Marketing I. Alejandra Oliver Rodriguez.

3º ADEb, 2021-22

CHAPTER 10. Pricing: Understanding and Capturing Customer Value.

1. What is a Price?
The Price is the sum of all the values that customers give up to gain the benefits of acquiring/ using a
product. It goes beyond the exchange of money:
• Selection cost: Time, effort, and uncertainty.
• Transport.
• Assembling.

Price importance and impact. Price is among the most flexible elements of the marketing – mis as prices
can be changed quickly. It has a major impact on the firm’s market share and profitability due to fixed
costs, a small change in price has a larger impact on profit. It is used to communicate quality and
positioning.

• Last crises + Internet (easier to compare offers). It allows more frugal and conscious consumers which
leads to an increase in pricing pressure.
• Cutting prices is often not the best answer, as you may lose profits, damage price wars, and cheapen
the brand.
• Companies should sell value, not price, by explaining customers why it is worth to pay a higher price.

2. Major Pricing Strategies.

In this case, we will talk about the importance of the three C’s.

Consumer’s perception of value. Price ≤ Value.

Competitors. Competitor’s strategies and prices.

Cost to produce and sell. Price ≥ Costs.

Consumer Values – Based Pricing.

We must follow these steps to set a price: 1) Asses how much value the consumer perceives he can
obtain from the product; 2) Set a target price; and 3) Determine which costs can be incurred to produce
that product.

This allows for larger profits, as companies may extract more from the consumer surplus. Although
we can find it difficult as consumer’s value is hard to measure. It is hard because is subjective, it can vary
for different consumers and situations.
Marketing I. Alejandra Oliver Rodriguez.
3º ADEb, 2021-22

Good – Value Pricing or Price Oriented Value – Added Pricing or Premium

Attaching value – added features and services to
Offering just the right combination of quality and
differentiate the product and justifying charging a
service at a fair price
higher price.

Cost – Bases Pricing.

We must follow these steps to set a price: 1) Understand what are the costs necessary to produce,
deliver, and sell the product; and 2) Add a rate of return (mark – up).

This may lead to smaller profits as it extracts less consumer surplus, but it is typically easier to
measure. It is very important to know the exact costs, as they can give you information about what a
company can or cannot do.

Inside the Cost – Based Pricing, we can find different types of economies:
• Economies of scale. Which by increasing the number of units produced, it decreases the average cost
of each unit.

• Break – Even Point. Which is the point (price/quality) at which the organization starts having profit.
𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡
𝐵𝐸𝑃𝑞𝑡 =
𝑃𝑟𝑖𝑐𝑒 − 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡
𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡
𝐵𝐸𝑃𝑃𝑟𝑖𝑐𝑒 = + 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡
𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦

Competition – Based Pricing.

We must follow these steps to set a price: 1) Evaluate the competitor’s strengths; 2) Compare the
organization’s product with its competitors; and 3) Set your own price.
Marketing I. Alejandra Oliver Rodriguez.
3º ADEb, 2021-22

Consumers frequently judge a product’s value based on other products form the competition. Thus,
price has a strategic purpose which consists of differentiating from the competitors with a different
positioning and expel weaker competitors out of the market.

3. Other Considerations on Price Decisions.

Beyond the three C’s, the organization must consider internal and external factors. Pricing strategies
have to balance all these forces, which require regular realignment.

Internal Factors External Factors

• Overall Strategy. • Type of markets and level of competition: from
• Product’s Positioning. pure competition to pure monopoly.
• Marketing Objectives: attract new customers, • Price Elasticity.
retain old ones, fight competition, and help • Economic conditions: from boom to recession,
selling other products. interest rates, and resources’ costs.
• Marketing – Mix. • Other actors: resellers, and government.
• Organization’s resources. • Social Concerns.

CHAPTER 11. Pricing Strategies: Additional Cosniderations.

1. New Product development strategy.

There are different stages in the product’s life cycle which involve different goals that require different
pricing strategies. These strategies are the marketing – skimming price, and the market – penetration price.

Market – Skimming Price.

First of all, we must describe the market by setting a high price for a new product to maximize revenues
from the segment that is more willing to buy it. Later, reduce the high price for the second layer segment.
After reducing the price for the first time, keep reducing it for the third year, and so on.

