Pricing: Understanding and Capturing Customer Value

Chapter 9

Rest Stop: Previewing the Concepts

• Identify the three major pricing strategies and discuss the importance of understanding customer-value perceptions, company costs, and competitor strategies when setting prices

• Identify and define the other important external and internal factors affecting a firm’s pricing decisions

• Describe the major strategies for pricing new products

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Rest Stop: Previewing the Concepts

• Explain how companies find a set of prices that maximizes 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

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First Stop: Amazon vs. Walmart: Fighting it Out Online on Price

• Price war between Walmart and Amazon.com over online prices

• Though Walmart’s main source of revenue is its retail outlets, online retailing is growing

• Amazon.com ’s online sales are nearly 7 times greater than Walmart’s online sales

• Both companies competing to be lowest-priced online retailer

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Price vs. Value

• Cutting cost in tough economic times isn’t always the answer• Companies should sell value, not price

• Price reductions can:• Cut profits and initiate price wars• Cheapen perceptions of brand quality

• Marketers should strive to convince consumers that price is justified by value provided

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Figure 9.1 - Considerations in Setting Price

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Figure 9.2 - Value-Based Pricing vs. Cost-Based Pricing

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Customer Value-Based Pricing

• Setting price based on buyers’ perceptions of value rather than on the seller’s cost

• Types:• Good value pricing• Value-added pricing

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A Steinway piano—any Steinway piano—costs a lot. But to those who own one, price is nothing; the Steinway experience is everything

Good-Value Pricing

• Offering the right combination of quality and good service at a fair price

With its no-frills positioning and low prices, Snap Fitness is well-positioned to take advantage of either good or bad economic conditions

Value-Added Pricing

• Attaching value-added features and services to differentiate a company’s offers while charging higher prices Rather than cutting services to

maintain lower admission prices, premium theaters such as AMC’s Cinema Suites are adding amenities and charging more.

Marketing at Work

• Panera isn’t about the lowest prices— it’s about the value customers receive

• It’s value-added proposition: Good fast-casual food, outstanding service, and the experience

Panera Bread understands that, even in uncertain economic times, low prices often aren’t the best value. Says Panera CEO Ronald Shaich, “Give people something of value and they’ll happily pay for it.”

Types of Costs

Types of Cost-Based Pricing

Figure 9.3 - Break-Even Chart for Determining Target Return Price and Break-Even Volume

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Competition-Based Pricing

• Setting prices based on competitors’ strategies, prices, costs, and market offerings

Fast-growing clothing boutique Hot Mama isn’t likely to win a price war against giants like Macy’s or Kohl’s. Instead, it relies on personal service, a mom- and kid-friendly atmosphere, and its knowledgeable staff to turn harried moms into loyal patrons

Other Considerations Affecting Pricing Decisions

• Internal factors:• Overall marketing strategy, objectives, and the

marketing mix• Organizational considerations

• External factors:• Nature of the market and demand• Other environmental factors

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Overall Marketing Strategy, Objectives, and Mix

• Company must decide on its overall marketing strategy for the product and the role that price will play in accomplishing objectives

• Pricing decisions need to be coordinated with packaging, promotion, and distribution decisions

• Positioning may be based on price

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Overall Marketing Strategy, Objectives, and Mix

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Overall Marketing Strategy, Objectives, and Mix

• Many companies deemphasize price and use other marketing mix tools to create nonprice positions

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Cutting-edge consumer electronics maker Bang & Olufsen builds high value into its products and charges sky-high prices

Organizational Considerations

• Must decide who within the organization should set prices

• This will vary depending on the size and type of company

• Some firms maintain pricing departments

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The Market and Demand

• A firm’s flexibility in setting price varies depending on the nature of the market

• Types of markets:• Pure competition• Monopolistic competition• Oligopolistic competition• Pure monopoly

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Demand Curve

• Shows the number of units the market will buy in a given time period, at different prices that might be charged

The Price-Demand Curve

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When ConAgra raised prices on its Banquet frozen dinners, sales fell sharply. “The key component . . .is you’ve got to be at $1,” says CEO Gary Rodkin, pictured above. “Everything else pales in comparison to that.”

