BAA 120
8. Pricing - Understanding & Capturing Customer Value
What is Price?
Price: the amount of money charged for a product or service. Or the sum of all
the values that customers give up in order to gain the benefits of having or using
a product or service.
What are the Factors to consider when setting prices?
1. Product Value
2. Production Cost
The price the company charges will fall somewhere between one that is too high
to produce any demand (product value), and one that is too low to produce
profit (product cost).
Customer
Perceptions
Of Value
Price ceiling
No demand above
this price
Price range
Internal and external factors
Product
Costs
Price Floor
No Profits below
This price
1
1-Customer perceptions and value:
Product Value:
The customer will decide whether a product’s price is right by understanding how
much value consumers place on the benefits they receive from the product and
setting a price that capture this value.
New-Product Pricing Strategies
Pricing strategies usually change as product passes through its life cycle. The
introduction stage is specially challenging. And companies can choose between
two broad strategies:
A. Market-Skimming Pricing
Setting a high price for a new product to skim maximum revenues layer by layer
from the segments willing to pay the high price; the company makes fewer but
more profitable sales.
Customers usually are willing to pay high price because they want the new
product. (E.g.: Newly introduced advanced models of mobile phones, where the
High Price indicates company’s Market Skimming Strategy).
Conditions for Market-Skimming pricing strategy:
1- The product quality and image must support its price.
2- Enough buyers must want the product at that price.
2
3- The cost of producing small number is not too high not to make
profit.
4- Competitors should not be able to enter the market easily and
undercut the price.
B. Market-Penetration Pricing:
Setting a low price for a new product in order to attract a large number of buyers
and a large market share.
Example: Discount retailers such as Ramez; Or DELL penetrating the PC
market.
Conditions for Market-Penetration pricing strategy:
1- The market must be highly price sensitive so that a low price
produces more market growth.
2- Production and distribution costs must fall as sales volume
increases.
3- The low price must help keep out the competitors.
4- Penetration pricer must maintain its low-price position, or will lose his
advantage.
Price –Adjustment Strategies:
1- Discount pricing.
Discount: A straight reduction in price on purchases during a stated period
of time.
2- Segmented Pricing: Selling a product or service at two or more prices,
where the difference in prices is not based on differences in costs.
3
3- Psychological Pricing: used to play on the
consumer perception and mind.
4- Promotional Pricing: Temporary pricing products below the list price, and
sometimes even below cost, to increase short-term sales.
5- Geographical Pricing: Setting price based on the buyer’s geographic
location.
6- Dynamic Pricing: Adjusting prices
continually to meet the characteristics and
needs of individual customers and
situation.
Reference price: is the price that buyers carry in their minds and refer to when
they look at a given product.
4