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PRINCIPLES OF MARKETING
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Module 9: Pricing:
Understanding and Capturing
Customer Value
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Copyright Warning
This presentation is the intellectual property of Pearson Education
Inc. 2011. Students are hereby advised that they may not copy or
distribute this work to any third party
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Rest Stop: Previewing 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 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.
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Discuss
how companies adjust their prices to take into account different
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types of customers and situations.
Discuss the key issues related to initiating and responding to price changes.
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First Stop
Trader Joe’s Price Value Equation
What They Offer
Keeping Prices Low
Trader Joe’s Niche: Offers gourmetcaliber, one-of-a-kind products at
impossibly low prices. Limited product
assortment of 2,000 specialty items
unique to Trader Joe’s. 80% of items
are store brands (private label goods).
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Retail Atmosphere & Staff: Festive,
vacation-like atmosphere that makes
shopping fun provides Trader Joe’s
with a cool edge. Associates wear
Hawaiian shirts and consult with
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customers.
Cost Control is Key: Locates stores
in low-rent and out-of-the-way areas;
small store size and limited assortment
reduces facility and inventory costs.
Buys private label goods direct from
suppliers and negotiates price heavily.
Spends little on advertising; relies
primarily on word-of-mouth.
Results: Trader Joe’s is fastest
growing food store. Chain has
expanded to 330 stores in 25 states
with annual sales in
excess of $7.2 billion, a growth of 60%
in just 3 years.
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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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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 having or using the product or
service.
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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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Value-Based Pricing
Setting prices based on
buyers’ perceptions of
value rather than the
seller’s cost.
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Marketing in Action
When using a value-based pricing strategy,
marketers first assess customer needs and
value perceptions, then set the product’s
price.
A Steinway piano costs a lot. But to those
who own one, a Steinway is a great value.
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Customer Value-Based Pricing
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.
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Value-added pricing.
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Marketing in Action
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Wal-Mart pioneered the everyday low pricing concept, and their current “Expect
more. Pay Less.” selling message supports their good-value pricing strategy.
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Marketing in Action
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Rather than cutting the prices of its Stag umbrella line, Ebrahim Currim & Sons
introduced funky designs, cool colors, and valued-added features that allowed
them to sell at higher prices.
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Fuel for Thought
Many consumers believe that customization and personalization adds
value to products, and are willing to pay the price!
The mymms.com Web site lets consumers select their own M&M color
and message.
A 7-ounce bag costs $16.99, with a minimum order of one bag
required.
While the value-added M&M customization pricing scheme has been
well-received, a similar attempt to market Dove Chocolates failed.
Why?
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Cost Pricing
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Setting prices based on
the cost of producing,
distributing, and selling
product at a fair rate of
return.
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Cost-Based Pricing
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.
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Variable costs:
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Vary directly with the level of production.
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Cost-Based Pricing
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.
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Figure 9.3:
Chart for Determining Target-Return Price & Break-Even Volume
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Competition-Based Pricing
Setting prices based on
competitors’ strategies,
costs, prices, and market
offerings.
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Competition-Based Pricing
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?
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Marketing in Action
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Annie Bloom’s Books cannot compete directly on the basis of low prices, but relies
on outstanding customer service and a cozy atmosphere to convert booklovers to
loyal customers.
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Other Factors Affecting Pricing Decisions
Internal factors:
Overall marketing strategy, objectives, and the marketing mix.
Organizational considerations.
External factors:
The market and demand.
The economy.
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Other external factors.
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Internal Factors Affecting Pricing
Decisions
Overall marketing strategy, objectives, and the marketing 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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Internal Factors Affecting Pricing
Decisions
Overall marketing strategy, objectives, and the marketing mix:
Target costing supports priced-based positioning strategies:
Pricing starts with an ideal selling price, then targets costs that will ensure
that the price is met.
Other firms choose not to position on price, or select high price
strategies to enhance product prestige.
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Marketing in Action
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Some firms, like Titus, purposively position their product on the basis of high price
as part of its allure. Communications also emphasis the brand’s tradition and its
passion for design and performance.
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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.
Some firms maintain pricing departments.
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External Factors Affecting Pricing
Decisions
The market and demand:
A firm’s flexibility in setting price varies depending on the nature of the
market.
Four types of markets exist:
Pure competition.
Monopolistic competition.
Oligopolistic competition.
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Pure monopoly.
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Marketing in Action
Facing monopolistic competition,
Toyota and other vehicle
manufacturers differentiate their
offerings from one another on a
variety of features and benefits,
and thus can sell cars over a
range of prices.
The Prius is one of a handful of
“green” cars on the market.
