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

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.

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.

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.

Figure 9.1Figure 9.1Considerations in Setting PriceConsiderations in Setting Price

Quick FlickQuick Flick

Setting Prices at Wellbeing

Click to play video

Value-based PricingValue-based Pricing

Setting prices based on buyers’ perceptions of

value rather than on seller’s costs.

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

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 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

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.

Figure 9.2Figure 9.2Value-based Pricing vs. Value-based Pricing vs.

Cost-based PricingCost-based Pricing

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.

Figure 9.3Figure 9.3Break-Even Chart for Break-Even Chart for

Determining PriceDetermining 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

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

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.

Organizational considerations:– Must decide who within the

organization should set prices.

– This will vary depending on the size and type of company.

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

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 9.4Figure 9.4Demand CurveDemand Curve

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

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

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

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

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 New-Product Pricing StrategiesStrategies

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!

Product line pricing Optional-product pricing Captive-product pricing By-product pricing Product bundle pricing

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.

Optional-product pricing:– Pricing of optional

or accessory products sold with the main product (e.g., printers, USBflash drives, or digital cameraswith 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 StrategiesPrice 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 PricingSegmented 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.

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

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.

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

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 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

Figure 9.5Figure 9.5Assessing and Responding to Assessing and Responding to

Competitor Price ChangesCompetitor Price Changes

Responding to Price Changes

Fighting brands include budget-priced Basic versions of products such as Bounty Basic.

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

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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