Principles of marketing

Pricing: Understanding and Capturing

Customer Value

Dr. Vesselina Tossan

vesse
v
vesselina.tossan@lecnam.net
V
1
What Is a Price?
Price is the amount of money charged for a product or service

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 have a direct impact on a firm’s bottom line.

.
2
Major Pricing Strategies

three major pricing strategies: customer value-based pricing, cost-based pricing, and competition-based pricing.

3.
Major Pricing Strategies
Customer Value-Based Pricing
Value-based pricing uses the buyers’ perceptions of value rather than the
seller’s cost.
• Value-based pricing is customer driven.
• Cost-based pricing is product driven.
• Price is set to match perceived value.

.
4
Major Pricing Strategies

Target costing starts with an ideal selling price based on consumer value considerations and then
targets costs that will ensure that the price is met
.
5
Major Pricing Strategies
Customer Value-Based Pricing
Good-value pricing is offering just the right combination of
quality and good service at a fair price.

.
6
Major Pricing Strategies

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.

.
Low cost producers 7
Major Pricing Strategies
Cost-Based Pricing
Fixed costs (=overhead) are the costs that do not vary with production
or sales level.
•Rent
•Heat
•Interest
•Executive salaries
•Mass –media spending
•Listing fees in supermarkets

.
8
Major Pricing Strategies
Cost-Based Pricing
Variable costs vary directly with the level of production.
• Raw materials (ex: for a toilet water fragrance, alcohol, perfume)
• Packaging
• Online (click through rate)

.
9
Major Pricing Strategies

Cost-Based Pricing
Total costs are the sum of the fixed and variable costs for any given level of
production.

.
10
Example : The Logan car (Dacia acquired
by Renault in 1999)
• For the first time in automotive industry, the
design was completed at a target cost by
applying the “design to cost” method.
Innovative at the time, this method turned
the logic of traditional design on its head:
without compromising on reliability and
safety, cost optimization became an
imperative at every stage of vehicle design.
From start to finish, the final sale price was
factored into every technical constraint.
Under this strategy, the use of proven and
amortized Groupe Renault parts and
technologies was a considerable asset.
.
 •
• Differences between list price and consumer price

.
11
Example of price of a
toilet water sold to the
consumer 50 euros

Ex-works cost : 4 € = 16% of list price (lp)

that is 25€
Advertising and selling cost : 12,5€ 50% of lp
Producer’s margin : 8,5€ = 34% of lp
List price (Prix fabricant)

Distributor cost & margin: 30 % of consumer

price

VAT (20% of consumer price)

Consumer price 50
13

12
Major Pricing Strategies
Management needs to know how its costs vary with different levels of production

SRAC = short-run average cost curve LRAC = long-run average cost

B shows that a 3000 daily production plant is the best size to build if demand is
strong enough to support this level of production
.
13
Major Pricing Strategies
This drop in the average
cost with accumulated
production experience is
called the experience
curve (or the learning
curve).

The market has to stand

ready to buy the higher
output.

The producer must get

a large market share
early in the product’s
life cycle => price low
(ex: car industry,
computer industry….)

.
14
Major Pricing Strategies
Cost-Based Pricing
Cost-plus pricing adds a standard markup to the cost of the product.
• Benefits
 Sellers are certain about costs.
 It is simple
 Price competition is minimized.
 Buyers feel it is fair.
• Disadvantages
 Ignores demand and competitor prices

.
15
Cost based pricing (or markup pricing)
example

• Suppose a manufacturer of toasters has a total cost of 16

euros /unit. If the manufacturer wants to earn a 20 percent
markup on sales, what is his markup price?

16 .
Cost based pricing (or markup pricing)
example correction
Suppose a manufacturer of toasters has a total cost of 16 euros /unit. If the
manufacturer wants to earn a 20 percent markup on sales, what is his markup
price?

• Markup price= unit cost + markup price x desired return on sales

• markup price = unit cost/(1 - desired return on sales) =16/(1 - 0.2) = 20

The manufacturer would charge dealers 20 euros per unit and make a profit of 4
euros per unit.
The dealers, in turn, will mark up the toaster.
If dealers want to earn 50 percent on the sales price, how much will they mark
up the toaster to?
17 .
Cost based pricing (or markup pricing)
example correction (2)

If dealers want to earn 50 percent on the sales price, they

will mark up the toaster to 40 euros = (20 + 50% of 40).

18 .
 Major Pricing Strategies
Cost-Based Pricing
Break-even pricing ( or variation called
target return pricing) is setting price to break
even on costs (or to make the target return it
is seeking).

Unit price of a product : 20 dollars .

19
Major Pricing Strategies

As price increases, the break-even volume drops (column 2). But as price increases, the demand for
toasters also decreases (column 3).
What is the best price?
.
20
Major Pricing Strategies

Competition-Based Pricing
Competition-based pricing is setting prices
based on competitors’ strategies, costs, prices,
and market offerings.