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Figure 9.4:
Demand Curve
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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.
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Large demand change = elastic demand.
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Marketing in Action
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When ConAgra raised prices on its Banquet frozen dinners, sales fell
sharply. Banquet found it must be priced near $1 to sell.
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External Factors Affecting Pricing
Decisions
The economy:
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 in the marketing mix.
Some firms have held price, but repositioned brands to enhance their
value.
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Marketing in Action
Rather than cutting prices, many companies
are shifting their marketing communications
to focus on more affordable items in the
product mix.
Home Depot does just that with their “More
saving. More doing.” ad series.
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External Factors Affecting Pricing
Decisions
Other external factors:
Channel member reaction to price.
Governmental reaction or pricing controls.
Social concerns.
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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.
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Company makes fewer, but more
profitable sales.
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New-Product Pricing Strategies
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.
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Marketing in Action
Electronics often use a skimming
pricing strategy. The first VCRs
cost in excess of $1,500 and
declined to as low as $49 at the
end of their life cycle. HDTVs
originally cost $43,000 in 1990,
yet many are now priced around
$500.
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Market-Penetration Pricing
Setting a low initial price in
order to “penetrate” the
market quickly and deeply.
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Can attract a large number of buyers
quickly and win a large market share.
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New-Product Pricing Strategies
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.
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Fuel for Thought
Suppose that your firm implements a penetration pricing
strategy while costs are increasing, only to find that demand is
insufficient at the price set.
How likely is it that you will be able to successfully raise
your price to offset the increase in costs? Or would it be
would be better to decrease price further? Would your
answer depend on the elasticity of demand? Explain!
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Table 9.1:
Product Mix Pricing
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Marketing in Action
Quicken offers an entire line of
financial products including Home,
Basic, Deluxe, Premiere and
Home & Business versions, priced
at $ 29.99,
$ 59.99, $79.99 and $89.99,
respectively.
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Marketing in Action
Captive-product pricing applies to products
that must be used with the main product.
Normally, such products are priced
relatively high to maximize profits.
Kodak is planning to buck the industry
trend by selling their printers without
discounts, but pricing their ink cartridges
inexpensively.
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Table 9.2:
Price Adjustments
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Price Adjustment Strategies
Discounts:
Cash
Quantity
Functional
Seasonal
Allowances:
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Trade-in
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Promotional
Theme parks and hotels often
use seasonal pricing to help
manage their capacity.
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Price Adjustment Strategies
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.
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Time pricing: price is varied according to time of year, season, month,
day,
or hour.
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Marketing in Action
Evian water in a 1-liter bottle might cost
you 5 cents an ounce at the supermarket,
whereas the same water may run $2.28
an ounce when sold in 5-ounce cans as
Brumisateur Mineral Water Spray
Moisturizer.
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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.
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Price Adjustment Strategies
Promotional pricing:
Discounts (loss leaders).
Special-event pricing.
Cash rebates .
Low-interest financing.
Longer warranties.
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Free maintenance.
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Firms offer promotional
prices to create buying
excitement and urgency.
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Price Adjustment Strategies
Geographical pricing:
FOB-origin pricing.
Uniform-delivered pricing.
Zone pricing.
Basing-point pricing.
Freight-absorption pricing.
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Uniform-delivered
pricing charges the same
freight cost to all buyers,
regardless of location.
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Price Adjustment Strategies
Dynamic pricing:
Adjusting prices continually to meet the characteristics and needs of
individual customers and situations.
International pricing:
Adjusting prices for international markets requires consideration of
many factors.
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Price Adjustment Strategies
Factors influence international pricing:
Economic conditions.
Competitive situations.
Laws and regulations.
Development of the wholesaling and retailing system.
Consumer perceptions and preferences.
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Different marketing objectives.
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Costs.
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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.
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Price Changes
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.
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When gas prices rise sharply,
angry buyers often accuse major
oil of companies of price gouging.
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Figure 9.5:
Assessing and Responding to Competitor Price Changes
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Marketing in Action
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P&G offers budget-based basic versions of several brands,
including Bounty.
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Public Policy and Pricing
Pricing within channel levels:
Price fixing.
Predatory pricing.
Pricing across channel levels:
Price discrimination.
Retail price maintenance.
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Deceptive pricing.
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Figure 9.6:
Public Policy Issues in Pricing
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Marketing in Action
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The widespread use of checkout scanners has led to increasing
complaints of overcharging by retailers.
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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 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.
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Discuss
how companies adjust their prices to take into account different
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types of customers and situations.
Discuss the key issues related to initiating and responding to price changes.
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