Pricing: Understanding and Capturing Customer Value

Chapter 9
Page 287

LO1: Define price, identify the three major pricing strategies, and discuss the importance of
understanding customer-value perceptions, company costs, and competitor strategies when
setting prices.
LO2: Identify and define the other important external and internal factors affecting a firm’s
pricing decisions.
LO3: Describe the major strategies for pricing new products.
LO4: Explain how companies find a set of prices that maximizes the profits from the total
product mix.
LO5: Discuss how companies adjust and change their prices to take into account different types
of customers and situations.
LO6: Discuss the major public-policy concerns and key pieces of legislation that affect pricing
decisions.

Major Pricing Strategy:

LO1: Define price, identify the three major pricing strategies, and discuss the importance of
understanding customer-value perceptions, company costs, and competitor strategies when
setting prices.
- Price:
- The amount of money charged for a product or service, or the sum of the values
that customers exchange for the benefit of having or using the product or service.
1. Customer Value-Based Pricing:
- Customer Value-Based Pricing:
- Setting price based on buyers’ perceptions of value rather than on the
seller’s cost.

Two Types of Customer Value-Based Pricing:

a. Good-Value Pricing:
- Good-Value Pricing:
- Offering just the right combination of quality and good service at a
fair price.
- Mercedes-Benz released its CLA Class, entry-level models starting at
US$31 500. From its wing-like dash and diamond-block grille to its 208-hp
turbo inline-4 engine, the CLA Class gives customers “The Art of
Seduction. At a price reduction.”
- everyday low pricing (EDLP). EDLP involves charging a constant,
everyday low price with few or no temporary price discounts. (Walmart)
b. Value-Added pricing:
- Value Added Pricing:
- Attaching value-added features and services to differentiate a
company’s offers and charging higher prices.
- Rather than cutting prices to match competitors, they add quality,
services, and value-added features to differentiate their offers and
thus support their higher prices.
- premium audio brand Bose doesn’t try to beat out its competition by
offering discounts or by selling lower-end, more affordable versions of its
speakers, headphones, and home theater system products. Instead, for
more than 50 years, Bose has poured resources into research and
innovation to create high-quality products that merit the premium prices it
charges.
2. Cost-Based Pricing:
- Cost-Based Pricing:
- Setting prices based on the costs of producing, distributing, and selling
the product plus a fair rate of return for effort and risk.
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.
- Total Costs:
- The sum of the fixed and variable costs for any given level of production.
Cost-Plus Pricing:
- Cost-Plus Pricing (Markup Pricing):
- Adding a standard makeup to the cost of the product.
- Break-Even Pricing (Target Return Pricing):
- Setting price to break even on the costs of making and marketing a
product or setting price to make a target return.
- As the price increases, demand decreases, and the market may not buy
even the lower volume needed to break even at the higher price.
3. Competition-Based Pricing:
- Competition-Based Pricing:
- Setting prices based on competitors’ strategies, prices, costs, and market
offerings.
- ask several questions.
1. How does the company’s market offering compare with
competitors’ offerings in terms of customer value?
2. How strong are current competitors, and what are their current
pricing strategies?

Other Internal and External Considerations Affecting Price Decisions:

