Pricing: Understanding and

Capturing Customer Value

Lecture 1 of Marketing 2
Objectives Outline (1 of 2)
9.1 Define price, identify the three major pricing strategies,
and discuss the importance of understanding customer-
value perceptions, company costs, and competitor
strategies when setting prices.
9.2 Identify and define the other important external and
internal factors affecting a firm’s pricing decisions.
9.3 Describe the major strategies for pricing new products.
Objectives Outline (2 of 2)
9.4 Explain how companies find a set of prices that
maximizes the profits from the total product mix.
9.5 Discuss how companies adjust and change their prices
to take into account different types of customers and
situations.
9.6 Discuss the major public policy concerns and key pieces
of legislation that affect pricing decisions.
First Stop: Peloton
For the Peloton faithful, it isn’t
just about the price of a
Peloton bike. It’s about the
values received from
membership in the dynamic,
closely connected Peloton
community.
Objective Outline 9.1
Define price, identify the three major pricing strategies, and
discuss the importance of understanding customer value
perceptions, company costs, and competitor strategies when
setting prices.
Price
• Amount of money charged for a product or service
• Determines a firm’s market share and profitability
• Produces revenue
Figure 9.1
Considerations in Setting Price
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.
• Types of value-based pricing:
– Good-value pricing
– Value-added pricing
Figure 9.2
Value-Based Pricing versus Cost-Based Pricing
Value-Added Pricing
Value-added pricing: Luxury
outerwear brand Canada
Goose creates high-quality,
carefully crafted products that
keep you warm in the
harshest climates, adding
value that merits its premium
prices.
Cost-Based Pricing
• Based on the costs of producing, distributing, and selling
the product plus a fair rate of return for effort and risk
• Types of costs:
– Fixed costs (overhead)
– Variable costs
– Total costs
Types of Cost-Based Pricing
Cost-plus pricing (markup pricing)
• Adding a standard markup to the cost of the product
Break-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
Figure 9.3
Break-Even Chart for Determining Target Return Price and
Break-Even Volume
Competition-Based Pricing (1 of 2)
• Setting prices based on competitors’ strategies, costs,
prices, and market offerings
• Company should ask several questions to assess
competitors’ pricing strategies:
– How does the company’s market offering compare in
terms of customer value?
– How strong are current competitors?
– What are their current pricing strategies?
Competition-Based Pricing (2 of 2)
Pricing versus competitors:
Despite its premium prices,
customers believe that
Caterpillar gives them a lot
more value for the price over
the lifetime of its machines.
Objective Outline 9.1 Summary
• The three major pricing strategies include
– Customer value–based pricing
– Cost-based pricing
– Competition-based pricing
• Customer value perceptions, company costs, and
competitor strategies are important considerations when
setting prices.
Objective Outline 9.2
Identify and define the other important external and internal
factors affecting a firm’s pricing decisions.
Other Internal and External
Considerations Affecting Price
Decisions
• Internal factors
– Overall marketing strategy, objectives, and mix
– Organizational considerations
• External factors
– Market and demand
– Economy
– Impact on other parties in its environment
Overall Marketing Strategy,
Objectives, and Mix
• Pricing decisions must coordinate with packaging,
promotion, and distribution decisions.
• Positioning may be based on price.
– Target costing starts with an ideal selling price, then
targets costs that ensure the price is met.
• Nonprice positions can be created to differentiate the
marketing offer.
Organizational Considerations
• Management decides who should set prices.
• Varies depending on the size and type of company
– Small companies—Top management
– Large companies—Divisional or product managers
– Industries with price as the key factor—Pricing
departments
Pricing in Different Types of Markets
• Pure competition
• Monopolistic competition
• Oligopolistic competition
• Pure monopoly
Pricing in Monopolistic Competition
Markets
Pricing in monopolistic
competition markets: Bose
sets its premium audio
products apart not by price
but by the power of its brand
and the host of differentiating
features.
Figure 9.4
Demand Curve
Price Elasticity of Demand
• Measure of the sensitivity of demand to changes in price
– Inelastic demand: Demand hardly changes with a small
change in price.
– Elastic demand: Demand changes greatly with a small
change in price.
Economy
Factors impacting pricing strategies
• Boom or recession
• Inflation
• Interest rates
Responses to the frugality of post recession consumers
• Cut prices and offer discounts
• Develop more affordable items
• Redefine value propositions
Other External Factors
• Company must consider several other factors in its
external environment when setting prices.
– Resellers
– Government
– Social concerns
Objective Outline 9.2 Summary
• Factors affecting a firm’s pricing decisions:
– Internal—marketing strategy, objectives, marketing mix,
and organizational considerations
– External—nature of market, demand, economy, reseller
needs, and government actions
Objective Outline 9.3
Describe the major strategies for pricing new products.
New Product Pricing Strategies (1 of 2)
Market-skimming pricing (price skimming)
• Setting a high price to skim maximum revenues from the
segments willing to pay the high price
• Company makes fewer but more profitable sales
Market-penetration pricing
• Setting a low price to attract a large number of buyers and
a large market share
New Product Pricing Strategies (2 of 2)
Penetration pricing: Amazon
used penetration pricing for
Amazon Prime Video in more
than 240 international markets
to build a customer base and
make headway against higher
priced Netflix.
Objective Outline 9.3 Summary
• Strategies for pricing new products include
– Market-skimming pricing
– Market-penetrating pricing
Objective Outline 9.4
Explain how companies find a set of prices that maximizes
the profits from the total product mix.
Product Mix Pricing Strategies
Table 9.1 Product Mix Pricing

