Marketing Management

Pricing （chpt10&11）
Understanding and capture customer value
INSTRUCTOR: YU CHENG, CLAIRE

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Learning objectives
1. Explain how companies find a set of prices that maximizes the profits from the total product
mix.
2. Discuss how companies adjust their prices to take into account different types of customers
and situations.
3. Discuss the key issues related to initiating and responding to price changes.

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What is price

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What is price?
In the narrowest sense, price is the amount of
money charged for a product or service.

In the broadly, price is the sum of all the values that

customers give up in order to gain the benefits of
having or using a product or service.

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Price has many names
⚫Rent ⚫Fee
⚫Tuition ⚫Dues
⚫Fare ⚫Interest
⚫Rate ⚫Donation
⚫Commission ⚫Salary
⚫Wage ⚫Discount

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The main price strategies

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Considerations in Setting Price
7
The main pricing strategies
1.Customer value-based pricing 基于顾客价值的定价
2.Cost-based pricing 基于成本的定价
3.Competition based pricing 基于竞争对手的定价

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1.Value-based pricing

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1.Customer Value-Based Pricing
Based on buyers’ perceptions of value rather than on the seller’s cost
Price is considered before the marketing program is set. Two types:
▪Good-value pricing offers just the right combination of quality and good service at a fair price.
This involves introducing less expensive versions of established, brand name products. It also
involves redesigning existing brands to offer more quality for a given price or the same quality
for less.

▪Value-added pricing refers to attaching value-added features and services to differentiate a

company’s offers and charging higher prices. For example, even as frugal consumer spending
habits linger, some movie theater chains are adding amenities and charging more rather than
cutting services to maintain lower admission prices.

10
Figure 9.2 - Value-Based Pricing
versus Cost-Based Pricing

11
1.Value-based pricing
E.g. A certain watch costing $20,000~$500,000 is not actually expensive, but in
fact a tremendous value.

• Which is built by hand and require more

than 1 years per watch.
• Precise timing
• Good investment, value maintenance or
even appreciation.
• The psychological and emotional value.
• Buying relate to big event in life:
successful career, get married or the
birth of child.
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2. cost-based
pricing

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2.Cost-based pricing
Cost based pricing involves setting prices based on the
Walmart
costs for producing, distributing, and selling the
product plus a fair rate of return for its effort and risk.

Some companies like Walmart or Southwest airline, work

to become the “low-cost producers” in their industries.
Companies with lower costs can set lower prices that
result in smaller margins but greater sales and profits.

Spring airline

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 2.Cost-based pricing-Types of Costs
What kinds of costs involved of running a bread store?
• Rent
• Employee’s salary
• Equipment(bakeware,
oven, blender, freezer,
bread mold)
• Storage shelf
• renovation
a.Fix costs固定成本: Costs that do not vary with production or sales level;
b.Variable costs变动成本: Vary directly with the level of production.
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• Utilities(heat, gas,
electricity and phones)
• Raw materials (flour,
powder, eggs, butter,
sugar and etc)
• Packaging
• Napkin
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2.Cost-based pricing-Types of Costs
c. Costs at Different Levels of Production 不同生产水平下的成本
Suppose Texas Instruments has built a plant to produce 1,000 calculators per day.

Figure 2 :Long-run cost behavior in a different-size plant

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2.Cost-based pricing-Types of Costs
d. Costs as a Function of Production Experience 生产经验与成本函数
• Gains experience in producing calculators
• Workers learn shortcuts and become familiar
with the equipment
• Workers well organized
• Better equipment and production process
• More efficient and gain economies of scale

If a downward-sloping experience
curve exists, this is highly significant
for the company. It means the
company’s unit production cost fall.

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Types of Cost-Based Pricing

2.1 Cost-plus pricing (markup pricing)

• Adding a standard markup to the cost of the product

2.2Break-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

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2.Cost-based pricing
2.1 Cost-plus pricing（成本加成） or markup pricing（加成定价）
Adding a standard markup to the cost of the product. Lawyers, accountants and other professionals typically
price by adding a standard markup to their costs.
E.g. Suppose a toaster manufacturer had the following costs and expected sales
Variable cost per unit :$10
Total Fixed costs: $300,000
Expected total sales:50,000 units
What is the manufacturer’s cost per toaster? = Unit cost= variable cost+ Fixed costs =$10+
$300,000
=$16
Unit sales $50,000
Suppose the manufacturer wants to earn a 20% markup on sales price.
The markup price should be? Markup Price = Unit cost $16
= =$20
(1-desired return on sales) (1-0.2)

The manufacturer would charge dealers $20 per toaster and make a profit of $4 per unit. The dealers, in turn, will
markup the toaster to earn 50% , how dealer markup the price?

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2. Cost-based pricing
2.2 Break-Even Analysis and Target Profit Pricing(盈亏平衡分析) Or target profit pricing （目标利润定价）
Setting price to break even on the costs of making and marketing a product, or setting price to make a target
profit. The break-even point (BEP) is the point at which cost or expenses and revenue are equal: there is no
net loss or gain, and one has "broken even.

