By:
RICKY Z. SOLOMON
MARGARET VERA M. BOSALES
12-ABM3
MAJOR PRICING STRATEGIES
• The price the company charge will fall
somewhere between one that is too high to
produce any demand and one that is too low to
produce a profit. Customer perceptions of the
product’s value set the ceiling for prices. If
customers perceive that the product’s price is
greater than its value, they will not buy the
product.
• Figure 4.5 summarizes the major considerations
in setting price. It suggests three (3) major
pricing strategies: customer value-based pricing,
cost-based pricing, and competition-based
pricing.
Customer
perceptions
of value
Price ceiling
No demand
above this price
Other internal and
external
considerations
Product
costs
Competitors’
strategies and prices
marketing strategy,
objectives, and mix
Nature of the
market and demand
Price floor
No profits
below this
price
FIGURE 4.5 CONSIDERATIONS IN SETTING PRICE
Customer Value-Based Pricing
In the end, the customer will decide whether a product’s
price is right. Pricing decisions must start with customer value.
When customers buy a product, they exchange something of
value (the price) to get something of value (the benefits of having
or using the product). Effective, customer value-based pricing
involves understanding how much value consumers place on the
benefits they receive from the product. Then, we have to set a
price that captures this value.
Customer value-based pricing uses buyers’
perceptions of value (not the seller’s cost!) as the key to pricing.
Customer value-based pricing is setting price based on buyers’
perceptions of value. Therefore, the marketer cannot design a
product and marketing program and afterwards set the price.
Instead, price is an integral part of the marketing mix – it is
determined before the marketing program is set.
Cost-based pricing
Design a
good
product
Determine
product
costs
Set
price
based
on cost
Convince
buyers of
product’s
value
• If the price turns out to be too high, the company must
settle for lower mark ups or lower sales, both resulting in
disappointing profits.
FIGURE 4.6 VALUE-BASED PRICING VERSUS COST-BASED
PRICING
Value-based pricing
Assess
customer
needs and
value
perception
s
Set target
price to
match
customer
perceived
value
Determin
e costs
that can
be
incurred
Design
product to
deliver
desired
value at
target
price
• Pricing begins with analyzing consumer needs and
value perceptions, and the price is set to match
perceived value.
FIGURE 4.6 VALUE-BASED PRICING VERSUS COST-BASED
PRICING
Important to remember that:
“Good Value” is
not the same as
“low price”.
Companies often find it
hard to measure the value
customers will attach to its
product. Still, consumers will
use these perceived value to
evaluate a product’s price. So
the company must work to
measure them.
According to an Old Russian proverb, there are two fools in every market –
• First is the one who asks too much example, if the seller charges
more than the buyer’s perceived value, the company’s sales will
suffer.
• Second is the one who asks too little, example, if the seller charges
less, its products sell very well, but they produce less revenue than
they would if they priced at the level of perceived value.
Two Types of Value-Based Pricing
•Good-Value Pricing
•Value-Added Pricing
GOOD-VALUE PRICING
Good-value pricing is the first customer value-based
pricing strategy. It refers to offering the right
combination of quality and good service at a fair price –
fair in terms of the relation between price and delivered
customer value. Good-value pricing is mainly used for
less-expensive products, for instance for less-expensive
versions of established, brand-name products.
In other cases, Good value pricing has involved
redesigning existing brands to offer more quality for a
given price or the same quality for less.
Example:
•Walmart promises
everyday low prices
on everything it sells
•McDonald’s offer
value meals and
peso menu items.
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.
•Value-based pricing in its literal sense implies
basing pricing on the product benefits perceived by
the customer instead of the exact cost of developing
the product.
•When
products
emotions(fashion)
are
sold
based
on
•In shortages(e.g. drinks at open air festival on a
hot summer day) or for complementary products
(e.g. printer cartridges, headsets for cell phones)
In other words, you add features and thereby customer
value – and in return you charge more for the value-added
product. Therefore, value-added pricing does not aim at
cutting prices to match competitors, but attaching valueadded features to differentiate the products from
competitors’ offers. The added value justifies a higher price
in customers’ eyes.
Example
To return to our airlines example,
take a look at higher-priced
premium
airlines
such
as
Singapore
Airlines,
Emirates,
Etihad Airways or Lufthansa.
Flying with these airlines will cost
you much more – but customers
are willing to spend that additional
price because they will get more
value. Value is added in terms of
comfort, luxury, premium service
and so further. These additional
value-added features increase the
service’s value in customers’ eyes –
and justify a higher price.
•It’s focused on customer perception of value
that your product offers, and based on the value,
you determine the price, and adjust the cost.
COST BASED PRICING
•Setting prices based on the costs for producing,
distributing and selling the product or services
and adding some amount to allow the business
needs to make a profit.
•Goods which are very intensely traded (e.g. oil
and other commodities) or which are sold to
highly sophisticated customers in large markets
(e.g. automotive industry are usually sold using
cost-plus pricing.
