Understanding Next Exit - AUTHORauthor.uthm.edu.my/uthm/www/content/lessons/808/marketing...

Prentice Hall, Copyright 2009

1

Pricing: Understanding and Capturing

Customer Value

Chapter 9

Next Exit

9-2

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Rest Stop: Previewing 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.

9-3 Prentice Hall, Copyright 2009

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 9-4

Figure 9.1

Considerations in Setting Price

9-5 5 Prentice Hall, Copyright 2009

Value-based Pricing

Setting prices based on

buyers’ perceptions of

value rather than

on seller’s costs.


Customer 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


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


Value-added Pricing

Many 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

http://www.mymms.com/customprint/?src=111817&sc_cid=C_GG_37_N00_MA8C0N00CGG37111

http://www.mydovechocolate.com/home/index.asp?src=111909&sc_cid=C_D0_45_OFF_MYDOVOFFCD045111


Cost-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.


Figure 9.2

Value-based Pricing vs.

Cost-based Pricing


Internal Factors Affecting

Pricing 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.


Figure 9.3 Break-Even Chart for

Determining Price


Types of cost-based pricing:

–Cost-plus pricing:

•Adding a standard markup to the cost

of the product.

–Break-even pricing

–Target-profit pricing


Pricing Decisions


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


Pricing Decisions


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.


Pricing Decisions


Organizational considerations:

–Must decide who within the

organization should set prices.

–This will vary depending on the size

and type of company.


Pricing Decisions


External Factors Affecting

Pricing 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


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


Figure 9.4

Demand Curve


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


Pricing Decisions


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


Pricing Decisions


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

Strategies


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


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

Strategies


Product line pricing

Optional-product pricing

Captive-product pricing

By-product pricing

Product bundle pricing

Product 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.



Optional-product pricing:

–Pricing of optional or accessory products sold with the main product (e.g., printers, USB flash drives, or digital cameras with computers).



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.



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).


Price Adjustment Strategies

Discount and allowance pricing

Segmented pricing

Psychological pricing

Promotional pricing

Geographical pricing

Dynamic pricing

International pricing



Discounts

–Cash

–Quantity

–Functional

–Seasonal

Allowances

–Trade-in

–Promotional


Segmented Pricing

Selling a product or service at

two or more prices, where the

difference in prices is not based

on differences in costs.



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.



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.



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



Dynamic pricing:

–Adjusting prices

continually to

meet the

characteristics

and needs of

individual

customers and

situations.



International pricing:

–Adjusting prices

for international

markets requires

consideration of

many factors.



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


Price 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


Figure 9.5 Assessing and Responding to

Competitor Price Changes

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Rest Stop: Reviewing 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.

Understanding Next Exit - AUTHORauthor.uthm.edu.my/uthm/www/content/lessons/808/marketing...

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