?
Why?
Copyright 2007, Prentice-Hall Inc.
9-24
Product Mix Pricing Strategies
 Product line pricing
 Optional-product



pricing
Captive-product
pricing
By-product pricing
Product bundle
pricing
Copyright 2007, Prentice-Hall Inc.
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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
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Product Line Pricing:
Gramophone sells a line of
high-end sound systems
ranging in price from
$5,000 to $120,000.
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Optional- and Captive-Product Pricing
 Optional-Product
– Pricing optional or
accessory products
sold with the main
product (e.g., ice
maker with the
refrigerator).
Video Snippet
Song Airline uses
optional-product
pricing to create
highly successful
and profitable
revenue streams.
 Captive-Product
– Pricing products that must be used with the main
product (e.g., replacement cartridges for Gillette
razors).
Copyright 2007, Prentice-Hall Inc.
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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).
Copyright 2007, Prentice-Hall Inc.
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Marketing in Action
Product-Bundle Pricing
Travelers who book flight, hotel, and car together
can save on average $189.00 from Expedia.com
Copyright 2007, Prentice-Hall Inc.
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Price Adjustment Strategies
 Discount and allowance pricing
 Segmented pricing
 Psychological pricing
 Promotional pricing
 Geographical pricing
 Dynamic pricing
 International pricing
Copyright 2007, Prentice-Hall Inc.
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Discounts and Allowances
 Discounts
–
–
–
–
Cash
Quantity
Functional
Seasonal
 Allowances
– Trade-in
– Promotional
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Christmas cards purchased out of
season, such as in March or July, are
often sold at a discount.
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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. Customer-segment
2. Product-form
3. Location pricing
4. Time pricing
Copyright 2007, Prentice-Hall Inc.
Pricing at Walt Disney World
Resorts varies by the time of year.
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Psychological Pricing
 Considers the psychology of prices
and not simply the economics.
 Consumers usually perceive higherpriced products as having higher
quality.
 Consumers use price less when they
can judge the quality of a product by
examining it or recalling experiences.
Copyright 2007, Prentice-Hall Inc.
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Promotional Pricing Techniques
 Cash Rebates
 Special-Event
Pricing
 Loss Leaders
 Low-Interest
Financing
 Longer
Warranties
 Free Maintenance
Copyright 2007, Prentice-Hall Inc.
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Marketing in Action
Promotional Pricing
Companies offer promotional pricing to create
excitement and a sense of urgency.
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Geographical Pricing
 FOB-origin pricing
 Uniform-delivered

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
pricing
Zone pricing
Basing-point pricing
Freight-absorption
pricing
Copyright 2007, Prentice-Hall Inc.
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Dynamic Pricing
Adjusting prices continually to
meet the characteristics and
needs of individual customers
and situations.
Copyright 2007, Prentice-Hall Inc.
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Marketing in Action
Dynamic Pricing
Buyers benefit
from dynamic
pricing. Shopping
sites on the Web
that offer
comparison
services help
buyers track price
changes as they
occur.
http://shopper.cnet.com/
Copyright 2007, Prentice-Hall Inc.
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International Pricing
 Price depends on many factors,
including:
– Economic conditions
– Competitive situations
– Laws and regulations
– Development of the wholesaling and
retailing system
– Consumer perceptions and preferences
– Costs
Copyright 2007, Prentice-Hall Inc.
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Initiating Price Changes
 Price Cuts:
– Excess capacity
– Falling market share
– Dominate market through lower costs
 Price Increases:
– Cost inflation
– Overdemand
Copyright 2007, Prentice-Hall Inc.
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Let’s Talk!
How would consumers
likely react if Joy
suddenly cut its price in
half? Explain.
Can you think of any
products or services
where a drop in price
might decrease demand
for the item? Explain.
Copyright 2007, Prentice-Hall Inc.
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Figure 9-5
Assessing and Responding to Competitor
Price Changes
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Figure 9-6
Public Policy Issues in Pricing
Copyright 2007, Prentice-Hall Inc.
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Rest Area: Reviewing the Concepts






Discuss the importance of understanding customer
value perceptions and company costs when setting
prices.
Identify and define the other important internal and
external factors affecting a firm’s pricing decisions.
Describe the major strategies for pricing imitative and
new products.
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 key issues related to initiating and responding
to price changes.
Copyright 2007, Prentice-Hall Inc.
9-44