Pricing: Understanding and

Capturing Customer Value

UNIT 7
MARKETING I
What is a Price?
Price is the amount of money charged for a product or service, or the sum of all
the values that customers exchange for the benefits of having or using the
product or service.

Even if in the past it was the major factor affecting buyer choice and now we have
others important too, it remains essential in our strategy.

A small percentage improvement of price can generate a large percentage increase

in profitability.

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MARKETING MIX
Why is price different from the other three?
Price is the only element in the marketing mix that
produces revenue; all other elements represent
costs.

Price is also one of the most flexible marketing mix

elements; prices can be changed quickly.

Smart managers treat pricing as a key strategic tool for

creating customer value and building customer
relationships.

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 Where does the right price fall?

The right price will fall between where one that is too low to produce a profit
(behind product costs) and one that is too high to produce any demand (so customer
perceptions of the product’s value set the ceiling for prices).

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Major Pricing Strategies
1) Customer Value-based pricing.
2) Cost-based pricing.
3) Competition-based pricing.

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Major Pricing Strategies
1) Customer Value-Based Pricing
Setting price based on buyers perceptions of value rather than on the seller’s
cost.
It is customer driven

What does it mean practically?

Marketer cannot design product and marketing program and

then set the price.

Price is considered along all other marketing mix variables before

the marketing program is set.

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Major Pricing Strategies
1) Customer Value-Based Pricing

One thing is to calculate the cost

of the ingredients in a meal…

…another to measure satisfaction,

taste, environment, vibes, status.

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Major Pricing Strategies
1) Customer Value-Based Pricing

How can we measure the value customers attach to the product?

Ask them!
(Example: how much will they pay for a basic product? And for each benefit added?)

Conduct experiments to test the perceived value of different product offers.

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Major Pricing Strategies
1) Customer Value-Based Pricing

“Good value” doesn’t mean “low price”

Customer-oriented pricing involves understanding how much value consumers place

on the benefits they receive from the product and setting a price that captures that
value.

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Major Pricing Strategies
1) Customer Value-Based Pricing
There are two types of Customer Value-Based Pricing:
A) Good-value pricing consists in offering just the right combination of quality and good service
at a fair price.
A peculiar concept is “Everyday Low Pricing” (EDLP) : involves charging a
constant everyday low price with few or no temporary price discounts.
(The king is Walmart, that defined the concept)
On the opposite, we find the “High-Low Pricing” involves charging higher
prices on an everyday basis but running frequent promotions to lower
prices temporarily on selected items.

In some case, necessity to redesign

Very used by companies after existing brands to offer more quality
the recession of 2008-2009 for a given price or the same quality
for less

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Major Pricing Strategies
1) Customer Value-Based Pricing
B) Value-added pricing attaches value-added features and services to differentiate a company’s
offers and charging higher prices.
Challenging the competitors NOT cutting the price, but they attach value-added features and services to
differentiate their offers and thus support higher prices
AMC Theatres (the second-largest American theatre chain) operates
in more than 50 theatres with some kind of food and beverage
amenities, including Fork&Screen (upgraded leather seating, seat-
side service, cocktails…) and Cinema Suites (additional food,
extensive wine list, cocktails, more space…)

“Once people experience it, more often

they don’t want to go anywhere else”
(Company’s spokeperson)

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Major Pricing Strategies
2) Cost-based pricing
Cost-based pricing sets prices based on the costs for producing, distributing,
and selling the product plus a fair rate of return for effort and risk.
Some companies want to become low-cost producer in their industries: doing the
same things of competitors but in a more efficient way.

Why should we choose this strategy?

“What makes you different or weird, that's your strength.”
— Meryl Streep

Which is the key to manage this strategy?

It is not minimize costs; many firms invest in higher costs so they can claim higher prices and margins.
The key is to manage the spread between costs and prices.

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Major Pricing Strategies
2) Cost-based pricing
Type of costs:
Fixed costs are the costs that do not vary with production or sales level.
For example: bills for rent, interest, executive salarie.

Variable costs vary directly with the level of production.