Fixed cost
Break-Even Volume=
Price-Variable cost

$300,000
30,000 =
$20-$10

If the price is $30, where is the

break even point?

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2. Cost-based pricing
2.2 Break-Even Analysis and Target Profit Pricing Or target profit pricing
The manufacturer should consider different prices and estimate break-even volumes, probable demand, and
profits for each. *Assumes fixed costs of $300,000 and constant unit variable costs of $10.

(1) （2） （3） （4） （5） （6）

Price Unit demand needed Expected unit sales at given Total revenue Total costs* Profit (4)-(5)
to break even price（既定价格的期望需 (1)X(3)
（盈亏平衡产量） 求量）
$14 71000

$16 67000

$18 60000

$20 42000

$22 23000

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2. Cost-based pricing
2.2 Break-Even Analysis and Target Profit Pricing Or target profit pricing
The manufacturer should consider different prices and estimate break-even volumes, probable demand, and
profits for each. *Assumes fixed costs of $300,000 and constant unit variable costs of $10.

(1) （2） （3） （4） （5） （6）

Price Unit demand needed Expected unit sales at Total revenue Total costs* Profit (4)-(5)
to break even given price（既定价格 (1)X(3)
（盈亏平衡产量） 的期望需求量）
$14 75,000 71000 994,000 1010,000 -16,000

$16 50,000 67000 1,072,000 970,000 102,000

$18 37,500 60000 1,080,000 900,000 180,000

$20 30,000 42000 840,000 720,000 120,000

$22 25,000 23000 506,000 530,000 -24,000

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3. Competitor-
based pricing

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The main
pricing
strategies
Competitor based pricing

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 3. Competition based pricing
3.1 How does the company’s market offering compare with competitors’ offering in terms of
customer value?

CMHK
If consumers perceive that the
company’s product or service
provides greater value, the company
can charge a higher price.

If consumers perceive less value

relative to competing products, the
company must either charge a lower
price or change customer China Unicom
perceptions to justify a higher price.

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New product pricing strategy

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New product pricing strategy
Market-skimming pricing (市场撇脂定价)
Marketing penetration pricing（市场渗透定价）

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New product pricing strategy
Market-skimming pricing
Set high initial prices to “skim” revenues layer by layer from the market.

1. The product’s quality and image

must support its higher price and
enough buyers must want the
product at that price.
2. The costs of producing a smaller
volume cannot be so high.
3. Competitors should not be able to
enter the market easily and
undercut the high price.
* Price of 256GB iPhone XR/8

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 New product pricing strategy
Marketing penetration pricing
Set low initial price in order to penetrate the market quickly and deeply.

1. The market must be

highly price sensitive, so
that a low price produces
more market growth.
2. Production and
distribution costs must
fall as sales volume
increases.

Affordable smartphone in Africa

and India

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Product Mix Pricing Strategies
⚫Product Line Pricing(生产线定价)
Setting prices across an entire product line， e.g. BMW X3,X5; Audi A series, Q series
⚫Optional-Product Pricing（备选产品定价）
Pricing optional or accessory products sold with the main product
⚫Captive-Product Pricing（附属产品定价）
Pricing products that must be used with the main products
⚫By-Product Pricing（副产品定价）
Pricing low-value by-products to get rid of them
⚫Product Bundle Pricing（一揽子定价法）
Pricing bundles of products sold together

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Product Mix Pricing Strategies
⚫Product Line Pricing （产品线定价）: setting prices across an entire product line

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Product Mix Pricing Strategies
⚫Optional-Product Pricing（备选产品定价）
Pricing optional or accessory products sold with the main product
e.g. A car buyer may choose to order a GPS navigation system and Bluetooth wireless
communication.
Refrigerators come with optional ice maker.

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Product Mix Pricing Strategies
⚫Captive-Product Pricing（附属产品定价）: pricing products that must be used with the main
products.
e.g. Gillette sells low-priced razors but makes money on the replacement cartridge.
Amazon price Kindle for only 40% of Apple, the profits is come from the e-book, music, movie sold
from Kindle.

In the case of services industry, this captive-product pricing is called two-part pricing（二分定
价）. The price of the service is broken into a fixed fee plus a variable usage rate.
•At Disney and other amusement parks, you pay a daily ticket or season pass charge plus
additional fees for food and other in-park features.
•Telecommunication companies charge a flat rate for a basic calling plan, then charge for data
usage over what the plan allows.
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 Product Mix Pricing Strategies
⚫By-Product Pricing（副产品定价）: pricing low-value by-products to get rid of them
Do you remember how Haitian deal with the soybean dregs?

Using by-product pricing, the company seeks a market for these by-products to help offset the
costs of disposing of them and to help make the price of the main product more competitive.
e.g. To produce orange juice of brand like Simply Orange, Minute Main of others, coca-cola
company and their partner Cutrale need purchase about 50 million boxes of oranges.

Orange essential oil

Food flavoring
Household cleanser
Crop and livestock
Raw materials of the bottle
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Product Mix Pricing Strategies
⚫Product Bundle Pricing(一揽子定价法): pricing bundles of products sold
together. E.g. phone service and high-speed internet connections.