LO2: Identify and define the other important external and internal factors affecting a firm’s pricing
decisions.
- Internal factors affecting pricing:
1. Company’s overall marketing strategy
2. Objectives
3. Marketing mix
- External factors affecting pricing:
1. Nature of the market and demand
2. Other environmental factors.
Overall Marketing Strategy, Objectives, and Mix:
- Strategy:
- If a company has selected its target market and positioning carefully, then its
marketing mix strategy, including price, will be fairly straightforward. For example,
Tesla targets high-end, technology-driven buyers with sophisticated all-electric
cars that “accelerate the advent of sustainable transportation.” Such elevated
targeting and positioning dictate charging premium prices.
- Objectives:
- Pricing may play an important role in helping to accomplish company objectives
at many levels. A firm can set prices to attract new customers or profitably retain
existing ones. It can set prices low to prevent competition from entering the
market or set prices at competitors’ levels to stabilize the market. Etc.
- Marketing Mix:
 - Price decisions must be coordinated with product design, distribution, and
promotion decisions to form a consistent and effective integrated marketing mix
program.
- Target Costing:
- Pricing that starts with an ideal selling price, then targets costs that will ensure
that the price is met.
- Instead, it starts with an ideal selling price based on customer value
considerations and then targets costs that will ensure that the price is met.
Organizational Considerations:
- In small companies, prices are often set by top management rather than by the
marketing or sales departments. In large companies, pricing is typically handled by
divisional or product managers. In industrial markets, salespeople may be allowed to
negotiate with customers within certain price ranges.
The Market and Demand:
- Thus, before setting prices, the marketer must understand the relationship between price
and demand for the company’s product.
Pricing in Different Types of Markets:
- Economists recognize 4 types of markets:
1. Pure Competition:
- The market consists of many buyers and sellers trading in a uniform
commodity, such as wheat, copper, or financial securities. No single buyer
or seller has much effect on the going market price.
- Sellers in these markets do not spend much time on marketing strategy.
2. Monopolistic Competition:
- many buyers and sellers trading over a range of prices rather than a
single market price.
- Because there are many competitors, each firm is less affected by
competitors’ pricing strategies than in oligopolistic markets.
- Sellers try to develop differentiated offers for different customer segments
and, in addition to price, freely use branding, advertising, and personal
selling to set their offers apart.
3. Oligopolistic Competition:
- The market consists of only a few large sellers.
- Bell, Rogers, Telus, and Shaw—control a lion’s share of the cable/satellite
television market in Canada.
- to woo customers away from competitors, they offer special discounts,
free equipment upgrades, and lock-in prices.
4. Pure Monopoly:
- the market is dominated by one seller.
- Example: Canada Post, a power company, De Beers and diamonds
- Pricing is handled differently in each case.
Analyzing the Price-Demand Relationship:
- Demand Curve:
 - A curve that shows the number of units the market will buy in a given time period,
at different prices that might be charged.

Price Elasticity of Demand:

- Price Elasticity:
- A measure of the sensitivity of demand to changes in price.
● If demand hardly changes with a small change in price, we say demand is
inelastic.
● If demand changes greatly, we say the demand is elastic.
The Economy:
- Economic factors such as a boom or recession, inflation, and interest rates affect [pricing
decisions.
- Most obvious response to the new economic realities is to cut prices and offer discounts.
- Companies can combat their price propositioning by developing “price tiers” which are
different lines (premium and affordable)
Other External Factors:
- What impact its prices will have on other parties in its environment.
- How will resellers react to various prices?
- Government
- Social concerns: In setting prices, a company’s short-term sales, market share, and
profit goals may need to be tempered by broader societal considerations.
 New Product Pricing Strategies:
LO3: Describe the major strategies for pricing new products.
Market-Skimming Pricing:
- Market-Skimming Pricing (Price Skimming):
- Setting a high price for a new product to skim maximum revenues layer by layer
from the segments willing to pay the high price; the company makes fewer but
more profitable sales.
- Example: Apple
- Makes sense under certain conditions:
1. The product’s quality and image must support its higher price, and
enough buyers must want the product at that price.
2. The costs of producing a smaller volume cannot be so high that they
cancel the advantage of charging more.
3. Competitors should not be able to enter the market easily and undercut
the high price.
Market-Penetration Pricing:
- 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.
- Example: Netflix
- Several conditions must be met for this low-price strategy to work:
1. The market must be highly price sensitive so that a low price produces
more market growth.
2. Production and distribution costs must decrease as sales volume
increases.
3. The low price must help keep out the competition, and the penetration
price must maintain its low-price position. Otherwise, the price advantage
may be only temporary.

