PRINCIPLES OF MARKETING Customer Value and Pricing Strategies 1 What is 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. 2 What is Price? Discussion Question • How does a company like Apple price their products? 3 Major Pricing Strategies • The price the company charges will fall between one that is too low to produce a profit and one that is too high to produce any demand. 4 Major Pricing Strategies 5 Major Pricing Strategies • 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. • Whereas customer-value perceptions set the price ceiling, costs set the floor for the price that the company can charge. 6 Cost-based pricing Types of costs: • Fixed costs (also known as overhead) are costs that do not vary with production or sales level. Example: Rent, interest, salary. • Variable costs vary directly with the level of production. Example: Raw materials, packaging. • Total costs = Fixed costs + Variable costs 7 Cost-based pricing 8 Cost-based pricing The Experience Curve (Learning Curve) 9 Cost-based pricing Cost-plus pricing adds a standard markup to the cost of the product. Markup price = unit cost/(1 - desired return on sales) Benefits: • Sellers are certain about costs. • Price competition is minimized. • Buyers feel it is fair. Drawback: • Ignores demand and competitor prices 10 Cost-based pricing Break-even pricing (target return pricing) is setting price to break even on costs or to make a target return. 11 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. 12 Value-based pricing • There are two types of Value-Based Pricing: Good-value pricing and added-value pricing. • Good-value pricing is offering just the right combination of quality and good service at a fair price. (Less-expensive versions of established products or offer more quality for a given price). 13 Value-based pricing • High-low pricing involves charging higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected items. 14 Value-based pricing • Value-based pricing doesn’t mean simply charging what customers want to pay or setting low prices to meet competition. • Many companies adopt Valueadded pricing strategies - they add quality, services, and value-added features to differentiate their offers and thus support their higher prices. 15 Competition-Based Pricing • Competition-based pricing is 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. 16 Discussion Question • Discuss how the Internet has changed pricing competition? 17 Other Considerations Affecting Price Decisions Organizational Considerations • 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. 18 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. Pure competition: No single buyer or seller has much effect on the going market price. 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. Oligopolistic competition: Each seller is alert and responsive to competitors’ pricing strategies and marketing moves. Pure monopoly: Pricing is handled differently in each case. 19 Other Considerations Affecting Price Decisions 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 20 Other Considerations Affecting Price Decisions Analyzing the Price–Demand Relationship • 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. • Elastic demand is when demand changes greatly with a small change in price. Price elasticity of demand = % change in quantity demand % change in price 21 Other Considerations Affecting Price Decisions The Economy and Other External Factors • 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. • The company should set prices that give resellers a fair profit, encourage their support, and help them to sell the product effectively. 22 New Pricing Strategies Market-skimming pricing strategy sets high initial prices to “skim” revenue layers from the market. • Product quality and image must support the price. • Buyers must want the product at the price. 23 New Pricing Strategies Market-penetration pricing involves setting a low price for a new product in order to attract a large number of buyers and a large market share. 24 Product Mix Pricing Strategies Product Line and Optional Product Pricing • Product line pricing takes into account the cost differences between products in the line, customer evaluations of their features, and competitors’ prices. • Optional product pricing takes into account optional or accessory products along with the main product. 25 Product Mix Pricing Strategies Product Line and Optional Product Pricing • Captive product pricing sets prices of products that must be used along with the main product. • By-product pricing sets a price for byproducts in order to make the main product’s price more competitive. • Product bundle pricing combines several products at a reduced price. 26 Price Adjustment Strategies Discount and allowance pricing reduces prices to reward customer responses such as making volume purchases, paying early, or promoting the product. 27 Price Adjustment Strategies Segmented pricing involves selling a product or service at two or more prices, where the difference in prices is not based on differences in costs. 28 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. • Reference prices are prices that buyers carry in their minds and refer to when they look at a given product. 29 Price Adjustment Strategies Promotional pricing is characterized by temporarily pricing products below the list price, and sometimes even below cost, to increase short-run sales. Examples: • special-event pricing • limited-time offers • cash rebates • low-interest financing, extended warranties, or free maintenance 30 Price Adjustment Strategies Geographical Pricing • FOB-origin (free on board): goods are placed free on board a carrier; the customer pays the freight from the factory to the destination. • Uniform-delivered pricing: the company charges the same price plus freight to all customers, regardless of their location. • Zone pricing: the company sets up two or more zones where customers within a given zone pay the same price. • Basing-point pricing: 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: the seller absorbs all or part of the freight charges in order to get the desired business. 31 Price Adjustment Strategies Dynamic pricing involves adjusting prices continually to meet the characteristics and needs of individual customers and situations. 32 Discussion • Use a online shopping sites or apps (Tiki, Lazada, Shopee,…) and shop for a product you are interested in purchasing. Identify the pricing strategy used by the retailer. 33 Price Changes Initiating Price Changes Price cuts occur due to: • Excess capacity • Increased market share Price increases occur due to: • Cost inflation • Increased demand • Lack of supply 34 Price Changes Responding to competitor price changes: 35 Price Adjustment Strategies Public Policy Issues in Pricing • Within Channel Levels / Across Channel Levels 36