For example: packaging, wires, raw materials
Why? Because the cost of the single unit is the same, but the total variable
cost changes in base of the number of units produced.

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Major Pricing Strategies
2) Cost-based pricing
Type of costs:
Total costs are the sum of the fixed and variable costs for any given level of
production.

Management wants to charge a price that will at least cover the total production
costs at a given level of production.

The company must watch its costs carefully. If it costs the company more than its
competitors to produce and sell a similar product, the company will need to
charge a higher price or make less profit, putting it at a competitive disadvantage.

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Major Pricing Strategies
Cost-based pricing VS Customer Value-Based Pricing

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Major Pricing Strategies
2) Cost-based pricing

Advantages
 Sellers are certain about costs.
 Buyers feel it is fair.
There is no need to make frequent adjustments as demand changes
Sellers earn a fair return but do not take advantage of buyers if
demand becomes great.

Disadvantages
 Ignores demand and competitor prices (and
for this reason is not generally used)

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 Major Pricing Strategies
3) Competition-Based Pricing
So we have a strategy based on the client, another based on the cost of the
product…what could be based the third one?

Competition-based pricing is setting prices based on

competitors’ strategies, costs, prices, and market
offerings. Consumers will base their judgments of a
product’s value on the prices that competitors charge for
similar products.

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Major Pricing Strategies
3) Competition-Based Pricing
In assessing competitors’ pricing strategies, the company should ask:
1. How does the company’s market offering compare with competitors’ offerings in terms
of customer value?
If consumer perceive less value to competing products, the company must charge
a lower price or change the customer perception to justify a higher price

2. How strong are current competitors and what are their current pricing strategies?
For example, If the market is dominated by larger and lower-price competitors, It
could be wise not to face them directly, but to target unserved niches with value-
added products and services at higher prices.
The principle: no matter what price you charge -low, high or in
between- just be certain to give customers a superior value for that
price.

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 Major Pricing Strategies
Competitor Reactions to Pricing Changes

Company might decide that it should wait and respond when it has more information on the effects of the
competitor’s price change. However, waiting too long to act might let the competitor get stronger and more confident
as its sales increase.
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 Price Adjustment Strategies
Let’s focus on the introduction stage:
Pricing strategies usually change as the product passes through its life cycle. The
introductory stage, on which the price is settled for the first time, is especially
challenging.
Companies can choose between two broad strategies: market-skimming pricing
and market-penetration pricing.
1) Market-skimming pricing strategy sets high initial prices to “skim” maximum revenues layer by
layer from the segments willing to pay the high price

When Apple first introduced the iPhone,
its initial price was as high as $599; after
6 months $399 (for 8-GB model) and
$499 (16-GB model), after a year $199
and $299.
In this way, Apple has skimmed the
maximum amount of revenue from
the various segments of the market.

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Price Adjustment Strategies
Let’s focus on the introduction stage:

Market skimming makes sense only under certain conditions

It requires:
 Product quality and image must support its higher price.

 Buyers must want the product at the price.

 The costs of producing a smaller volume cannot be so high that they cancel the
advantage of charging more.

 Competitors should not be able to enter the market easily and undercut the high
price.

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Price Adjustment Strategies
Let’s focus on the introduction stage:

2) 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.

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.

The high sales volume results in falling costs,

allowing companies to cut their prices even
further.

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Price Adjustment Strategies
Let’s focus on the introduction stage:

Market-penetration pricing is convenient under certain conditions

It requires:
 The market must be highly price sensitive.

 Production and distribution cost must decrease as sales volume increases.

 The low price must help keep out the competition (risk of a commercial war: the
price advantages may be only temporary).

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 Price Adjustment Strategies
How can we adjust the price during the Product Life Cycle?
Companies usually adjust their basic prices to account for various customer differences and changing situations:
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 Adjusting prices for psychological effect
Promotional pricing Temporarily reducing prices to spur short-run sales
Geographical pricing Adjusting prices to account for the geographic location
of customers
Dynamic and personalized Adjusting prices continually to meet the characteristics
pricing and needs of individual customers and situations
International pricing Adjusting prices for international markets

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Price Adjustment Strategies
Discount and allowances
Discount pricing reduces prices on purchases during a stated period of time
or of larger quantities.
“2/10, net 30” (although payment is due within 30 days, the buyer
can deduct 2% if the bill is paid within 10 days)

Allowances discount list prices by providing promotional money in return

for an agreement to feature the manufacturer’s products in some way.

