Chapter 9
Pricing: Understanding and Capturing
Customer Value
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What Is a Price?
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Narrowly defined, price is the amount of
money charged for a product or service.
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Broadly defined, price is the sum of all of the
values that consumers give up in order to
gain the benefits of having or using the
product or service.
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Factors to Consider When
Setting Price
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Some of the factors are:
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Customer perceptions of value
Marketing strategy, objectives, mix
Nature of the market and demand
Competitors’ strategies and prices
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Customer Perceptions of Value
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Value-based pricing:
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Uses buyers’ perceptions of value, not the seller’s
cost, as the key to pricing.
Types of value-based pricing:
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Good value pricing:
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offering the right combination of quality and good service
at a fair price.
Value-added pricing:
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attaching value-added features and services to
differentiate a market offering and support higher prices.
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Internal Factors Affecting Pricing
Decisions
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Cost-based pricing:
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Setting prices based on the costs for producing,
distributing, and selling the product plus a fair rate of return
for its effort and risk.
Fixed costs:
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Costs that do not vary with production or sales level.
Variable costs:
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Costs that vary directly with the level of production.
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Internal Factors Affecting Pricing
Decisions
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Types of cost-based pricing:
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Cost-plus pricing:
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Break-even pricing
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Adding a standard markup to the cost of the product.
Determining the price at which the company will break
even
Target-profit pricing
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Determining the price at which the company will make
the target profit it is seeking
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Internal Factors Affecting Pricing
Decisions
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Survival
Current profit maximization
Market share leadership (lower prices)
Product quality leadership (higher prices)
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Internal Factors Affecting Pricing
Decisions
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Marketing mix strategy:
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Price decisions must be coordinated with product
design, distribution, and promotion decisions to
form a consistent and effective marketing
program.
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External Factors Affecting Pricing
Decisions
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The market and demand:
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Pure competition:
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Monopolistic competition:
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a common market structure where many competing producers
sell products that are differentiated from one another products
Oligopolistic competition:
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a market consists of many buyers and sellers trading in a
uniform commodity. No single buyer or seller has much effect
on the going market price.
the market consists of a few sellers who are sensitive to each
other’s pricing strategy
Pure monopoly:
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the market consists of one seller
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External Factors Affecting Pricing
Decisions
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The market and demand:
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Analyzing the price-demand relationship:
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Different prices result in different levels of demand, as
illustrated by the demand curve.
The price elasticity of demand refers to how
responsive demand will be to a change in price.
Demand may be characterized as:
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Inelastic (basic needs)
Elastic
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External Factors Affecting Pricing
Decisions
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Competitors’ strategies and prices:
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How does the market offering compare to
competitive products in terms of value?
How strong is the competition and what is their
pricing strategy?
How does the competitive landscape influence
customer price sensitivity?
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New-Product Pricing Strategies
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Market skimming:
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Setting a high price for
a new product to
“skim” revenues layerby-layer from those
willing to pay the high
price.
Company makes
fewer, but more
profitable sales.
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When to use:
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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 price.
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New-Product Pricing Strategies
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Market penetration:
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Setting 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:
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Market is highly price
sensitive so a low price
produces more growth.
Costs must fall as sales
volume increases.
Competition must be kept
out of the market or the
effects will be only
temporary.
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Price Changes
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Price cuts may be initiated due to:
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Excess capacity
Falling demand in face of strong competitive price
Dominate market through lower costs
Price increases may be initiated due to:
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Cost inflation
Overdemand
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Responses to Price Changes
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Buyer reactions to price changes.
Competitor reactions to price changes.
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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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