Transcript Price

Pricing
Understanding and Capturing
Customer Value
Chapter
9
Chapter Outline
 What is a Price?
 Customer Perceptions of Value
 Company and Product Costs
 Other Internal and External
Considerations Affecting Price Decisions
 New-Product Pricing
 Product Mix Pricing
 Price-Adjustment Strategies
 Price Changes
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Previewing the Concepts
1.
2.
3.
4.
5.
6.
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.
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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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.
 Price is the only element in the marketing
mix that produces revenue; all other
elements represent costs.
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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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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.
• Value-added pricing.
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Marketing in Action
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
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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Cost-Based Pricing
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.
– Variable costs:
• 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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Break-Even Pricing and Target
Profit Pricing
 Break-even pricing is the price at
which total costs are equal to total
revenue and there is no profit.
 Target profit pricing is the price at
which the firm will break even or
make the profit it is seeking.
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Figure 9.3:
Chart for Determining TargetReturn 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
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.
– 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 price-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
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.
• Pure monopoly.
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Types of Markets
 Pure competition is a market with many
buyers and sellers trading uniform
commodities where no single buyer or
seller has much effect on market price.
 Monopolistic competition is a market with
many buyers and sellers who trade over a
range of prices rather than a single market
price with differentiated offers.
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Types of Markets
 Oligopolistic competition is a market with
few sellers because it is difficult for sellers
to enter who are highly sensitive to each
other’s pricing and marketing strategies.
 Pure monopoly is a market with only one
seller. In a regulated monopoly, the
government permits a price that will yield
a fair return. In a non-regulated
monopoly, companies are free to set a
market price.
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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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Analyzing the Price-Demand
Relationship - Demand Curve
Price elasticity
– the change
in demand
with a small
change in
price:
– Elastic
– Inelastic
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External Factors Affecting Pricing
Decisions
 The market and demand:
– Analyzing the price-demand relationship:
• The demand curve shows the number of units
the market will buy in a given period at
different prices.
– Normally, demand and price are inversely
related.
– Higher price = lower demand
– For prestige (luxury) goods, higher price can
equal higher demand when consumers
perceive higher prices as higher quality.
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External Factors Affecting Pricing
Decisions
– Price elasticity of demand:
•illustrates the response of demand to
a small change in price.
– Inelastic demand occurs when demand
hardly changes when there is a small
change in price.
– Elastic demand occurs when demand
changes greatly for a small change in
price.
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Price Elasticity of Demand
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Price Elasticity of Demand
 Factors affecting price elasticity of
demand
– Unique product
– Quality
– Prestige
– Substitute products
– Cost relative to income
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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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New-Product Pricing Strategies
Market-skimming
pricing
Market-penetration
pricing
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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.
Company makes fewer, but more
profitable sales.
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Market-Skimming Pricing
 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.
Can attract a large number of buyers
quickly and win a large market share.
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Market-Penetration Pricing
 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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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:
– Trade-in
– 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:
1. Customer-segment: different customers pay
different prices for the same good.
2. Product-form: different versions are priced
differently but not according to cost.
3. Location pricing: different prices are
charged for each location even when the
cost of offering the good is the same.
4. 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.
– Free maintenance.
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.
– Different marketing objectives.
– Costs.
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Initiating Price Changes
Initiating
Price Cuts
Initiating
Price
Increases
Buyer
Reactions to
Price Changes
Competitor
Reactions to
Price Changes
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Initiating 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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Initiating 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.
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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Reviewing the Concepts
1. Identify the three major pricing strategies and
2.
3.
4.
5.
6.
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.
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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9 - 60