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Chapter 9

BMGT 350 Chapter Notes - Chapter 9: Price Ceiling, Price Floor, Target Costing

Business and Management
Course Code
BMGT 350
Roxanne Lefkoff

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Chapter 9- Pricing, Understanding and Capturing Customer Value
What Is a Price?
Price: amount of money charged for a product or service, or the sum of the values that customers exchange for the benefits of having or
using the product or service
historically- Major factor affecting buyer choice
recently- non price factors have gained increasing importance
one of most important elements that determine a firm’s market share and profitability
only element in marketing mix that produces revenue, all others represent costs
one of most flexible marketing mix elements, can be quickly changed
number one problem facing many marketing executives, many companies do not handle pricing well
smart managers treat pricing as a key strategic tool for creating and capturing customer value
prices have direct impact on a firm’s bottom line
Major Pricing Strategies
price company charges will fall somewhere between too low to produce a profit or too high to produce demand
customer perception of product’s value set ceiling for its price
ocustomer perceive product’s price to be greater than its value, they won’t buy product
Product cost set floor for a product’s price
oCompany prices product below its costs, company’s profits will suffer
Three major pricing strategies:
oCustomer value-based pricing
oCost-based pricing
ocompetition-based pricing
Customer Value-Based Pricing
pricing decision must start with customer value
when customers buy a product, exchange something of value (price) to get something of value (benefits of having or using the product)
customer value-based pricing: setting price based on buyers’ perceptions of value rather than on seller’s cost
price is considered along with all other marketing mix variables before the marketing program is set
company designs what it considers to be a good product, adds up the costs of making the product, sets a price that covers costs plus a target
value-based pricing reverses this process
company 1st assesses customer needs and value perceptions, then sets target price based on customer perceptions of value
Considerations in Setting Price:
oProduct Costs:
Price floor
No profits below this price
oCompetition and other external factors:
Competitors’ strategies and prices
Marketing strategy, objectives, and mix
Nature of market and demand
oConsumer perceptions of value:
Price ceiling
No demand above the price
cost-based pricing:
odesign a good product
odetermine product costs
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oset price based on cost
oconvince buyers of product’s value
value-based pricing:
oassess customer needs and value perceptions
oset target price to match customer perceived value
odetermine costs that can be incurred
odesign product to deliver desired value at target price
“good value” not the same as “low price”
hard to measures value customers attach to its product
consumers use perceived values to evaluate a product’s price so the company must work to measure them
two types of value-based pricing:
ogood-value pricing
ovalue-based pricing
Good-Value Pricing
offering just the right combination of quality and good service at a fair price
introducing less-expensive versions of established, brand name products
redesigning existing brands to offer more quality for a given price or the same quality for less
some companies succeed by offering less value but at very low price s
ALDI practices an important type of good-value pricing at the retail level called everyday low pricing (EDLP)
EDLP involves charging a constant, everyday low price with few or no temporary price discounts
Retailers such as Costco practice EDLP but Wal-Mart is the king
High-low pricing-chagrining higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected
oKohl’s and Macy’s have frequent sale days early-bird savings, bonus earnings for store credit-card holders
Value-Added Pricing
Attaching value-added features and services to differentiate a company’s offers and charging higher prices
Adding amenities and charging more rather than cutting services to maintain lower admission prices
Cost-Based Pricing
Setting prices based on the costs of producing ,distribution, selling the product plus a fair rate of return for effort and risk
Low-cost producers:
oSouthwest Airlines
oSmaller margins, greater sales and profits
Apple, BMW, Steinway intentionally pay higher costs so that they can add value and claim higher prices and margins
Types of Costs
Fixed costs (overhead): Costs that do not vary with production or sales level
oCompany must pay each month’s bills for rent, heat, interest, executive salaries regardless of the company’s level of output
Variable costs: vary directly with level of production
oEach PC produced by HP involves a cost of computer chips, wires, plastic, packaging and other inputs-tend to be same for each
unit produced- costs tend to be the same for each unit produced, they’re called variable costs because the total varies with number
of units produced
Total costs: sum of fixed and variable costs for any given level of production
oManagement wants to charge a price that will at least cover the total production costs t a given level of production
Cost-Plus Pricing
Adding a standard markup to the cost of the product
oExample: electronics retailer might pay a manufacturer $20 for a flash drive and arm kit up to sell at $30, 50% markup on cost
oGross margin is $10
Does using standard markups to set prices make sense?
oGenerally no
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