Pricing: understanding and capturing customer

value
COURSE #9

Daniela Ionita,
Associate Professor - Marketing Department
Objectives
1. Define price and discuss the importance
of pricing in today’s fast-changing
environment.
2. Identify three major pricing strategies.
3. Review external and internal factors
affecting a firm’s pricing decisions.
What is a price?
• Price (narrow sense)= the amount of money
charged for a product
• Price (broad sense)= the sum of all the values that
customers give up to gain the benefits of
having/using a product
– Major factor affecting buyer choice
– The only element of the marketing mix that produces
revenue
– Can be changed very quickly
– Key role in creating customer value
Three major pricing strategies: customer value–based
pricing, cost-based pricing, and competition-
based pricing

€ PRICE
€€
Customer value-based pricing vs cost based pricing

• Uses buyers’perceptions of value • Based on seller’s cost

• Price is considered along with all
other marketing mix variables • Product driven
before the mkt program is set
“Good value” is not the same as “good
price”
Customer value-based pricing: good-value
pricing
• The Great Recession of 2008 and 2009 cause a
fundamental and lasting shift in consumers attitudes
toward price and quality
• Good-value pricing – offering just the right combination
of quality and good service at a fair price
Introducing less expensive versions of established brand-
name products
Redesigning existing brands to offer more quality for a
given price or the same quality for less
high-low pricing – charging higher
everyday low pricing (EDLP) – charging
prices on an everydaybasis but running
a constant, everyday low price with
frequent promotions to lower prices
few or no price discounts
temporarily on selected items.
Customer value-based pricing: value-added
pricing
• Value added pricing = attaching value added
features and services to differentiate a
company’s offers and charging higher prices
Some theater chains are turning their
multiplexes into smaller, roomier luxury
outposts. The new premium theaters
offer value-added features such as on-
line reserved seating, high-backed
leather executive or rocking chairs with
armrests and footrests, the latest in
digital sound and super-wide screens,
dine-in restaurants serving fine food
and drinks and even valet parking.
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

Fixed costs Variable

Total costs
(overhead) costs

do not vary with vary directly with the

production level production level
(rent, interest, (raw materials, packaging,
depreciation, mgm sales commissions, direct
salaries) labor costs)
Costs at different levels of production

Short-run average cost curve Long-run average cost curve

Competition-based pricing
Competition-based In assessing competitors’ pricing
pricing = involves strategies the company should ask
setting prices based on several questions:
competitors’ strategies, How does the company’s market
costs, prices, and
offering compare with
market offerings
competitors’offerings in terms of
customer value?
 How strong are current
competitors?
 What principle should guide
decisions about what price to charge
relative to those of competitors?
Caterpillar makes high-quality, heavy-duty construction and mining equipment. It
dominates its industry despite charging higher prices than competitors such as
Komatsu. When a commercial customer once asked a Caterpillar dealer why it should
pay $500,000 for a big Caterpillar bulldozer when it could get an “equivalent” Komatsu
dozer for $420,000, the Caterpillar dealer famously provided an analysis like the
following:

The goal is not to match or beat competitors’ prices but to set prices
according to the relative value created versus competitors!
 Other internal and external considerations
affecting price decisions

Internal factors External factors

 Overall marketing strategy
 Objectives
 Marketing mix
 Organizational
considerations
 Nature of the market
 Demand
 Environmental factors
Internal factors: objectives, marketing
mix and organizational considerations
Objectives: Marketing mix:
– Attract new customers Price decisions must be
– Profitably retain coordinated with product
design, distribution and
existing customers
promotion decision to form
– Prevent competition an integrated marketing mix.
entering the market e.g.: a high performance
– Stabilize the market quality product -> higher
– Help the sales of other price to cover the costs,
products in the support the resellers,
company’s line promote it.
Cuvée Spéciale Cent Cinquantenaire

$220 USD

"Hard to find, impossible to pronounce, and

prohibitively expensive”
Who should set prices?
• Small companies -> top management
• Large companies -> top management sets the
pricing objectives and policies
 Divisional/product managers
 Pricing department - in industries in which pricing is a
key factor (airlines, telecom, oil companies)
 Sales, production, finance managers - influence on
pricing
 Salespeople may be allowed to negociate within certain
price ranges - industrial markets
External factors: types of markets and the
economy
• Pure competition: many buyers and sellers trading in a uniform
commodity -> no single buyer/seller has much effect on the
ongoing market price
• Monopolistic competition: many buyers and sellers who trade
over a range of prices, than a single market price (sellers can
differentiate their offers to buyers-less affected by
competitors’pricing strategies)
• Oligopolistic competition: only a few sellers -> alert and
responsive to competitors’moves
• Pure monopoly: one seller (government monopoly, private
regulated monopoly, private unregulated monopoly) -> pricing is
handled differently
 Even in tough economic times,
consumers don’t buy based on prices
alone!

Despite selling its shoes for as much as $150 a pair, Nike commands
the highest consumer loyalty of any brand in the footwear segment