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Pricing

Understanding and Capturing


Customer Value

Chapter 9

Rest Stop: Previewing the Concepts


1.
2.
3.
4.
5.
6.

Identify the three major pricing strategies and discuss the


importance of understanding customer-value perceptions,
company costs, and competitor strategies when setting
prices.
Identify and define the other important internal and external
factors affecting a firms pricing decisions.
Describe the major strategies for pricing imitative and new
products.
Explain how companies find a set of prices that maximize
the profits from the total product mix.
Discuss how companies adjust their prices to take into
account different types of customers and situations.
Discuss the key issues related to initiating and responding
to price changes.

Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall

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First Stop
Trader Joes Price Value Equation

Keeping Prices Low

What They Offer


Trader Joes Niche: Offers
gourmet-caliber, one-of-a-kind
products at impossibly low
prices. Limited product
assortment of 2,000 specialty
items unique to Trader Joes.
80% of items are store brands
(private label goods).
Retail Atmosphere & Staff:
Festive, vacation-like
atmosphere that makes
shopping fun provides Trader
Joes with a cool edge.
Associates wear Hawaiian
shirts and consult with
customers.

Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall

Cost Control is Key: Locates


stores in low-rent and out-ofthe-way areas; small store size
and limited assortment reduces
facility and inventory costs.
Buys private label goods direct
from suppliers and negotiates
price heavily. Spends little on
advertising; relies primarily on
word-of-mouth.
Results: Trader Joes is fastest
growing food store. Chain has
expanded to 330 stores in 25
states with annual sales in
excess of $7.2 billion, a growth
of 60% in just 3 years.
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Price vs. Value

Cutting cost in tough economic times isnt

always the answer. Companies should sell


value, not price.
Price reductions can:
Cut

profits and initiate price wars.


Cheapen perceptions of brand quality.

Marketers should strive to convince

consumers that price is justified by value


provided.
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What Is a Price?

Narrowly defined, price is the amount


of money charged for a product or
service.

Broadly defined, price is the sum of

all of the values that consumers give


up in order to gain the benefits of
having or using the product or
service.
Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall

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Factors to Consider When


Setting Price

Customer perceptions of value:


No

demand exists above price ceiling.

Other internal and external considerations:


Marketing

strategy, objectives, mix.


Nature of the market and demand.
Competitors strategies and prices.

Product costs:
No

profits are available below the price floor.

Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall

9-6

Major Pricing Strategies

Customer value-based pricing:


Setting

prices based on buyers perceptions of


value rather than the sellers cost.

Cost-based pricing:
Setting

prices based on the cost of producing,


distributing, and selling product at a fair rate
of return.

Competition-based pricing:
Setting

prices based on competitors


strategies, costs, prices, and market offerings.

Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall

9-7

Customer Value-Based Pricing

Customer value-based pricing:


Price

is considered along with the other


marketing mix variables before the marketing
program is set.
Customer needs and value perceptions are
assessed.
Target price is based on value perception.

Types

of value-based pricing:

Good value pricing.


Value-added pricing.
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Cost-Based Pricing

Cost-based pricing:
Costs

set the floor for the price that the


company can charge.
Product-driven, rather than value-driven.

Types of costs:
Fixed

costs:

Do not vary with production or sales level.


Variable

costs:

Vary directly with the level of production.


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Cost-Based Pricing

Types of cost-based pricing:


Cost-plus

(markup) pricing:

Adding a standard markup to the cost of


the product.
Break-even

pricing.
Target return pricing.

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Competition-Based Pricing

Assumes consumers base their judgments

of a products value on the prices charged


by competitors for similar products.
Assessing competitors pricing strategies:
How

does the firms offering compare in terms


of customer value?
How strong are competitors; what are their
pricing strategies?
What principle should guide pricing decisions
relative to those of the competition?
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Other Factors Affecting Pricing


Decisions

Internal factors:
Overall

marketing strategy, objectives,


and the marketing mix.
Organizational considerations.

External factors:
The

market and demand.


The economy.
Other external factors.
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Internal Factors Affecting Pricing


Decisions

Overall marketing strategy, objectives, and


the marketing mix:
Company

must decide on its overall


marketing strategy for the product and the
role that price will play in accomplishing
objectives.
Pricing decisions need to be coordinated with
packaging, promotion, and distribution
decisions.
Positioning may be based on price.
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Internal Factors Affecting Pricing


Decisions

Overall marketing strategy, objectives, and


the marketing mix:
Target

costing supports price-based


positioning strategies:
Pricing starts with an ideal selling price, then
targets costs that will ensure that the price is met.

Other

firms choose not to position on price, or


select high price strategies to enhance
product prestige.

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Internal Factors Affecting Pricing


Decisions

Organizational considerations:
Must

decide who within the organization


should set prices.
This will vary depending on the size and
type of company.
Some firms maintain pricing
departments.

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External Factors Affecting Pricing


Decisions

The market and demand:


A

firms flexibility in setting price varies


depending on the nature of the market.
Four types of markets exist:
Pure competition.
Monopolistic competition.
Oligopolistic competition.
Pure monopoly.
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External Factors Affecting Pricing


Decisions

The market and demand:


Analyzing

the price-demand
relationship:
Different prices result in different levels of
demand, as shown by the demand curve.

