PRICING: UNDERSTANDING AND CAPTURING CUSTOMER VALUE
WHAT IS A PRICE?
Price: the amount of money charged for a product or service, or the sum of the values that customers
exchange for the benefits of having/using the product or service.
Price is the only element in the marketing mix that produces revenue; all other elements
Price is one of the most flexible marketing mix elements; prices can be changed quickly
MAJOR PRICING STRATEGIES
CUSTOMER VALUE-BASED PRICING
Customer value-based pricing: Setting price based on buyers’ perceptions of value rather than on the
Price is considered along with the other marketing mix variables before the marketing program
Considerations in setting price
Customer-value based Competition-based Cost-based
perceptions Other internal and external costs
of value considerations
-Marketing strategy, objectives, and mix
-Nature of the market and demand Price Floor
Price -Competitor’s strategies and prices No profits
Ceiling below this price
There are two types of value-based pricing: good-value pricing and value-added pricing:
Good-value pricing: Offering just the right combination of quality and good service at a fair price.
State of economy have caused a shift in consumer attitudes towards price and quality
Many companies have responded to this by introducing less-expensive versions of brand-name
Everyday low pricing (EDLP) is an important type of good-value pricing.
Value-added pricing: Attaching value-added features and services to differentiate a company’s offers
and charging higher prices. COST-BASED PRICING
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.
Value-based pricing Vs. Cost-based pricing
Design a good Determine Set price based on Convince buyers of
product product costs cost product’s value
Assess customer Set target price to Determine costs Design product to
needs and value match customer that can be deliver desired
perceptions perceived value incurred value at target price
TYPES OF COSTS
Fixed costs (aka Overhead): Costs that do not vary with production or sales level. (Ex. Rent, salaries,
Variable costs: Costs that vary directly with the level of production.
Total costs: The sum of the fixed and variable costs for any given level of production.
Cost-plus pricing (Markup pricing): Adding a standard markup to the cost of the product.
Break-even pricing (Target return pricing): Setting price to break even the costs of making and
marketing a product, or setting price to make a target return.
Competition-based pricing: Setting prices based on competitors’ marketing strategies, prices, costs, and
market offerings. OTHER INTERNAL AND EXTERNAL CONSIDERATIONS AFFECTING PRICING
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.
Management must decide who within the organization should set prices.
In small companies, prices are often set by top management
In large companies, pricing is typically handled by divisional or product line managers.
THE MARKET AND DEMAND
Demand curve: A curve that shows the number of units the market will buy in a given time period, at
different prices that might be charged.
In a normal case, demand and price are inversely related; the higher the price, the lower the
Price elasticity: A measure of the sensitivity of demand to changes in price.
If demand hardly changes with a small change in price, demand is inelastic
If demand changes greatly, demand is elastic
If demand is elastic, sellers will consider lowering their prices, which will produce more total
Economic conditions can have a strong impact on the firm’s pricing strategies. Economic factors such as
a boom or a recession affect pricing decisions because they affect consumer spending, consumer
perceptions of the product’s price and value, and the company’s costs of producing and selling a
product. Companies can deal with these conditions by lowering prices, or shifting their marketing focus
to more affordable items in their product mixes.
OTHER EXTERNAL FORCES
Social Concerns NEW PRODUCT PRICING
Market-skimming pricing (Price skimming): Setting a high price for a new product to skim maximum
revenues layer by layer from the segments willing to pay the high price; the company makes fewer but
more profitable sales.
Product’s quality and image must support its higher price, and enough buyers must want the
product at that price
Costs of producing a small volume can’t be so high that they cancel the advantage of charging
Competitors should not be able to enter the market easily and undercut the high price
Market-penetration pricing: Setting a low initial price for a new product in order to attract a large
number of buyers and a large market share.
Market must be highly price sensitive so that a low price produces more market growth
Production and distribution costs must fall as sales volume increases
Low price must help keep out the competition, and the penetration pricer must maintain its
low-price position—otherwise the price advantage may be only temporary
PRODUCT MIX PRICING
The strategy for setting a