Chapter Nine
Pricing: Understanding and
Capturing Customer Value
Roadmap: Previewing the Concepts
1.
2.
3.
4.
5.
6.
Discuss the importance of understanding
customer value perceptions and company costs
when setting prices.
Identify and define the other important internal
and external factors affecting a firm’s pricing
decisions.
Describe the major strategies for pricing imitative
and new products.
Explain how companies find a set of prices that
maximizes the profits from the total product mix.
Discuss how companies adjust their prices to
take into account different types of customers
and situations.
Discuss key issues related to initiating and
responding to price changes.
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Case Study
Toys ‘R’ Us – Pricing for Success
The Past
The Present
 1970s: Toys ‘R’ Us
emerges as a toy retailing
category killer, offering
greater product selection
and lower prices than its
small store competition.
 Explosive growth occurs.
 Late 1990s: Wal-Mart
uses toys as a loss
leader, pricing lower than
Toys ‘R’ Us and becomes
the largest toy retailer.
 Toys ‘R’ Us tries price
matching and fails
miserably, losing sales,
profit, and market share.
 New ownership closes
stores, cut costs, and steps
away from the price war.
 Efforts focus on top-selling,
higher margin or exclusive
items, store atmosphere,
shopper experiences, and
customer service.
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What Is a Price?
 Narrowly, price is the amount of money
charged for a product or service.
 Broadly, price is the sum of all the
values that consumers exchange for
the benefits of having or using the
product or service.
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Major Considerations in
Setting Price
 Customer perceptions of value
 Other internal and external
considerations
– Marketing strategy, objectives, mix
– Nature of the market and demand
– Competitors’ strategies and prices
 Product costs
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Customer Value Perceptions
 Customer-oriented pricing:
– Involves understanding how much value
consumers place on the benefits they
receive from the product and setting a
price that captures that value.
 Value-based pricing:
– Uses buyers’ perceptions of value, not the
seller’s cost, as the key to pricing.
• Good value pricing
• Value-added pricing
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Internal Factors Affecting
Pricing Decisions
 Company and Product Costs:
– Fixed Costs:
• Costs that do not vary with production
or sales level.
– Variable Costs:
• Costs that vary directly with the level of
production.
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Cost-Based Pricing
 Cost-plus pricing
– Adding a standard markup to the cost of
the product
 Break-even pricing
 Target-profit pricing
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Internal Factors Affecting
Pricing Decisions
 Marketing Objectives:
– Company must decide on its strategy for
the product.
– General pricing objectives:
• Survival
• Current profit maximization
• Market share leadership
• Product quality leadership
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Internal Factors Affecting
Pricing Decisions
 Marketing Mix Strategy:
– Price decisions must be coordinated with
product design, distribution, and
promotion decisions to form a consistent
and effective marketing program.
– Target costing:
• Pricing that starts with an ideal selling
price, then targets costs that will ensure
that the price is met.
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Internal Factors Affecting
Pricing Decisions
 Organizational Considerations:
– Must decide who within the organization
should set prices.
– This will vary depending on the size and
type of company.
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External Factors Affecting
Pricing Decisions
 The Market and Demand:
– Costs set the lower limit of prices while the
market and demand set the upper limit.
– Pricing in different types of markets:
•
•
•
•
Pure competition
Monopolistic competition
Oligopolistic competition
Pure monopoly
– Analyzing the price-demand relationship
– The price elasticity of demand
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External Factors Affecting
Pricing Decisions
 Competitors’ Strategies and Prices
– How does the market offering compare?
– How strong is competition and what is
their pricing strategy?
– How does competition influence price
sensitivity?
 Other External Factors
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New-Product Pricing Strategies
 Market Skimming:
– Set a high price for a
new product to
“skim” revenues
layer by layer from
the market.
– Company makes
fewer, but more
profitable sales.
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 When to Use:
– Product’s quality and
image must support
its higher price.
– Costs of low volume
cannot be so high
they cancel the
advantage of
charging more.
