Pricing Understanding and Capturing Customer Value Chapter 9

Rest Stop: Previewing the Concepts Identify the three major pricing strategies and discuss the importance of understanding customer-value perceptions, company costs, and competitor strategies when setting prices. Identify and define the other important internal and external factors affecting a firm’s pricing decisions. Describe the major strategies for pricing imitative and new products. Explain how companies find a set of prices that maximize the profits from the total product mix. Discuss how companies adjust their prices to take into account different types of customers and situations. Discuss the key issues related to initiating and responding to price changes. Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall

First Stop Trader Joe’s Price Value Equation Keeping Prices Low Cost Control is Key: Locates stores in low-rent and out-of-the-way areas; small store size and limited assortment reduces facility and inventory costs. Buys private label goods direct from suppliers and negotiates price heavily. Spends little on advertising; relies primarily on word-of-mouth. Results: Trader Joe’s is fastest growing food store. Chain has expanded to 330 stores in 25 states with annual sales in excess of $7.2 billion, a growth of 60% in just 3 years. What They Offer Trader Joe’s Niche: Offers gourmet-caliber, one-of-a-kind products at impossibly low prices. Limited product assortment of 2,000 specialty items unique to Trader Joe’s. 80% of items are store brands (private label goods). Retail Atmosphere & Staff: Festive, vacation-like atmosphere that makes shopping fun provides Trader Joe’s with a cool edge. Associates wear Hawaiian shirts and consult with customers. Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall

Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall Price vs. Value Cutting cost in tough economic times isn’t always the answer. Companies should sell value, not price. Price reductions can: Cut profits and initiate price wars. Cheapen perceptions of brand quality. Marketers should strive to convince consumers that price is justified by value provided. Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall

Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall 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. Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall

Factors to Consider When Setting Price Customer perceptions of value: No demand exists above price ceiling. Other internal and external considerations: Marketing strategy, objectives, mix. Nature of the market and demand. Competitors’ strategies and prices. Product costs: No profits are available below the price floor. Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall

Major Pricing Strategies Customer value-based pricing: Setting prices based on buyers’ perceptions of value rather than the seller’s cost. Cost-based pricing: Setting prices based on the cost of producing, distributing, and selling product at a fair rate of return. Competition-based pricing: Setting prices based on competitors’ strategies, costs, prices, and market offerings. Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall

Customer Value-Based Pricing Price is considered along with the other marketing mix variables before the marketing program is set. Customer needs and value perceptions are assessed. Target price is based on value perception. Types of value-based pricing: Good value pricing. Value-added pricing. Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall

Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall Cost-Based Pricing Cost-based pricing: Costs set the floor for the price that the company can charge. Product-driven, rather than value-driven. Types of costs: Fixed costs: Do not vary with production or sales level. Variable costs: Vary directly with the level of production. Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall

Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall Cost-Based Pricing Types of cost-based pricing: Cost-plus (markup) pricing: Adding a standard markup to the cost of the product. Break-even pricing. Target return pricing. Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall

Competition-Based Pricing Assumes consumers base their judgments of a product’s value on the prices charged by competitors for similar products. Assessing competitors’ pricing strategies: How does the firm’s offering compare in terms of customer value? How strong are competitors; what are their pricing strategies? What principle should guide pricing decisions relative to those of the competition? Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall

Other Factors Affecting Pricing Decisions Internal factors: Overall marketing strategy, objectives, and the marketing mix. Organizational considerations. External factors: The market and demand. The economy. Other external factors. Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall

Internal Factors Affecting Pricing Decisions Overall marketing strategy, objectives, and the marketing mix: Company must decide on its overall marketing strategy for the product and the role that price will play in accomplishing objectives. Pricing decisions need to be coordinated with packaging, promotion, and distribution decisions. Positioning may be based on price. Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall

Internal Factors Affecting Pricing Decisions Overall marketing strategy, objectives, and the marketing mix: Target costing supports price-based positioning strategies: Pricing starts with an ideal selling price, then targets costs that will ensure that the price is met. Other firms choose not to position on price, or select high price strategies to enhance product prestige. Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall

