Pricing:
Understanding and
Capturing Customer
Value
Learning Objectives
10.1 Answer the question “What is price?” and discuss the
importance of pricing in today’s fast-changing environment.
10.2 Define price, identify the major pricing strategies, and discuss
the importance of understanding customer-value
perceptions, company costs, and competitor strategies when
setting prices.
10.3 Identify and discuss the other important external and internal
factors affecting a firm’s pricing decisions.
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.
• No matter what the state of the economy, 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 the price is justified by
the value provided.
• Price is the only element in the marketing mix that produces revenue; all
other elements represent costs.
9-4
Considerations in Setting Price
The price the company charges will fall somewhere between one that is too
low to produce a profit and one that is too high to produce any demand.
9-5
Value-Based Pricing vs. Cost-Based Pricing
Value-based pricing is customer-driven, whereas cost-based pricing
is product-driven.
9-6
Customer Value-Based Pricing
• Setting price based on
buyers’ perceptions of
value rather than on the
seller’s cost
• Types:
• Good value pricing
• Value-added pricing
© Westend61 GmbH/Alamy Stock Photo
A Steinway piano—any Steinway
piano—costs a lot. But to a Steinway
customer, it’s a small price to pay for
the value of owning one.
Good-Value Pricing
• Offering the right combination of quality
and good service at a fair price.
• In many cases, this involves introducing
less-expensive versions of established
brand name products or new lower-
price lines.
• In other cases, good-value pricing
involves redesigning existing brands to
offer more quality for a given price or
the same quality for less.
With its no-frills positioning and low
prices, Snap Fitness is well-positioned
to take advantage of either good or bad
economic conditions
Value-Added Pricing
• Attaching value-added features
and services to differentiate a
company’s offers while charging
higher prices.
Rather than cutting services to
maintain lower admission prices,
premium theaters adding
amenities and charging more.
Travel in our Suite - Singapore Airlines
Cost-based pricing
• Setting prices based on the costs for
producing, distributing, and selling the
product plus a fair rate of return for effort
and risk.
Types of Costs
Fixed costs (overhead)
• Do not vary with production or sales level
Variable costs
• Vary directly with the level of production
Total costs
• Sum of the fixed and variable costs for any
given level of production
Types of Cost-Based Pricing
Cost-plus (markup) pricing
• Adding a standard markup to the cost of the
product
Break-even (target return)
pricing
• Setting price to break even on the costs of
making and marketing a product, or setting
price to make a target return
Cost-Based Pricing
• Disadvantage: Any pricing method that ignores demand and competitor
prices is not likely to lead to the best price.
• Still, cost-plus pricing remains popular for many reasons:
Sellers are more certain about costs than about demand. By tying the
price to cost, sellers simplify pricing. There is no need to make
frequent adjustments as demand changes.
If the industry uses this method, prices tend to be similar, and price
competition is minimized.
Many people feel that cost-plus pricing is fairer to both buyers and
sellers. Sellers earn a fair return but do not take advantage of buyers
if demand becomes great.
Figure 10.5 Break-Even Chart for Determining Target Return
Price and Break-Even Volume
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.
Fast-growing clothing boutique Hot Mama
isn’t likely to win a price war against
giants like Macy’s or Kohl’s. Instead, it
relies on personal service, a mom- and
kid-friendly atmosphere, and its
knowledgeable staff to turn harried moms
into loyal patrons
9 - 15
Other Considerations Affecting Pricing
Decisions
• Internal factors:
• Overall marketing strategy, objectives, and the marketing mix
• Organizational considerations
• External factors:
• Nature of the market and demand
• Other environmental factors
9 - 16
Overall Marketing Strategy, Objectives, and 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.
• Many companies deemphasize price and use other marketing mix
tools to create nonprice positions. Often, the best strategy is not to
charge the lowest price but rather to differentiate the market offering
to make it worth a higher price.
Brands might build their marketing strategies around premium
pricing or affordable pricing. Consumer electronics maker
Visio’s aim is “to make high-quality technology and content
affordable to everyone.”
Andrey_Popov/Shutterstock
9 - 17
Overall Marketing Strategy, Objectives, and Mix
• 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.
• Target costing reverses the usual process of first designing a
new product, determining its cost, and then asking, “Can we sell
it for that?”
9 - 18
Organizational Considerations
Who should set prices? Who can influence prices?
• This will vary depending on the size and type of company.
• 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.
• Others who have an influence on pricing include sales managers,
production managers, finance managers, and accountants.