– Competitors should
not be able to enter
market easily and
undercut the price.
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New-Product Pricing Strategies
 Market Penetration:
– Set a low initial price
in order to
“penetrate” the
market quickly and
deeply.
– Can attract a large
number of buyers
quickly and win a
large market share.
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 When to Use:
– Market is highly
price sensitive so a
low price produces
more growth.
– Costs must fall as
sales volume
increases.
– Need to keep
competition out or
effects are only
temporary.
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Product Mix Pricing Strategies
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Product line pricing
Optional-product pricing
Captive-product pricing
By-product pricing
Product bundle pricing
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Product-Line Pricing
 Involves setting price steps between
various products in a product line
based on:
– Cost differences between products
– Customer evaluations of different features
– Competitors’ prices
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Optional- and CaptiveProduct Pricing
 Optional-Product
– Pricing optional or accessory products
sold with the main product (e.g., ice maker
with the refrigerator).
 Captive-Product
– Pricing products that must be used with
the main product (e.g., replacement
cartridges for Gillette razors).
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By-Product and Product
Bundle Pricing Strategies
 By-Product Pricing
– Pricing low-value by-products to get rid of
them (e.g., animal manure from zoo).
 Product Bundle Pricing
– Pricing bundles of products sold together
(software, monitor, PC, and printer).
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Price Adjustment Strategies
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Discount and allowance pricing
Segmented pricing
Psychological pricing
Promotional pricing
Geographical pricing
Dynamic pricing
International pricing
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Discounts and Allowances
 Discounts
– Cash
– Quantity
– Functional
– Seasonal
 Allowances
– Trade-in
– Promotional
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Segmented Pricing
 Selling a product or service at two or
more prices, where the difference in
prices is not based on differences in
costs.
 Types:
1. Customer-segment
2. Product-form
3. Location pricing
4. Time pricing
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Psychological Pricing
 Considers the psychology of prices
and not simply the economics.
 Consumers usually perceive higherpriced products as having higher
quality.
 Consumers use price less when they
can judge the quality of a product by
examining it or recalling experiences.
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Promotional Pricing
 Low-Interest
Financing
 Longer
Warranties
 Free Maintenance
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 Cash Rebates
 Special-Event
Pricing
 Loss Leaders
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Geographical Pricing
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FOB-origin pricing
Uniform-delivered pricing
Zone pricing
Basing-point pricing
Freight-absorption pricing
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Dynamic Pricing
 Adjusting prices continually to meet
the characteristics and needs of
individual customers and situations.
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International Pricing
 Price depends on many factors,
including:
– Economic conditions
– Competitive situations
– Laws and regulations
– Development of the wholesaling and
retailing system
– Consumer perceptions and preferences
– Costs
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Initiating Price Changes
 Price Cuts:
– Excess capacity
– Falling market share
– Dominate market through lower costs
 Price Increases:
– Cost inflation
– Overdemand
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Responses to Price Changes
 Buyer reactions to price changes
 Competitor reactions to price changes
 Firm responses to price changes:
– Reduce price to match competition
– Raise the perceived quality of its offer
– Improve quality and increase price
– Launch a low-price “fighting brand”
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Public Policy and Pricing
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Price fixing
Predatory pricing
Price discrimination
Retail price maintenance
Deceptive pricing
– Promotion price reductions
– Scanner fraud
– Price confusion
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Rest Stop: Reviewing the Concepts
1. Discuss the importance of understanding
customer value perceptions and company costs
when setting prices.
2. Identify and define the other important internal
and external factors affecting a firm’s pricing
decisions.
3. Describe the major strategies for pricing
imitative and new products.
4. Explain how companies find a set of prices that
maximizes the profits from the total product mix.
5. Discuss how companies adjust their prices to
take into account different types of customers
and situations.
6. Discuss key issues related to initiating and
responding to price changes.
Copyright 2007, Prentice Hall, Inc.
9-31