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Transcript of Prentice Hall, Copyright 2009 1 Pricing: Understanding and Capturing Customer Value Chapter 9 Next...
Pricing: Pricing: Understanding Understanding and Capturing and Capturing
Customer Customer ValueValue
Chapter 9Next Exit
2
9-2Prentice Hall, Copyright 2009
Rest Stop:Rest Stop: Previewing the ConceptsPreviewing the Concepts
1. Discuss the importance of understanding customer-value perceptions and company costs when setting prices.
2. Identify and define the other important internal and external factors affecting a firm’s pricing decisions.
3. Describe the major strategies for pricing imitative and new products.
4. Explain how companies find a set of prices that maximize the profits from the total product mix.
5. Discuss how companies adjust their prices to take into account different types of customers and situations.
6. Discuss key issues related to initiating and responding to price changes.
9-3Prentice Hall, Copyright 2009
BackgroundCompany: Ryanair is one
of Europe’s most popular carriers, flying 42.5 million passengers to 100+ European destinations.
Profitability: Profits have increased at double-digit rates for the past 3 years; average fare is $53 and profit margin is 17% compared to Southwest’s $92 and 7%.
Future Goal: CEO Michael O’Leary says that more than half of Ryanair’s customers will fly free by 2010.
Ryanair –Ryanair – FREE Air Travel?FREE Air Travel?Case StudyCase Study
How Can They Do This?Frugal Cost Structure: Constantly
looking for new ways to cut costs— removed seat back pockets to reduce weight and cleaning costs. Sells 98% of tickets online, reducing commissions. Flight crews buy their own uniforms.
Charges for Amenities: Customers pay for refreshments, snacks, and baggage check-in services.
Generates Revenue Creatively: Planes serve as giant billboards; sells in-plane seatback advertising; merchandising in-flight. In the future, in-flight gaming is planned.
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What Is a Price?What Is a Price?
Narrowly defined, price is the amount of money charged for a product or service.
Broadly defined, price is the sum of all of the values that consumers give up in order to gain the benefits of having or using the product or service.
Prentice Hall, Copyright 2009 9-5
Figure 9.1Figure 9.1Considerations in Setting PriceConsiderations in Setting Price
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Quick FlickQuick Flick
Setting Prices at Wellbeing
Click to play video
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Value-based PricingValue-based Pricing
Setting prices based on buyers’ perceptions of
value rather than on seller’s costs.
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Customer Perceptions of ValueCustomer Perceptions of Value
Value-based pricing:– Price is considered along with the
other marketing mix variables before the marketing program is set.
– Types of value-based pricing:•Good value pricing
•Value-added pricing
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Good-Value Pricing
Don’t confuse “good value” with “low price.” Some car buyers consider the luxurious Bentley Continental GT automobile a real value, even though it carries a hefty price tag of $ 150,000.
Marketing in Action
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Value-added PricingMany consumers believe that customization and personalization adds value to products, and are willing to pay the price!
The mymms.com Web site lets consumers select their own M&M color and message. A 7-ounce bag costs $13.99, with a minimum order of three bags required.
Consumers are eating it up to the point where Dove chocolate now offers custom messages for foil wrappings as well.
Marketing in Action
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Cost-based PricingCost-based Pricing
Setting prices based on the costs for producing,
distributing, and selling the product plus a fair rate of
return for its effort and risk.
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Figure 9.2Figure 9.2Value-based Pricing vs. Value-based Pricing vs.
Cost-based PricingCost-based Pricing
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Internal Factors Affecting Internal Factors Affecting Pricing DecisionsPricing Decisions
Cost-based pricing:– Fixed costs:
• Costs that do not vary with production or sales level.
– Variable costs:• Costs that vary directly with the level of
production.
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Figure 9.3Figure 9.3Break-Even Chart for Break-Even Chart for
Determining PriceDetermining Price
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Types of cost-based pricing:– Cost-plus pricing:
•Adding a standard markup to the cost of the product.