9 - 19
The Market and Demand
• Before setting prices, the marketer must understand the relationship
between price and demand for its products.
• A firm’s flexibility in setting price varies depending on the nature of the
market.
• Types of markets:
• Pure competition (wheat)
• Monopolistic competition (restaurants, books of the same genre)
• Oligopolistic competition (Boeing and Airbus)
• Pure monopoly (Tap water: İSKİ for Istanbul)
Demand Curve
• Shows the number of units
the market will buy in a given
time period, at different prices
that might be charged.
• Demand and price are
inversely related
• Higher price = lower demand
9 - 21
Price Elasticity of Demand
• Measure of the sensitivity of demand to changes in price:
• Inelastic demand – Demand hardly changes with a small change in
price
• Elastic demand – Demand changes greatly with a small change in
price
Other Internal and External Considerations
Affecting Price Decisions
The Economy and Other External
Factors
• Economic conditions
• Reseller’s response to price
• Government
• Social concerns
Pricing and the economy: To meet the
needs of cost-conscious customers with
tighter budgets, [Link] introduced
lower-priced private label brands such
as Cute Pet and Best Home.
Sundry Photography/Alamy Stock Photo
9 - 23
The Economy: Impact on Pricing
• 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.
• Some firms have held price, but repositioned brands to enhance
their value.
Pricing Strategies:
Advanced Topics
Learning Objectives
11.1 Describe the major strategies for pricing new products.
11.2 Explain how companies choose a portfolio of prices to
maximize the profits from the total product mix.
11.3 Discuss how companies adjust their prices to account for
different types of customers and situations.
11.4 Discuss the key issues related to initiating and responding to
price changes.
New-Product Pricing Strategies
Market-skimming pricing
• Setting a high initial price for a new product to “skim”
revenue layers from the market (from segments
willing to pay the high price).
• Company makes fewer but more profitable sales.
Market-penetration pricing
• Setting a low price for a new product to attract a large
number of buyers and a large market share.
• The high sales volume results in falling costs, allowing
companies to cut their prices even further.
9 - 27
When to Use Market-Skimming Pricing
• Buyers must want the product at the price.
• Product quality and image must support the price.
• Costs of low volume cannot be so high that they cancel out
the benefit of higher price.
• Competitors should not be able to enter the market easily
and undercut prices.
9 - 28
When to Use Market-Penetration Pricing
• Market is highly price sensitive so a low price produces
more growth.
• Production and distribution costs decrease as sales
volume increases.
• Low price can help keep out the competition, and the
penetration pricer can maintain its low-price position.
Gillette prices its Fusion ProGlide starter pack low to
attract a large market share and then makes money over
time through sales of high-margin refill blades.
Product Mix Pricing Strategies
Product line pricing
• Setting the price steps between various
products in a product line based on cost
differences between the products in the
line, customer evaluations of their features,
and competitors’ prices.
Optional product pricing
• Pricing of optional or accessory products
along with the main product.
Product Mix Pricing Strategies
Captive product pricing
• Setting a price for products that must be
used along with a main product.
By-product pricing
• Setting a price for by-products to make the
main product’s price more competitive.
Product bundle pricing
• Combining several products and offering
the bundle at a reduced price.
Price Adjustment Strategies
Strategy Description
Discount and allowance Reducing prices to reward customer responses such as volume
pricing 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 effects
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 and needs of
pricing individual customers and situations
International pricing Adjusting prices for international markets
Price Adjustment Strategies – Discounts
• A straight reduction in price on purchases made during a
stated period of time or in larger quantities.
• Forms:
• Cash discount
• Quantity discount
• Functional discount
• Seasonal discount
Price Adjustment Strategies – Allowances
• Reduction from the list price for buyer actions such as trade-ins
or promotional and sales support.
• Discount list prices by providing promotional money in return
for an agreement to feature the manufacturer’s products in
some way.
• Forms:
Trade-in allowances – Price reductions given for turning in an
old item when buying a new one.
Promotional allowances – Payments or price reductions that
reward dealers for participating in advertising and sales
support programs.
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.
• For segmented pricing to be effective:
Market must be segmentable
Segments must show different degrees of demand
Costs of segmenting cannot exceed the extra revenue
Must be legal
• Forms:
Customer-segment pricing
Product-form pricing
Location-based pricing
Time-based pricing
• Under customer-segment pricing, different customers pay different
prices for the same product or service.
• Museums and movie theaters, for example, may charge a lower admission for
students and senior citizens.
• Under product form pricing, different versions of the product are
priced differently but not according to differences in their costs.
