1 1 Chapter 9 Pricing: Understanding and Capturing Customer Value

9-2 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.

9-3 Prentice Hall, Copyright 2009 Factors to Consider When Setting Price Some of the factors are:  Customer perceptions of value  Marketing strategy, objectives, mix  Nature of the market and demand  Competitors’ strategies and prices

9-4 Customer Perceptions of Value Value-based pricing:  Uses buyers’ perceptions of value, not the seller’s cost, as the key to pricing.  Types of value-based pricing: Good value pricing:  offering the right combination of quality and good service at a fair price. Value-added pricing:  attaching value-added features and services to differentiate a market offering and support higher prices.

9-5 Prentice Hall, Copyright 2009 Internal Factors Affecting Pricing Decisions 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.  Fixed costs: Costs that do not vary with production or sales level.  Variable costs: Costs that vary directly with the level of production.

9-6 Prentice Hall, Copyright 2009 Internal Factors Affecting Pricing Decisions Types of cost-based pricing:  Cost-plus pricing: Adding a standard markup to the cost of the product.  Break-even pricing Determining the price at which the company will break even  Target-profit pricing Determining the price at which the company will make the target profit it is seeking

9-7 Prentice Hall, Copyright 2009 Internal Factors Affecting Pricing Decisions Survival Current profit maximization Market share leadership (lower prices) Product quality leadership (higher prices)

9-8 Prentice Hall, Copyright 2009 Internal Factors Affecting 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.

9-9 External Factors Affecting Pricing Decisions The market and demand: Pure competition:  a market consists of many buyers and sellers trading in a uniform commodity. No single buyer or seller has much effect on the going market price. Monopolistic competition:  a common market structure where many competing producers sell products that are differentiated from one another productsdifferentiated Oligopolistic competition:  the market consists of a few sellers who are sensitive to each other’s pricing strategy Pure monopoly:  the market consists of one seller

9-10 Prentice Hall, Copyright 2009 External Factors Affecting Pricing Decisions The market and demand:  Analyzing the price-demand relationship: Different prices result in different levels of demand, as illustrated by the demand curve.  The price elasticity of demand refers to how responsive demand will be to a change in price. Demand may be characterized as: Inelastic (basic needs) Elastic

9-11 Prentice Hall, Copyright 2009 External Factors Affecting 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?

9-12 Prentice Hall, Copyright 2009 When to use:  Product’s quality and image must support its higher price.  Costs of low volume cannot be so high they cancel the advantage of charging more.  Competitors should not be able to enter market easily and undercut price. 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. New-Product Pricing Strategies

9-13 Prentice Hall, Copyright 2009 When to use:  Market is highly price sensitive so a low price produces more growth.  Costs must fall as sales volume increases.  Competition must be kept out of the market or the effects will be only temporary. 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. New-Product Pricing Strategies

9-14 Prentice Hall, Copyright 2009 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

9-15 Prentice Hall, Copyright 2009 Responses to Price Changes Buyer reactions to price changes. Competitor reactions to price changes.  Reduce price to match competition  Raise the perceived quality of its offer  Improve quality and increase price  Launch a low-price “fighting brand”