Product Mix Pricing Strategies:

LO4: Explain how companies find a set of prices that maximizes the profits from the total product
mix.
Five product mix pricing situations:
1. Product Line Pricing:
- Product Line Pricing:
- Setting the price steps between various products in a product line based
on cost differences between the products, customers evaluations of
different features, and competitors’ prices.
- Example: Intuit
- offers an entire line of Quicken financial management software versions,
including Starter, Deluxe, Premier, and Home and Business versions
priced at $59.99, $89.99, $129.99, $159.99, respectively.
- Many buyers happily pay more to obtain additional Premier features, such
as financial-planning, retirement, and investment-monitoring tools.
2. Optional-Product Pricing:
- Optional-Product Pricing:
- The pricing of optional or accessory products along with a main product.
- Companies must decide which items to include in the base price and
which to offer as options.
- Example: Car buyers may choose to order a navigation system and
premium entertainment system.
3. Captive-Product Pricing:
- Captive-Product Pricing:
- Setting a price for products that must be used along with a main product,
such as bladder for a razor and games for a video-game console.
- Example: Razor blade cartridges, video games, printer cartridges etc.
- Producers of the main products often price them low and set high
markups on the supplies.
- The price of the service is broken into a fixed fee plus a variable usage
rate.
- Must be careful because with high costs consumers can become resentful
of the brand and switch to other cheaper options.
4. By-Product Pricing:
- By-Product Pricing:
- Setting a price for by-products to help offset the costs of disposing of
them and help make the main product’s price more competitive.
- Example: Gildale Farms sources wood biomass from various by-product
processes to create fuel pellets and animal bedding pellets, which are
then marketed to farmers.
5. Product Bundle Pricing:
- Product Bundle Pricing:
- Combining several products and offering the bundle at a reduced price.
- Example: Fast food restaurants, bundle a burger, fries, and a soft drink at
a “combo” price. Or Microsoft 365 products
- Price bundling can promote the sales of products consumers might not
otherwise buy, but the combined price must be low enough to get them to
buy the bundle.
 Price Adjustment Strategies and Price Changes:
LO5: Discuss how companies adjust and change their prices to take into account different types
of customers and situations.
Seven price adjustment strategies:
1. Discount and Allowance Pricing:
- Discount:
- A straight reduction in price on purchases during a stated period of time
or of larger quantities.
- Cash discount: a price reduction to buyers who pay their bills promptly.
“2/10, net 30”
- Quantity discount: a price reduction to buyers who buy large volumes
- Functional discount (trade discount): to trade-channel members who
perform certain functions,such as selling, storing, and record keeping.
- Seasonal discount: a price reduction to buyers who buy merchandise or
services out of season.
- Allowances:
- Promotional money paid by manufacturers to retailers in return for an
agreement to feature the manufacturer’s products in some way.
- Trade-in allowances: are price reductions given for turning in an old item
when buying a new one. (automobile industry)
- Promotional allowances: are payments or price reductions that award
dealers for participating in advertising and sales-support programs.
2. Segmented Pricing:
- Segmented Pricing:
- Selling a product or service at two or more prices, where the difference in
prices is not based on differences in costs.
- Customer-segment pricing: different customers pay different prices for
the same product or service. (museums, movie theaters may charge
different prices for students, adults, and seniors.)