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Price Adjustment Strategies
Segmented pricing
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.

It takes several forms.

 Customer-segment pricing, different customers pay different prices for the same product or service
(Museums and movie theaters may charge a lower admission for students and senior citizens.)

 Product form pricing, different versions of the product are priced differently but not according to
differences in their costs (Business class on a flight).

 Location-based pricing, a company charges different prices for different locations, even though the cost of
offering each location is the same (theaters vary their seat prices because of locations).

 Time-based pricing, a firm varies its price by the season, the month, the day, and even the hour.

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Price Adjustment Strategies
Segmented pricing
To be effective:
 Market must be segmentable.
 Segments must show different degrees of demand.
 Segments should reflect the real differences in customer’s perceived value.
 Costs of segmenting cannot exceed the extra revenue.
 Must be legal.

Do not treat customers in lower price as a second-class citizen/clients!

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Price Adjustment Strategies
Psychological Pricing
Psychological pricing considers the psychology of prices and not simply the economics;
the price is used to say something about the product.
Who is a better lawyer, the one who charges $50 per hour or the other who
charges $500 per hour?

Reference prices are prices that buyers carry in their minds and refer to when
they look at a given product.

Ex. 2,99 euros or 3,00?

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Price Adjustment Strategies
Promotional Pricing
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

The main objective of promotional pricing is to move prospective customers over humps that
are holding them back from making the purchase decision.

This pricing tactic should be used with caution as it can have adverse affects such as price wars or
damage to brand equity.

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Price Adjustment Strategies
Dynamic pricing
Throughout most of history, prices were set by negotiation between buyers and sellers. Fixed-
price policies (setting one price for all buyers- is a modern idea at the end of 19th century.

Thanks to Internet haggling is coming back! (Ebay, Craigslist, Priceline.com,

Ticketmaster.com)

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

Dynamic online pricing benefits both sellers and buyers. Consumers armed with instant
access to product and price comparisons can often negotiate better in-store prices.

Internet sellers such as Amazon.com L.L.Bean can mine their database to gauge a specific
shopper’s desires, measure his or her means, instantaneously tailor offers to fit that
shopper’s behavior and price product accordingly.

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Price Adjustment Strategies
Dynamic pricing
Retailers, hotels, airlines…change prices according to change in demands, costs or
competitor pricing, adjusting for specific items on a daily, hourly or even continuous
basis.
Online offers and prices can be based on what specific customers search for and
buy, how much they pay for other purchases and whether they might be willing and
able to spend more.

Is it…legal?
Yes! As long as companies do not discriminate based on age, gender,
location and similars.

Showrooming: consumers come to store to see the item, then they

compare the price online and buy it on internet with lower price.

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Price Adjustment Strategies
International pricing
International pricing involves adjusting prices continually to meet the characteristics and needs
of individual customers and situations from country to country.

A couple of examples:

A Gucci handbag
$140 in Milan, $240
in US.

A Big Mac: $4,20 in

US, $7,85 in Norway.

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 Synergy between Price and Product
Internal factors
Price is important, but do not forget that the product must be viewed in a wider perspective
of the company:

Company’s overall Specific targets

marketing strategy Marketing mix

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 Synergy between Price and Product
Internal factors
Looking at the bigger picture: the target costing.
The target costing reverses the usual process of first designing a new product, then, determine its cost
and then asking “Can we sell it for that?”

Instead it starts with an ideal selling price based on customer value consideration and then
targets costs that will ensure that the price is met.

When Honda designed Honda Fit, it began with a

$13,950 starting price point and highway mileage of 33
miles per gallon firmly in mind. It then designed a
stylish, peppy little car with costs that allowed it to give
target customers those values.

