Fundamentals of Marketing

Chapter 7:
Pricing: Understanding and Capturing
Customer Value
What Is a Price?

Price is the amount of money charged for a product or service, or the sum of
all the values that customers exchange for the benefits of having or using the
product or service.
→ The only element in the marketing mix that produces revenue
→ the most flexible marketing mix elements

Major Pricing Strategies

A. Customer Value-Based Pricing

● Value-based pricing uses the buyers’ perceptions of value rather than the
seller’s cost.
• Value-based pricing is customer driven.
• Whereas Cost-based pricing is product driven.
• Price is set to match perceived value.

1. Good-value pricing is a pricing strategy that aims to provide customers with a

high-quality product or service at a reasonable price.
Eg: Kahwa cha3biya(Issam) : good quality coffee with an affordable price.

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2. Value-added pricing is a pricing strategy that involves adding value to a

product or service and then charging a higher price for it.
by adding additional features, benefits, or services to a product or service, the business can differentiate itself
from competitors and offer customers a unique and valuable experience that justifies the higher price.
Eg: Spotify premium: the luxury of zero adds and other interesting features

B. Cost-Based Pricing

● Cost-based pricing sets prices based on the costs for producing, distributing,
and selling the product plus a fair rate of return for effort and risk.

Rappel Accounting:
Fixed costs (also known as overhead) are Variable costs vary Total costs are the sum
the costs that do not vary directly with the level of of the fixed and variable
with production or sales level. production. costs for any given level
• Rent / Heat / Interest / Executive salaries • Raw materials of production.
• Packaging

1. Costs at different levels of production

Rappel Micro:

2. Costs as a function of production experience

Figure 10.4
3. Cost-plus pricing (or markup pricing) adds a standard markup to the cost of the product.
• Benefits: Sellers are certain about costs / Price competition is minimized / Buyers feel it is fair
• Disadvantages: Ignores demand and competitor prices

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4. Break-even pricing (target return pricing) is setting price to break

even on costs or to make a target return.

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C. Competition-Based Pricing

● Competition-based pricing is setting prices based on competitors’

strategies, costs, prices, and market offerings.
Consumers will base their judgments of a product’s value on the prices that competitors charge for similar
products.

Other internal and external considerations affecting pricing

Internal Factors:
1. Marketing Objectives

2. Overall Marketing Strategy, Objectives, and Mix

Target costing starts with an ideal selling price based on consumer value
considerations and then targets costs that will ensure that the price is met.

3. Organizational Considerations
• Who should set prices? (Top management, Pricing team ect.)
• Who can influence prices? (Marketing departmentby providing insights on customer behavior,
market trends, and competitive positioning, finance department ect.)

External Factors:

The Market and Demand

Before setting prices, the marketer must understand the relationship between price and demand for its products.

Retour Micro:
Analyzing the Price–Demand Relationship
• Demand and price are inversely related.
• Higher price = lower demand
Price Elasticity of Demand
Price elasticity is a measure of the
sensitivity of demand to changes in price.
Inelastic demand is when demand hardly
changes with a small change in price.
Elastic demand is when demand changes
greatly with a small change in price.

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Setting Initial Product Prices

Market shimming: (Low Sales + High Price(margin) )
The goal of market shimming is to differentiate the new product or service from
existing offerings by highlighting unique features or benefits that set it apart.
Eg: Intel's strategy of setting a high price for their new product, a $1,000 chip, is an example of price skimming targeting early adopters and other
customers who are willing to pay a premium price for the latest technology. By setting a high price, Intel is able to maximize their revenue from
this specific target market, even though the sales volume may be lower. This can result in fewer but more profitable sales.

Market Penetration: (High Sales + Low Price(margin) )

he goal of market penetration is to capture a larger portion of the market share
and increase profitability.
Walmart's strategy of setting low prices for their products is an example of a penetration pricing strategy. Walmart aims to attract a larger number
of buyers who are price-sensitive and may be looking for a bargain. This can result in a larger market share for Walmart, as they are able to reach a
wider customer base than competitors who may have higher prices. However, this strategy may also result in lower profit margins, as the lower
prices may not cover the full cost of production and distribution. To make up for this, Walmart may rely on high sales volume to generate profits.

Price-Adjustment Strategies

Initiating and Responding to Price Changes

Assessing and Responding to Competitors’

Price Changes:

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