– Break-even pricing
– Target-profit pricing
Internal Factors Affecting Internal Factors Affecting Pricing DecisionsPricing Decisions
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Overall marketing strategy, objectives, and the marketing mix:– Company must decide on its overall
marketing strategy for the product.– General pricing objectives:
• Survival
• Current profit maximization
• Market share leadership
• Product quality leadership
Internal Factors Affecting Internal Factors Affecting Pricing DecisionsPricing Decisions
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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 that starts with an ideal selling price,
then targets costs that will ensure that the price is met.
Internal Factors Affecting Internal Factors Affecting Pricing DecisionsPricing Decisions
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Organizational considerations:– Must decide who within the
organization should set prices.
– This will vary depending on the size and type of company.
Internal Factors Affecting Internal Factors Affecting Pricing DecisionsPricing Decisions
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External Factors Affecting External Factors Affecting Pricing DecisionsPricing Decisions
The market and demand:– Costs set the lower limit of prices while the
market and demand sets the upper limit.– Pricing in different types of markets:
• Pure competition
• Monopolistic competition
• Oligopolistic competition
• Pure monopoly
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Monopolistic Competition
In a monopolistic competitive market, many different sellers offer products over a wide range prices.
Moen sets its bath fixtures apart through strong branding and advertising, reducing the impact of price.
Marketing in Action
Prentice Hall, Copyright 2009 9-21
Figure 9.4Figure 9.4Demand CurveDemand Curve
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Upwards Sloping Demand
Gibson was surprised to learn that its high-quality instruments didn’t sell as well at lower prices, indicating that their demand curve runs counter to the norm and slopes upward.
Marketing in Action
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The market and demand:– The price elasticity of demand refers to
how responsive demand will be to a change in price. Demand may be characterized as:• Inelastic
•Elastic
External Factors Affecting External Factors Affecting Pricing DecisionsPricing Decisions
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Competitors’ Strategies and Prices:– How does the market offering compare to
competitive products in terms of value?– How strong is the competition and what is
their pricing strategy?– How does the competitive landscape
influence customer price sensitivity? Other External Factors
External Factors Affecting External Factors Affecting Pricing DecisionsPricing Decisions
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Market Skimming Setting a high price
for a new product to “skim” revenues layer by layer from those willing to pay the high price.
Company makes fewer, but more profitable sales.
When to Use Product’s quality and
image must support its higher price.
Costs of low volume can’t be so high they cancel the advantage of charging more.
Competitors should not be able to enter market easily and undercut price.
New-Product Pricing New-Product Pricing StrategiesStrategies
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Skimming Pricing Strategy
Electronics often use a skimming pricing strategy. The first VCRs cost in excess of $1,500 and declined to as low as $49 at the end of their life cycle. HDTVs originally cost $43,000 in 1990, yet many are now priced around $500.
Marketing in Action
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Market Penetration Setting a low initial
price in order to “penetrate” the market quickly and deeply.
Can attract a large number of buyers quickly and win a large market share.
When to Use Market is highly price
sensitive so a low price produces more growth.
Costs must fall as sales volume rises.
Competition must be kept out of the market or the effects will be only temporary.
New-Product Pricing New-Product Pricing StrategiesStrategies
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Fuel for ThoughtFuel for Thought
Suppose that your firm implements a penetration pricing strategy while costs are increasing, only to find that demand is insufficient at the price set.
How likely is it that you will be able to successfully raise your price to offset the increase in costs? Or would it be would be better to decrease price further? Would your answer depend on the elasticity of demand? Explain!
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Product line pricing Optional-product pricing Captive-product pricing By-product pricing Product bundle pricing
Product Mix Pricing StrategiesProduct Mix Pricing Strategies
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Product Mix Pricing StrategiesProduct Mix Pricing Strategies
Product-line pricing:– Involves setting price
steps between products in a product line based on cost differences between products and customer perceptions of value.
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Product Mix Pricing StrategiesProduct Mix Pricing Strategies
Optional-product pricing:– Pricing of optional
or accessory products sold with the main product (e.g., printers, USBflash drives, or digital cameraswith computers).
