PRICING; understanding and
capturing customer value
BEAULEX .M. KATUMBI
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Inside this Topic
I. DEFINITION OF PRICE I .FACTORS TO CONSIDER WHEN SETTING PRICES III. PRICING STRATEGIES
IV. NEW PRODUCT PRICING STRATEGIES VI. PRODUCT MIX PRICING STRATEGIES VII.PRICE-
ADJUSTMENT STRATEGIES IX.PRICE CHANGES PUBLIC POLICY AND PRICING
Lets go
PRICING
The second major marketing mix tool— pricing.
If effective product development, promotion, and distribution sow the seeds of business
success, effective pricing is the harvest.
Firms successful at creating customer value with the other marketing mix activities must still
capture some of this value in the prices they earn.
Companies today face a fierce and fast-changing pricing environment.
Value-seeking customers have put increased pricing pressure on many companies.
Thanks to recent economic woes, the pricing power of the Internet, and value-driven retailers such as
Walmart, today’s more frugal consumers are pursuing spend-less strategies.
In response, it seems that almost every company is looking for ways to cut prices.
Yet, cutting prices is often not the best answer.
Reducing prices unnecessarily can lead to lost profits and damaging price wars.
It can cheapen a brand by signalling to customers that price is more important than the customer value
a brand delivers.
WHAT IS PRICE
Price is the amount of money charged for a product or a service.
More broadly, price is the sum of all the values that customers give up to gain the benefits of having or using a
product or service.
Historically, price has been the major factor affecting buyer choice.
In recent decades, nonprice factors have gained increasing importance.
However, price still remains one of the most important elements that determines a firm’s market share and
profitability.
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. #
Unlike product features and channel commitments, prices can be changed quickly.
At the same time, pricing is the number-one problem facing many marketing executives, and many companies
do not handle pricing well. Some managers view pricing as a big headache, preferring instead to focus on other
marketing mix elements.
However, smart managers treat pricing as a key strategic tool for creating and capturing customer value
MAJOR PRICING STRATEGIES
he price the company charges will fall somewhere between one that is too high to produce any demand and
one that is too low to produce a profit.
1. Customer value-based pricing
uses buyers’ perceptions of value, not the seller’s cost, as the key to pricing.
Value-based pricing means that the marketer cannot design a product and marketing program and then set
the price.
Price is considered along with all other marketing mix variables before the marketing program is set.
Although costs are an important consideration in setting prices, cost-based pricing is often product driven.
The company designs what it considers to be a good product, adds up the costs of making the product, and
sets a price that covers costs plus a target profit.
Marketing must then convince buyers that the product’s value at that price justifies its purchase.
Value-based pricing reverses this process. The company first assesses customer needs and value
perceptions.
It then sets its target price based on customer perceptions of value.
The targeted value and price drive decisions about what costs can be incurred and the resulting
product design.
As a result, pricing begins with analyzing consumer needs and value perceptions, and the price is set
to match perceived value.
It’s important to remember that “good value” is not the same as “low price.
CONSIDERATIONS FOR SETTING PRICE
Pricing methods continues
Good-Value Pricing
Recent economic events have caused a fundamental shift in consumer attitudes
toward price and quality.
In response, many companies have changed their pricing approaches to bring
them in line with changing economic conditions and consumer price perceptions.
More and more, marketers have adopted good-value pricing strategies—offering
the right combination of quality and good service at a fair price.
Value-Added Pricing
Value-based pricing doesn’t mean simply charging what customers want to pay or setting low
prices to meet competition.
Instead, many companies adopt value-added pricing strategies.
Rather than cutting prices to match competitors, they attach value-added features and services to
differentiate their offers and thus support higher prices.
For example, at a time when competing restaurants lowered their prices and screamed “value” in
a difficult economy, fast-casual chain Panera Bread has prospered by adding value and charging
accordingly
Cost-Based Pricing
Whereas customer-value perceptions set the price ceiling, costs set the floor for the price that the company
can charge.
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.
A company’s costs may be an important element in its pricing strategy.
Types of Costs
A company’s costs take two forms: fixed and variable.
Fixed costs (also known as overhead) are costs that do not vary with production or sales level. For example, a
company must pay each month’s bills for rent, heat, interest, and executive salaries—whatever the company’s
output.
Variable costs vary directly with the level of production.
Each PC produced by HP involves a cost of computer chips, wires, plastic, packaging, and other inputs.
Although these costs tend to be the same for each unit produced, they are called variable costs because the total
varies with the number of units produced.
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.
Costs at Different Levels of Production
To price wisely, management needs to know how its costs vary with different levels of production
Costs as a Function of Production Experience
Suppose TI runs a plant that produces 3,000 calculators per day. As TI gains experience in
producing calculators, it learns how to do it better. Workers learn shortcuts and become
more familiar with their equipment. With practice, the work becomes better organized, and
TI finds better equipment and production processes.
