Chapter Ten & Eleven
Pricing:
Understanding and Capturing
Customer Value
Copyright © 2009 Pearson Education, Inc.
Chapter 10- slide 1
Publishing as Prentice Hall
What Is a Price?
Price is the amount of money charged for a product or
service. It is the sum of all the values that
consumers give up in order to gain the benefits of
having or using a product or service.
What Is a Price?
Price is the only element
in the marketing mix
that produces
revenue; all other
elements represent
costs
Factors to Consider When
Setting Prices
Customer Perceptions of Value
Understanding how much
value consumers place
on the benefits they
receive from the product
and setting a price that
captures that value
Factors to Consider When
Setting Prices
Customer Perceptions of Value
Factors to Consider When
Setting Prices
Customer Perceptions of Value
Value-based pricing uses the buyers’ perceptions of
value, not the sellers cost, as the key to pricing.
Price is considered before the marketing program is
set.
Value-based pricing is customer driven
Cost-based pricing is product driven
Factors to Consider When
Setting Prices
Customer Perceptions of Value
Factors to Consider When
Setting Prices
Customer Perceptions of Value
Value-based pricing
Good-value pricing
Value-added pricing
Factors to Consider When
Setting Prices
Customer Perceptions of Value
Good-value pricing offers the right combination of
quality and good service to fair price
Existing brands are being redesigned to offer more
quality for a given price or the same quality for less
price
Factors to Consider When
Setting Prices
Customer Perceptions of Value
Everyday low pricing (EDLP) involves charging a
constant everyday low price with few or no
temporary price discounts
High-low pricing involves charging higher prices on an
everyday basis but running frequent promotions to
lower prices temporarily on selected items
Factors to Consider
When Setting Prices
Company and Product Costs
Cost-based pricing involves setting prices based on the
costs for producing, distributing, and selling the
product plus a fair rate of return for its effort and
risk
Factors to Consider When
Setting Prices
Company and Product Costs
Cost-based pricing adds a standard markup to the cost
of the product
Factors to Consider When
Setting Prices
Company and Product Costs
Types of costs
Fixed Variable Total
costs costs costs
Factors to Consider
When Setting Prices
Company and Product Costs
Fixed costs are the costs that do not vary with
production or sales level
Rent
Heat
Interest
Executive salaries
Factors to Consider When
Setting Prices
Company and Product Costs
Variable costs are the costs that vary with the level of
production
Packaging
Raw materials
Factors to Consider
When Setting Prices
Company and Product Costs
Total costs are the sum of the fixed and variable costs
for any given level of production
Average cost is the cost associated with a given level of
output
Factors to Consider When
Setting Prices
Costs at Different Levels of Production
Factors to Consider When
Setting Prices
Costs as a Function of Production Experience
Experience or learning curve is when average cost falls as
production increases because fixed costs are spread over
more units
Factors to Consider When
Setting Prices
Cost-Plus Pricing
Cost-plus pricing adds a standard markup to the cost of
the product
Benefits
Sellers are certain about costs
Prices are similar in industry and price competition is
minimized
Consumers feel it is fair
Disadvantages
Ignores demand and competitor prices
Factors to Consider
When Setting Prices
Break-Even Analysis and Target Profit
Pricing
Break-even pricing is the price at which total costs are
equal to total revenue and there is no profit
Target profit pricing is the price at which the firm will
break even or make the profit it’s seeking
Factors to Consider When
Setting Prices
Break-Even Analysis and Target Profit Pricing
Factors to Consider When
Setting Prices
Other Internal and External
Considerations Affecting Price
Decisions
The demand curve shows the number of units the market
will buy in a given period at different prices
Normally, demand and price are inversely related
Higher price = lower demand
For prestige (luxury) goods, higher price can equal higher
demand when consumers perceive higher prices as
higher quality
Factors to Consider When
Setting Prices
Other Internal and External Considerations
Affecting Price Decisions
New-Product Pricing Strategies
Pricing Strategies
Market-skimming
pricing
Market- penetration
pricing
New-Product Pricing Strategies
Market-skimming pricing is a strategy with high
initial prices to “skim” revenue layers from the
market
Product quality and image must support the price
Buyers must want the product at the price
Costs of producing the product in small volume should
not cancel the advantage of higher prices
Competitors should not be able to enter the market
easily
New-Product Pricing Strategies
Pricing Strategies
Market-penetration pricing sets a low initial
price in order to penetrate the market quickly
and deeply to attract a large number of buyers
quickly to gain market share
Price sensitive market
Inverse relationship of production and
distribution cost to sales growth
Low prices must keep competition out of the
market
Product Mix Pricing Strategies
Pricing Strategies
Optional- Captive-
Product
product product
line pricing
pricing pricing
Product
By-product
bundle
pricing
pricing
Product Mix Pricing Strategies
Pricing Strategies
Product line pricing takes into account the cost
differences between products in the line, customer
evaluation of their features, and competitors’ prices
Optional-product pricing takes into account optional or
accessory products along with the main product
Product Mix Pricing Strategies
Pricing Strategies
Captive-product pricing
involves products that
must be used along with
the main product
Two-part pricing involves
breaking the price into:
Fixed fee
Variable usage fee
Price Mix Pricing Strategies
Pricing Strategies
By-product pricing refers to products with little or no
value produced as a result of the main product.
Producers will seek little or no profit other than the
cost to cover storage and delivery.
Price Mix Pricing Strategies
Pricing Strategies
Product bundle pricing combines several products at a
reduced price
Price-Adjustment Strategies
Discount and
Segmented
allowance
pricing
pricing
Psychological Promotional
pricing pricing
Geographic Dynamic International
pricing pricing pricing
Price-Adjustment Strategies
Pricing Strategies
Discount and allowance pricing reduces prices to
reward customer responses such as paying early or
promoting the product
Discounts
Allowances
Price-Adjustment Strategies
Pricing Strategies
Segmented pricing is used when
a company sells a product at
two or more prices even
though the difference is not
based on cost
Price-Adjustment Strategies
Pricing Strategies
Segmented Pricing
To be effective:
Market must be segmentable
Segments must show different degrees of demand
Watching the market cannot exceed the extra revenue
obtained from the price difference
Must be legal
Price-Adjustment Strategies
Pricing Strategies
Psychological pricing occurs when sellers consider the
psychology of prices and not simply the economics
Reference prices are prices that buyers carry in their minds
and refer to when looking at a given product
Noting current prices
Remembering past prices
Assessing the buying situations
Price-Adjustment Strategies
Pricing Strategies
Promotional pricing is when prices are temporarily
priced below list price or cost to increase demand
Loss leaders
Special event pricing
Cash rebates
Low-interest financing
Longer warrantees
Free maintenance
Price-Adjustment Strategies
Pricing Strategies
Risks of promotional pricing
Used too frequently, and copies by competitors can
create “deal-prone” customers who will wait for
promotions and avoid buying at regular price
Creates price wars
Price-Adjustment Strategies
Pricing Strategies
Dynamic pricing is when prices
are adjusted continually to
meet the characteristics and
needs of the individual
customer and situations