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 35

Synergy between Price and Product

Product mix pricing strategies:
The strategy for setting a product’s price often has to be changed when the product
is part of a product mix

In this case, the target is maximizing profits on the total product mix

The five product mix pricing strategies are:

1) Product line pricing
2) Optional product pricing
3) Captive product pricing
4) By-product pricing
5) Product bundle pricing
 Synergy between Price and Product
Product mix pricing strategies:
In 1) product line pricing, management must determine the price steps to set
between the various products in a line. The product line could include a broad
range of prices for the various products.

Companies usually develop product lines rather than single

products.

Rossignol offers 7 collections of alpine skis of all design and size,

with prices from $150 (junior skis) to more than $1.100 for a pair
of its radical racing collection.

Careful: management must determine the price steps to set

between the various product in a line.

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 Synergy between Price and Product
Product mix pricing strategies:
2) Optional Product Pricing takes into account optional or accessory products
along with the main product.

Refrigetors are offered

Car navigation
with optional ice makers
system

Management have to decide which items

to include in the base price!

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Synergy between Price and Product
Product mix pricing strategies:
3) Captive product pricing sets prices of products that must be used along with
the main product.
An example: price of Gillette Fusion razors is low, but once you
buy it, you are a captive customer for its higher-margin
replacement cartidges.

Companies that use captive product pricing must be careful.

 Finding the right balance between the main product and captive
product prices can be tricky.

 Even more, consumers trapped into buying expensive captive products

may come to resent the brand that ensnared them.

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 Synergy between Price and Product
Product mix pricing strategies:
4) By-product pricing sets a price for by-products in order to make the main
product’s price more competitive..
 Producing products and services often generates by-products. If the by-products have no value and if
getting rid of them is costly, this will affect pricing of the main product.
An example: In Coca-cola nothing goes waste!
To make its orange (Minute Maid) C.C. and Cutrale squeeze
50 millions of orange each year just for Florida. It’s a lot of
orange peels! From them they extract essential oils while
what is left is pressed into pellets sold for livestock feed.
Using by-product pricing, the company seeks a market for these by-products and has two
advantages:
 to help offset the costs of disposing of them and help make the price of the main product more
competitive.
The by-products themselves can even turn out to be profitable—turning trash into cash.

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Synergy between Price and Product
Product mix pricing strategies:
Using 5) product bundle pricing, sellers often combine several products and offer the
bundle at a reduced price.
For example, fast-foods combine burger, fries and a soft drink at a “combo” price. And Comcast, Time
Warner, Verizon, and other telecommunications companies bundle TV service, phone service, and high-
speed internet connections at a low combined price.

Price bundling can promote the sales of products consumers might not
otherwise buy, but the combined price must be low enough to get them
to buy the bundle!

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 Final Considerations On Price Decisions
Other External Factors
The nature of the market and the price-demand relationship.
Marketers have to know PRICE ELASTICITY: a measure of the sensitivity of demand
to changes in price

 Inelastic demand is when demand hardly

changes with a small change in price.
 Increase the price!

 Elastic demand is when demand changes

greatly with a small change in price.
 Lower the price!

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Final Considerations On Price Decisions
Other External Factors
Which are the actual economic conditions?
Boom or recession, inflation, and interest rates affect pricing decisions because they affect
consumer spending, consumer perceptions of the product’s price and value, and the company’s
costs of producing and selling a product.

Consumers have tightened their belts and become more value conscious.

 The most obvious response to the new economic realities is to cut prices and offer discounts, to help spur short-
term sales; but lower prices mean lower margins. And once a company cuts prices, it’s difficult to raise them
again when the economy recovers.

 Rather than cutting prices, many companies have instead shifted their marketing focus or added more
affordable lines to their product mixes. Other companies are holding their price positions but redefining the
“value” in their value propositions. Even in tough economic times, consumers don’t buy based on prices alone.

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Final Considerations On Price Decisions
Other External Factors

Which are the government’s policies and the rules?

Careful: “predatory pricing” (selling below cost with the intention of
punishing a competitor) is forbidden.

How the resellers will response to price change?

The company should set prices that give resellers a fair profit, encourage
their support, and help them to sell the product effectively.

Are there any social concerns?

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