Example
•In a retail store, a person
buys something for 500
pesos and he/she sells it for
1000 pesos to customer, this
is called cost-based pricing.
•In other companies – such
as Apple and BMW –
intentionally pay higher costs
so that they can claim higher
prices and margins.
COST-PLUS PRICING
•Also known as markup pricing
•Simplest pricing method
•Cost plus pricing involves adding a mark up
to the cost of goods and services to arrive at
a selling price.
Example:
•Submit job bids by estimating the total project costs and
adding a standard markup for profit.
To illustrate markup pricing, suppose a toaster
manufacturer had the following costs and expected
sales:
Variable cost
Fixed costs
Expected unit sales
Php 10
Php 300
Php 50
Then the manufacturer’s cost per toaster is given by the
following:
Unit Cost = Variable cost +
=
Php 10 +
= Php 16
fixed costs
unit sales
Php 300
Php 50
Now suppose the manufacturer wants to earn a 20 percent markup on
sales. The manufacturer’s markup price is given by the following:
Markup price
=
=
Unit cost
( 1-desired return on sales)
Php 16
1- .2
= Php 20
The manufacturers would charge dealers Php 20 per
toaster and make a profit of Php 4 per unit. The dealers
in turn, will mark up the toaster.
If dealers want to earn 50 percent on the sales price,
they will mark up the toaster to Php 30 ( Php 20 +
50percent of 20). This number is equivalent to a markup on cost of 10 percent (Php 20 Php 20)
Using standard mark-ups to set prices generally doesn’t
make sense. Any pricing method that ignores demand
and competitor prices is not likely to lead to the best
price.
Still, markup pricing remains popular for many
reasons:
•First, sellers are more certain about costs than
about demand.
•Second, when all firms in the industry use this
pricing method, prices tend to be similar, so price
competition is minimized.
•Third, many people feel that cost-plus pricing is
fairer to both buyers and sellers.
Break-Even Analysis and Target Profit Pricing
•break-even pricing is called as target
return pricing
•shows the total cost and total revenue
expected at different sales volume
levels.
Figure B. shows a break-even chart for the toaster
manufacturer discussed here.
Fixed cost are Php 300 regardless of sales
volume. Variable costs are added to fixed costs to form
total costs, which rise volume. The total revenue curve
starts at zero and rises with each unit sold. The slope of
the total revenue curve reflects the price of Php 20 per
unit.
The total revenue and total cost curves cross at
300 units. This is the break-even o lume. At Php 20 the
company must sell at least 30 units to break even, that
is, for total revenue to cover total cost. Break-even
volume can be calculated using the following formula:
Formula:
fixed cost
break-even volume
=
Price - variable cost
Php 300
=
Php 20 – Php 10
= Php 30
If the company wants to make a profit, it
must sell more than 300 units at Php 20 each.
Suppose the toaster manufacturer has invested
Php 1000 in the business anad wants to set a
price to earn a 20 percent return, or Php
200,000 . In that case , it must sell at least 500
units at Php 20 each. If the company charges a
higher price, it will not need to sell as many
toasters to achieve its target return. But the
markets may not buy even this lower volume
at the higher price. Much depends on price
elasticity and competitors prices.
Total revenue
1,200
Target return
(Php200,000)
1,000
Total cost
800
600
400
Fixed cost
200
10
20
30
40
50
Sales volume in units (thousands)
COMPETITION-BASED PRICING
Competition-based pricing is a pricing
method that makes use of competitors' prices,
costs, and market offerings for the same or
similar product as basis in setting a price.
Consumers will base their judgment 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
1. How does the company's market offering compare with
competitors' offering 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.
2. How strong are current competitors, and what are their current
pricing strategies?
• If the company faces a host of smaller
competitors charging high prices relative to the
value they deliver, it might charge lower prices to
drive weaker competitors from the market. If the
market is dominated by larger, low-price
competitors, the company may decide to target
unserved market niches with value-added
products at higher prices.
This strategy is usually implemented by companies when there
are several competitors in the market selling similar products.
Example
• The pricing strategy used by
Coca-Cola and Pepsi
• No matter what price you charge – high, low, or in
between – be certain to give customers superior value
for that price.
OTHER INTERNAL AND EXTERNAL CONSIDERATIONS
AFFECTING PRICE DECISIONS
In general, there is uncertainty about how
consumers, competitors, resellers etc. would react to
prices. Price considerations are important in market
planning, analysis, marketing mix variables, demand
forecasting, competitive structure, costs, and government
actions. Beyond customer value perceptions, costs, and
competitor strategies, the company must consider several
additional internal and external factors.
FACTORS AFFECTING PRICE DECISIONS
Internal factors
External factors
•Marketing
Objectives
•Marketing Mix
Strategy
•Cost
•Organizational
considerations
•Nature of the
market and
demand
•Competition
•Other
Environmental
Factors(economy,
resellers and
government)
PRICING
DECISIONS