- Product form pricing: a round-trip economy seat on a flight from Toronto
to London might cost $1100, whereas a business-class seat on the same
flight might cost $6500 or more (business class and economy)
- Location-based pricing: a company charges different prices for different
locations, even though the cost of offering each location is the same.
(theaters vary their seat prices because of audience preferences for
certain locations.)
- Time-based pricing: a firm varies its price by the season, the month, the
day, and even the hour. (theaters charge matinee pricing during the
daytime)
- To be effective:
1. Market must be segmentable
2. Segments must show different degrees of demand.
3. The cost of segmenting and reaching the market cannot exceed
the extra revenue obtained from the price difference.
 4. Must be legal
5. Segmented prices should reflect real differences in customers’
perceived value.
6. Companies must also be careful not to treat customers in lower
price tiers as second-class citizens.
3. Psychological Pricing:
- Psychological Pricing:
- Pricing considers the psychology of prices and not simply the economics;
the price is used to say something about the product.
- Consumers usually perceive higher-priced products as having higher
quality.
- Reference Prices:
- Prices that buyers carry in their minds and refer to when they look at a
given product.
- Williams-Sonoma once offered a fancy bread maker at the steep price of
$279. However, it then added a $429 model. The expensive model
flopped, but sales of the cheaper model doubled.
- For most purchases, consumers don’t have all the skill or information they
need to figure out whether they are paying a good price.
- Example: 0.99 at the end of a price
4. Promotional Pricing:
- Promotional Pricing:
- Temporarily pricing products below the list price, and sometimes even
below cost, to increase short-run sales.
- Discounts
- Special-event pricing
- Limited-time offers (flash sales)
- Cash rebates
- Low-interest financing
- Longer warranties
- Free maintenance
- Promotional pricing can help move customers over the hump in the
buying decision process, by encouraging consumers to convert to its
Windows 10 operating system.
5. Geographical Pricing:
- Geographical Pricing:
- Setting prices for customers located in different parts of the country or
world.
- FOB Pricing: ask each customer to pay the shipping cost
- Uniform-delivered pricing: the company charges the same price plus
freight to all customers, regardless of their location.
- Zone pricing: The company sets up two or more zones. All customers
within a given zone pay a single total price; the more distant the zone, the
higher the price.
 - Basing-point pricing: seller selects a given city as a “basing point” and
charges all customers the freight cost from that city to the customer
location, regardless of the city from which the goods are actually shipped.
- Freight-absorption pricing: The seller absorbs all or part of the actual
freight charges to get the desired business.
6. Dynamic and Personalized Pricing:
- Dynamic Pricing:
- Adjusting prices continually to meet the characteristics and needs of
individual costumes and situations.
- it adjusts prices according to market forces and consumer preferences.
However, done poorly, it can trigger margin-eroding price wars and
damage customer relationships and trust.
- Strategies to combat cross-channel price comparisons and shopping or,
better, to it into an advantage: “price match guarantee”
7. International Pricing:
- Most companies adjust their prices to reflect local market conditions and cost
considerations.
- Price escalation: may result from differences in selling strategies or market
conditions. in most instances, however, it is simply a result of the higher costs of
selling in another country—the additional costs of operations, product
modifications, shipping and insurance, exchange-rate fluctuations, and physical
distribution.

