Pricing: Understanding and Capturing
Customer Value
Session Outline
What Is a Price?
Factors to Consider when Setting Prices
Pricing Strategies
Pricing Process
What Is a Price?
The amount of money charged for a product or
service, or the sum of the values that customers
exchange for the benefits of having or using the
product or service.
Factors to Consider when Setting Prices
Other internal and external
considerations
Customer
perceptions of
value
Price Ceiling
No demand above
this price
Marketing strategy,
objectives, and mix
Nature of the market and
demand
Competitors’ strategies and
prices
Product costs
Price Floor
No profits below
this price
Customer Perceptions of Value
In the end, the customer will decide whether
a product's price is right. Pricing decisions, like
other marketing mix decisions, must start with
customer value.
Value-Based Pricing Versus Cost-Based Pricing
The
Wrong
Way
Design a
good product
Cost-Based Pricing
Setting prices based on the costs for
producing, distributing and selling the
product plus a fair rate of return for effort
and risk.
Determine
product costs
Set price
based on
cost
Convince
buyers of
product’s
value
Value-Based Pricing Versus Cost-Based Pricing
The
Right
Way
Assess
customer
needs and
value
perceptions
Value-based Pricing
Setting price based on buyers’ perceptions
of value rather than on the seller’s cost.
Set target
price to
match
customer
perceived
value
Determine
costs that
can be
incurred
Design
product to
deliver
desired
value at
target price
Good Value Pricing and Value Added Pricing
Good Value Pricing
Offering just the right combination of quality and
good service at a fair price.
Value Added Pricing
Attaching value added features and services to
differentiate a company’s offer and charging higher
prices.
Company and Product Costs
Cost Based Pricing
Setting prices based on the costs for producing,
distributing and selling the product plus a fair rate of
return for effort and risk.
Cost Plus Pricing
Adding a standard markup to the cost of the product.
Other Cost Considerations
Types of Costs
Costs at Different Levels of Production
Costs as a Function of Production Experience
Other Internal and External
Considerations Affecting Price Decisions
Overall Marketing Strategy, Objectives and
Mix
Organizational Considerations
The Market and Demand
Competitors Strategies and Prices
Pricing Strategies
New-Product Pricing Strategies
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.
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.
Skimming vs Penetration
Unit
sales
Profitability
Penetration
price
Skimming
price
Time in local
market
Penetration
price
Skimming
price
Time in local
market
Pricing Process
Setting the Price (Pricing Process)
1. Selecting the Pricing Objective
2. Determining Demand
3. Estimating Costs
4. Analyzing Competitors’ Costs, Prices,
and Offers
5. Selecting a Pricing Method
6. Selecting the Final Price
1. Selecting the Pricing Objectives
Survival
Current Profit Maximization
Marketing
Objectives
Maximum Market Share
Maximum Market Skimming
Product Quality Leadership
2. Determining Demand
Price Elasticity of Demand
Price Rs.
Inelastic Demand
Elastic Demand
15
10
15
10
100 105
Quantity Demanded
per Period
50
150
Quantity Demanded
per Period
3. Estimating Costs
Demand sets a ceiling on the price the
company can charge for its product. Costs set
the floor. The company wants to charge a
price that covers its cost of producing,
distributing and selling the product, including
a fair return for its effort and risk.
4.Analyzing Competitors’ Costs, Prices and
Offers
Within the range of possible prices
determined by market demand and company
costs, the firm must take competitors’ costs,
prices and possible price reaction into
account
(reactions/ responses from
customers, competitors, distributors, suppliers
and even governments).
5.Selecting a Pricing Method
High Price
(No possible demand at this
price)
Ceiling Price
Customers’ assessment of
unique product features
Orienting point
Competitors’ prices and
prices of substitutes
Costs
Floor Price
Low Price
(No possible profit at this price)
Given
the
customers’ demand
schedule, the cost
function
and
competitors’ prices,
the company can
now select a price.
6. Selecting the Final Price
Pricing methods narrow the range from which
the company must select its final price. In
selecting that price, the company must consider
additional factors,
Impact of Other Marketing Activities
 Company Pricing Policies
 Gain and Risk Sharing Pricing
 Impact of Price on Other Parties

Summary and Conclusions