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Product Mix Pricing StrategiesProduct Mix Pricing Strategies
Captive-product pricing:– Pricing products that must
be used with the main product.
– Kodak is planning to buck the industry trend by selling their printers without discounts but pricing their ink cartridges inexpensively.
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Product Mix Pricing StrategiesProduct Mix 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).
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Price Adjustment StrategiesPrice Adjustment Strategies
Discount and allowance pricing Segmented pricing Psychological pricing Promotional pricing Geographical pricing Dynamic pricing International pricing
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Price Adjustment StrategiesPrice Adjustment Strategies
Discounts–Cash–Quantity–Functional–Seasonal
Allowances–Trade-in–Promotional
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Segmented PricingSegmented Pricing
Selling a product or service at two or more prices, where the
difference in prices is not based on differences in costs.
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Price Adjustment StrategiesPrice Adjustment Strategies
Types of segmented pricing:1. Customer-segment: different customers
pay different prices for the same good.
2. Product-form: different versions are priced differently but not according to cost.
3. Location pricing: different prices are charged for each location even when the cost of offering the good is the same.
4. Time pricing: price is varied according to time of year, season, month, day, or hour.
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Product-Form Pricing
Evian water in a 1-liter bottle might cost you 5 cents an ounce at the supermarket, whereas the same water may run $2.28 an ounce when sold in 5-ounce cans as Brumisateur Mineral Water Spray Moisturizer.
Marketing in Action
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Price Adjustment StrategiesPrice Adjustment Strategies
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 during product
evaluation when they can judge the quality of a product by examining it or recalling experiences.
9-40Prentice Hall, Copyright 2009
Psychological Pricing
Reference prices are those prices that buyers carry in their minds and refer to when evaluating a given product. The tag at right offers a suggested retail price for reference.
Marketing in Action
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Price Adjustment StrategiesPrice Adjustment Strategies
Geographical pricing:– FOB-origin pricing– Uniform-delivered
pricing– Zone pricing– Basing-point pricing– Freight-absorption
pricing
Promotional pricing:– Loss leaders– Special-event
pricing– Low-interest
financing– Longer warranties– Free maintenance– Discounts
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Price Adjustment StrategiesPrice Adjustment Strategies
Dynamic pricing:– Adjusting prices
continually to meet the characteristics and needs of individual customers and situations.
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Price Adjustment StrategiesPrice Adjustment Strategies
International pricing:– Adjusting prices
for international markets requires consideration of many factors.
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Price Adjustment StrategiesPrice Adjustment Strategies
Factors influence international pricing:– Economic conditions– Competitive situations– Laws and regulations– Development of the wholesaling and retailing
system– Consumer perceptions and preferences– Different marketing objectives– Costs
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Price ChangesPrice Changes
Price cuts may be initiated due to:– Excess capacity– Falling demand in face of strong competitive
price– Dominate market through lower costs
Price increases may be initiated due to:– Cost inflation– Overdemand
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Figure 9.5Figure 9.5Assessing and Responding to Assessing and Responding to
Competitor Price ChangesCompetitor Price Changes
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Responding to Price Changes
Fighting brands include budget-priced Basic versions of products such as Bounty Basic.
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Public Policy and PricingPublic Policy and Pricing
Price fixing Predatory pricing Price discrimination Retail price maintenance Deceptive pricing:
– Promoted price reductions– Scanner fraud– Price confusion
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Rest Stop:Rest Stop: Reviewing the ConceptsReviewing the Concepts
1. Discuss the importance of understanding customer-value perceptions and company costs when setting prices.
2. Identify and define the other important internal and external factors affecting a firm’s pricing decisions.
3. Describe the major strategies for pricing imitative and new products.
4. Explain how companies find a set of prices that maximize the profits from the total product mix.
5. Discuss how companies adjust their prices to take into account different types of customers and situations.
6. Discuss key issues related to initiating and responding to price changes.
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Copyright © 2009 Pearson Education, Inc. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice HallPublishing as Prentice Hall