• Using location-based pricing, a company charges different prices for
different locations, even though the cost of offering each location is the
same.
• For instance, state universities charge higher tuition for out-of-state students, and
theaters vary their seat prices because of audience preferences for certain
locations.
• Finally, using time-based pricing, a firm varies its price by the season,
the month, the day, and even the hour.
• For example, movie theaters charge matinee pricing during the daytime, and
resorts give weekend and seasonal discounts.
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.
• With psychological pricing, consumers usually perceive higher-priced products
as having higher quality.
• Reference prices are prices that buyers carry in their minds and refer to
when they look at a given product.
• Sellers can influence or use these consumers’ reference prices when setting
price.
• Even small differences in price can signal product differences. A 9 or 0.99 at
the end of a price often signals a bargain.
Psychological pricing: Dunkin’s S!p coffee experiment showed
that price and context can affect brand perceptions.
Dunkin' Donuts
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
Firms offer promotional prices to create
buying excitement and urgency.
Promotional pricing: Some marketers bombard consumers with
endless price promotions, eroding the brand’s value. “Shopping with a
coupon at Bed Bath & Beyond has begun to feel like a given instead
of like a special treat.”
9 - 38
Price Adjustment Strategies – Geographical
Pricing
FO B-origin (free on board) pricing is a geographical pricing strategy in which
goods are placed free on board a carrier; the customer pays the freight from the
factory to the destination.
Uniform-delivered pricing is a geographical pricing strategy in which the
company charges the same price plus freight to all customers, regardless of their
location.
Zone pricing is a strategy in which the company sets up two or more zones
where customers within a given zone pay the same price.
Basing-point pricing means that a seller selects a given city as a “basing point”
and charges all customers the freight cost from that city to the customer.
Freight-absorption pricing is a strategy in which the seller absorbs all or part of
the freight charges in order to get the desired business.
Price Adjustment Strategies - Dynamic Pricing
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.
Thanks to the internet and apps such as
ShopSavvy, smart shoppers can now routinely
compare prices online to take advantage of the
constant price skirmishes among sellers, snap up
good deals, and leverage retailer price-matching
policies. Dynamic pricing done poorly, however,
can cause shopper confusion, disgruntlement, or
brand distrust.
Price Adjustment Strategies – International Pricing
• International pricing involves adjusting prices continually to meet the
characteristics and needs of individual customers and situations.
• The price that a company should charge in a specific country depends
on economic conditions, laws and regulations, competitive situations,
etc.
Companies often must change their pricing
To lower prices in developing countries,
strategies from country to country. For example,
Unilever developed smaller, more affordable
Apple sells its latest phones at premium prices
packages that put the company’s premier
to affluent Chinese customers but successfully
brands within the reach of cash-strapped
launched its iPhone 13 at a lower price while
customers.
also introducing the iPhone13 Mini at a lower
price point aimed at China’s midrange
customers.
Initiating Price Changes
Price cuts occur due to:
• Excess capacity
• Increased market share
• Excess capacity, inventory
• Falling demand in the face of strong price
competitive price or a weakened economy
• Attempt to dominate the market through
lower costs
Image by Stan Moniz; Owned by Agit
Price increases occur due to: Global, Inc.
• Cost inflation
Price reduction strategy:
• Increased demand Thanks to its lower prices,
• Lack of supply Wavestorm is now the
surfboard market leader.
Buyer Reactions to Pricing Changes
• Price increases
• Product is “hot”
• Company greed
• Price cuts
• New models will be available
• Models are not selling well
• Quality issues
Initiating price increases: When gasoline
prices rise rapidly, regardless of the reason,
angry consumers often accuse the major oil
companies of enriching themselves by
gouging customers. Jerry and Marcy Monkman/[Link]/Alamy
Stock Photo
Competitor Reactions to Pricing Changes
• Why did the competitor change the price?
• Is the price cut permanent or temporary?
• Is the company trying to grab market share?
• Is the company doing poorly and trying to increase sales?
• Is it a signal to decrease industry prices to stimulate demand?
9 - 44
Assessing and Responding to
Competitor Price Changes
Responding to Pricing Changes Effective Action
Responses
• Reduce price to match competition
• Maintain price but raise the
perceived value through
communications
• Improve quality and increase price
• Launch a lower-price “fighting” brand
Fighter brands: Intel launched its
Celeron microprocessor as a fighter
brand to compete head-to-head with
Ralf Liebhold/Shutterstock
competitor AMD’ s lower-priced
processors, allowing Intel’s high-end
Pentium processor line to maintain its
premium prices.
