Chapter 9

Pricing:
Understanding and
Chapter 1

Capturing Customer
Value

Prentice Hall, Copyright 2009 9-1

 Rest Stop: Previewing the Concepts
 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.

Prentice Hall, Copyright 2009 9-2

 Case Study
Ryanair – FREE Air Travel?
Background How can they do this?
 Company: Ryanair is one of  Frugal cost structure: Constantly
Europe’s most popular looking for new ways to cut costs
carriers, flying 42.5 million — removed seat back pockets to
passengers to 100+ European reduce weight and cleaning costs.
destinations. Sells 98% of tickets online,
 Profitability: Profits have reducing commissions. Flight
increased at double-digit crews buy their own uniforms.
rates for the past 3 years;  Charges for amenities: Customers
average fare is $53 and profit pay for refreshments, snacks, and
margin is 17% compared to baggage check-in services.
Southwest’s $92 and 7%.  Generates revenue creatively:
 Future Goal: CEO Michael Planes serve as giant billboards;
O’Leary says that more than sells in-plane seatback advertising;
half of Ryanair’s customers merchandising in-flight. In the
will fly free by 2010. future, in-flight gaming is planned.

Prentice Hall, Copyright 2009 9-3

 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.
Prentice Hall, Copyright 2009 9-4
 Factors to Consider When
Setting Price
 Customer perceptions of value
► Price ceiling inhibits demand
 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
Prentice Hall, Copyright 2009 9-5
 Customer Perceptions of Value

 Value-based pricing:
►Uses buyers’ perceptions of value, not the
seller’s cost, as the key to pricing.
►Price is considered along with the other
marketing mix variable before the marketing
program is set.
►Types of value-based pricing:
• Good value pricing
• Value-added pricing
Prentice Hall, Copyright 2009 9-6
 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.

Prentice Hall, Copyright 2009 9-7

 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
►Target-profit pricing

Prentice Hall, Copyright 2009 9-8

 Internal Factors Affecting
Pricing Decisions
 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
Prentice Hall, Copyright 2009 9-9
 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.
Prentice Hall, Copyright 2009 9-10
 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.

Prentice Hall, Copyright 2009 9-11

 External Factors Affecting
Pricing 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
Prentice Hall, Copyright 2009 9-12
 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
• Elastic
Prentice Hall, Copyright 2009 9-13
 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?
 Other external factors

Prentice Hall, Copyright 2009 9-14

 New-Product Pricing Strategies
 Market skimming:  When to use:
► Setting ► Product’s quality and
a high price
for a new product image must support its
to “skim” revenues higher price.
layer-by-layer from ► Costs of low volume
those willing to pay cannot be so high they
the high price. cancel the advantage of
► Company
charging more.
makes
► Competitors should not
fewer, but more
profitable sales. be able to enter market
easily and undercut
price.
Prentice Hall, Copyright 2009 9-15
 New-Product Pricing Strategies
 Market  When to use:
penetration: ► Market is highly price
► Setting a low initial sensitive so a low price
price in order to produces more growth.
“penetrate” the ► Costs must fall as sales
market quickly and
deeply. volume increases.
► Can attract a large ► Competition must be

number of buyers kept out of the market

quickly and win a or the effects will be
large market share. only temporary.
Prentice Hall, Copyright 2009 9-16
 Product Mix Pricing Strategies

 Product line pricing

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

Prentice Hall, Copyright 2009 9-17

 Product 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 optional or accessory products sold
with the main product (e.g., ice maker with
the refrigerator).
Prentice Hall, Copyright 2009 9-18
 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 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)

Prentice Hall, Copyright 2009 9-19

 Price Adjustment Strategies
 Discount and allowance pricing
 Segmented pricing
 Psychological pricing
 Promotional pricing
 Geographical pricing
 Dynamic pricing
 International pricing
Prentice Hall, Copyright 2009 9-20
 Price Adjustment Strategies

 Discounts  Allowances
►Cash ►Trade-in
►Quantity ►Promotional
►Functional
►Seasonal

Prentice Hall, Copyright 2009 9-21

 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:
1. Customer-segment
2. Product-form
3. Location pricing
4. Time pricing

Prentice Hall, Copyright 2009 9-22

 Price Adjustment Strategies
 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.
Prentice Hall, Copyright 2009 9-23
 Price Adjustment Strategies

 Promotional pricing:  Geographical pricing:

► Loss leaders ► FOB-origin pricing
► Special-event pricing ► Uniform-delivered

► Low-interest financing pricing

► Longer warranties ► Zone pricing

► Free maintenance ► Basing-point pricing

► Discounts ► Freight-absorption
pricing

Prentice Hall, Copyright 2009 9-24

 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.

Prentice Hall, Copyright 2009 9-25

 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
Prentice Hall, Copyright 2009 9-26
 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:

►Costinflation
►Overdemand

Prentice Hall, Copyright 2009 9-27

 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 quality of its offer
►Improve quality and increase price
►Launch a low-price “fighting brand”
Prentice Hall, Copyright 2009 9-28
 Public Policy and Pricing
 Price fixing
 Predatory pricing
 Price discrimination
 Retail price maintenance
 Deceptive pricing:
►Promoted price reductions
►Scanner fraud
►Price confusion
Prentice Hall, Copyright 2009 9-29
 Rest Stop: Reviewing the Concepts
 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.
Prentice Hall, Copyright 2009 9-30
 All rights reserved. No part of this publication may be reproduced, stored in a
retrieval system, or transmitted, in any form or by any means, electronic,
mechanical, photocopying, recording, or otherwise, without the prior written
permission of the publisher. Printed in the United States of America.

Copyright © 2009 Pearson Education, Inc.  

Publishing as Prentice Hall

Prentice Hall, Copyright 2009 9-31