Internal Factors Affecting Pricing Decisions Organizational considerations: Must decide who within the organization should set prices. This will vary depending on the size and type of company. Some firms maintain pricing departments. Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall

External Factors Affecting Pricing Decisions The market and demand: A firm’s flexibility in setting price varies depending on the nature of the market. Four types of markets exist: Pure competition. Monopolistic competition. Oligopolistic competition. Pure monopoly. Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall

External Factors Affecting Pricing Decisions The market and demand: Analyzing the price-demand relationship: Different prices result in different levels of demand, as shown by the demand curve. Price elasticity of demand: Refers to how responsive changes in demand will be to a change in price. Small demand change = inelastic demand. Large demand change = elastic demand. Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall

External Factors Affecting Pricing Decisions The economy: Economic factors have a strong impact on pricing strategies. The recent recession has led to many consumers becoming more value-conscious. While some firms have cut price, others have shifted to featuring more affordable items in the marketing mix. Some firms have held price, but repositioned brands to enhance their value. Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall

External Factors Affecting Pricing Decisions Other external factors: Channel member reaction to price. Governmental reaction or pricing controls. Social concerns. Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall

New-Product Pricing Strategies 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 cannot be so high they cancel out the benefit of higher price. Competitors should not be able to enter market easily and undercut price. Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall

New-Product Pricing Strategies 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 fall as sales volume increases. Competition must be kept out of the market or the effects will be only temporary. Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall

Product Mix Pricing Strategies Product-line pricing: Setting the price steps between various products in a product line based on cost differences between products, customer evaluations of different features, and competitors’ prices (e.g., various Quicken products). Optional-product pricing: Pricing optional or accessory products sold with the main product (e.g., ice maker with the refrigerator). Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall

Product Mix Pricing Strategies Captive-product pricing: Pricing products that must be used with the main product (e.g., replacement cartridges for Gillette razors). By-product pricing: Pricing by-products in order to make the main product’s price more attractive (e.g., wood by-products used to create useful chemicals). Product bundle pricing: Combining several products and offering the bundle at a reduced price (e.g., fast food combo meals). Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall

Price Adjustment Strategies Discount and allowance pricing. Segmented pricing. Psychological pricing. Promotional pricing. Geographical pricing. Dynamic pricing. International pricing. Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall

Price Adjustment Strategies Discounts: Cash Quantity Functional Seasonal Allowances: Trade-in Promotional Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall

Price Adjustment Strategies 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: Customer-segment. Product-form. Location-based pricing. Time-based pricing. Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall

Price Adjustment Strategies Psychological pricing: Considers the psychology of prices and not simply the economics; the price is used to say something about product. Price can often influence perceptions of quality. Reference prices are important. Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall

Price Adjustment Strategies Promotional pricing: Discounts (loss leaders) Special-event pricing Cash rebates Low-interest financing Longer warranties Free maintenance Geographical pricing: FOB-origin pricing Uniform-delivered pricing Zone pricing Basing-point pricing Freight-absorption pricing Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall

Price Adjustment Strategies 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. Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall

Price 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. Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall

Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall Price Changes Price cuts may be initiated due to: Excess capacity. Falling demand in face of strong competitive price or a weakened economy. Attempt to dominate market through lower costs. Price increases can greatly improve profits and may be initiated due to: Cost inflation. Overdemand. Marketers should avoid price gouging. Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall

Responses to Price Changes Buyer reactions to price changes. Competitor reactions to price changes. Firm responses to price changes by competition: Reduce price to match competition. Raise the perceived value of its offer. Improve quality and increase price. Launch a low-price “fighting brand.” Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall

Public Policy and Pricing Pricing within channel levels: Price fixing. Predatory pricing. Pricing across channel levels: Price discrimination. Retail price maintenance. Deceptive pricing. Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall

Rest Stop: Reviewing the Concepts Identify the three major pricing strategies and discuss the importance of understanding customer-value perceptions, company costs, and competitor strategies when setting prices. Identify and define the other important internal and external factors affecting a firm’s pricing decisions. Describe the major strategies for pricing imitative and new products. Explain how companies find a set of prices that maximize the profits from the total product mix. Discuss how companies adjust their prices to take into account different types of customers and situations. Discuss the key issues related to initiating and responding to price changes. Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall