Session 08 - Chap10-11 PRICE

7/15/21
TOPIC 08
Chapter 10+11
Pricing
Understanding and Capturing
Customer Value
Copyright © 2009 Pearson Education, Inc.
Chapter 10 - slide 1
Publishing as Prentice Hall
Pricing Concepts
Understanding and
Capturing Customer Value
Topic Outline
Internal and External
Considerations
Affecting Price
Decisions
Com pany and

Product Costs
Custom er
Perceptions of Value
W hat Is “Price”?

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What Is “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.
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.

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Major Pricing Strategies
Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved.
Factors to Consider When

Setting Prices
Value-based pricing
Cost-based pricing

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Prices
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
– “customers don’t care how much something cost you
to make or your competitors, they care how much
value they’re receiving at a particular price.”
• Cost-based pricing is product driven

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Value-based pricing
Now, to be fair, the marketing
that cemented the value of
diamonds was carried out over
decades. But there's no doubt it
has worked. People now
subconsciously associate
diamonds with luxury. It's even
considered a symbol of love and
commitment, which
exponentially increases
Apple em ploys value-based their perceived
pricing throughout its product line- value exponentially.
up. In the earliest days, their Even with much cheaper man-
pricing reflected the sim plicity of made alternatives on the market,
their products and ease of use for
the custom er. This was an exercise
genuine diamonds have not lost
in building up a m arket share, and
their value, and prices have Starbucks has a m assive
a loyal base of custom ers, not to risen continuously. global custom er base. Their brand
m ention a lot of custom er awareness is so extensive that they
value over the years. have becom e synonym ous with
They did this by developing an good coffee-based beverages.
operating system that prioritized However, this is another exam ple of
ease of use, which put it a step custom ers associating m ore with
above their m ain com petitors' the nam e than the actual product.
products at the tim e. Fast forward Starbucks has a policy of
two decades and the m ajority of encouraging social interactions
personal com puter system s, between patrons. Their shops allow
sm artphones, and various other custom ers to sit in as long as they
tech pieces (wearables, M P3 want, without needing to repeatedly
players, etc.) being used in the buy som ething. Over tim e,
continental United States are Apple Starbucks has priced its coffee
products (39% of the US m arket higher, which has left them with a
share). higher-incom e-consum er-base. It's
the loyalty of that consum er base
Copyright © 2010 Pearson Education, Inc. that keeps the com pany going.

Setting Prices
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

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Setting Prices
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
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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.
In short, cost-based pricing adds a standard

markup to the cost of the product.

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Setting Prices
Types of costs
Fixed Variable Total

costs costs costs

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Factors to Consider
When Setting Prices
Fixed costs are the costs that do not vary with

production or sales level
• Rent
• Heat
• Interest
• Executive salaries

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Setting Prices
Variable costs are the costs that vary with the

level of production
• Packaging
• Raw materials

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Factors to Consider
When Setting Prices
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

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Setting Prices
Cost-Plus Pricing
• 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

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Cost-Plus Pricing

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Cost-Plus Pricing
• Answer:

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Cost-Based Pricing
Break-even pricing (target return pricing) is

setting price to break even on costs or to make a
target return.
Figure 10.5 Break-Even Chart for Determining Target

Return Price and Break-Even Volume.
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Competition-Based Pricing
Competition-based pricing is setting prices
based on competitors’ strategies, costs, prices,
and market offerings.
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CLASS ACTIVITY (20’): Pricing decisions will form a key part of

the firm’s overall marketing strategy. In this activity, your task is to
identify:
1. why the firm has adopted their particular pricing approach?
2. pros and cons of this approach?
3. would you choose a different approach?
1. When ‘Great Cuts’ (haircuts) originally opened, they charged just $12 per haircut.
However, since they have become widespread and more popular, they have
progressively increased their price to over $20 per haircut.
2. Flip-flop restaurant has enjoyed a steady flow of customers, including many repeat
ones over several years. However, Flip-flops has decided to close in three months’
time in order to redevelop the site for home units. Therefore, they have decided to
increase the average price of main meals from $15 to $25 until the restaurant closes.
3. Mercedes prefer to maintain high prices, even though they could afford to discount or
reduce prices at times.
4. Many McDonald’s stores offer a 40c ice-cream cone.
5. Some supermarket chains use limited price discounting, instead preferring to use
everyday low pricing.
6. Many department stores will have large sales in January. This is designed to clear
stock and ensure good sales levels in a traditionally quiet sales month.

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Setting Prices
Other Internal and External
Considerations
• Customer perceptions of value set the

upper limit for prices, and costs set the
lower limit.
• Companies must consider internal and
external factors when setting prices.

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Setting Prices
• Internal factors affecting pricing include the

company’s marketing objectives, marketing
strategy, costs and organizational
considerations.
– E.g. Honda and Toyota decided to develop their Acura and Lexus
brands to compete with European luxury-performance cars in the
higher income segment, this required charging a high price.
– Top management sets the pricing objective and policies, and often
approves the prices proposed by lower-level-management or
salespeople.
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Setting Prices
Considerations
The Market and Demand
• Before setting prices, the Pure competition

marketer must understand
the relationship between Monopolistic competition
price and demand for its Oligopolistic competition

products.
– E.g. commodity vs. luxury Pure monopoly
products
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Prices
Other Internal and External Considerations
Competitor's Strategies
• Comparison of offering in terms of

customer value
• Strength of competitors
• Competition pricing strategies
• Customer price sensitivity

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Factors to Consider
When Setting Prices
Consideration
Economic conditions
Reseller’s response to price
Government
Social concerns

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New-Product Pricing Strategies
Pricing Strategies
Market- Market-
skimming penetration
pricing pricing

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Market-skimming pricing is a strategy with high

initial prices to skim revenue layers from the
market
1. Product quality and image must support the price
2. Buyers must want the product at the price
3. Costs of producing the product in small volume should not
cancel the advantage of higher prices
4. Competitors should not be able to enter the market easily

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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
1. Price sensitive market
2. Inverse relationship of production and
distribution cost to sales growth
3. Low prices must keep competition out of the
market
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Price Adjustment Strategies
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Price-Adjustment Strategies
Pricing Strategies
Discount and allowance pricing reduces

prices to reward customer responses such
as paying early or promoting the product
– Discounts: 10% off for 1st 50 customers
– Allowances: buy 1 get 1 free

35
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

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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
E.g. hotel prices in peak time or holidays, or fast-food

combo prices.

37
Pricing Strategies
Psychological pricing occurs when sellers

consider the psychology of prices and not
simply the economics.
E.g. $9.99 is much better than $10; or a Dior

handbag increase $100 every year; special
price for a limited time etc.
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Price Changes
Initiating Pricing Changes
Price cuts occur due to:

• Excess capacity
• Increased market share
Price increase from:
• Cost inflation
• Increased demand
• Lack of supply
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Price Changes
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Reflective Activity 08
1. Other than influencing profit margins,

how important is the role of price in the
firm’s marketing mix?
2. Is there a relationship between the
“price” factor and the firm’s or product
positioning?

41
All rights reserved. No part of this publication may be reproduced, stored in a

retrieval system, or transmitted, in any form or by any means, electronic,
mechanical, photocopying, recording, or otherwise, without the prior written
permission of the publisher. Printed in the United States of America.


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7/15/21

Com pany and

Copyright © 2010 Pearson Education, Inc.

Price is the amount of money charged for a

Price is the only element in the marketing mix

Copyright © 2010 Pearson Education, Inc.

Factors to Consider When Setting

• Understanding how much value

Copyright © 2010 Pearson Education, Inc.

Major Pricing Strategies

Factors to Consider When

Copyright © 2010 Pearson Education, Inc.

Major Pricing Strategies

Factors to Consider When Setting

Value-based pricing uses the buyers

Copyright © 2010 Pearson Education, Inc.

Factors to Consider When

Good-value pricing offers the right

Existing brands are being redesigned to offer

Copyright © 2010 Pearson Education, Inc.

Factors to Consider When

Everyday low pricing (EDLP) involves

High-low pricing involves charging higher

Cost-based pricing involves setting prices

In short, cost-based pricing adds a standard

Copyright © 2010 Pearson Education, Inc.

Factors to Consider When

Fixed Variable Total

Copyright © 2010 Pearson Education, Inc.

Fixed costs are the costs that do not vary with

Copyright © 2010 Pearson Education, Inc.

Factors to Consider When

Variable costs are the costs that vary with the

Copyright © 2010 Pearson Education, Inc.

Total costs are the sum of the fixed and

Average cost is the cost associated with a

Copyright © 2010 Pearson Education, Inc.

Factors to Consider When

Copyright © 2010 Pearson Education, Inc.

Copyright © 2010 Pearson Education, Inc.

Copyright © 2010 Pearson Education, Inc.

Major Pricing Strategies

Break-even pricing (target return pricing) is

Figure 10.5 Break-Even Chart for Determining Target

Major Pricing Strategies

Major Pricing Strategies

CLASS ACTIVITY (20’): Pricing decisions will form a key part of

Copyright © 2010 Pearson Education, Inc.

Factors to Consider When

• Customer perceptions of value set the

Copyright © 2010 Pearson Education, Inc.

Factors to Consider When

• Internal factors affecting pricing include the

Factors to Consider When

• Before setting prices, the Pure competition

price and demand for its Oligopolistic competition

Factors to Consider When Setting

• Comparison of offering in terms of

Copyright © 2010 Pearson Education, Inc.

Reseller’s response to price

Copyright © 2010 Pearson Education, Inc.

New-Product Pricing Strategies

Copyright © 2010 Pearson Education, Inc.

New-Product Pricing Strategies