There are some necessary conditions that we have to bear in mind. These conditions include a good
quality product perception by customers, large enough segment, profitable which means that revenues
cannot be offset by the costs id producing in a small scale, and finally, competitors cannot enter easily
and undercut the high price.
Marketing I. Alejandra Oliver Rodriguez.
3º ADEb, 2021-22

Market – Penetration Price.

First of all, we should describe this type of market by setting a low price for the new product in order
to attract a large number of customers and, consequently, obtain a large market share. In this type of
markets, profits are obtained afterwards by selling more – quantity or other products – to these customers,
and by obtaining economies of scale.

This type of market has also some necessary conditions that we have to bear in mind. These conditions
consist in highly price sensitive markets, in which low prices leads to a large pool of customers, presence
of economies of scale, deterring competitors from entering the market due to low prices, and customers
must stay with the company.

2. Product – Mix Pricing Strategies.

Product – Line Pricing.
Companies typically don’t have a single product but rather a product line. Firms need to maximize the
profits of the entire line. The pricing of these product lines becomes more complex due to the relations
and differences between products: related demand, perceptions of value, cannibalization, economies of
scale, and different competitors.

Optional – product pricing.

Consists in offering a base product for a fair price and some extra options charged in addition. In this
case, companies must decide what to include in the base product and what is additional.

Captive – Product Pricing.

Consists of a main product that can only be used of complemented with the appropriate supply. In this
case, typically, companies price the main product low and obtain profit from selling the suppliers. It has
several conditions, which are: Finding the right balance between the main product and the supplies,
otherwise customers might get angry and stop buying. Also, the same company has to sell the main and
the captive – products.

Product Bundle Pricing.

Consists of combining several products that are offered together in a bundle at a lower price than what
customers would pay if buying them individually. This strategy allows to sell products that otherwise
would not be sold. As it reduces the items handled, it can also make the operations easier.
Marketing I. Alejandra Oliver Rodriguez.
3º ADEb, 2021-22

3. Price Adjustment Strategies.

Companies are able to adjust their prices to account for various customer differences and changing
situations:
- Discount and allowance pricing.
- Segmented pricing.
- Psychological pricing.
- Promotional pricing.
- Geographical pricing.
- Dynamic and internet pricing.

Segmented Pricing.

Consists of selling a product with different prices, being that these differences are not based in different
costs: Customer – segment pricing, where different customers ay different prices for the same product
such as student discount in museums; Product from pricing, where different versions of products are
paid differently, but this is not based in cost, such as flying in first – class; Location – based pricing; and
Time – based pricing where differences in price are due to variations by season, period of the month,
week – day vs. weekend, and hour

Psychological Pricing.

In this case, price is a very strong sign of quality, especially when the customer cannot assess the
product’s quality. There is a reference price, which is he price that buyers carry in their mind and use as
a reference when evaluating a given product. This reference can be for different products in the same
category or for the same product in different periods, situations, or locations.

Promotional pricing.

It consists of temporarily pricing products bellow the list price with the aim of increasing sales, get rid
of too much stock, and fight competition. It might even be bellow costs, it pushes undecided customers
to act/buy. Here, you have to be careful with changing customers’ reference price, so it should be used as
a short – term fix tool, not as a standard way of doing business.

Dynamic and Internet pricing.

To meet the characteristics and need of each customer and situation, you have to adjust prices
continually. It was done in the past when people were always negotiating prices, e – commerce brought
it again. You have to be careful with this strategy, so customers don’t feel that you are exploiting them.
Marketing I. Alejandra Oliver Rodriguez.
3º ADEb, 2021-22

4. Price Changes.
Initiating price changes.
A small initial change can have an unpredictable larger consequence, such as a butterfly effect. This
cause – effect relation can take time to occur and their parts be geographically distant. Chaos is the science
of surprises, of the non – linear and the unpredictable. This can teach us to expect the unexpected.

PRICE CHANGES CAN BE A GOOD EXAMPLE OF CHAOS THEORY.

It is important to know that there are some dangers of initiating price changes. This is due to the
possibility of customers having long memories, and also due to the possible reaction of your competitors,
which can provoke that gains in the initial short – term can be lost in the long – run.

Responding to price changes.

To do so, we must evaluate the competitor’s price change. We do this by answering the following
questions: Why did the competitor change the price? Is the price change temporary or permanent? What
are the implications to our company? Are other competitors going to react? How will customers react to
our change/ not change?

