Chapter 10- slide 1

Copyright 2009 Pearson Education, Inc.

Publishing as Prentice Hall

Chapter Ten
Pricing:
Understanding and Capturing
Customer Value
ILP108
Topic 9a
Chapter 10- slide 2
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Chapter Objectives
Answer the question What is price? and discuss
the importance of pricing in todays fast changing
environment.
Discuss the importance of understanding
customer value perceptions when setting prices.
Discuss the importance of company and product
costs in setting prices.
Identify and define the other important external
and internal factors affecting a firms pricing
decisions.
Chapter 10- slide 3
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Price is the amount of money charged for a product or
service. What consumers give up in order to gain the
benefits of having or using a product or service. The only
element in the marketing mix that produces revenue; all
other elements represent costs
Factors to Consider When Setting Prices

What Is a Price?
Chapter 10- slide 4
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall

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
Two types: Cost-plus and Break-Even / Target
Profit Pricing


Chapter 10- slide 5
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Costs at Different Levels of Production

To price wisely, management needs to know
how average cost vary with different levels of
production.
Chapter 10- slide 6
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Experience or learning curve is when average
cost falls as production increases because
fixed costs are spread over more units


Costs as a Function of Production Experience
Chapter 10- slide 7
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall


Cost-plus pricing
Sales) on Return Desired - (1
Cost Unit
Price Markup
Cost-plus pricing adds a standard markup to the
cost of the product
Chapter 10- slide 8
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall
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



Cost-plus pricing
Chapter 10- slide 9
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall

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 its seeking
Break-Even Analysis and Target Profit Pricing

Chapter 10- slide 10
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall
cost) Variable - (Price
cost Fixed
volume even - Break
Chapter 10- slide 11
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall

Everyday Low Price (EDLP) charging a constant
everyday low price with few or no temporary
price discounts
Examples:
McDonalds offer value menus.
Air Asia offers constant low air fares
Value-based pricing

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.
Chapter 10- slide 12
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall

High-low pricing: charging higher prices on an
everyday basis but running frequent promotions to
lower prices temporarily on selected items
Value-added pricing attaches value-added features
and services to differentiate offers, support higher
prices, and build pricing power.
(pricing power means the ability to escape price competition and to justify higher prices
and margins without losing market share)


Chapter 10- slide 13
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall

General pricing objectives
Survival
Profit maximization
Market share leadership
Customer retention and relationship building
Attracting new customers
Opposing competitive threats
Increasing customer excitement
Pricing Objectives

Chapter 10- slide 14
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall

Price is only one of the marketing mix tools that a
company uses to achieve its marketing objectives.
Price decisions must be coordinated with product
design, distribution, and promotion decisions to
form a consistent and effective integrated
marketing program.
Overall Marketing Mix

Chapter 10- slide 15
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall

Companies often position their products on price and
then tailor other marketing mix decisions to the prices
they want to charge.
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
Non-price strategies differentiate the marketing offer
to make it worth a higher price.
Deemphasize price and use other marketing mix tools to
create nonprice positions.



Overall Marketing Strategy

Chapter 10- slide 16
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall

Who should set the price
small companies: top management not marketing or sales
departments.
large companies: divisional or product line managers.
industries where pricing is a key factor: pricing departments
Who can influence the prices
industrial markets: salespeople can negotiate with customers
within certain price ranges.

Organizational considerations
Chapter 10- slide 17
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall
The market and demand: Types of markets
Many buyers and sellers trading in a
uniform commodity. Sellers do not spend
much time on marketing strategy.
Many buyers and sellers, A range of
prices. Sellers can differentiate their
offers to buyers and buyers pay
different prices for them.
A few sellers highly sensitive to each
others pricing and marketing
strategies. Difficult for new sellers to
enter the market.
one seller who may be a government
monopoly, a private regulated
monopoly, or a private nonregulated
monopoly. Price to get fair return or
what the market will bear.
Chapter 10- slide 18
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall
The market and demand: Price-Demand Relationship
The demand curve shows the number of units the market will
buy in a given period at different prices
Normally, higher price = lower demand
Prestige (luxury) goods, higher price = higher demand
Chapter 10- slide 19
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall

