10 AND 11

Pricing Products:
Understanding and Capturing Customer Value
Pricing Products:
Pricing Strategies
 Learning Objectives

After studying this chapter, you should be able

to:

1. Answer the question “What is price?” and discuss

the importance of pricing in today’s fast-changing
environment

2. Discuss the importance of understanding customer

value perceptions when setting prices

3. Discuss the importance of company and product

costs in setting prices

4. Identify and define the other important internal and

external factors affecting a firm’s pricing decisions
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 What Is Price?

Price is the amount of money charged for a

product or service. It is the sum of all the
values that consumers give up in order to
gain the benefits of having or using a
product or service.

Price is the only element in the marketing mix

that produces revenue; all other elements
represent costs

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Factors to Consider When Setting
Prices
Customer Perception of Value

Value-based pricing uses the buyers’

perceptions of value, not the seller’s cost,
as the key to pricing. Price is considered
before the marketing program is set.

• Value-based pricing is customer driven

• Cost-based pricing is product driven
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 Factors to Consider When Setting
Prices
Customer Perception of Value

Value-based pricing
• Good-value pricing
• Offers the right combination of quality and good
service to fair price
• Value-added pricing
• Existing brands are being redesigned to offer more
quality for a given price or the same quality for less
price

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 Factors to Consider When Setting
Prices
Customer Perception of Value (Good-Value
Pricing)

Everyday low pricing (EDLP) involves charging a

constant everyday low price with few or no
temporary price discounts

High-low pricing involves charging higher prices on

an everyday basis but running frequent promotion
to lower prices temporarily on selected items

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 Factors to Consider When Setting
Prices
Customer Perception of Value (Value-Added Pricing)

Value-added pricing attaches value-added features

and services to differentiate offers, support higher
prices, and build pricing power

Pricing power is the ability to escape price competition

and to justify higher prices and margins without losing
market share

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 Factors to Consider When Setting
Prices
Company and Product Costs

Cost-based pricing involves setting prices

based on the costs for producing,
distributing, and selling the product plus a
fair rate of return for its effort and risk

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 Factors to Consider When Setting
Prices
Company and Product Costs

Types of costs
• Fixed costs
• Rent, salaries etc
• Variable costs
• Raw materials, packaging etc
• Total costs
• TC = TFC + TVC

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 Factors to Consider When Setting
Prices
Company and Product Costs – (1) Costs as a Function
of Product Experience, Concept

Experience or learning curve is when the average

cost falls as production increases because fixed
costs are spread over more units

* Economies of Scale

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 Factors to Consider When Setting
Prices
Company and Product Costs – (2) Cost-Based
Pricing

Cost-based pricing adds a standard markup

to the cost of the product

markup price= unit cost

(1 - desired rate of return)

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 Factors to Consider When Setting
Prices
Company and Product Cost – (3) Break-Even Analysis
and Target Profit Pricing

Break-even pricing is the price at which total costs

are equal to total revenue and there is no profit.
TC = TR

Target profit pricing is the price at which the firm will

break even or make the profit it’s seeking

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Factors to Consider When Setting
Prices
Break-Even Analysis and Target Profit Pricing

break-even = fixed cost

volume (price-variable cost)

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 Factors to Consider When Setting
Prices
Other Internal and External Considerations
Affecting Price Decisions

Customer perceptions of value set the

upper limit for prices, and costs set the
lower limit

Companies must consider internal and

external factors when setting prices
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 Factors to Consider When Setting
Prices
Other Internal and External Considerations
Affecting Price Decisions

Internal factors
• Marketing strategies
• Organization
• Who should set the price and who can influence
• Objectives
• Survival, profit maximization, customer retention etc
• Marketing mix
• 4 P’s (Product, Place, Promotion and Price)
External factors
• Market demand
• Competitor’s strategies and prices
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 Factors to Consider When Setting
Prices
Other Internal and External Considerations
Affecting Price Decisions

Types of markets
• Pure competition
• Monopolistic competition
• Oligopolistic competition
• Pure monopoly

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 Factors to Consider When Setting
Prices
Other Internal and External Considerations
Affecting Price Decisions

Pure competition is a market with many buyers and

sellers trading uniform commodities where no
single buyer or seller has much effect on market
price

Monopolistic competition is a market with many

buyers and sellers who trade over a range of
prices rather than a single market price with
differentiated offers.

