c hapter 9 pricing: understanding and capturing customer value

CCHAPTER HAPTER 99

Pricing: Pricing: Understanding and Understanding and

Capturing Customer Capturing Customer ValueValue

Copyright 2007, Prentice-Hall Inc. 9-2

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.

Roadmap: Previewing the Concepts


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.

The Present Toys ‘R’ Us tries price

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.

TOYS ‘R’ USTOYS ‘R’ US – Pricing for Success – Pricing for Success


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.


Figure 9-1Factors Affecting Pricing Decisions


Customer Value Perceptions

Effective, customer-oriented Effective, customer-oriented pricing involves understanding pricing involves understanding

how much value consumers how much value consumers place on the benefits they place on the benefits they

receive from the product and receive from the product and setting a price that captures setting a price that captures

that value.that value.


Figure 9-2Value-Based Pricing Vs. Cost-Based

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.

Good-Value Pricing and Value-Added Pricing


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.

Marketing in Action


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.

Internal Factors Affecting Pricing Decisions


Cost-plus pricing– Adding a standard markup to the cost of

the product.

Break-even pricing Target-profit pricing

Cost-Based Pricing Methods


Figure 9-3Break-Even Chart for Determining Price


Marketing Objectives:– Company must decide on its strategy for

the product.– General pricing objectives:

Survival Current profit maximization Market share leadership Product quality leadership



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.”

Marketing in Action


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.



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



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.



What type of market best describes the cable TV industry?

Let’s Talk!

comcast.com


Figure 9-4The Demand Curve



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


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.

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.

New-Product Pricing Strategies


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.

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.

New-Product Pricing Strategies


Let’s Talk!

What type of pricing strategy is normally used when a new prescription drug is introduced in the U.S.?

Why?


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 high-end 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).

Song Airline uses optional-product pricing to create highly successful and profitable revenue streams.

Video Snippet


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

Marketing in Action


Discount and allowance pricing Segmented pricing Psychological pricing Promotional pricing Geographical pricing Dynamic pricing International pricing

Price Adjustment Strategies


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. Customer-segment2. Product-form3. Location pricing4. 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.

Marketing in Action


Geographical Pricing

FOB-origin pricing Uniform-delivered

pricing Zone pricing Basing-point pricing Freight-absorption

pricing


Dynamic Pricing

Adjusting prices continually Adjusting prices continually to meet the characteristics to meet the characteristics

and needs of individual and needs of individual customers and situations.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.

Marketing in Action

http://shopper.cnet.com/


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


Initiating Price Changes

Price Cuts:– Excess capacity– Falling market share– Dominate market through lower costs

Price Increases:– Cost inflation– Overdemand


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.


Figure 9-5Assessing and Responding to

Competitor Price Changes


Figure 9-6Public Policy Issues in Pricing


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.

Rest Area: Reviewing the Concepts

c hapter 9 pricing: understanding and capturing customer value

Documents

valueadded pricing slide

pricing decisions slide

pricing lower

pricing imitative

costplus pricing

valuebased pricing

goodvalue pricing

costbased pricing slide