Pricing: Capturing Customer Value

What is price?
Price is the amount of money charged for a product or service. Price is the sum of all the values that
customers give up in order to gain the benefits of having or using a product or service.  Price is one
of the most important elements determining a firm’s market share and profitability
Why pricing is important
- Price is the only element in the marketing mix that produces revenue; all other elements
represent costs.
- It is one of the most flexible marketing mix elements – can be changed quickly
- It is a key strategic tool for creating and capturing customer value
- Prices have a direct impact on the bottom line.
- Part of the overall value proposition – key role in creating customer value and building
customer relationships.
Major pricing strategies
Considerations in setting price: The price will fall somewhere between a price that is too high to
produce any demand, and a price that is too low to produce a profit.

Three main approaches to pricing

1. Customer value-based pricing: Setting the price based on buyer’s perceptions of value, not the
seller’s cost.

Good-value pricing: Offering just the right combination of quality and good service at a fair price.
E.g. introducing less expensive versions of established brands, redesigning existing brands to offer
more quality (or same quality for less) and every-day-low-price vs high-low pricing
Value added pricing: Rather than cutting prices to match competitors’ prices, marketers adopting this
strategy attach value-added features and services to differentiate their offerings, and this supports
higher prices.
 2. Cost-based pricing: Setting prices based on the costs of producing, distributing and selling
product, plus a fair rate of return.
The key is to manage the spread between costs and prices - how much the company makes for
the customer value it delivers:
 Companies with lower costs can set lower prices that result in smaller margins but greater
sales and profits (low cost producer).
 Other companies intentionally pay higher costs so that they can add value and claim higher
prices and margins (differentiator).
Types of costs: Fixed costs (overhead) – costs that do not vary with production or sales level,
variable costs – costs that vary directly with the level of production, and total costs – the sum of the
fixed costs and variable costs for any given level of production.
Cost-plus pricing: Cost-plus pricing (markup pricing) is the simplest method of pricing. Adds a
standard markup to the cost of the product – typically used by professional services.  Not the best
approach to pricing – ignores consumer demand and competitor pricing.  Used because sellers are
more confident about the costs than the demand, links the price to cost – simplifying pricing, when all
companies in a market do this, it standardizes the pricing, and sellers earn a fair return on investment.
Breakeven pricing: Breakeven pricing (or target return pricing) is setting the price to break even on
the costs of making and marketing a product, or to make the desired profit.
3. Competition based pricing: Setting prices based on competitor’s strategies, costs, prices and
market offerings.
Consumers makes their judgments of a product value by comparing the prices that competitors
charge for similar products. There are two approaches: High price-high margin, and low price-
low margin.
The goal of based pricing is not to match or beat competitors’ prices, rather to set prices
according to the relative value created versus competitors.  If a company creates greater value
for customers, higher prices are justified.
Other internal and external considerations in pricing
Marketing strategy, objectives and marketing mix: Pricing plays a role in achieving company
objectives at many levels:
 Attract new customers or to profitably retain existing customers.
 Deter new competitors from entering the market to stabilize the market.
 Retain the loyalty of resellers or avoid government intervention.
 Reduced to temporarily create excitement for a brand or to help the sales of other products in
the line.
Organizational considerations: Companies handle pricing in a variety of ways.
 Small companies: Prices are often set by top management rather than by the marketing or sales
department.
 Large companies: Pricing is typically handled by divisional or product-line managers
 Industrial Markets: Salespeople may be allowed to negotiate with customers within certain price
ranges. Top management sets the pricing objectives and policies, and it often approves the prices
proposed by the lower-level management or salespeople.
The market and demand: There are four types of markets:
Pure competition: Sellers cannot charge more than the going price because buyers can obtain as much
as they need at that price. There are a large number of buyers and sellers for undifferentiated
(commodity) products.
Monopolistic competition: A range of prices occurs because sellers can differentiate their offers.
Product offerings are differentiated by design, quality, brand image and product features.
Oligopolistic competition: Sellers are highly sensitive to each other’s pricing and marketing
strategies. Market can be dominated by a small number of large suppliers.
Pure monopoly: Pricing is handled differently, depending on whether it is a government monopoly or
a regulated monopoly. Essentially, one supplier can determine price without regard for competition.
Analyzing the price-demand relationship
The demand curve