The next step is to evaluate the possible reactions, which are: Ignore competitor’s price change; make
the same price change; reduce the price even lower; offer better quality; improve the service; trade
marketing campaigns; and invest in communication.

CHAPTER 12. Marketing Channels: Delivering Customer Value.

1. Supply Chain and Value Delivery Network.

Few producers sell their good directly to final users, most are intermediaries. The main functions of
channel members are:
- Contact ⇒ Connect suppliers and buyers.
- Information ⇒ Gather and distribute information through the several actors.
- Match ⇒ Adjust the offer to the specific needs of the buyer.
- Promotion ⇒ Know how to sell to consumers.
- Negotiation ⇒ Facilitate the transaction.
Marketing I. Alejandra Oliver Rodriguez.
3º ADEb, 2021-22

2. Designing the Channel.

To design the channel, there are four steps:
Analyse Consumer Setting Channel Identify Different Evaluate and Select
Needs. Objectives. Intermediaries. the Intermediary (es).
Decide on the desired
Identify possible Evaluate and select
Finding what target level of customer
alternatives: Type of those that best fit our
consumers want from service: Which
Intrm. (supermarkets, goals: economic
the channel: Nearby customers to reach,
own store, online, etc.), (growth, likely sales,
location, convenience; desired control, waned
Number of Intrm. costs, profitability),
prestige, expertise, or profits, company goals
(intensive, selective), control, adaptability,
friendliness. and resources,
and responsibilities of experience, reputation,
product’s nature, and
this intermediaries. or cooperativeness.
competitors.

3. New Formats of Distribution.

Multichannel distribution.
It refers to a producer that uses two or more marketing channels. Its main advantage is that it allows
to reach customers with different needs and limitations. Besides, it has the following disadvantages: It is
harder to control, and it can generate conflict between different channels if they are competing for the
same customers.

Disintermediation.
Is the explosive rise of the digital technologies, which is creating new ways to access customers. The
last crises pushed for price pressure and more efficiency, making companies skip intermediaries and
selling directly to their customers.

4. Channels & Conflict.

Number of channel levels.
The channel level is a layer of intermediaries that perform some work in bringing the product closer
to the final buyer. There are two possibilities, the direct one, which has no intermediaries; and the indirect
one which has one or more intermediaries.

The greater the number of channel levels, the lower the control by the producer, but the grater the
channel complexity.
Marketing I. Alejandra Oliver Rodriguez.
3º ADEb, 2021-22

Cooperation & conflict.

Each member of the channels level depends on the others for its own success. Thus, coordination and
cooperation would be expectable yet, channel conflict is frequent. There are two types of conflict:
Horizontal conflict, among firms at the same channel level; and Vertical conflict, between firms of
different channel levels.

Partnering has a huge impact as it sells not through the intermediary’s but with them. If it is long –
term, it helps to motivate your intermediaries to do their best, it deals that satisfy both the producer and
the intermediary, there is an exchange of information, and it has continuous evaluation and improvement
or replacement.

5. Marketing Logistics & Supply Chain Management.

Sometimes, selling a product is easier than getting it to customers. Companies must decide how to
store, handle, and move their customers. Logistics effectiveness has a major impact on both, customer
satisfaction and company success.

Nature and importance of logistics.

Rising importance of customer satisfaction, customers have to be served faster and better. Growing
pressure on prices, logistics for an important share of the product’s cost; Explosion of product variety and
complexity, there are higher demands on logistics; Improvements in information technology, it creates
opportunity for faster and more efficient logistics; Higher concerns with environmental sustainability,
logistics affects significantly the environment.

Major logistics functions.

Warehousing, which stores the goods while they wait to be sold. Distribution centre, which is a
large and highly automated warehouse designed to receive foods form various origins, take orders, fill the
transportation vehicles efficiently, and deliver the goods to the customer as quickly as possible. And
Inventory Management, which maintains a delicate balance between carrying too little inventory
(keeping costs down) and too much inventory (serve customers the best).
- Just – in – time → Is when the exact amount of goods needed arrive only when they are needed in
order to save inventory costs. It requires accurate forecasting, constant exchange of information, and
quick transportation.
- Radio frequency identification (RFID) → Are small devices such as tags and chips that allow to
know in real – time which is the exact location of a product.
- Smart shelves → Are shelves that can assess automatically how much inventory they have in a given
moment, and by taking into account the forecast demand, automatically order the necessary shipment.