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 Factors to Consider When Setting
Prices
Other Internal and External Considerations
Affecting Price Decisions

Oligopolistic competition is a market with few sellers

because it is difficult for sellers to enter who are
highly sensitive to each other’s pricing and marketing
strategies

Pure monopoly is a market with only one seller. In a

regulated monopoly, the government permits a price
that will yield a fair return. In a non-regulated
monopoly, companies are free to set a market price.

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 Factors to Consider When Setting
Prices
Other Internal and External Considerations
Affecting Price Decisions

The demand curve shows the number of units the

market will buy in a given period at different prices

• Normally, demand and price are inversely related

• Higher price = lower demand
• For prestige (luxury) goods, higher price can equal
higher demand when consumers perceive higher
prices as higher quality

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Factors to Consider When Setting
Prices
Other Internal and External Considerations
Affecting Price Decisions

Price elasticity of demand illustrates the

response of demand to a change in price

Inelastic demand occurs when demand hardly

changes when there is a small change in price

Elastic demand occurs when demand changes

greatly for a small change in price

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 Factors to Consider When Setting
Prices
Other Internal and External Considerations
Affecting Price Decisions

Factors affecting price elasticity of demand

• Unique product
• Quality
• Prestige
• Substitute products
• Cost relative to income

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Factors to Consider When Setting
Prices

Other Internal and External Considerations

Affecting Price Decisions

Competition strategies and prices

Factors to consider
• Comparison of offering in terms of customer value
• Strength of competitors
• Competition pricing strategies
• Customer price sensitivity
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 Factors to Consider When Setting
Prices
Other Internal and External Considerations
Affecting Price Decisions

Other external factors

• Economic conditions
• Resellers’ response to price
• Government
• Social concerns

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 TWO BROAD NEW-PRODUCT
PRICING STRATEGIES
 Market skimming pricing
Setting a high price for a new product to
skim maximum revenues layer by layer
from the segments willing to pay the high
price.
Sony introduced HDTV, Blu-Ray Disc
Player

 Market penetration pricing

Setting a low price for a new product in
order to attract a large number of buyers
and a large market share.
Maybelline High Definition Mascara
 Product Mix Pricing Strategies
• Product line pricing
• Optional-product pricing
• Captive- product pricing
• By-product pricing
• Product bundle pricing
 1. Product Line Pricing
Setting prices for a closely related set of
products or for a product line.
Different elements of the product line can
be used to appeal to different segments of
the market.
The product can differ in small ways, such
as features or complementary
Example, Coke, Diet Coke, Cherry Coke,
and Vanilla Coke, the prices are quite
similar
 2. Optional-Product Pricing
• Offering to sell optional or accessory products along with their main
product.

• Example, I-Pod buyers may choose extra accessories such as

travel chargers, external transmitters, speakers and armbands.
 3. Captive-Product Pricing
– Applies to products that are used together when
one of the product fills a sustainable need.

– Example, Gillette prices razors rather modestly

but makes huge margins on the blades.
 4. By-Product Pricing
• Manufacturers will seek a
market for its by-products
and should accept any price
that covers more that the
cost or storing and
delivering them.
• Meat processes, petroleum,
agriculture products,
chemicals etc
• Example, zoo sells manure
to farmers
 5. Price Bundling (Product Bundle
Pricing)
– Takes a set of products, offers them to customers
in a package, usually price the package lower than
sum of the individual components.