Pricing Situation Description

Product line pricing Setting prices across an entire product line

Optional-product Pricing optional or accessory products sold with the

pricing main product
Captive-product Pricing products that must be used with the main
pricing product
By-product pricing Pricing low-value by-products to get rid of or make
money on them
Product bundle pricing Pricing bundles of products sold together
Product Mix Pricing
Captive-product pricing:
Nintendo makes little or no
profit on its Switch video
game console but makes up
for it through sales of higher-
margin video games.
Objective Outline 9.4 Summary
• The firm uses the following pricing strategies to maximize
the profits from the total mix:
– Product line pricing
– Optional products
– Captive products
– By-products
– Product bundles
Objective Outline 9.5
Discuss how companies adjust and change their prices to
take into account different types of customers and situations.
Price Adjustment Strategies
Table 9.2 Price Adjustments
Strategy Description
Discount and Reducing prices to reward customer responses such
allowance as volume purchases, paying early, or promoting the
pricing product
Adjusting prices to allow for differences in customers,
Segmented pricing
products, or locations
Psychological pricing Adjusting prices for psychological effect
Promotional pricing Temporarily reducing prices to spur short-run sales
Adjusting prices to account for the geographic location
Geographical pricing
of customers
Adjusting prices continually to meet the characteristics
Dynamic pricing
and needs of individual customers and situations
International pricing Adjusting prices for international markets
Discount and Allowance Pricing
• Discount—a straight reduction in price on purchases
during a stated period of time or of larger quantities
– Cash, quantity, functional, and seasonal discounts
• Allowance—promotional money paid to retailers for an
agreement to feature the manufacturer’s products in some
way
– Trade-in and promotional allowances
Segmented Pricing
• Selling a product or service at two or more prices, where
the difference in prices is not based on differences in costs
• Forms of segmented pricing:
– Customer-segment pricing
– Product form pricing
– Location-based pricing
– Time-based pricing
Psychological Pricing
• Considers the psychology of prices and not simply the
economics
– The price says something about the product.
• Reference prices: Prices that buyers carry in their minds
and refer to when looking at a given product
Promotional Pricing
• Temporarily pricing products below the list price to
increase short-run sales
• Forms of promotional pricing:
– Discounts and special-event pricing
– Limited-time offers and cash rebates
– Low-interest financing and longer warranties
– Free maintenance
Geographical Pricing
• FOB-origin pricing
• Uniform-delivered pricing
• Zone pricing
• Basing-point pricing
• Freight-absorption pricing
Dynamic and Personalized Pricing (1 of 2)
• Dynamic pricing: Adjusting prices continually to meet the
characteristics and needs of individual customers and
situations
• Prevalent online where the Internet introduces a new age
of fluid pricing
Dynamic and Personalized Pricing (2 of 2)
Dynamic pricing benefits both
sellers and buyers. Armed
with mobiles apps like
ShopSavvy, shoppers take
advantage of the constant
price skirmishes among
sellers, snap up good deals,
and leverage retailer price-
matching policies.
International Pricing
Price decisions of international companies
• Set a uniform worldwide price
• Adjust prices to reflect local market conditions and cost considerations

Prices charged depend on many factors

• Economic conditions
• Competitive situations
• Laws and regulations
• Nature of the wholesaling and retailing system
• Consumer perceptions and preferences
• Company’s marketing objectives
• Costs of selling in another country
Objective Outline 9.5 Summary
• Companies apply a variety of price adjustment strategies:
– Discount and allowance pricing
– Segmented pricing
– Psychological pricing
– Promotional pricing
– Geographical pricing
– Dynamic pricing
– International pricing
Objective Outline 9.6
Discuss the major public policy concerns and key pieces of
legislation that affect pricing decisions.
Initiating Price Changes
• Reasons for price cuts:
– Excess capacity
– Falling demand
– Attempt to dominate the market
• Reasons for price increases:
– Cost inflation
– Over-demand
Reactions to Price Changes
Buyer’s perspective
• Price increase:
– Product is more exclusive
or better made.
– Company is being greedy.
• Price cut:
– Brand wants to get a better
deal on an exclusive
product.
– Product’s quality has been
reduced.
– Company’s image has
tarnished.
Competitor’s perspective
• Price cut:
– Company is trying to grab a
larger market share.
– Company is doing poorly and
trying to boost its sales.
– Company wants the whole
industry to cut prices to
increase total demand.
Figure 9.5
Responding to Competitor Price Changes
Figure 9.6
Public Policy Issues in Pricing
Objective Outline 9.6 Summary
• Customers’ and competitors’ reactions must be considered
when initiating a price change.
• Buyer reactions are influenced by the meaning customers
see in the price change.
• Competitors’ reactions flow from a set reaction policy or an
analysis of each situation.
• Any response to a competitor’s price change should
consider many factors.
Final Thoughts
Why is cost-based pricing not the right way to price
everything?