CHAPTER 10

Pricing Understanding
and Capturing Customer Value
Price- The amount of money charged for a product or service; the sum of the values that
customers exchange for the benefits of having or using the product or service.
Major Pricing Strategies:
1) Customer value-based pricing- Setting price based on buyers perceptions of value
rather than on the sellers cost.
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
companys offers and charging higher prices.
2) Cost-based pricing- Setting prices based on the costs for producing, distributing, and
selling the product plus a fair rate of return for effort and risk.
Types of Costs:
Fixed costs (overhead) - Costs that do not vary with production or
sales level.
Variable costs -Costs that vary directly with the level of production.
Total costs-The sum of the fixed and variable costs for any given level of
production.
Costs at Different Levels of Production
- The cost changes at different level of production.
Costs as a Function of Production Experience:
Experience curve (learning curve)- The drop in the average per-unit production
cost that comes with accumulated production experience.
Cost-plus pricing (markup pricing)- Adding a standard markup to the cost of the
product.
Break-even pricing (target return pricing)-Setting price to break even on the costs
of making and marketing a product or setting price to make a target return.
3) Competition-based pricing- Setting prices based on competitors strategies, prices,
costs, and market offerings.
Other Internal and External Considerations Affecting Price Decisions
Internal factors affecting pricing:
the companys overall marketing strategy, objectives, and marketing mix, as well as
other organizational considerations.
External factors affecting pricing:
the nature of the market and demand and other environmental factors.

Overall Marketing Strategy, Objectives, and Mix

Target costing- Pricing that starts with an ideal selling price and then targets costs that
will ensure that the price is met.
Organizational Considerations
Management must decide who within the organization should set prices.
The Market and Demand
The marketer must understand the relationship between price and demand for the
companys product.
Pricing in Different Types of Markets
1. Pure competition- the market consists of many buyers and sellers trading in a uniform
commodity, such as wheat, copper, or financial securities.
2. Monopolistic competition- the market consists of many buyers and sellers who trade
over a range of prices rather than a single market price.
3. Oligopolistic competition-the market consists of a few sellers who are highly sensitive
to each others pricing and marketing strategies.
4. Pure monopoly-the market consists of one seller.
Analyzing the Price-Demand Relationship
Price-Demand relationship (Law of demand) - As the price rises, quantity demanded
decreases; as price falls, quantity demanded increases.
Demand curve-A curve that shows the number of units the market will buy in a given
time period, at different prices that might be charged.
Price Elasticity of Demand
Price elasticity- A measure of the sensitivity of demand to changes in price.
Elastic demand- Demand relationship in which the percentage change in quantity
demanded is larger than the percentage change in price in absolute value.
Inelastic demand- Demand that response somewhat, but not a great deal, to change in
price.
The Economy
Economic factors such as a boom or recession, inflation, and interest rates affect pricing
decisions because they affect consumer spending, consumer perceptions of the products
price and value, and the companys costs of producing and selling a product.
Other External Factors
Resellers reaction to various prices
The government
Social concerns