Caterpillar has a wordwide competitor

Komatsu
Arrived on mobile
phone services in
France in 2012
.
21
Example Fuze Tea consumer price

Price Fuz tea : 1,43 euros per liter

Price Ice tea : 1,26 euros per liter October 2018 in Auchan PARIS
Price Maytea : 1,89 euros per liter
Price Nestea : 1,75 euros per liter
Price Arizona : 1,92 euros per liter
Price ice tea Auchan : 0,84 euros per liter

22
 Exercise market research to determine optimal price (1 of 4)
Geosat wants to launch a new videophone. They made a market research on 2000 potential buyers exposing them to
different prices. For some prices, a part of them said they are too high, another part of them said they are too low to induce
good quality. Their main competitor, Orange, market leader, offers a videophone at 990 euros.

1. What is the psychologic price of Geosat videophone (the price that maximizes the number of buyers)?
2. What is the breakeven knowing that there are 1 200 000 euros fixed cost, that unit variable cost is 680 euros and the
selling price is 890 euros ?
3. What pricing strategy do you recommend?

Price Too Not % too % not enough Growing Decreasinig Level of

expensive enough expensive expensive compound compound acception
X expensiv X/Total Y/ Total Too Not enough 100- (A+B)
Y expensive expensive
A B

750 0 750
790 250 590
820 430 420
870 580 240
910 740 0
Total 2 000 2 000

23
 Exercise (2 of 4)
Geosat wants to launch a new videophone. They made a market research on 2000 potential buyers. Their
main competitor, Orange, market leader, offers a videophone at 990 euros.

1. What is the psychologic price of Geosat videophone (the price that maximizes the number of buyers)?
2. What is the breakeven knowing that there are 1 200 000 euros fixed cost, that unit variable cost is 680
euros and the selling price is 890 euros ?
3. What pricing strategy do you recommend?

Price Too Not % Too % Not enough Growing Decreasing Level of

expensive enough expensive expensive compound compound acception
X expensive X/Total Y/Total too not enough 100-(A+B)
Y expensive expensive B
A
750 0 750 0 37,5 0% 100%
790 250 590 12,5 29,5
820 430 420 21,5 21
870 580 240 29 12
910 740 0 37 0 100% 0%
Total 2 000 2 000 100 100

24
 Exercise (3 of 4)
Geosat wants to launch a new videophone. They made a market research on 2000 potential buyers. Their
main competitor, Orange, market leader, offers a videophone at 990 euros.

1. What is the psychologic price of Geosat videophone (the price that maximizes the number of buyers)?
2. What is the breakeven knowing that there are 1 200 000 euros fixed cost, that unit variable cost is
680 euros and the selling price is 890 euros ?
3. What pricing strategy do you recommend?
Price Too Not % Too % Not enough Growing Decreasing Level of
expensive enough expensive expensive compound compound acception
X expensive X/Total Y/Total too not enough 100-(A+B)
Y expensive expensive B
A

750 0 750 0 37,5 0% 100%

790 250 590 12,5 29,5 12,5 62,5
820 430 420 21,5 21 34 33
870 580 240 29 12 63 12
910 740 0 37 0 100% 0%
Total 2 000 2 000 100 100 25
 Exercise (4 of 4)
Geosat wants to launch a new videophone. They made a market research on 2000 potential buyers. Their
main competitor, Orange, market leader, offers a videophone at 990 euros.

1. What is the psychologic price of Geosat videophone (the price that maximizes the number of buyers)?
2. What is the breakeven knowing that there are 1 200 000 euros fixed cost, that unit variable cost is
680 euros and the selling price is 890 euros ?
3. What pricing strategy do you recommend?

Price Too Not % Too % Not enough Growing Decreasing Level of

820 is the
expensive enough expensive expensive compound compound acception price that
X expensive X/Total Y/Total too not enough 100-(A+B) maximizes
Y expensive expensive B
A number of
buyers
750 0 750 0 37,5 0% 100% 0
(psychological
790 250 590 12,5 29,5 12,5 62,5 25 price), not
820 430 420 21,5 21 34 33 33 necessary
revenues nor
870 580 240 29 12 63 12 25
profit
910 740 0 37 0 100% 0% 0
Total 2 000 2 000 100 100 26
Exercise (4 of 4)
Geosat wants to launch a new videophone. They made a market research on 2000 potential buyers. Their
main competitor, Orange, market leader, offers a videophone at 990 euros.

1. What is the psychologic price of Geosat videophone (the price that maximizes the number of buyers)?
2. What is the breakeven knowing that there are 1 200 000 euros fixed cost, that unit variable cost
is 680 euros and the selling price is 890 euros ?
3. What pricing startegy you recommend?

27
Exercise (4 of 4)
Geosat wants to launch a new videophone. They made a market research on 2000 potential buyers. Their
main competitor, Orange, market leader, offers a videophone at 990 euros.

1. What is the psychologic price of Geosat videophone (the price that maximizes the number of buyers)?
2. What is the breakeven knowing that there are 1 200 000 euros fixed cost, that unit variable cost is
680 euros and the selling price is 890 euros ?
3. What pricing startegy you recommend?