Price bundle can promote

the sales of products
consumers might not
otherwise buy, but the
combined price must be
low enough to get them to
buy the bundle.

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Price-Adjustment Strategies 价格调整战略
Companies usually adjust their basic prices to account for various customer
differences and changing situations.

⚫Discount and Allowance Pricing

⚫Segmented Pricing
⚫Psychological Pricing
⚫Geographical Pricing

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Discount and Allowance Pricing
Most companies adjust their basic price to reward customers for certain responses, such as
early payment of bills, volume purchases and off-season buying. These price adjustments
called discounts and allowances.
What kind of the forms of discounts and allowances you know?
Cash discount Allowances
Functional discount(trade discount)
Compensates channel members for stocking & Trade-in allowances
selling the product. Price reductions given for turning in
an old item when buying a new one.
e.g. pricing a book – manufacturing cost ￥20
Quantity discount Publisher’s suggested retail price ￥100
Bookstore (40% discount) ￥60
Wholesaler(55% discount) ￥45
Distributor (65% discount) ￥35
Promotion allowances
Seasonal discount
e.g. selling swimming suits in Reward dealers for participating in
winter. advertising and sales support
programs.

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Segmented Pricing
In segmented pricing, the company
sells a product or services at two or
more price, even though the
difference in prices is not based on
differences in costs. Discussion: Starbucks’ pricing in China
Customer segment pricing. E.g.
museum charge a lower admission
for students and senior citizens.
Location pricing. E.g. Universities
charge higher tuition for out of state
students.

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 1. Operation cost
(turnover rate)
2. Positioning
3. Consumer habits

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 Psychological Pricing
Perfume

Which one is better

do you think?

￥600 ￥100 Lawyer

Consumer usually perceive
higher-priced products as
having higher quality. Especially
Which one would you like to buy?
then they cannot judge quality
￥100
￥150
because they lack the
￥200 information or skill, price
becomes an important signal. ￥3000 ￥2000

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 Psychological Pricing
What is the feeling of the
price?
￥77 vs ￥88

8 is round, even and creates a

￥12.9 ￥18.8
smoothing effect, whereas 7 is
angular and creates a jarring
Display the private brand next effect.
to a more expensive one. 8’s pronunciation in Chinese is
similar to “发”,which means
wealth. It is a lucky number in
China.

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 What is the influence of
￥299.9 and ￥300?

The 299.9 will more likely

be seen as a bargain price,
whereas the ￥300 price
suggests more quality.

￥9999 vs ￥10000
Which one will you choose for a laser
surgery?

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 Dynamic and Internet Pricing
Dynamic pricing: Adjusting prices continually to meet the characteristics and needs of individual
customers and situations
Prevalent online where Internet introduces fluid pricing

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Geographical Pricing
Should the company risk losing the business of more-distant customers by charging
them higher prices to cover the higher shipping costs?
Or should the company charge all customers the same prices regardless of location?

The SCI Paper Company is located in Foshan, Guangdong, and sells paper products
to customers all over China. The cost of freight is high and affects the companies
from whom customers buy their paper. The company wants to establish a
geographical pricing policy. It is trying to determine how to price the order to
three specific customers: Customer A(Xinjiang), Customer B(Beijing), Customer
C(Shanghai).

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Geographical Pricing
A
B

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 One option is for SCI to ask each customer to pay the
shipping cost from Foshan to the customer’s location.
FOB-origin
pricing All three customers would pay the same product price
(free on board of ￥12000, with customer A paying, say, ￥5000 for
shipping; customer B ￥4000， customer C： ￥3000.
原产地定价法)
A geographical pricing
strategy in which goods
are placed free on board a
carrier. At that point the
title and responsibility
pass to the customer, who
pays the freight from the
factory to the destination.

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 The freight charge is set at the average freight cost,
Uniform- suppose is ￥4000.
delivered pricing Customer A,B,C they pay the same freight.
（统一交货定
价法）
FOB Uniform
The company charges the
Customer A ￥5000 ￥4000
same price plus freight to
all customers , regardless Customer B ￥4000 ￥4000
of their location. Customer C ￥3000 ￥4000

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 It is between FOB-origin pricing and uniform-delivered pricing.
The company sets up two or more zones.

Zone pricing
（地区定价法）
The company sets up two
or more zones. All
customers within a zone
pay the same total price;
the more distant the zone,
the higher the price.

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 The seller selects a given city as a “basing point”.

Basing point Industries such as sugar, cement, steel, and automobiles

pricing used basing-point pricing for years, but this method has
（基点定价法） become less popular today.

The seller designates

some city as a basing Some companies set up multiple basing points to create
point and charges all more flexibility: they quote freight charges from the
customers the freight cost basing-point city nearest to the customer.
from that city to the
customer.

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Summary
⚫What is price
⚫Main pricing strategy
⚫New product pricing strategy
⚫Product mix pricing strategy
⚫Price adjustment strategy

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