The economy
The demand curve is a graph
showing the
Economic relationship
factors such as boom or recession, inflation and interest rates affect pricing decisions
between
because price
they andconsumer
affect volume sold.
spending, consumer perceptions of the product’s price and value, and
Ascompany’s
the price rises,costs.
quantity sold falls

Other external factors include: Government, industry protection and regulation, public policy, equity
and access, and social concerns

New-product pricing strategies

When companies bring out a new product can choose between 2 broad strategies to set the prices:
Market-skimming pricing: Setting a high initial price for a new product to skim maximum revenue
from the segments willing to pay the high price; the company makes fewer but more profitable sales.
Market skimming pricing makes sense only under certain conditions:
 - The products quality and image support its higher price
- Enough buyers want the product at that price
- The costs of producing a smaller volume cannot be so high that it cancels out the advantage of
charging more
- Competitors should not be able to enter the market easily and undercut the higher price
- Typically used in shopping and specialty goods
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. The high-sales volume results in falling costs, allowing the
companies to cut their prices even further. Market-penetration pricing makes sense under the
following conditions:
- The market must be highly price sensitive so that a low-price producers more market growth
- Production and distribution costs must fall as sales volume increases
- The low price must help keep out the competition, and the company adopting penetration
pricing must maintain its low-price position –otherwise, the price advantage may be only
temporary
- Purchase intervals are short
- Typically used in convenience goods
Product mix pricing strategies
Product-line pricing: Setting prices across an entire product line.  Management must decide on the
price steps to set between the various products in a line, take into account cost differences between the
products and account for differences in customer perceptions of the value of different features.
Optional-product pricing: Pricing optional or accessory products sold with the main product
Captive-product pricing: Pricing products that must be used with the main product
By-product pricing: Pricing low-value by-products to get rid of them or to make money on them and
the main products
Product-bundle pricing: Pricing bundles of products sold together
Price-adjustment strategies
Discount and allowance pricing: Reducing prices to reward customer responses such as volume
purchases, paying early or promoting the product
Segmented pricing: Adjusting prices to allow for differences in customers, products or locations
Psychological pricing: Adjusting prices for psychological effect
Promotional pricing: Temporarily reducing prices to increase short-term sales
Geographical pricing: Adjusting prices to account for the geographic location of customers
Dynamic / online pricing: Adjusting prices continually to meet the characteristics and needs of
individual customers and situation
Discount and allowance pricing
Allowances: promotional allowances and trade-ins
Discounts: Cash discounts, seasonal discounts, quality discounts and function (trade) discounts

Segment pricing
The company sells a product or service at two or more prices, even though the difference in price is
not based on differences in costs
Customer-segment pricing: customers pay different prices for the same product
Product-form pricing: different forms of the product are priced differently, but not based on costs
Location-based pricing: different prices for specific locations, not based on costs
Time-based pricing: different prices for time of day, time of year etc.
Revenue management (aka yield management): prices routinely set hour by hour depending on
availability, demand and competitor price changes
Psychological pricing: Reference prices *When initiating price changes
marketers must consider buyer
reactions and competitor reactions
Geographic pricing: FOB – origin
pricing, uniform-delivered pricing,
zone pricing, basing-point pricing,
freight-absorption pricing
Promotional pricing should not be
used too frequently, promotional
pricing is easily copied and can
caused brand position and value
erosion

Promotional pricing
Promotional pricing can be an effective means of generating sales. However, it can be damaging if
taken as a steady diet. Includes:
Discounts: Off reduction from normal price to increase sales
Rebates: Cash back
Functional (trade) Discounts: Volume
Special-event pricing: Season based
Low-interest finance/free maintenance: Intended to reduce consumer price.

Public policy and price changes

Prohibited practices (within channels):
Price fixing: Talking to competitors to fix prices Predatory
pricing: Selling below cost with the intention of punishing a
competitor or putting the competitor out of business
Public policy: Across channels:
Price discrimination: offering different prices or trading
terms to different customers
Resale price maintenance: Manufacturers cannot require
retailers to charge specified prices.
Deceptive pricing: Stating or advertising prices that are not
available to the customer