Pricing: Understanding and Capturing Customer Value

What Is a Price? u u Narrowly, price is the amount of money charged for a product or service. u u Broadly, price is the sum of all the values that consumers exchange for the benefits of having or using the product or service.

Factors Affecting Pricing Decisions

Customer Value Perceptions Effective, customer-oriented pricing involves understanding how much value consumers place on the benefits they receive from the product and setting a price that captures that value.

Value-Based Pricing Vs. Cost-Based Pricing

u u Good-Value Pricing: – –Offering just the right combination of quality and good service at a fair price. u u Value-Added Pricing: – –Attaching value-added features and services to differentiate a marketing and offer and support higher prices, rather than cutting prices to match competitors. Good-Value Pricing and Value-Added Pricing

Value-Added Pricing Caterpillar offers dealers a wide range of value-added services, including training, investment advice, and guaranteed parts delivery. These services justify charging a higher price.

u u Company and Product Costs: – –Fixed Costs: F F Costs that do not vary with production or sales level. – –Variable Costs: F F Costs that vary directly with the level of production. Internal Factors Affecting Pricing Decisions

u u Cost-plus pricing – –Adding a standard markup to the cost of the product. u u Break-even pricing u u Target-profit pricing Cost-Based Pricing Methods

Break-Even Chart for Determining Price

u u Marketing Objectives: – –Company must decide on its strategy for the product. – –General pricing objectives: F F Survival F F Current profit maximization F F Market share leadership F F Product quality leadership Internal Factors Affecting Pricing Decisions

u u 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: F F Pricing starts with an ideal selling price, then targets costs that will ensure that the price is met. Internal Factors Affecting Pricing Decisions

u u Organizational Considerations: – –Must decide who within the organization should set prices. – –This will vary depending on the size and type of company. F F Small organizations F F Large organizations F F Industrial firms F F Service providers Internal Factors Affecting Pricing Decisions

u u The Market and Demand: – –Costs set the lower limit of prices while the market & demand set the upper limit. – –Pricing in different types of markets: F F Pure competition F F Monopolistic competition F F Oligopolistic competition F F Pure monopoly – –Analyzing the price-demand relationship. –. –The price elasticity of demand. External Factors Affecting Pricing Decisions

u u Types of Markets: – –Pure Competition: many buyers and sellers of a uniform commodity at a uniform price. – –Monopolistic Competition: many buyers and sellers of differentiated products, at different prices. – –Oligopolistic Competition: a few sellers who are highly sensitive of each other’s prices. Goods may be uniform or nonuniform. – –Pure Monopoly: a single government, private regulated, or private nonregulated seller. External Factors Affecting Pricing Decisions

The Demand Curve

External Factors Affecting Pricing Decisions u u Competitive Issues Affecting Price – –What are our competitor’s costs, prices, and market offerings? – –Will our pricing attract, restrict, or drive out competitors? – –How does our market offering compare to the competition in terms of customer value? – –How strong are current competitors and what is their pricing strategy? – –How does competition influence price sensitivity? u u Other External Factors

u u 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 the price. u u Market Skimming: – –Set a high price for a new product so as to “skim” revenues layer by layer from the market. – –Company makes fewer, but more profitable sales. New-Product Pricing Strategies

u u When to Use: – –Market is highly price sensitive so a low price produces more growth. – –Costs must fall as sales volume increases. – –Need to keep competition out or effects are only temporary. u u Market Penetration: – –Set a low initial price in order for the brand 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

Product Mix Pricing Strategies u u Product line pricing u u Optional-product pricing u u Captive-product pricing u u By-product pricing u u Product bundle pricing

Product Line Pricing u u Sets price steps between various items in a product line based on: – –Cost differences between products – –Customer evaluations of different features – –Competitors’ prices Product Line Pricing: Product Line Pricing: Gramophone sells a line of high- end sound systems ranging in price from $5,000 to $120,000.

Optional- and Captive-Product Pricing u u Optional-Product – –Pricing optional or accessory products sold with the main product (e.g., ice maker with the refrigerator). u u Captive-Product – –Pricing products that must be used with the main product (e.g., replacement cartridges for Gillette razors).

By-Product and Product Bundle Pricing Strategies u u By-Product Pricing – –Pricing low-value by-products to get rid of them (e.g., animal manure from zoo). u u Product Bundle Pricing – –Pricing bundles of products sold together (software, monitor, PC, and printer).

Product-Bundle Pricing Expedia.com Expedia.com Travelers who book flight, hotel, and car together can save on average $ from Expedia.comExpedia.com

u u Discount and allowance pricing u u Segmented pricing u u Psychological pricing u u Promotional pricing u u Geographical pricing u u Dynamic pricing u u International pricing Price Adjustment Strategies

Discounts and Allowances u u Discounts – –Cash – –Quantity – –Functional – –Seasonal u u Allowances – –Trade-in – –Promotional Christmas cards purchased out of season, such as in March or July, are often sold at a discount.

Segmented Pricing u u Selling a product or service at two or more prices, where the difference in prices is not based on differences in costs. u u Types: Customer-segment Product-form Location pricing Time pricing Pricing at Walt Disney World Resorts varies by the time of year.

Psychological Pricing u u Considers the psychology of prices and not simply the economics. u u Consumers usually perceive higher-priced products as having higher quality. u u Consumers use price less when they can judge the quality of a product by examining it or recalling experiences.

Promotional Pricing Techniques u u Cash Rebates u u Special-Event Pricing u u Loss Leaders u u Low-Interest Financing u u Longer Warranties u u Free Maintenance

Promotional Pricing Companies offer promotional pricing to create excitement and a sense of urgency.

9-31 Dynamic Pricing Adjusting prices continually to meet the characteristics and needs of individual customers and situations.

Dynamic Pricing Buyers benefit from dynamic pricing. Shopping sites on the Web that offer comparison services help buyers track price changes as they occur.