Chapter Ten

Pricing: Understanding and Capturing Customer Value

WHAT IS A 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

FACTORS TO CONSIDER WHEN SETTING PRICES

Customer Perceptions of Value
Understanding how much value consumers place on the benefits they receive from the product
and setting a price that captures that value
Customer Perceptions of Value
 Value-based pricing
 Good-value pricing
 Value-added pricing

Value-based pricing uses the buyers’ perceptions of value, not the sellers 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 drive
Good-value pricing offers the right combination of quality and good service to fair price
Existing brands are being redesigned to offer more quality for a given price or the same quality
for less price
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
promotions to lower prices temporarily on selected items
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
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
Cost-based pricing adds a standard markup to the cost of the product

Company and Product Costs Types of costs

• Fixed costs
• Variable costs
• Total costs
Fixed costs are the costs that do not vary with production or sales level
• Rent
• Heat
• Interest
• Executive salaries
Variable costs are the costs that vary with the level of production
• Packaging
• Raw materials
Total costs are the sum of the fixed and variable costs for any given level of production
Average cost is the cost associated with a given level of output

Costs as a Function of Production Experience

• Experience or learning curve is when average cost falls as production increases because fixed
costs are spread over more units

Cost-Plus Pricing
• Cost-plus pricing adds a standard markup to the cost of the product
• Benefits
- Sellers are certain about costs
- Prices are similar in industry and price competition is minimized
- Consumers feel it is fair
• Disadvantages – Ignores demand and competitor prices
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
Target profit pricing is the price at which the firm will break even or make the profit it’s
seeking

Other Internal and External Considerations

• 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
Target costing starts with an ideal selling price based on consumer value considerations and
then targets costs that will ensure that the price is met
Organizational considerations include:
• Who should set the price
• Who can influence the prices

The Market and Demand

• Before setting prices, the marketer must understand the relationship between price and
demand for its products
1. Pure competition
2. Monopolistic competition
3. Oligopolistic competition
4. Pure monopoly
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.
Oligopolistic competition is a market with few sellers because it is difficult for sellers to enter a
market 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
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

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
Price elasticity of demand = % change in quantity demand
% change in price

Other Internal and External Considerations Competitor's Strategies

• Comparison of offering in terms of customer value
• Strength of competitors
• Competition pricing strategies
• Customer price sensitivity

Other Internal and External Consideration

• Economic conditions
• Reseller’s response to price
• Government
• Social concerns
Chapter 11
Pricing Strategies: Additional Considerations

New Pricing Strategies

Market-skimming pricing strategy sets high initial prices to “skim” revenue layers from the
market.
• Product quality and image must support the price.
• Buyers must want the product at the price.
Market-penetration pricing involves setting a low price for a new product in order to attract a
large number of buyers and a large market share

Product Mix Pricing Strategies

• Product line pricing
• Optional product pricing
• Captive product pricing
• By-product pricing
• Product bundle pricing
Product line pricing takes into account the cost differences between products in the line,
customer evaluations of their features, and competitors’ prices.
Optional product pricing takes into account optional or accessory products along with the main
product.
Captive product pricing sets prices of products that must be used along with the main product
By-product pricing sets a price for by-products in order to make the main product’s price more
competitive.
Product bundle pricing combines several products at a reduced price.

Price Adjustment Strategies

STRATEGY DESCRIPTION
Discount and allowance pricing Reducing prices to reward customer responses such as
volume purchases, paying early, or promoting the product
Segmented pricing Adjusting prices to allow for differences in customers,
products or locations
 Psychological pricing
Promotional pricing
Geographical pricing
Dynamic pricing
International pricing
Adjusting prices for psychological effect
temporarily reducing prices to spur short-run sales
Adjusting prices to account for the geographic location of
customers
Adjusting prices continually to meet the characteristics and
needs of individual customers and situations
Adjusting prices for international markets

Price Adjustment Strategies

Discount and allowance pricing reduces prices to reward customer responses such as making
volume purchases, paying early, or promoting the product.
Segmented pricing involves selling a product or service at two or more prices, where the
difference in prices is not based on differences in costs
• Customer-segment pricing
• Product-form pricing
• Location-based pricing
• Time-based pricing
For segmented pricing to be effective:
• Market must be segmentable
• Segments must show different degrees of demand
• Costs of segmenting cannot exceed the extra revenue
• Must be legal

Psychological pricing considers 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 they look at a
given product.
Promotional pricing is characterized by temporarily pricing products below the list price, and
sometimes even below cost, to increase short-run sales. Examples include:
• special-event pricing
• limited-time offers
• cash rebates
• low-interest financing, extended warranties, or free maintenance

Geographical pricing is used for customers in different parts of the country or the world.
• FOB-origin pricing
• Uniform-delivered pricing
• Zone pricing
• Basing-point pricing
• Freight-absorption pricing
FOB-origin (free on board) pricing is a geographical pricing strategy in which goods are placed
free on board a carrier; the customer pays the freight from the factory to the destination.
Uniform-delivered pricing is a geographical pricing strategy in which the company charges the
same price plus freight to all customers, regardless of their location.
Zone pricing is a strategy in which the company sets up two or more zones where customers
within a given zone pay the same price.
Basing-point pricing means that a seller selects a given city as a “basing point” and charges all
customers the freight cost from that city to the customer
Freight-absorption pricing is a strategy in which the seller absorbs all or part of the freight
charges in order to get the desired business.

Dynamic pricing involves adjusting prices continually to meet the characteristics and needs of
individual customers and situations.

International pricing involves adjusting prices continually to meet the characteristics and needs
of individual customers and situations.

Price Changes
Initiating Price Changes
Price cuts occur due to:
• Excess capacity
• Increased market share
Price increases occur due to:
• Cost inflation
• Increased demand
• Lack of supply

Buyer Reactions to Pricing Changes

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

Competitor Reactions to Pricing Changes

• Why did the competitor change the price?
• Is the price cut permanent or temporary?
• Is the company trying to grab market share?
• Is the company doing poorly and trying to increase sales?
• Is it a signal to decrease industry prices to stimulate demand?
Responding to Pricing Changes
Effective Action Responses
• 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

Public Policy and Pricing

Pricing Within Channel Levels

Price fixing legislation requires sellers to set prices without talking to competitors.
Predatory pricing legislation prohibits selling below cost with the intention of punishing a
competitor or gaining higher long-term profits by putting competitors out of business.
Robinson-Patman Act prevents unfair price discrimination by ensuring that the seller 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
• manufactures different qualities of the same product for different retailers
Retail (or resale) price maintenance is when a manufacturer requires a dealer to charge a
specific retail price for its product, which is prohibited by law
Deceptive pricing occurs when a seller states prices or price savings that mislead consumers or
are not actually available to consumers.
• Bogus reference or comparison prices
• Scanner fraud and price confusion