Pricing:

CHAPTE Understanding and

Capturing Customer

R TEN
Value
 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
 Customer Perceptions of Value

• Understanding how much value

consumers place on the benefits
they receive from the product and
setting a price that captures that
value
MAJOR PRICING STRATEGIES
Customer Value-Based Pricing

Value-based pricing uses the buyers’ perceptions 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
• Cost-based pricing is product driven
MAJOR PRICING STRATEGIES
Customer Value-Based Pricing

Good-value pricing offers the right

combination of quality and good service to
fair price
e.g., How about KFC Krunch Burger for Rs. 195?

Existing brands are being redesigned to offer

more quality for a given price or the same
quality for less price
 MAJOR PRICING STRATEGIES
Customer Value-Based Pricing

Everyday low pricing (EDLP) involves charging a constant

everyday low price with few or no temporary price
discounts e.g., salt etc.

High-low pricing involves charging higher prices on an

everyday basis but running frequent promotions to lower
prices temporarily on selected items e.g., clothing brands
MAJOR PRICING STRATEGIES
Customer Value-Based Pricing

Value-added pricing attaches value-added features and

services to differentiate offers, support higher prices,
and build pricing power e.g., mobile brands, automobiles
etc.

Pricing power is the ability to escape price competition

and to justify higher prices and margins without losing
market share e.g., Products/ services with monopoly etc.
MAJOR PRICING STRATEGIES
Cost-Based Pricing

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.
MAJOR PRICING STRATEGIES
Cost-Based Pricing

Fixed Variabl Total

costs e costs costs
MAJOR PRICING STRATEGIES
Cost-Based Pricing

Fixed costs are the costs that do not vary

with production or sales level
• Rent
• Heat
• Interest
• Executive salaries
MAJOR PRICING STRATEGIES
Cost-Based Pricing

Variable costs are the costs that

vary with the level of production
• Packaging
• Raw materials
 MAJOR PRICING STRATEGIES

Cost-Based Pricing

Total costs are the sum of the fixed and

variable costs for any given level of
production

Average cost is the cost associated with

a given level of output
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
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
• Prices are similar in industry and price
competition is minimized
• Consumers feel it is fair
• Disadvantages
• Ignores demand and competitor prices
MAJOR PRICING STRATEGIES
Cost-Based Pricing

Break-even pricing is the price at which total

costs are equal to total revenue and there is
no profit
MAJOR PRICING STRATEGIES
Competition Based Pricing

• Competition Based Pricing is setting prices

based on competitors’ strategies, costs, prices,
and market offerings.
 P R O D U C T L I F E C YC L E P R I C I N G

Price skimming is commonly used when

introducing a product.
price skimming the practice of charging a high price
on a new product or service in order to recover costs and
maximize profits as quickly as possible; the price is then
dropped when the product or service is no longer unique

Penetration pricing is also commonly used

when introducing a product.

penetration pricing a method used to build sales by

charging a low initial price to keep unit costs to
customers as low as possible
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

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
FACTORS TO CONSIDER WHEN
SETTING PRICES
Other Internal and External Considerations

Organizational considerations
include:
• Who should set the price
• Who can influence the 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
FACTORS TO CONSIDER WHEN SETTING
PRICES
Other Internal and External Consideration
The Market and Demand

Pure competition
Monopolistic
competition
Oligopolistic
competition
Pure monopoly
FACTORS TO CONSIDER WHEN SETTING
PRICES
Other Internal and External Considerations

The demand curve shows the number of units the

market will buy in a given period at different prices
• Normally, demand and price are inversely related
• Higher price = lower demand
• For prestige (luxury) goods, higher price can equal
higher demand when consumers perceive higher
prices as higher quality
FACTORS TO CONSIDER WHEN SETTING
PRICES
Other Internal and External Considerations

Price elasticity of demand illustrates the response of

demand to a change in price

Inelastic demand occurs when demand hardly changes when

there is a small change in price

Elastic demand occurs when demand changes greatly for a

small change in price

Price elasticity of demand = % change in quantity

demand
% change in price
FACTORS TO CONSIDER WHEN SETTING
PRICES
Other Internal and External Considerations
Competitor's Strategies

• Comparison of offering in terms of

customer value
• Strength of competitors
• Competition pricing strategies
• Customer price sensitivity
FACTORS TO CONSIDER
WHEN SETTING PRICES
Other Internal and External Consideration

Economic conditions
Reseller’s response to
price
Government

Social concerns