Price elasticity = % change in quantity demand
of demand % change in price
Factors affecting price elasticity of
demand
Unique product
Quality
Prestige
Substitute products
Cost relative to income
Chapter 10- slide 20
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Competitors Strategies and Prices
Company must also consider the competitors
costs, prices, and market offerings
Example: A consumer thinking of buying Canon digital
camera will evaluate Canons customer value and
price against the value and prices of comparable
products by Kodak, Sony, Nikon and others.
Companys pricing strategy will affect the
nature of competition
Example: Apple follows a high-price, high-margin
strategy in the smart phone market attracts many
competitors
Needs to benchmark costs and value against
competitors
Chapter 10- slide 21
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Economic conditions
Resellers response to
price
Government
Social concerns
Other External Factors


Chapter 10- slide 22
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall

Chapter Eleven
Pricing Strategies
Topic 9b
Chapter 10- slide 23
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Chapter Objectives
Describe the major strategies for pricing imitative
and new products.
Explain how companies find a set of prices that
maximize the profits from the total product mix.
Discuss how companies adjust their prices to take
into account different types of customers and
situations.
Discuss the key issues related to initiating and
responding to price changes.

Chapter 10- slide 24
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall

Pricing Strategies
New-Product Pricing Strategies
Market-skimming pricing
Market-penetration pricing
Product Mix Pricing Strategies
Product line pricing
Optional product pricing
Captive product pricing
By-product product pricing
Product bundle pricing
Topic Outline
Chapter 10- slide 25
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Price Adjustment Strategies
Discount and allowance pricing
Segmented pricing
Psychological pricing
Promotional pricing
Geographic pricing
Dynamic pricing
Price Changes
Conditions for price cuts and price increases
Buyers reactions
Responding to price changes

Chapter 10- slide 26
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall

New-Product Pricing Strategies
Market-skimming pricing is a strategy with
high initial prices to skim revenue layers
from the market. Conditions that support:
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
Chapter 10- slide 27
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall
New-Product 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. Conditions that support:
Price sensitive market
Production and distribution cost fall as
sales grow
Low prices can be maintained to keep
competition out of the market

Chapter 10- slide 28
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Product Mix Pricing Strategies
Product line pricing takes into account the cost
differences between products in the line,
customer evaluation of their features, and
competitors prices
- Management must decide on the price steps to
set between the various products in a line.
Normal Hair
$3.90
Anti-dandruff
$4.90
Hair Fall Defense
$4.90
Oily Hair
$3.90
Chapter 10- slide 29
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall
New car with ordinary rims
$59,000
Product Mix Pricing Strategies
Optional-product pricing takes into account
optional or accessory products along with the
main product

refrigerators with icemakers
cars with options such as stereos, GPS, and cruise
control.
New car with sports rims
$60,000
Example:
Chapter 10- slide 30
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall

Product Mix Pricing Strategies



pricing theater tickets
and selling refreshments
at a higher rate
game consoles and video
games.
Captive-product pricing involves products that
must be used along with the main product
- Two-part pricing:
Fixed fee
Variable usage fee


Example:
Chapter 10- slide 31
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall

Product Mix Pricing Strategies
Product bundle pricing combines several
products at a reduced price

vacation packages that include air and hotel
value meals in the fast-food industry
1 bottle: $2.70
Bundled 2 bottles: $4.90
Example:
Chapter 10- slide 32
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Price Mix 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.

selling scrap metal after producing metal
stampings
selling donut holes after producing donuts.

Example:
Chapter 10- slide 33
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Price-Adjustment Strategies
Discounts
cash discount for paying promptly
2/10, net 30 arrangement -the customer can deduct 2
percent if the bill is paid within 10 days.
quantity discount for buying in large volume
functional (trade) discount for selling, storing,
distribution, and record keeping.
seasonal discount is a price reduction to buyers who
buy merchandise or services out of season.
Chapter 10- slide 34
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Price-Adjustment Strategies
Allowances
trade-in allowance for turning in an old
item when buying a new one
Eg: RM5,000 for Proton cars > 10 years
promotional allowance to reward
dealers for participating in advertising or
sales support programs.

