Chapter Nine
Pricing: Understanding and
Capturing Customer Value
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.
 Dynamic Pricing: charging
different prices depending
on individual customers and
situations.
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Price Has Many Names
ice?
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Rent
Fee
Rate
Commission
Assessment
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Tuition
Fare
Toll
Premium
Retainer
• Bribe
• Salary
• Wage
• Interest
• Tax
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Dynamic Pricing
The Internet is ushering in a new era of fluid pricing. www.travelocity.com is an
independent site that provides price comparisons and guides, and searches all
airline and hotel sites for the best prices.
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Factors affecting price
decisions
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Customer Value Perceptions
Value-based pricing :
 Involves understanding how much value
consumers place on the benefits they receive
from the product and setting a price that
captures that value.
 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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Value-Based Pricing Vs.
Cost-Based Pricing
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GOOD VALUE PRICING
 Offering just the right combination of
quality and good service at a fair price.
– McDonald’s offer “value menus”
– EDLP Strategies of Wal-Mart etc
VALUE ADDED PRICING
 Attaching value added features and services
to differentiate a marketing offer and support
higher prices, rather than cutting prices to
match competitors.
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GOOD VALUE PRICING
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Value-Added Pricing
Caterpillar offers dealers a wide range of value-added services,
including training, investment advice, and guaranteed parts
delivery. These services justify charging a higher price.
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Company and Product Costs:
– Fixed Costs:
• Costs that do not vary with production
or sales level.
–Salary, room rent etc
– Variable Costs:
• Costs that vary directly with the level of
production.
–Sales commission, raw material cost etc
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Cost-Based Pricing
 Cost-plus pricing
– The simplest pricing model every where
used
– Adding a standard markup to the cost of
the product
Example
– Fixed cost- 100 Baht/ unit
– Variable cost- 50 Baht / Unit
Total cost- 150 Baht
– Profit margin – 50 Baht/ unit
– Selling price – 200 Baht / Unit
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Break Even Analysis
 Break-even pricing
– Setting price to break even on the costs of making
and marketing a product or setting price to make a
target profit
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Break-Even Chart for
Determining Price
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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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Target costing
Tata Nano –
Target Price- 75000 Baht
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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:
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Pure competition
Monopolistic competition
Oligopolistic competition
Pure monopoly
– Analyzing the price-demand relationship
– The price elasticity of demand
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Monopoly
 Only one company selling
product in the market
 The seller may be a
government monopoly or a
private regulated monopoly.
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Oligopoly
 The market consists of a few sellers who are
highly sensitive to each other’s pricing and
other marketing strategies.
 The product can be uniform (steel, aluminum
etc) or non uniform (cars, computers etc).
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monopolistic competition
 Under monopolistic competition, the market
consists of many buyers and sellers who
trade over a range of prices rather than a
single market price.
 A range of prices occurs because sellers
can differentiate their offers to buyers.
 Any physical product can be varied in
quality, features, or style or the
accompanying services can be varied.
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Pure competition
 Under pure competition, the market
consists of many buyers and sellers
trading in a uniform commodity such
as wheat, copper, or financial securities
such as stocks or bonds.
 No single buyer or seller has much
effect on the going market place.
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Perfect Competition ตลาดแข่งขันสมบูรณ์
• Many sellers offer many buyers an identical (homogeneous) product;
no seller can influence price
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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Price Skimming
 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
 Sets price steps
between various
items 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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Marketing in Action
Product-Bundle Pricing
Travelers who book flight, hotel, and car together
can save on average $189.00 from Expedia.com
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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
– Seasonal
 Allowances
– Trade-in
– Promotional
Christmas cards purchased out of
season, such as in March or July, are
often sold at a discount.
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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
Companies offer promotional pricing to create
excitement and a sense of urgency.
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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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FOB-origin pricing
 This practice means that the goods are placed free on
board a carrier.
 At that point the title and responsibility pass to the
customer, who pays the freight from the factory to the
destination.
 Free On Board means it is the buyer’s responsibility
to select the mode of transportation, choose the
specific carrier, handle any damage claims, and pay
all shipping charges
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Uniform-delivered pricing
 Uniform delivered pricing is the
opposite of FOB pricing.
 Here the company charges the same
price plus freight to all customers,
regardless of their location.
 The freight charge is set at the average
freight cost.
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Zone pricing
 Zone pricing falls between FOB origin
pricing and uniform delivered pricing.
The company sets two or more zones.
All customers within a given zone pay a
single total price, the more distant the
zone, the higher the price.
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Basing-point pricing
 Using the basing point pricing, the
seller selects a given city as basing
point and charges all customers the
freight cost from that city to the
customer location regardless of the city
from which the goods are actually
shipped.
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Product Price = $100
Basing-Point Pricing System
$20
Actual Freight
Customer
pays
$120
Base
Mill X
$30
Actual Freight
$10
Actual Freight
Mill
Z
Mill
Y
$10 Freight Absorption
$10 Phantom Freight
Adopted from: Monroe (1990), Pricing: Making Profitable Decisions, 2 ed.,
New York: McGraw-Hill Publishing Company.
Freight-absorption pricing
 Using this strategy, the seller absorbs
all or part of the actual freight charges
in order to get the desired business
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