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.
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Major Considerations in
Setting Price
1. Customer perceptions of value
2. Product Costs
3. Other internal and external considerations
–
–
–
Marketing strategy, objectives, mix
Nature of the market and demand
Competitors’ strategies and prices
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1. 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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2. Product Costs
 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)
See Fig. 9.3 Page 267
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3. 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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3. 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
1.
2.
3.
4.
5.
Product line pricing
Optional-product pricing
Captive-product pricing
By-product pricing
Product bundle pricing
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1. 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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2. Optional Product Pricing
 Optional-Product
– Pricing optional or accessory products
sold with the main product (e.g., ice maker
with the refrigerator).
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3. Captive-Product Pricing
 Captive-Product
– Pricing products that must be used with
the main product (e.g., replacement
cartridges for Gillette razors).
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4. By-Product Pricing
Strategies
 By-Product Pricing
– Pricing low-value by-products to get rid of
them (e.g., animal manure from zoo).
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5. Product Bundle Pricing
Strategies
 Product Bundle Pricing
– Pricing bundles of products sold together
(software, monitor, PC, and printer).
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