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Chapter 9

BMGT 350 Chapter 9: Chapter 9.docx

Business and Management
Course Code
BMGT 350

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Chapter 9- Pricing: understanding and capturing customer value
What is a price
Price- the amount of money charged for a product or service
Broadly it’s the sum of all the values that customers give up to gain the benefits of
having or using a product or service
Price is one of the most important things in determining a firms marketshare and
In marketing mix price is only thing that produces rev, all others are costs but its
also the most flexible
Price plays key role in creating value and relationships
Major pricing strategies
Customer perceptions of the products value set the price ceiling and the costs set
the floor Set price between these too and consider
external and internal factors like
competitors pricing, overall marketing mix,
nature of the market and demand
3 major pricing strategies
customer value based pricing
Effective customer oriented pricing involves understanding how much value
customers place on the benefits thye receive from the product and setting a price
that captures that value
Def- uses buyers perceptions of values as the keyto pricing. The marketer cant
design a product and marketing program then set the price. Price is consider along
with all the other marketing mix variables before the marketing program is set
Cost based pricing is the opposite and is often product driven. So the companie
designs what they feel is a good product and then adds up the costs and sets a
price. They then convince customers that the price is what is best valued
With customer value driven pricing, pricing begins with analyzing consumer
needs and value perceptions and the price is set to match the perceived value

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Measuring value is hard. Sometimes comps ask customers how much they would
pay for an item and for each additional benefit
There are 2 value based pricing methods- good value pricing and value added
Good value pricing
Many companies have changed pricing approaches to bring them in line with
economy ans consumer price perceptions
Good value prcing- offering the right combo of quality and good service at a fair
This often means introducing less expensive versions of established brand names
like the dollar menu
When you ask customers what is value they say brand names for less
Good value pricing has involved redesigning existing brands to offer more quality
for a given price or the same quality for less
Aldi supermarket does every day low pricing- EDLP which is a good type of
good-value based pricing. This involves charging constant everyday low prices
with few or no temporary price discounts. Costco does this too and walmart
Contrast- high-low pricing involves charging higher prices on an everyday basis
but running frequent promotions to lower prices temporarily on selected items.
Khols and macys does this
Value-added pricing
Def- attaching value-added features and services to differentiate a companys
offers and charging higher prices
So you support your higher prices through your value added features
Ex would be the cinemax theaters that have dinner and comfy seating and charge
higher prices
Cost based pricing
Remember costs set the floor for the price that the company can chage
Cost based pricing involves setting prices based on the costs of producing,
distributing, and selling the product plus a fair rate of return for the companys
efforts and risk
Some companies work to be a low cost producing company like walmart so they
can set lower prices but still see high sales

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Types of costs
Fixed and variable
Fixed (overhead) don’t vary with production or sales
Variable vary directly with level of production
Total costs- sum of fixed and variable costs for any given level of production
Cost-plus pricing
Cost plus pricing- also called markup prcing, adding a standard markup to the cost
of the product
So you add a markup to allow room for you to make a profit on the product
This ignores customer demand and competitor prices which isn’t smart but the
method is still popular due to being more certain about costs, it simplifies pricing
and when all firms in the industry use it, it tends to be around the same price as
Break even pricing- also called target return pricing: setting price to break even on
costs of making and marketing a product or setting price to make a target return
This pricing strategy uses concept of break even chart which shows the total cost
and total rev expected at different sales volume levels
Math for this is in the book
This strategy doesn’t take into accound price-demand relationship
Competition based pricing
This involves setting prices based on competitors strategies,costs, prices, market
Value is based on cpmetitors prices for similar products
If the customers perceive that the companies products have a higher value then
they can charge more
How strong are current compeititors and what are their pricing strategies? Base
pricing on this also so if you face a lot of competitiors that charge high prices
relative to the value, you might charge a lower price
Other internal and external considerations affecting price decisions
Internal factors affecting price- companies overall marketing strategy, objectives,
marketing mix, organizational considerations
External factors- nature of the market, demand, other environmental factors
Overall marketing strategy, objectives, mix
If you know your target market and positon, marketing mix strategy including
price will be pretty straight forward
A firm can set prices to attract new customers, profitably retain existing ones,
prevent comp from entering the market, or set at competitors prices to stabilize
the market
Decisions on other marketing mix variables can affect price
Normally position your products around price and then tailor other marketing mix
decisions to prices
Target costing- reverses the usual process of first desiging a product, determining
the cost, then asking can we sell it for that? Instead this starts with an ideal selling
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