pricing: understanding and capturing customer value

9-1Prentice Hall, Copyright 2009

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Pricing: Understanding and Capturing Customer

Value


Discuss the importance of understanding customer-value perceptions and company costs when setting prices.

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

Describe the major strategies for pricing imitative and new products.

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 key issues related to initiating and responding to price changes.

Rest Stop: Previewing the Concepts


Background Company: Ryanair is one of

Europe’s most popular carriers, flying 42.5 million passengers to 100+ European destinations.

Profitability: Profits have increased at double-digit rates for the past 3 years; average fare is $53 and profit margin is 17% compared to Southwest’s $92 and 7%.

Future Goal: CEO Michael O’Leary says that more than half of Ryanair’s customers will fly free by 2010.

Ryanair – FREE Air Travel?Case Study

How can they do this? Frugal cost structure: Constantly

looking for new ways to cut costs— removed seat back pockets to reduce weight and cleaning costs. Sells 98% of tickets online, reducing commissions. Flight crews buy their own uniforms.

Charges for amenities: Customers pay for refreshments, snacks, and baggage check-in services.

Generates revenue creatively: Planes serve as giant billboards; sells in-plane seatback advertising; merchandising in-flight. In the future, in-flight gaming is planned.


What Is a Price?

Narrowly defined, price is the amount of money charged for a product or service.

Broadly defined, price is the sum of all of the values that consumers give up in order to gain the benefits of having or using the product or service.


Factors to Consider When Setting Price

Customer perceptions of value► Price ceiling inhibits demand

Other internal and external considerations:► Marketing strategy, objectives, mix► Nature of the market and demand► Competitors’ strategies and prices

Product costs► No profits are available below the price floor


Customer Perceptions of Value

Value-based pricing:►Uses buyers’ perceptions of value, not the

seller’s cost, as the key to pricing.►Price is considered along with the other

marketing mix variable before the marketing program is set.

►Types of value-based pricing:• Good value pricing• Value-added pricing


Internal Factors Affecting Pricing Decisions

Cost-based pricing:► Setting prices based on the costs for producing,

distributing, and selling the product plus a fair rate of return for its effort and risk.

► Fixed costs:• Costs that do not vary with production or sales level.

► Variable costs:• Costs that vary directly with the level of production.



Types of cost-based pricing:►Cost-plus pricing:

• Adding a standard markup to the cost of the product.

►Break-even pricing►Target-profit pricing



Overall marketing strategy, objectives, and the marketing mix:►Company must decide on its overall

marketing strategy for the product.►General pricing objectives:

• Survival• Current profit maximization• Market share leadership• Product quality leadership



Marketing mix strategy:►Price decisions must be coordinated with

product design, distribution, and promotion decisions to form a consistent and effective marketing program.

►Target costing:• Pricing that starts with an ideal selling price,

then targets costs that will ensure that the price is met.



Organizational considerations:►Must decide who within the organization

should set prices.►This will vary depending on the size and

type of company.


External Factors Affecting Pricing Decisions

The market and demand:►Costs set the lower limit of prices while the

market and demand sets the upper limit.►Pricing in different types of markets:

• Pure competition

• Monopolistic competition

• Oligopolistic competition

• Pure monopoly



The market and demand:►Analyzing the price-demand relationship:

• Different prices result in different levels of demand, as illustrated by the demand curve.

►The price elasticity of demand refers to how responsive demand will be to a change in price. Demand may be characterized as:• Inelastic• Elastic



Competitors’ strategies and prices:►How does the market offering compare to

competitive products in terms of value?►How strong is the competition and what is

their pricing strategy?►How does the competitive landscape

influence customer price sensitivity? Other external factors


When to use:► Product’s quality and

image must support its higher price.

► Costs of low volume cannot be so high they cancel the advantage of charging more.

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

Market skimming:► Setting a high price

for a new product to “skim” revenues layer-by-layer from those willing to pay the high price.

► Company makes fewer, but more profitable sales.

New-Product Pricing Strategies


When to use:► Market is highly price

sensitive so a low price produces more growth.

► Costs must fall as sales volume increases.

► Competition must be kept out of the market or the effects will be only temporary.

Market penetration:► Setting a low initial

price in order to “penetrate” the market quickly and deeply.

► Can attract a large number of buyers quickly and win a large market share.

New-Product Pricing Strategies


Product line pricing Optional-product pricing Captive-product pricing By-product pricing Product bundle pricing

Product Mix Pricing Strategies



Product-line pricing:►Involves setting price steps between

products in a product line based on cost differences between products and customer perceptions of value.

Optional-product pricing:►Pricing optional or accessory products sold

with the main product (e.g., ice maker with the refrigerator).



Captive-product pricing:► Pricing products that must be used with the main

product (e.g., replacement cartridges for Gillette razors)

By-product pricing:► Pricing low-value by-products to get rid of them

(e.g., animal manure from zoo) Product bundle pricing:

► Pricing bundles of products sold together (software, monitor, PC, and printer)


Price Adjustment Strategies

Discount and allowance pricing Segmented pricing Psychological pricing Promotional pricing Geographical pricing Dynamic pricing International pricing



Discounts►Cash►Quantity►Functional►Seasonal

Allowances►Trade-in►Promotional



Segmented pricing:► Selling a product or service at two or more prices,

where the difference in prices is not based on differences in costs.

Types:1. Customer-segment2. Product-form3. Location pricing4. Time pricing



Psychological pricing:►Considers the psychology of prices and not

simply the economics.►Consumers usually perceive higher-priced

products as having higher quality.►Consumers use price less when they can

judge the quality of a product by examining it or recalling experiences.



Geographical pricing:► FOB-origin pricing► Uniform-delivered

pricing► Zone pricing► Basing-point pricing► Freight-absorption

pricing

Promotional pricing:► Loss leaders► Special-event pricing ► Low-interest financing► Longer warranties► Free maintenance► Discounts



Dynamic pricing:►Adjusting prices continually to meet the

characteristics and needs of individual customers and situations.

International pricing:►Adjusting prices for international markets

requires consideration of many factors.



Factors influence international pricing:► Economic conditions► Competitive situations► Laws and regulations► Development of the wholesaling and retailing

system► Consumer perceptions and preferences► Different marketing objectives► Costs


Price Changes

Price cuts may be initiated due to:►Excess capacity►Falling demand in face of strong

competitive price►Dominate market through lower costs

Price increases may be initiated due to:►Cost inflation►Overdemand


Responses to Price Changes

Buyer reactions to price changes. Competitor reactions to price changes. Firm responses to price changes by

competition:►Reduce price to match competition►Raise the perceived quality of its offer►Improve quality and increase price►Launch a low-price “fighting brand”


Public Policy and Pricing

Price fixing Predatory pricing Price discrimination Retail price maintenance Deceptive pricing:

►Promoted price reductions►Scanner fraud►Price confusion


Discuss the importance of understanding customer-value perceptions and company costs when setting prices.

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

Describe the major strategies for pricing imitative and new products.

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 key issues related to initiating and responding to price changes.

Rest Stop: Reviewing the Concepts


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Copyright © 2009 Pearson Education, Inc. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice HallPublishing as Prentice Hall

pricing: understanding and capturing customer value

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