Principles of Pricing

MBA Sharia
March 28, 2014
Creating value to customers
• A firm’s marketing efforts are directed toward creating value
for its chosen customers
• Understanding customers’ wants and needs is the foundation
for building this value
• Capturing the value falls to the marketing mix, referred to as
the Four Ps:
• Developing a product that satisfies those wants and needs
• Designing a promotion that conveys the value of that product to customers
• Choosing a distribution program that makes that product readily available
• Designing a pricing strategy that simultaneously creates a customer’s
incentive to buy that product and the firm’s incentive to sell that product
 The Value-Pricing Approach
The value-pricing approach to product pricing is
driven by a handful of factors

Marketing Objective Value

Efforts

Perceived Value
Customer’s incentive to Purchase
= [Perceived Value – Price]
Product Price
Price of
Substitutes
Firm’s Incentive to Sell
= [Price-COGS]

Cost of Goods Sold

Assessing a Product’s Value to
Customers
Determining Objective Value through Cost-
Structure Studies:
• The objective value or true economic value
(TEV) of a product to customer by
understanding the competitive alternatives,
the price and performance of those
alternatives, and the buyer’s costs
TEV = Cost of the Next Best Alternative + Value
of Performance Differential
Assessing a Product’s Value to
Customers
Determining Perceived Value:
1. Survey Methods:
e.g. Definitely would buy, probably would
buy, probably not buy, definitely not buy
The results often paint an overly optimistic
picture of a product’s potential.
Nevertheless, such surveys are often a good
first step in assessing perceived value
Assessing Price Sensitivity
The magnitude of Price
Price sensitivity tends to be far greater in high-cost
than in low-cost product categories.
Thus, a 10% price differential on a sports car will be
a far bigger deal than a 10% differential on a tube of
toothpaste.
Assessing Price Sensitivity (2)
Who Pays
The greater the extend that the user is responsible
for the costs, the greater is their price sensitivity
Competitive Factors
Price sensitivity is higher to the extend that
- The customer does no perceive significant
differences in alternative products
- It is easy to compare products and prices
- It is easy for the decision maker to switch products
Price customization
A number of factors cause value variation across
potential customers, such as:
- Taste
- Importance of performance
- Ability to pay
- Intensity to use
- Category knowledge
Price customization (2)
Several means to customize price are:
- Through the product line
- By controlling availability
- Through demographics
- Through transaction characteristics