The number of units x to breakeven is:

(890-680) x =1200 000

X= 5714

At 890 demand may not be very big (less than 25% of our target may consider bying, does-it make 5714
units?). This is a customer value based pricing including considerations about cost (cost based
strategy) and competition
28
Other factors affecting pricing decisions
.

Internal factors include the company’s overall marketing strategy,

objectives, and marketing mix, as well as organizational
considerations

External pricing considerations include the nature of the market

and demand and environmental factors such as the economy,
reseller needs, and government actions.
29
Other Considerations Affecting Price Decisions

Organizational Considerations
• Who should set prices?
• Who can influence prices?

Top management sets the pricing objectives and policies, and it often approves the prices
proposed by lower-level management or salespeople.

In industries in which pricing is a key factor (airlines, aerospace, steel, railroads, oil companies),
companies often have pricing departments to set the best prices or help others set them. These
departments report to the marketing department or top management
.
30
Other Considerations Affecting Price Decisions

The Market and Demand

Before setting prices, the marketer must understand the relationship between
price and demand for its products.

.
31
Other Considerations Affecting Price Decisions
The Market and Demand
Pricing In Different Types of Markets

Pure competition
Monopolistic competition
Oligopolistic competition
Pure monopoly
.
32
Pure competition
Many buyers and sellers trading in a uniform
commodity, such as wheat, copper, or financial
securities. No single buyer or seller has much
effect on the going market price.

Under monopolistic competition, the market consists of many buyers and sellers who trade over a range of
.
prices because sellers can differentiate their offers to buyers 33
 Oligopolistic competition

the market consists of only a few large sellers

Each seller is alert and responsive to competitors’ pricing strategies and marketing moves.

34
.
Pure monopoly
• In a pure monopoly, the
The Taxis before Uber
market is dominated by one
seller. The seller may be a
government monopoly (the
Postal Services), a private
regulated monopoly (a power
company a few years ago), or
a private unregulated
monopoly (De Beers and
diamonds). Pricing is handled
RATP, SNCF in France
differently in each case.
.
35
Other Considerations Affecting Price Decisions

The Market and Demand

Analyzing the Price–Demand Relationship
The demand curve shows the number of units the market will buy in a given
period at different prices
• Demand and price are inversely related.
• Higher price = lower demand

.
36
Other Considerations Affecting Price Decisions

The Market and Demand

Price Elasticity of Demand
Price elasticity is a measure of the sensitivity of demand to changes in price.
Inelastic demand is when demand hardly changes with a small change in price
0<⎮e⎮<1.
Elastic demand is when demand changes greatly with a small change in price.

e= Price elasticity of demand = % change in quantity of demand

% change in price

37 .
 Price elasticity on demand

Price
Pri
Elastic demand Inelastic demand
ce

Qty Qty

38
 Example of calculation of price elasticity
Quant
0 200 400 600 800 1 000 1 200 1 400 1 600 1 800 2 000
ity
Price 100 90 80 70 60 50 40 30 20 10 0

Price
100 If qty = 0 => Price =100
Qt If qty = 2 000 => Price = 0
y:
eP
+b
Qty = -20 P + 2 000

Elasticity = % change in quantity

50 % change in price

e = -20

Quantity 40
1000 2000
Other Considerations Affecting Price Decisions
The Economy and Other External Factors

Economic Rather than cutting prices,

many companies have
instead shifted their
conditions marketing focus or added
more affordable lines to
their product mixes.
Reseller’s (see next 2 slides)

response to
price
39
.
 Nespresso competitors

France :
2 concurrents principaux

Douwe Egberts (2002)

Kraft Foods (2004)
• Milieu de gamme
• Entrée de gamme
• Machines (169 €): Braun, Saeco
• Machines (69 €): Philips
2 bar
1,5 bar
• Café (Carte noire), thé
• 1,7 M machines en 3 ans Nespresso
(Twinings), chocolat chaud
• Café (Maison du café, Carte noire) (Suchard)
• Dosettes (« Pads ») pas exclusives 300 euros • Dosettes (« Discs ») sont
(Kraft 30% !), prix de 0,13 à 0,19 € exclusives, prix de 0,22 à 0,29 €

42
42
Lower price fighting brand Dolce Gusto
• 41 to 75 euros

41 .
Exercise

• Congratulations! You just won your state lottery and will be receiving
a check for $1 million. You have always wanted to own your own
business and have noticed the increase in the number of food
trucks in your local area. A new food truck with a kitchen and related
equipment costs about $100,000. Other fixed costs include salaries,
gas for the truck, and license fees and are estimated to be about
$50,000 per year. You decide to offer traditional Mediterranean
cuisine. Variable costs include food and beverages estimated at $6
per platter (meat, rice, vegetable, and pita bread). Meals will be
priced at $10. Calculate the break-even for your food truck
business. After reviewing your break-even, what changes would you
consider? Is this how you want to spend your lottery winnings?