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Published by Ezra Spero

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Published by: Ezra Spero on Mar 01, 2011
Copyright:Attribution Non-commercial


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Chapter 9Pricing: Understanding and Capturing Customer ValuePreviewing the Concepts: Chapter Objectives
 1. Discuss  the  importance  of  understanding  customer  value  perceptions  andcompany costs when setting prices.2. Identify and define the other important internal and external factors affecting afirm’s pricing decisions.3. Describe the major strategies for pricing imitative and new products.4. Explain how companies find a set of prices that maximize the profits from thetotal product mix.5. Discuss how companies adjust their prices to take into account different types of customers and situations.6. Discuss the key issues related to initiating and responding to price changes.
 Chapter Overview
Pricing is the second element in the marketing mix. It plays a powerful role, and that roleis detailed in this chapter. There are several sections to this chapter and a lot of materialto address.The chapter begins with discussing what a
actually is. It makes the point that priceis more than just the money the buyer hands over to the sellerthe broader view is thatthe price is the sum of all the values that the buyer exchanges for obtaining or using theproduct. There is also a brief discussion of dynamic- versus fixed-price policies, and howwe as a society have evolved from dynamic to fixed and back to dynamic again.The chapter then moves into the heart of pricing. Both internal and external factors thatmust be considered when setting price are detailed, as are the three general pricingapproaches of cost-based pricing, value-based pricing, and competition-based pricing.The new product pricing strategies of market skimming versus market penetration arealso discussed.The chapter then moves into product mix pricing strategies. Five different strategies areoutlined, including the often-forgotten category of by-product pricing. Strategies for adjusting  prices,  such  as  discount and  allowance  pricing,  segmented  pricing  andpsychological pricing are described, as well as initiating and responding to price changesin the marketplace. Finally, the public policy implications of pricing are covered,including the major laws that pertain to pricing.199
Chapter Outline1. Introduction
a. Toys ‘R’ Us emerged in the late 1970s as a toy retailing “category killer,”offering consumers a vast selection of toys at everyday low prices. Smaller stores and toy departments failed because they couldn’t match Toys ‘R’Us’s selection, convenience, and low prices.b. In the 1990s, however, Wal-Mart offered not just everyday-low-prices ontoys, but rock-bottom prices.c. Toys ‘R’ Us fought back by trying to match Wal-Mart’s super low prices,but with disastrous results. By early 2005, Wal-Mart held a 25 percentshare of the toy market; Toys ‘R’ Us’s share had fallen to 15 percent.d. Toys ‘R’ Us now has new owners and will likely develop a new gameplan. The chain is stepping back from cut-throat price wars that it can’twin. It’s emphasizing top-selling products and higher-margin exclusiveitems. It is improving store atmosphere. Still, Toys ‘R’ Us faces an uphillbattle to win back the now price-sensitive toy buyers it helped createdecades ago.
Let’s Discuss This
As the economy comes out of the recession and subsequent slow growth of the early2000s, how might companies now use the better economic environment to raise prices?As a consumer, do you wait for sales to buy, or when you want something, do you go buyit whether it’s on sale or not?
2. What Is a Price?
In the narrowest sense,
is the amount of money charged for a productor service. More broadly, price is the sum of all the values that consumersexchange for the benefits of having or using the product or service.b. Historically, price has been the major factor affecting buyer choice. Inrecent decades, nonprice factors have gained increasing importance. Priceremains one of the most important elements determining a firm’s marketshare and profitability.c. Price is the only element in the marketing mix that produces revenue; allother elements represent costs. Price is also one of the most flexibleelements of the marketing mix.d. Pricing is the number one problem facing many marketing executives, andmany companies do not handle pricing well. A frequent problem is thatcompanies are too quick to reduce prices in order to get a sale rather thanconvincing buyers that their products are worth a higher price. Other common mistakes include pricing that is too cost-oriented and pricing thatdoes not take the rest of the marketing mix into consideration.e. Smart managers treat pricing as a key strategic tool for creating andcapturing customer value. Prices have a direct impact on the firm’s bottomline.200
Key Term
Under the Hood/Focus on Technology
3. Factors to Consider When Setting Prices
a. A company’s pricing decisions are affected by both internal companyfactors and external environmental factors, including its overall marketingstrategy and mix, the nature of the market and demand, and competitors’strategies and prices.Use
Chapter Objective
1 here.Use
9-1 here.Use
Discussing the Issues
1 here.Customer Perceptions of Valueb. Pricing decisions, like other marketing mix decisions, must start withcustomer  value.  Effective  customer-oriented  pricing  involvesunderstanding how much value consumers place on the benefits theyreceive from the product and setting a price that captures this value.
Value-based pricing 
uses buyers’ perceptions of value, not the seller’scost, as the key to pricing. Value-based pricing means that the marketer cannot design a product and marketing program and then set price. Price isconsidered along with the other marketing mix variables before themarketing program is set.d. A comparison of cost-based pricing and value-based pricing is found inFigure 9-2. Cost-based pricing is product-driven. Value-based pricingreverses this process. The company sets its target price based on customer perceptions of the product value.e. A company using value-based pricing must find out what value buyersassign to different competitive offers. Measuring this perceived value canbe difficult. Sometimes companies ask consumers how much they wouldpay for a basic product and for each benefit added to the offer. Or, acompany might conduct experiments to test the perceived  value of different product offers.f. More and more, marketers have adopted value-pricing strategiesofferingjust the right combination of quality and good service at a fair price. Inmany cases, this has involved introducing less-expensive versions of established brand-name products.g. An important type of good-value pricing at the retail level is everyday lowpricing (EDLP). EDLP involves charging a constant, everyday low pricewith few or no temporary price discounts.1. In contrast, high-low pricing involves charginghigher  prices  on  an  everyday  basis  but  running  frequentpromotions to lower prices temporarily on selected items.201

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