Price Elasticity of Demand

• Measure of the sensitivity of demand to changes in price• Inelastic demand – Demand hardly changes with

a small change in price• Elastic demand – Demand changes greatly with a

small change in price

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The Economy: Impact on Pricing

• Economic factors have a strong impact on pricing strategies

• The recent recession has led to many consumers becoming more value-conscious• While some firms have cut price, others have

shifted to featuring more affordable items • Some firms have held price, but repositioned

brands to enhance their value

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Marketing at Work

• When the economy dipped, rather than cutting everyday prices, Whole Foods set out to convince shoppers that it was, in fact, an affordable place to shop

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Whole Foods assigned workers to serve as “value tour guides,” like the one above, to escort shoppers around stores pointing out value items

New-Product Pricing Strategies

When to Use Market-Skimming Pricing

• Product’s quality and image supportsits higher price

• Costs of low volume cannot be so high that they cancel out the benefit of higher price

• Competitors should not be able to enter market easily and undercut price

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When to Use Market-Penetration Pricing

• Market is highly price sensitive so a low price produces more growth

• Production and distribution costs decrease as sales volume increases

• Low price can help keep out the competition, and the penetration pricer can maintain its low-price position

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Product Mix Pricing Strategies

Product Mix Pricing Strategies

Price Adjustment Strategies – Discounts

• A straight reduction in price on purchases made during a stated period of time or in larger quantities

• Forms:• Cash discount• Quantity discount• Functional discount• Seasonal discount

Price Adjustment Strategies – Allowances

• Reduction from the list price for buyer actions such as trade-ins or promotional and sales support

• Forms:• Trade-in allowances – Price reductions given for

turning in an old item when buying a new one• Promotional allowances – Payments or price

reductions that reward dealers for participating in advertising and sales support programs

Price Adjustment Strategies – Segmented Pricing

• Selling a product or service at two or more prices, where the difference in prices is not based on differences in costs

• Forms:• Customer-segment pricing• Product-form pricing• Location-based pricing• Time-based pricing

Price Adjustment Strategies – Psychological Pricing

• Pricing that considers the psychology of prices, not simply the economics; the price says something about the product

• Reference pricing: Prices that buyers carry in their minds and refer to when they look at a given product

Price Adjustment Strategies – Promotional Pricing

• Discounts • Special-event

pricing• Cash rebates • Low-interest

financing• Longer warranties• Free maintenance

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Firms offer promotional prices to create buying excitement and urgency

Price Adjustment Strategies – Geographical Pricing

• FOB-origin pricing• Uniform-delivered pricing• Zone pricing• Basing-point pricing• Freight-absorption pricing

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Price Adjustment Strategies – Dynamic Pricing

• Adjusting prices continually to meet the characteristics and needs of individual customers and situations

• Especially prevalent online

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The Web seems to be taking us back in time to a new age of fluid pricing. At Priceline.com, you can “name your own price

Factors Influencing International Pricing

• The price that a company should charge in a specific country depends on economic conditions, laws and regulations, competitive situations, etc

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To lower prices in developing countries,Unilever developed smaller, more affordable packages that put the company’s premier brands within the reach of cash-strapped customers

Price Changes: Initiating Price Cuts

• Reasons for price cuts• Excess capacity• Falling demand in face of strong competitive

price or a weakened economy• Attempt to dominate market through lower costs

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Price Increases

• Can greatly improve profits and may be initiated due to:• Cost inflation• Overdemand

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When gasoline prices rise rapidly, angry consumers often accuse the major oil companies of enriching themselves by gouging customers

Figure 9.5 - Assessing and Responding to Competitor Price Changes

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Fighter Brands

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Starbucks has positioned its Seattle’s Best Coffee unit to compete more directly with the “mass-premium” brands sold by Dunkin’ Donuts, McDonald’s, and other lower-priced competitors

Figure 9.6 - Public Policy Issues in Pricing

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Public Policy and Pricing

• Pricing within channel levels:• Price fixing• Predatory pricing

• Pricing across channel levels:• Price discrimination• Retail (or resale) price maintenance• Deceptive pricing

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Rest Stop: Reviewing the Concepts

• Identify the three major pricing strategies and discuss the importance of understanding customer-value perceptions, company costs, and competitor strategies when setting prices

• Identify and define the other important external and internal factors affecting a firm’s pricing decisions

• Describe the major strategies for pricing new products

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Rest Stop: Reviewing the Concepts

• Explain how companies find a set of prices that maximizes 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

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