PRINCIPLES OF MARKETING

Session 7: Pricing product –

Understanding and Capturing
customer value
 Learning Objectives
After studying this chapter, you should be able to:
1. Answer the question “What is price?” and discuss the
importance of pricing in today’s fast-changing
environment
2. Discuss the importance of understanding customer
value perceptions when setting prices
3. Discuss the importance of company and product
costs in setting prices
4. Identify and define the other important internal and
external factors affecting a firm’s pricing decisions
 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
The Importance of Price

To
To the
the consumer...
consumer...
To
To the
the seller...
seller... Price
Price is
is the
the cost
cost
Price
Price is
is revenue
revenue of
of something
something

Price
Price allocates
allocates resources
resources
in
in aa free-market
free-market economy
economy
 Pricing Strategies
Customer Perceptions of Value
 Pricing Strategies
Customer Perceptions of Value

Value-based pricing uses the buyer’s

perception 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

 Pricing Strategies
Customer Perceptions of Value

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
 Pricing Strategies
Customer Perceptions of Value

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
 Pricing Strategies
Customer Perceptions of Value

Value-added pricing attaches value-added features

and services to differentiate offers, support higher
prices, and build pricing power
 Pricing Strategies
Company and Product Costs

- 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 is product driven

The cost determinant of price

Types
Types of
of Costs
Costs

Variable
Variable Fixed
Fixed Cost
Cost
Cost
Cost

Varies
Varies with
with changes
changes Does
Does not
not change
change
in
in level
level of
of output
output as
as level
level of
of output
output changes
changes
Factors to Consider When Setting Prices
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
 Pricing Strategies
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
 Factors to Consider
When Setting 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
 Factors to Consider When
Setting Prices
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
 Factors to Consider When
Setting Prices
Other Internal and External Considerations
The Market and Demand

• Before setting prices, the marketer must

understand the relationship between price
and demand for its products
The Demand Curve
The Supply Curve
 How Demand and Supply
Establish Price

Price
Price The
Theprice
priceat
atwhich
whichdemand
demandand
and
Equilibrium
Equilibrium supply
supplyare
areequal.
equal.

Elasticity
Elasticity Consumers’
Consumers’responsiveness
responsivenessoror
of
of Demand
Demand sensitivity
sensitivityto
tochanges
changesin
inprice.
price.
Price Equilibrium
 Elasticity of Demand

 Consumers buy more or less

Elastic
Elastic of a product when the
Demand
Demand price changes.

Inelastic
Inelastic  An increase or decrease in
Demand
Demand price will not significantly
affect demand.
Factors to Consider When Setting Prices
Other Internal and External Considerations
Competitor's Strategies

• Strength of competitors
• Competition pricing strategies
• Customer price sensitivity
 Factors to Consider
When Setting Prices
Other Internal and External Consideration
 New-Product Pricing Strategies
Pricing Strategies

• Market-skimming pricing
• Market-penetration pricing
 New-Product Pricing Strategies

Market-skimming pricing is a strategy when a firm

charges a high introductory price, often coupled with
heavy promotion to “skim” revenue layers from the
market
 Price skimming

Inelastic Demand

Situations Unique Advantages/Superior

When
Price
Legal Protection of Product
Skimming
Is Successful
Technological Breakthrough

Blocked Entry to Competitors

 New-Product Pricing Strategies

Market-penetration pricing: a firm charges relatively

low price for a product as way to reach the mass
market
• Price sensitive market
• Low prices must keep competition out of the market