Chapter 10- slide 35
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Price-Adjustment 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


Customer-segment pricing
Product-form pricing
Location pricing
Time pricing
To be effective:
Market must be segmentable
Segments must show
different degrees of demand
Costs cannot exceed the extra
revenue obtained from the
price difference
Must be legal
reflect real differences in
customers perceived value
Chapter 10- slide 36
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Customer-segment pricing
different customers pay different prices for the
same product or service.
E.g. Muzium has three admission prices for students,
adults, and seniors. All three groups are entitled to the
same services
Product form pricing
different versions of the
product are priced
differently but not according
to differences in their costs.
Chapter 10- slide 37
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Location pricing
a company charges different prices for
different locations, even though the cost of
offering each location is the same.
E.g. Concert organizers charges different prices for seats
in different areas of the same stadium

Time pricing, a firm varies its prices by the
season, the month, the day, and even the
hour.

Chapter 10- slide 38
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Price-Adjustment Strategies
Psychological pricing occurs when sellers
consider the psychology of prices and not
simply the economics Eg: RM599, RM388
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
Do you know the prices of soft drinks in your head?
Chapter 10- slide 39
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall

Price-Adjustment 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

Chapter 10- slide 40
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Loss leaders are products sold below cost to
attract customers in the hope they will buy
other items at normal markups.
Special event pricing is used to attract
customers during certain seasons or periods.
Cash rebates are given to consumers who buy
products within a specified time.
Low-interest financing, longer warrantees, and
free maintenance lower the consumers total
price.

Chapter 10- slide 41
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Price-Adjustment 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
Can erode a brands value in the eyes of
customers.
Quick fix instead longer-term brand building
strategies
Creates price wars
Chapter 10- slide 42
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall

Price-Adjustment Strategies
Geographical pricing is used for customers in
different parts of the country or the world
FOB-origin pricing
Uniformed-delivered pricing
Zone pricing
Basing-point pricing
Freight-absorption pricing

Chapter 10- slide 43
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall

Price-Adjustment Strategies
FOB-origin (free on board) pricing means that
the goods sold are placed free on board a
carrier. At that point the title and
responsibility pass to the customer, who pays
the freight from the factory to the destination.
Uniformed-delivered pricing is the opposite of
FOB pricing. Here, the company charges the
same price plus freight to all customers,
regardless of their location. The freight charge
is set at the average freight cost.

Chapter 10- slide 44
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall

Price-Adjustment Strategies
Zone pricing falls between FOB-origin pricing
and uniform-delivered pricing.
The company sets up two or more zones. All
customers within a given zone pay a single total
price; the more distance the zone, the higher
the price.
Basing-point pricing means that a seller selects
a given city as a basing point and charges all
customers the freight cost associated from that
city to the customer location, regardless of the
city from which the goods are actually shipped
Chapter 10- slide 45
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Price-Adjustment Strategies

Freight-absorption pricing means the
seller absorbs all or part of the actual
freight charge as an incentive to attract
business in competitive markets
The seller who is anxious to do business with
a certain customer or geographical area
Chapter 10- slide 46
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall

Example
Chapter 10- slide 47
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall

Chapter 10- slide 48
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall

Price-Adjustment Strategies
Dynamic pricing is when prices are adjusted
continually to meet the characteristics and
needs of the individual customer and situations


Advantages.
Tailor products to fit shoppers
behavior, price products
accordingly.
Adjust prices instantly based on
inventories, costs, and demand at
any given moment
Buyers benefit
Chapter 10- slide 49
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Initiating Price Changes

Price cuts
Price increases
Chapter 10- slide 50
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Situations that may lead a firm to consider price cuts.
Excess capacity. The firm needs more business and
cannot get it through increased sales effort, product
improvement, or other measures.
Falling market share in the face of strong price
competition.
Drive to dominate the market through lower costs.
Either the company starts with lower costs than its
competitors, or it cuts prices in the hope of gaining
market share that will further cut costs through
larger volume.
Chapter 10- slide 51
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Situations that may lead a firm to consider price increase.
Cost inflation. Rising costs squeeze profit margins and
lead companies to pass cost increases along to
customers.
Over demand. When a company cannot supply all that
its customers need, it can raise prices, ration products
to customers, or both.
Buyer Reactions to Pricing Changes

Chapter 10- slide 52
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Responding to Price Changes