– Often consisting of models that slow sellers,

specially priced to eliminate inventory

– But, some of the bundle can be prices higher than

the sum of the product, example, McD-Happy
Meals

– Nevertheless, you as a product manager shall seek

ways to unbundled the product package to allow
customers to choose what they want to pay for
 Price Adjustment Strategies

• Discount and allowance pricing

• Segmented pricing
• Psychological pricing
• Promotional pricing
• Geographical pricing
• International pricing
 Price Adjustment Strategies

Pricing Strategies

• Discounts
• Cash discount for paying promptly
• Quantity discount for buying in large volume
• Functional (trade) discount for selling, storing, distribution, and record
keeping

• Allowances
• Trade in allowance for turning in an old item when buying a new one
• Promotional allowance to reward dealers for participating in advertising or
sales support programs

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 Price Adjustment Strategies

Pricing Strategies

Discount and allowance pricing reduces prices

to reward customer responses such as paying
early or promoting the product
• Discounts
• Allowances

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 Price Adjustment Strategies
Pricing Strategies

Segmented pricing is used when a company

sells a product at two or more prices even
though the difference is not based on cost

• Customer segment pricing

• Product form segment pricing
• Different versions of the product are priced differently
• Location pricing
• Charge different price for different location

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 Price Adjustment Strategies
Pricing Strategies

Psychological pricing occurs when sellers consider the

psychology of prices and not simply the economics, the price is
used to say something about the product.

• Reference prices are prices that buyers carry in their minds

and refer to when looking at a given product
• Noting current prices
• Remembering past prices
• Assessing the buying situations

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 Price Adjustment
Strategies
Pricing Strategies

Promotional pricing is when prices are temporarily

priced below list price or cost to increase demand.

• Loss leaders
• Special event pricing
• Cash rebates
• Low interest financing
• Longer warrantees
• Free maintenance

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 Price Adjustment Strategies
Pricing Strategies

Risks of promotional pricing

• Used too frequently, and copies by
competitors can create “deal-prone”
customers who will wait for promotions and
avoid buying at regular price
• Creates price wars

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 Price Adjustment Strategies
Pricing Strategies

Geographical pricing is used for customers in

different parts of the country or the world
• FOB (Free-On-Board) pricing
• Uniformed delivery pricing
• Zone pricing
• Basing point pricing
• Freight absorption pricing

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 Price Adjustment Strategies
Pricing Strategies

• Dynamic pricing
• when prices are adjusted continually to meet the
characteristics and needs of the individual customer
and situations

• International pricing
• prices are set in a specific country based on country-
specific factors
• Economic conditions
• Competitive conditions
• Laws and regulations
• Infrastructure
• Company marketing objective

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 Price Changes
Initiating Pricing Changes

Price cuts is a reduction in price

• Excess capacity
• Increase market share

Price increases is an increase in selling price

• Cost inflation
• Increased demand and lack of supply

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 Price Changes
Buyer Reactions to Pricing Changes

• Price cuts
• New models will be available
• Models are not selling well
• Quality issues
• Price increases
• Product is “hot”
• Company greed

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 Price Changes
Responding to Price Changes

Questions
• Why did the competitor change the price?
• Is the price cut permanent or temporary?
• What is the effect on market share and profits?
• Will competitors respond?

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 Price Changes
Responding to Price Changes

Solutions
• Reduce price to match competition
• Maintain price but raise the perceived value
through communications
• Improve quality and increase price
• Launch a lower-price “fighting brand”
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 Public Policy and Pricing

Pricing Within Channel Levels

Price fixing: Sellers must set prices without talking to

competitors

Predatory pricing is prohibited.

Selling below cost with the intention of punishing a
competitor or gaining higher long-term profits by
putting competitors out of business

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 Public Policy and Pricing

Pricing Across Channel Levels

Robinson Patman Act prevents unfair price

discrimination by ensuring that sellers offer the same
price terms to customers at a given level of trade

• Price discrimination is allowed:

• If the seller can prove that costs differ when selling to different
retailers
• If the seller manufactures different qualities of the same product
for different retailers

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 Public Policy and Pricing
Pricing Across Channel Levels

Retail (resale) price maintenance is when a

manufacturer requires a dealer to charge a specific
retail price for its products.

Deceptive pricing occurs when a seller states prices or

price savings that mislead consumers or are not
actually available to consumers

Both are prohibited under the LAW!

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 Public Policy and Pricing
Pricing Across Channel Levels

Deceptive pricing occurs when a seller states prices

or price savings that mislead consumers or are not
actually available to consumers
• Scanner fraud failure of the seller to enter current
or sale prices into the computer system
• Price confusion results when firms employ pricing
methods that make it difficult for consumers to
understand what price they are really paying

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