Chapter 9

Pricing: Understanding and Capturing Customer Value
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Prentice Hall, Copyright 2009

Chapter 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

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Case Study
Ryanair – FREE Air Travel?
Background  Company: Ryanair is one of
Europe’s most popular carriers, flying 42.5 million passengers to 100+ European destinations. Profitability: Profits have increased at double-digit rates for the past 3 years; average fare is $53 and profit margin is 17% compared to Southwest’s $92 and 7%. Future Goal: CEO Michael O’Leary says that more than half of Ryanair’s customers will fly free by 2010.

How can they do this?  Frugal cost structure: Constantly
looking for new ways to cut costs — removed seat back pockets to reduce weight and cleaning costs. Sells 98% of tickets online, reducing commissions. Flight crews buy their own uniforms. Charges for amenities: Customers pay for refreshments, snacks, and baggage check-in services. Generates revenue creatively: Planes serve as giant billboards; sells in-plane seatback advertising; merchandising in-flight. In the future, in-flight gaming is planned.
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 

Prentice Hall, Copyright 2009

What Is a Price?  Narrowly defined. price is the amount of money charged for a product or service. 9-4 Prentice Hall.  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. Copyright 2009 .

objectives. mix ► Nature of the market and demand ► Competitors’ strategies and prices  Product costs ► No profits are available below the price floor 9-5 Prentice Hall.Factors to Consider When Setting Price  Customer perceptions of value ► Price ceiling inhibits demand  Other internal and external considerations: ► Marketing strategy. Copyright 2009 .

not the seller’s cost. Copyright 2009 9-6 .Customer Perceptions of Value  Value-based pricing: ►Uses buyers’ perceptions of value. 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.

Prentice Hall. Copyright 2009 9-7 . ► Variable costs: • Costs that vary directly with the level of production. and selling the product plus a fair rate of return for its effort and risk. distributing.Internal Factors Affecting Pricing Decisions  Cost-based pricing: ► Setting prices based on the costs for producing. ► Fixed costs: • Costs that do not vary with production or sales level.

►Break-even pricing ►Target-profit pricing Prentice Hall. Copyright 2009 9-8 .Internal Factors Affecting Pricing Decisions  Types of cost-based pricing: ►Cost-plus pricing: • Adding a standard markup to the cost of the product.

Copyright 2009 9-9 . and the marketing mix: ►Company must decide on its overall marketing strategy for the product.Internal Factors Affecting Pricing Decisions  Overall marketing strategy. ►General pricing objectives: • Survival • Current profit maximization • Market share leadership • Product quality leadership Prentice Hall. objectives.

and promotion decisions to form a consistent and effective marketing program. then targets costs that will ensure that the price is met. distribution. Copyright 2009 9-10 . ►Target costing: • Pricing that starts with an ideal selling price. Prentice Hall.Internal Factors Affecting Pricing Decisions  Marketing mix strategy: ►Price decisions must be coordinated with product design.

Copyright 2009 9-11 .Internal Factors Affecting Pricing Decisions  Organizational considerations: ►Must decide who within the organization should set prices. Prentice Hall. ►This will vary depending on the size and type of company.

Copyright 2009 9-12 .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.

External Factors Affecting Pricing Decisions  The market and demand: ►Analyzing the price-demand relationship: • Different prices result in different levels of ►The demand. Demand may be characterized as: • Inelastic • Elastic Prentice Hall. as illustrated by the demand curve. price elasticity of demand refers to how responsive demand will be to a change in price. Copyright 2009 9-13 .

Copyright 2009 9-14 .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.

New-Product Pricing Strategies  Market skimming:  When to use: ► Setting a high price for a new product to “skim” revenues layer-by-layer from those willing to pay the high price. ► Product’s ► Company quality and image must support its higher price. but more profitable sales. ► Costs of low volume cannot be so high they cancel the advantage of charging more. makes fewer. Copyright 2009 . ► Competitors should not be able to enter market easily and undercut price. 9-15 Prentice Hall.

► Can attract a large number of buyers quickly and win a large market share. ► Costs must fall as sales volume increases. Copyright 2009 is highly price sensitive so a low price produces more growth. 9-16 .New-Product Pricing Strategies  Market penetration: ► Setting  When to use: ► Market a low initial price in order to “penetrate” the market quickly and deeply. ► Competition must be kept out of the market or the effects will be only temporary. Prentice Hall.

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 .

Copyright 2009 .g. optional or accessory products sold with the main product (e..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. ice maker with the refrigerator). 9-18  Optional-product pricing: ►Pricing Prentice Hall.

and printer) 9-19  By-product pricing: ► Pricing  Product bundle pricing: ► Pricing Prentice Hall.g. Copyright 2009 .Product Mix Pricing Strategies  Captive-product pricing: ► Pricing products that must be used with the main product (e.. PC. monitor.g.. replacement cartridges for Gillette razors) low-value by-products to get rid of them (e. animal manure from zoo) bundles of products sold together (software.

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 ►Cash ►Quantity ►Functional ►Seasonal  Allowances ►Trade-in ►Promotional Prentice Hall. Copyright 2009 9-21 .

Price Adjustment Strategies  Segmented pricing: ► Selling a product or service at two or more prices. Copyright 2009 . 4. where the difference in prices is not based on differences in costs. Customer-segment Product-form Location pricing Time pricing 9-22  Types: 1. 3. Prentice Hall. 2.

Prentice Hall.Price Adjustment Strategies  Psychological pricing: ►Considers the psychology of prices and not simply the economics. Copyright 2009 9-23 . ►Consumers use price less when they can judge the quality of a product by examining it or recalling experiences. ►Consumers usually perceive higher-priced products as having higher quality.

Price Adjustment Strategies  Promotional pricing: Loss leaders ► Special-event pricing ► Low-interest financing ► Longer warranties ► Free maintenance ► Discounts ►  Geographical pricing: FOB-origin pricing ► Uniform-delivered pricing ► Zone pricing ► Basing-point pricing ► Freight-absorption pricing ► Prentice Hall. Copyright 2009 9-24 .

9-25  International pricing: ►Adjusting Prentice Hall. Copyright 2009 . prices for international markets requires consideration of many factors.Price Adjustment Strategies  Dynamic pricing: ►Adjusting prices continually to meet the characteristics and needs of individual customers and situations.

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 .

Copyright 2009 9-27 .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: ►Cost inflation ►Overdemand Prentice Hall.

 Competitor reactions to price changes.Responses to Price Changes  Buyer reactions to price changes. Copyright 2009 9-28 .  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 9-29 .Public Policy and Pricing  Price fixing  Predatory pricing  Price discrimination  Retail price maintenance  Deceptive pricing: ►Promoted price reductions ►Scanner fraud ►Price confusion Prentice Hall.

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. Prentice Hall. Copyright 2009 9-30 . 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. Explain how companies find a set of prices that maximizes the profits from the total product mix.

recording. or transmitted.All rights reserved. Inc. stored in a retrieval system. in any form or by any means. without the prior written permission of the publisher. electronic. Copyright © 2009 Pearson Education. Printed in the United States of America.   Publishing as Prentice Hall Prentice Hall. No part of this publication may be reproduced. photocopying. mechanical. Copyright 2009 9-31 . or otherwise.

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