Price Changes:
Initiating Price Changes:
Initiating Price Cuts:
- Cutting price reasons:
- Excessive capacity
- Falling demand in the face of strong price competition or a weakened economy.
- Drive to dominate the market through lower costs
Initiating Price Increases:
- A major factor in price increases is cost inflation.
- Price gouger: when gasoline prices rise rapidly, angry customers often accuse the major
oil companies of enriching themselves at the expense of consumers.
- It can “unbundle” its market offering, removing features, packaging, or services and
separately pricing elements that were formerly part of the offer.
Buyer Reactions to Price Changes:
- Most people would think that the quality is being reduced and the brand’s luxury image
might be tarnished.
- A price drop can adversely affect how consumers view the brand.
Competitors Reaction to Price Changes:
- competitors can interpret a company price cut in many ways.
 - It might think the company is trying to grab a larger market share or that it’s doing poorly
and trying to boost its sales. Or it might think that the company wants the whole industry
to cut prices to increase total demand.
Responding to Price Changes:
-

Public Policy and Pricing:

LO6: Discuss the major public-policy concerns and key pieces of legislation that affect pricing
decisions.
- The sections of the Competition Act that regulate pricing are Part VI: Offenses in
Relation to Competition and Part VII.1: Deceptive Marketing Practices.
- The Act prohibits price fixing, meaning that sellers must set prices without talking
to competitors. Otherwise, price collusion is suspected. Price fixing is illegal—that
is, the government does not accept any excuses for it.
- bid rigging—where one party agrees not to submit a bid or tender in response to
a call, or agrees to withdraw a bid or tender submitted at the request of another
party—as another indictable offense pertaining to price fixing.
- (abuse of dominant position), sellers are prohibited from using predatory
pricing—selling below cost with the intention of punishing a competitor, or gaining
higher long-run profits by putting competitors out of business.
- Price discrimination:
- by ensuring that sellers offer the same price terms to customers at a given level
of trade.
- Price maintenance:
- a manufacturer cannot require dealers to charge a specified retail price for its
product. Although the seller can propose a manufacturer’s suggested retail price
to dealers, it cannot refuse to sell to a dealer who takes independent pricing
action, nor can it punish the dealer by shipping late or denying advertising
allowances.
- Deceptive pricing:
- Deceptive pricing occurs when a seller states prices or price savings that are not
actually available to consumers. For example, firms cannot advertise a product at
a low price, carry very limited stock, and then tell consumers that they’re out of
the product so that they can entice them to switch to a higher-priced item. This
“bait-and-switch” advertising is illegal in Canada.
- Scanner fraud and price confusion:
- The widespread use of scanner-based computer checkouts has led to increasing
complaints of retailers overcharging their customers. Most of these overcharges
result from poor management—from a failure to enter current or sale prices into
the system.
Quiz:
1. Retailers like Winners and Marshalls carry less-expensive versions of established brand
name products or new lower-price lines. They have adopted a ________ pricing strategy.
- Good-Value
2. When demand hardly changes with a small change in the price of a product, the demand for
the product is best described as ________.
- Inelastic
3. ________ pricing occurs when a seller states prices or price savings that mislead consumers
or are not actually available to consumers.
- Deceptive
4. NerdHerd Electronics sells three different sizes of televisions at three different prices. In this
case, the company's pricing strategy is referred to as ________ pricing.
- Product Line
5. ________ uses buyers' perceptions of what a product is worth as the key to pricing.
- Customer Value-Based Pricing
6. There are more than 200 wild blueberry producers in Nova Scotia. An individual farmer
cannot charge more than the going market price per unit without the risk of losing business
to the other farmers. This is an example of ________.
- Pure Competition
7. Which of the following conditions is most likely essential for implementing a successful
market-penetration pricing strategy for a product?
- The market for the product is highly price sensitive.
8. Which of the following pricing strategies is the opposite of FOB-origin pricing?
- Uniform-Delivered Pricing
9. With each new generation of Apple iPhone, iPad, or Mac computer, new models start at a
high price then work their way down as newer models are introduced. Apple initially uses a
________ strategy.
- Market Skimming
10. BC Place, home of the Vancouver Whitecaps FC charges different prices for seats in
different areas of the stadium, even though each seat costs the same for the owners of the
stadium. What is this form of pricing called?
- Product-Form Pricing
11. The first Canadian Tire store opened in 1922. Since the early 21st century, its strategy has
been updated to capture a larger market share by offering lower everyday prices to attract a
large number of buyers and win a large market share. This is referred to as ________.
- Market-Penetration Pricing
12. Which of the following sets the price ceiling for a product's pricing?
- Customers Percetion of Value
13. Lovely Skin is establishing a pricing strategy for a new moisturizer. The total cost to produce
each unit is $3.50. The company has decided to add a $1.50 markup, so the unit price to
distributors will be $5. Lovely Skin is using a ________ approach to price the new
moisturizer.
- Cost-Plus
14. Vac "N" Sew, a consumer electronics outlet, offers a price reduction of $100 when customers
bring in a used vacuum cleaner and exchange it for a new vacuum cleaner or sewing
machine. This is an example of a ________.
 - Tade-In Allowance
15. How do firms that use captive-product pricing make up for the low prices of their main
products?
- They set high markups on the captive products.

Mini Sim: