1. Pricing: Understanding and Capturing Customer Value
Chapter Nine
Pricing: Understanding and Capturing Customer Value

2. Describe the major strategies for pricing imitative and new products.
4/20/2017
Discuss the importance of understanding customer value perceptions and company costs 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 maximizes the profits from the total product mix.
Discuss how companies adjust their prices to take into account different types of customers and situations.
Discuss key issues related to initiating and responding to price changes.
Copyright 2007, Prentice Hall, Inc.
Copyright 2005 Brainy Betty, Inc.

3. Toys ‘R’ Us – Pricing for Success
Case Study
Toys ‘R’ Us – Pricing for Success
The Past
1970s: Toys ‘R’ Us emerges as a toy retailing category killer, offering greater product selection and lower prices than its small store competition.
Explosive growth occurs.
Late 1990s: Wal-Mart uses toys as a loss leader, pricing lower than Toys ‘R’ Us and becomes the largest toy retailer.
The Present
Toys ‘R’ Us tries price matching and fails miserably, losing sales, profit, and market share.
New ownership closes stores, cut costs, and steps away from the price war.
Efforts focus on top-selling, higher margin or exclusive items, store atmosphere, shopper experiences, and customer service.
Copyright 2007, Prentice Hall, Inc.

4. What Is a Price?
Narrowly, price is the amount of money charged for a product or service.
Broadly, price is the sum of all the values that consumers exchange for the benefits of having or using the product or service.
Copyright 2007, Prentice Hall, Inc.

5. Major Considerations in Setting Price
Customer perceptions of value
Other internal and external considerations
Marketing strategy, objectives, mix
Nature of the market and demand
Competitors’ strategies and prices
Product costs
Copyright 2007, Prentice Hall, Inc.

6. Customer Value Perceptions
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:
Uses buyers’ perceptions of value, not the seller’s cost, as the key to pricing.
Good value pricing
Value-added pricing
Copyright 2007, Prentice Hall, Inc.

7. Internal Factors Affecting Pricing Decisions
Company and Product Costs:
Fixed Costs:
Costs that do not vary with production or sales level.
Variable Costs:
Costs that vary directly with the level of production.
Copyright 2007, Prentice Hall, Inc.

8. Cost-Based Pricing Cost-plus pricing Break-even pricing
Adding a standard markup to the cost of the product
Break-even pricing
Target-profit pricing
Copyright 2007, Prentice Hall, Inc.

9. Internal Factors Affecting Pricing Decisions
Marketing Objectives:
Company must decide on its strategy for the product.
General pricing objectives:
Survival
Current profit maximization
Market share leadership
Product quality leadership
Copyright 2007, Prentice Hall, Inc.

10. 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.
Target costing:
Pricing that starts with an ideal selling price, then targets costs that will ensure that the price is met.
Copyright 2007, Prentice Hall, Inc.

11. 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.
Copyright 2007, Prentice Hall, Inc.

12. External Factors Affecting Pricing Decisions
The Market and Demand:
Costs set the lower limit of prices while the market and demand set the upper limit.
Pricing in different types of markets:
Pure competition
Monopolistic competition
Oligopolistic competition
Pure monopoly
Analyzing the price-demand relationship
The price elasticity of demand
Copyright 2007, Prentice Hall, Inc.

13. External Factors Affecting Pricing Decisions
Competitors’ Strategies and Prices
How does the market offering compare?
How strong is competition and what is their pricing strategy?
How does competition influence price sensitivity?
Other External Factors
Copyright 2007, Prentice Hall, Inc.

14. New-Product Pricing Strategies
Market Skimming:
Set a high price for a new product to “skim” revenues layer by layer from the market.
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 the advantage of charging more.
Competitors should not be able to enter market easily and undercut the price.
Copyright 2007, Prentice Hall, Inc.

15. New-Product Pricing Strategies
Market Penetration:
Set 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 increases.
Need to keep competition out or effects are only temporary.
Copyright 2007, Prentice Hall, Inc.

16. Product Mix Pricing Strategies
Product line pricing
Optional-product pricing
Captive-product pricing
By-product pricing
Product bundle pricing
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17. Product-Line Pricing
Involves setting price steps between various products in a product line based on:
Cost differences between products
Customer evaluations of different features
Competitors’ prices
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18. Optional- and Captive-Product Pricing
Optional-Product
Pricing optional or accessory products sold with the main product (e.g., ice maker with the refrigerator).
Captive-Product
Pricing products that must be used with the main product (e.g., replacement cartridges for Gillette razors).
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19. By-Product and Product Bundle Pricing Strategies
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).
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20. Price Adjustment Strategies
Discount and allowance pricing
Segmented pricing
Psychological pricing
Promotional pricing
Geographical pricing
Dynamic pricing
International pricing
Copyright 2007, Prentice Hall, Inc.

21. Discounts and Allowances
Cash
Quantity
Functional
Seasonal
Allowances
Trade-in
Promotional
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22. 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 pricing
Time pricing
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23. 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 when they can judge the quality of a product by examining it or recalling experiences.
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24. Promotional Pricing Low-Interest Financing Longer Warranties
Free Maintenance
Cash Rebates
Special-Event Pricing
Loss Leaders
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25. Geographical Pricing FOB-origin pricing Uniform-delivered pricing
Zone pricing
Basing-point pricing
Freight-absorption pricing
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26. Dynamic Pricing
Adjusting prices continually to meet the characteristics and needs of individual customers and situations.
Copyright 2007, Prentice Hall, Inc.

27. International Pricing
Price depends on many factors, including:
Economic conditions
Competitive situations
Laws and regulations
Development of the wholesaling and retailing system
Consumer perceptions and preferences
Costs
Copyright 2007, Prentice Hall, Inc.

28. Initiating Price Changes
Price Cuts:
Excess capacity
Falling market share
Dominate market through lower costs
Price Increases:
Cost inflation
Overdemand
Copyright 2007, Prentice Hall, Inc.

29. Responses to Price Changes
Buyer reactions to price changes
Competitor reactions to price changes
Firm responses 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”
Copyright 2007, Prentice Hall, Inc.

30. Public Policy and Pricing
Price fixing
Predatory pricing
Price discrimination
Retail price maintenance
Deceptive pricing
Promotion price reductions
Scanner fraud
Price confusion
Copyright 2007, Prentice Hall, Inc.

31. Describe the major strategies for pricing imitative and new products.
4/20/2017
Discuss the importance of understanding customer value perceptions and company costs 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 maximizes the profits from the total product mix.
Discuss how companies adjust their prices to take into account different types of customers and situations.
Discuss key issues related to initiating and responding to price changes.
Copyright 2007, Prentice Hall, Inc.
Copyright 2005 Brainy Betty, Inc.