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Chapter 10

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Queen's University
COMM 131
Ethan Pancer

Chapter 10: Pricing: Understanding and Capturing Customer Value What is a Price?  It is 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  One of the most flexible of the four P’s  can change quickly o At the same time it is also the number one problem facing marketing executives Major Pricing Strategies  Customer perceptions set the price ceiling, the cost base sets the price floor Customer Value-Based Pricing  Setting the price based on buyers’ perceptions of value rather than on the seller’s costs o Understanding how much value customers place on the benefits they receive from the product and setting a price that captures this value  This strategy involves assessing customer needs and value perceptions, setting a target price based on those perceptions, this info drives decisions about what costs can be incurred, and the resulting product design  price = perceived value Good-Value Pricing  Involves offering just the right combination of quality and good service at a fair price o In many cases has involved introducing less-expensive versions of established, brand-name products o In other cases, it involves redesigning existing brands to offer more quality for a given price, or the same quality for less  Everyday low pricing (EDLP) involves charging a constant low price w. few/no discounts  High-Low pricing involves selling high everyday but having frequent promotions Value Added Pricing  Involves attaching value-added features and services to differentiate a company’s offers and charging higher prices  “customers want value and are willing to pay for it” Cost-Based Pricing  Involves setting prices based on the costs for producing, distributing, and selling the product plus a fair rate of return for effort and risk Cost-Plus Pricing  Involves adding a standard markup to the cost of the product  This method ignores consumer demand & competitor prices  doesn’t lead to best price  Break-even pricing (target return pricing) is setting the price to breakeven on the costs of making and marketing a product, or setting price to make a target return o Fails to consider customer value and the relationship between price and demand  These methods might help a company determine minimum prices, but that’s it Competition-Based Pricing  Involves setting prices based on competitors’ strategies, prices, costs, & market offerings  Should first ask a couple of questions: o How does competitor’s offer differ from mine in terms of customer value?  Charging higher/lower depends on if your p’s perceived value is high/low o How strong are current competitors and what are are their pricing strategies?  If face many firms charging high price w. low value, you can charge lower price and get rid of competition; if many low price, you can target un- served niches seeking higher value for a higher price Other Internal and External Considerations Affecting Pricing Decisions Overall Marketing Strategy, Objectives, and Mix  Before setting price, the company must decide on its overall marketing strategy for p/s o If the company has selected its target market and its positioning carefully, it’s marketing mix strategy, including price, should be fairly straightforward  Pricing may play an important role in helping to accomplish company objectives o Can set prices to attract new customers or to profitably retain existing ones o Can set low prices to prevent entrants or match competitors to stabilize the market  Companies often position their products on price, and then tailor other marketing mix decisions to the prices they want to charge o Support this with a technique called target costing – start with ideal selling price then target costs that will ensure that the price is met Organizational Considerations  Must decide who within the org will decide upon the price o In small companies, usually top mgmt. sets prices rather than sale/marketing dept. o In large companies, usually by division or product line managers o Could be a negotiation between customers & the firm The Market and Demand  Before setting prices, the marketer must understand the relationship between price and demand for the company’s product Pricing in Different Types of Markets  Pure Competition – many buyers & sellers with uniform products = no single buyer/seller has an effect on the market price  not much time spent on marketing strategy  Monopolistic Competition – many buyers & sellers that trade over a range of prices as offers are differentiated  minimally affected by competitor price strategies  Oligopolistic Competition – few sellers that are highly sensitive to each other’s pricing  Pure Monopoly – market only has one seller  pricing is handled differently depending on if it is a gov’t monopoly, a private regulated monopoly, or a private non-regulated one Analyzing the Price-Demand Relationship  Each price level will lead to a different level of demand in the market o The higher the price, the less is demanded by the market Price Elasticity of Demand  Price elasticity is 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 with a small change in price, demand is elastic o Sellers will consider a lower price to generate more total revenue The Economy  Economic factors like boom or recession periods, inflation, and interest rate affect pricing decisions because they affect consumer spending, consumer perceptions of value, & costs o Might offer deep discounts to get people to buy product during a recession – but undesirable in LR, might hurt brand image, will hurt ROE and profitability  It is important to remember that even in rough times, consumers do not buy purely based on price  still price vs. perceived value Other External Factors  Must know what impact its prices will have on other parties in its environment o How will resellers react since they want a fair profit too o The gov’t will affect pricing decisions – price floors, ceilings, affect costs o Might also have to take into account social concerns  Prices will most likely change as the product transitions through the PLC New-Product Pricing Market-Skimming Pricing  Involves setting a high price for a new product to skim max revenues layer by layer from segments willing to pay the high price; company makes fewer but more profitable sales  Makes sense when: the product’s quality/image support the higher price, customers are willing to pay higher price, cost of producing smaller volume can’t be so high that it cancels the advg of charging more, competitors not able to easily copy and undercut you Market-Penetration Pricing  Involves setting a low initial price for a new product in order to attract a large number of buyers and a large market share  high sales = spread FCs = low unit costs = lower price  Conditions to be met: market must be highly price sensitive, production and distribution costs must fall as sales volume increases, low price must help keep out competition and you must maintain low price position Product Mix Pricing  Pricing is difficult because the various products in the mix have related demand and costs, and face different degrees of competition  five pricing situations below Product Line Pricing  Involves setting the price steps between various products in a product line based on cost differences between products, customer evaluations of diff features, & competitors’ price Optional-Product Pricing  This is the pricing of optional or accessory products along with a main product o Fridge price, with or without the water/ice dispenser  optional feature Captive-Product Pricing  two-part pricing  Involves setting a price for products that must be used along with a main product  Finding the right balance between the main product and the captive product can be tricky o Consumers that are entrapped by buying expensive captive-products may come to resent the brand that ensnared them  think of printers and ink cartridges By-Product Pricing  Setting a price for by-products to make the main product`s price more competitive  When producing products/service, there are often by-products that are costly to dispose of  if you can find a market to sell by-products, can reduce selling price of main prod. Product Bundle Pricing  Involves combining several products
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