MARKETING

PRINCIPLES
Week 4, meeting 1: Offering Value: Price
Learning objectives

■ What is the role of price in the marketing mix?

■ What pricing orientations do marketers use to guide pricing
decisions?
■ Why do marketers make price adjustments and how might
they harm profitability?
■ What are the psychological influences that affect customer
perceptions of value?
■ How are digital innovations benefiting price management in
organizations? What are the implications of algorithmic
pricing?

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What just happened?

■ The price is a strong communication tool

– It says something about the brand, quality, perceived value, desirability etc.
■ A higher price must mean (in our minds) better quality, thus a €5.000,- watch
should be of a much higher quality than a €1.000,- watch
■ The fact that it is sold at Lidl may reduce the attractiveness of the watch for
many
What is the role of price in the
marketing mix?
■ Price
– The assignment of value used to express the rate
of exchange
– Fee, premium, rent, toll, fare, tuition, buyer’s
investment.
– Pricing decisions relate directly to the
effectiveness of an organization’s business model:
■ Revenues are a function of sales and price point
■ Profitability is the difference between revenues
and the cost of doing business

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What is the role of price in the
marketing mix?
■ Raising prices can increase revenues and profits if sales
remained unchanged, but raising prices can also cause a
decline in demand
■ Managing costs contributes directly to profitability
– A brand’s value proposition is a major driver of buyer
response to price

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Primary determinants influencing price

Marketers must consider how the target market

perceives value, how competing prices
compare, and the price implications relative to
the costs to bring the offer to market.

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Primary determinants influencing price

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Pricing objectives

Before any pricing decisions

are made, a company must
identify the objectives it
wishes to attain through
pricing.

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Pricing objectives

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What pricing orientations do marketers
use to guide pricing decisions?
■ Pricing orientation refers to the organization’s strategic view of
pricing in its marketing strategy as well as the methods used
to reach pricing decisions that support a competitive
advantage.
■ Types of pricing orientation
– Competition-based pricing orientation relies upon
competitive benchmarking.

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What pricing orientations do
marketers use to guide pricing
decisions?
– Cost-based pricing approaches include:
■ Cost-plus (markup) pricing
■ Target return pricing
■ Break-even pricing
– Customer value-based pricing leverages the customer
perception of value as a sum of both the benefits and costs
of the product.

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Pricing tactics

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Pricing Activity 1

■ Go through the scenario in your group and answer the following questions
■ Activity 1 pricing case
■ Look at each pricing orientation and determine which have been referred to
in this case and by whom: competition based pricing, cost-based pricing,
value based pricing
■ Which pricing orientation do you think they should focus on? Why?
■ Which pricing tactic (price skimming or penetration) should they use for the
launch period (see table 7.2) Why?
Product Mix Pricing Strategies
Captive-product pricing involves products that must be used along with the main product. Low
initial price for product and then high(er) prices for the product(s) required to use it.
Why do marketers make price
adjustments and how might they
harm profitability?
■ Price adjustments
– Discounts are price reductions, sometimes called price-offs.
– Promotional pricing such as cash or gift card rebate offers may
be used to adjust pricing.

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Price Adjustment Tactics
Promotional pricing is when prices are temporarily priced below list price or cost to
increase demand
• Loss leaders
• Special event pricing
• Cash or gift card rebates
• Special pricing for loyalty card members
• Low-interest financing
• Longer warranties
• Free maintenance/service contract

Copyright © 2012 Pearson Education

Assignment in pairs:
What promotional pricing tactics do you
recognize?
■ Look into the commercial
brochures to see
which promotional
pricing tactics you can
recognize. Choose 2
examples to share.
■ On-line students can
visit folders.nl or weekly-
ads.us to do the exercise.
Apple I-phone pricing
Pricing Illusions

What is a better
bargain?

Pair A or B?
Pricing Illusions
Difference is exactly the same
14 euros. But pair B is
perceived to be the better deal
because it was reduced from a
number starting with 8 to a
number starting with 6
(perceived as 20). Pair A is
reduced from 7 to 6 (thus 10
euros in perception)
What are the psychological
influences that affect customer
perceptions of value?
■ Behavioral economics and consumer psychology shed insight
on the phenomenon of irrationality in buyer behavior.

– References prices are prices the buyer has knowledge of

and uses as a point of comparison in evaluating the price of
the product under consideration

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What are the psychological
influences that affect customer
perceptions of value?
■ Internal reference are prices held in memory or
perceived by the buyer
■ prices could be based on the last price the buyer
paid for a similar product, a price cap the buyer has
set for him or herself (also known as a reservation
price), recall of prices seen or advertising in the
past, knowledge of what others paid for a similar
product, and beliefs as to what a fair price might be.
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What are the psychological
influences that affect customer
perceptions of value?
External reference prices are supplied by other sources
including the marketer or store setting
■ For example, if you are shopping for a new pair of
shoes, you can use the prices of the shoe assortment
in the store as reference prices.
■ Marketers can use advertising and in-store signage,
or on-page copy for e-commerce, to provide
external reference price cues.
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 What are the psychological
influences that affect customer
perceptions of value?

– Price transparency is the availability of price

information.
– People base their perceived values on reference points.
– If you’re selling a to-list app, then people will look
around and find another to-do list app. If they search the
Internet and discover that your competitors sell to-do
list apps at $100 then this will set their perception of the
right price for all to-do list apps.
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 What are the psychological
influences that affect customer
perceptions of value?

People may be prone to loss aversion depending upon the

payment mode.
Research suggests that people spend more when using
debit and credit cards and less when using cash.
Cash spenders will spend more if they have small bills
and change than if they have large bills. They will hesitate
to break a $100 bill but wouldn’t hesitate to use a mix of
smaller bills.
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 What are the psychological
influences that affect customer
perceptions of value?

Buyers fall prey to beliefs and perceptions that harm

their ability to make optimized decisions.

For example, many consumers believe that Amazon

offers at or near the lowest prices on a broad range of
goods, even when that’s not always the case.

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What are the psychological influences
that affect customer perceptions of
value?

Mental costs are a possible explanation.

Mental costs are soft costs incurred in times of choice
overload, friction, and anxiety and whose debt we pay with
intangible resources like time, effort, and worry.
In contrast, product prices represent hard costs we pay with
monetary resources. The marketer must remember cost is not
just a mathematical calculation; it is especially a
psychological calculation.
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Price Perception Strategies
Sales signs are cues that indicate there is a bargain to be had

• Suggests buyer must be quick

• Notion of scarcity
Price Perception Strategies
Odd-Number Pricing
Visualizing the effects of algorithmic
pricing

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How are digital innovations
benefiting price management in
organizations?
■ Pricing software as a service (SaaS)
– Pricing software, typically sold as a SaaS subscription, can
provide valuable support for an organization’s price
management function, particularly when organizations have
a large product portfolio.
– Pricing effectiveness for firms using pricing software was
more than twice that of non-users.
■ Fair-pay pricing model
– Fair-pay pricing is a digital, interdependent pricing method
that integrates try before you buy, pay what you want pricing,
relationship pricing, and the influence of social capital.
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THANK YOU