Price

elasticity of demand:

Refers to how responsive changes in


demand will be to a change in price.
Small demand change = inelastic demand.
Large demand change = elastic demand.
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External Factors Affecting Pricing


Decisions

The economy:
Economic

factors have a strong impact on


pricing strategies.
The recent recession has led to many
consumers becoming more value-conscious.
While some firms have cut price, others have
shifted to featuring more affordable items in
the marketing mix.
Some firms have held price, but repositioned
brands to enhance their value.
Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall

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External Factors Affecting Pricing


Decisions

Other external factors:


Channel

member reaction to price.


Governmental reaction or pricing
controls.
Social concerns.

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New-Product Pricing Strategies


skimming: When to use:
Market

Setting a high
price for a new
product to skim
revenues layerby-layer from
those willing to
pay the high price.

Company

makes
fewer, but more
profitable sales.

Products

quality and
image must support its
higher price.
Costs of low volume
cannot be so high they
cancel out the benefit of
higher price.
Competitors should not
be able to enter market
easily and undercut
price.

Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall

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New-Product Pricing Strategies

Market penetration: When to use:


Setting

a low initial
price in order to
penetrate the
market quickly and
deeply.
Can attract a large
number of buyers
quickly and win a
large market share.

Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall

Market

is highly pricesensitive so a low


price produces more
growth.
Costs fall as sales
volume increases.
Competition must be
kept out of the market
or the effects will be
only temporary.
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Product Mix Pricing Strategies

Product-line pricing:
Setting

the price steps between various


products in a product line based on cost
differences between products, customer
evaluations of different features, and
competitors prices (e.g., various Quicken
products).

Optional-product pricing:
Pricing

optional or accessory products sold


with the main product (e.g., ice maker with the
refrigerator).

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Product Mix Pricing Strategies

Captive-product pricing:
Pricing

products that must be used with the


main product (e.g., replacement cartridges for
Gillette razors).

By-product pricing:
Pricing

by-products in order to make the main


products price more attractive (e.g., wood byproducts used to create useful chemicals).

Product bundle pricing:


Combining

several products and offering the


bundle at a reduced price (e.g., fast food
combo meals).

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Price Adjustment Strategies

Discount and allowance pricing.


Segmented pricing.
Psychological pricing.
Promotional pricing.
Geographical pricing.
Dynamic pricing.
International pricing.
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Price Adjustment Strategies

Discounts:
Cash

Allowances:

Quantity

Trade-in

Promotional

Functional
Seasonal

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Price Adjustment Strategies

Segmented pricing:
Selling

a product or service at two or more


prices, where the difference in prices is not
based on differences in costs.

Types:
1.
2.
3.
4.

Customer-segment.
Product-form.
Location-based pricing.
Time-based pricing.

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Price Adjustment Strategies

Psychological pricing:
Considers

the psychology of prices and


not simply the economics; the price is
used to say something about product.
Price can often influence perceptions of
quality.
Reference prices are important.

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Price Adjustment Strategies

Promotional pricing:
Discounts (loss
leaders)
Special-event pricing
Cash rebates
Low-interest
financing
Longer warranties
Free maintenance

Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall

Geographical
pricing:

FOB-origin pricing
Uniform-delivered
pricing
Zone pricing
Basing-point pricing
Freight-absorption
pricing

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Price Adjustment Strategies

Dynamic pricing:
Adjusting

prices continually to meet the


characteristics and needs of individual
customers and situations.

International pricing:
Adjusting

prices for international


markets requires consideration of many
factors.

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Price Adjustment Strategies

Factors influence international pricing:


Economic

conditions.
Competitive situations.
Laws and regulations.
Development of the wholesaling and retailing
system.
Consumer perceptions and preferences.
Different marketing objectives.
Costs.
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Price Changes

Price cuts may be initiated due to:


Excess

capacity.
Falling demand in face of strong competitive
price or a weakened economy.
Attempt to dominate market through lower
costs.

Price increases can greatly improve profits


and may be initiated due to:
Cost

inflation.
Overdemand.

Marketers should avoid price gouging.


Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall

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Responses to Price Changes

Buyer reactions to price changes.


Competitor reactions to price changes.
Firm responses to price changes by
competition:
Reduce

price to match competition.


Raise the perceived value of its offer.
Improve quality and increase price.
Launch a low-price fighting brand.
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Public Policy and Pricing

Pricing within channel levels:


Price

fixing.
Predatory pricing.

Pricing across channel levels:


Price

discrimination.
Retail price maintenance.
Deceptive pricing.
Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall

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Rest Stop: Reviewing the Concepts


1.
2.
3.
4.
5.
6.

Identify the three major pricing strategies and discuss the


importance of understanding customer-value perceptions,
company costs, and competitor strategies when setting
prices.
Identify and define the other important internal and external
factors affecting a firms pricing decisions.
Describe the major strategies for pricing imitative and new
products.
Explain how companies find a set of prices that maximize
the profits from the total product mix.
Discuss how companies adjust their prices to take into
account different types of customers and situations.
Discuss the key issues related to initiating and responding to
price changes.

Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall

9 - 34

All rights reserved. No part of this publication may be reproduced, stored in a


retrieval system, or transmitted, in any form or by any means, electronic,
mechanical, photocopying, recording, or otherwise, without the prior written
permission of the publisher. Printed in the United States of America.

Copyright 2011 Pearson Education, Inc.


Publishing as Prentice Hall

Copyright 2011, Pearson Education Inc. Publishing as Prentice-Hall

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