Cost-Plus Pricing
The simplest pricing method is cost-plus pricing (or markup pricing)—adding a
standard markup to the cost of the product.
Construction companies, for example, submit job bids by estimating the total
project cost and adding a standard markup for profit. Lawyers, accountants, and
other professionals typically price by adding a standard markup to their costs.
Some sellers tell their customers they will charge cost plus a specified markup; for
example, aerospace companies often price this way to the government.
Break-Even Analysis and Target Profit
Pricing
Another cost-oriented pricing approach is break-even pricing (or a variation called target return pricing).
The firm tries to determine the price at which it will break even or make the target return it is seeking.
Target return pricing uses the concept of a break-even chart, which shows the total cost and total revenue
expected at different sales volume levels.
Competition-Based Pricing
Competition-based pricing involves 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.
In assessing competitors’ pricing strategies, the company should ask several questions.
First, how does the company’s market offering compare with competitors’ offerings in terms of customer
value? If consumers perceive that the company’s product or service provides greater value, the company
can charge a higher price.
If consumers perceive less value relative to competing products, the company must either charge a lower
price or change customer perceptions to justify a higher price.
Other internal and external considerations affecting the
price decisions
Beyond customer value perceptions, costs, and competitor strategies, the company must consider several
additional internal and external factors.
Internal factors affecting pricing include the company’s overall marketing strategy, objectives, and
marketing mix, as well as other organizational considerations.
External factors include the nature of the market and demand and other environmental factors.
Overall Marketing Strategy, Objectives, and Mix
Overall Marketing Strategy, Objectives, and Mix
Price is only one element of the company’s broader marketing strategy.
Thus, before setting price, the company must decide on its overall marketing strategy for the product or service.
If the company has selected its target market and positioning carefully, then its marketing mix strategy, including
price, will be fairly straightforward.
Companies often position their products on price and then tailor other marketing mix decisions to the prices they
want to charge.
Here, price is a crucial product-positioning factor that defines the product’s market, competition, and design.
Many firms support such price-positioning strategies with a technique called target costing.
Target costing reverses the usual process of first designing a new product, determining its cost, and then asking,
“Can we sell it for that?” Instead, it starts with an ideal selling price based on customer-value considerations and
then targets costs that will ensure that the price is met.
Organizational Considerations
Management must decide who within the organization should set prices. Companies handle pricing in a
variety of ways.
In small companies, prices are often set by top management rather than by the marketing or sales
departments.
In large companies, pricing is typically handled by divisional or product line managers. In industrial
markets, salespeople may be allowed to negotiate with customers within certain price ranges.
Even so, 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 in setting them
The Market and Demand
As noted earlier, good pricing starts with an understanding of how customers’ perceptions of value affect the
prices they are willing to pay.
Both consumer and industrial buyers balance the price of a product or service against the benefits of
owning it.
Thus, before setting prices, the marketer must understand the relationship between price and demand for the
company’s product.
In this section, we take a deeper look at the price-demand relationship and how it varies for different types
of markets. We then discuss methods for analyzing the price-demand relationship.
Pricing in Different Types of Markets
The seller’s pricing freedom varies with different types of markets.
Economists recognize four types of markets, each presenting a different pricing challenge.
Under pure competition, the market consists of 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.
In a purely competitive market, marketing research, product development, pricing, advertising, and sales promotion play
little or no role.
Thus, sellers in these markets do not spend much time on marketing strategy.
Under monopolistic competition, the market consists of many buyers and sellers who trade over a range of prices rather
than a single market price.
A range of prices occurs because sellers can differentiate their offers to buyers. Sellers try to develop differentiated market
Under oligopolistic competition, the market consists of a few sellers who are highly sensitive to each other’s pricing and
marketing strategies. Because there are few sellers, each seller is alert and responsive to competitors’ pricing strategies and
moves.
In a pure monopoly, the market consists of one seller. The seller may be a government
monopoly
Analyzing the Price-Demand Relationship
Each price the company might charge will lead to a different level of demand.
The relationship between the price charged and the resulting demand level is shown in the demand curve in
The Economy
Economic conditions can have a strong impact on the firm’s pricing strategies.
Economic factors such as a 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.
In the aftermath of the recent Great Recession, consumers have rethought the pricevalue equation.
Many consumers have tightened their belts and become more value conscious. In the new, more-frugal economy,
bemoans one marketer, “The frill is gone.”
Even more, consumers will likely continue their thrifty ways well beyond any economic recovery.
Other External Factors
Beyond the market and the economy, the company must consider several other factors in its
external environment when setting prices.
It must know what impact its prices will have on other parties in its environment.
How will resellers react to various prices? The company should set prices that give resellers a
fair profit, encourage their support, and help them to sell the product effectively.
The government is another important external influence on pricing decisions.
Finally, social concerns may need to be taken into account.
In setting prices, a company’s short-term sales, market share, and profit goals may need to be
tempered by broader societal considerations
Reference ; 70% Kotler 30 others
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