Chapter 10: Pricing and Customer Value

Chapter 10: Pricing: Understanding and Capturing Customer Value

• Learning Objectives (10.1): Define "price," and discuss pricing's importance in today's dynamic market. Understanding how price is connected to value for customers is vital.

• Learning Objectives (10.2): Define price. Identify major pricing strategies. Understand the importance of customer-value perceptions, company costs, and competitor strategies when setting prices.

• Learning Objectives (10.3): Identify and explain external and internal factors affecting pricing decisions. Note these are significant in shaping pricing strategies.

• Peloton Example: Peloton in-home exercise bikes are premium-priced ($1,745). Their value isn't solely the price but includes membership in the connected community and its related features. This example demonstrates value-based pricing rather than simple cost-based pricing.

What is Price?

• Price is the monetary amount charged for a product or service. It represents the sum of all values exchanged for those benefits to the customer.

• Companies should sell value, rather than just a lower price, in any economic climate. Focusing on value ensures both customer satisfaction and profitability.

Learning Objective 2: Major Pricing Strategies

• Customer Value-Based Pricing: Value-based pricing prioritizes customers' perceived value rather than sellers' costs. It's a customer-driven approach contrasted with the product-driven cost-based pricing. Prices are set to reflect the perceived value the customer attributes to the product.

• Good-Value Pricing: Good-value pricing offers a fair price for the quality and service received. The focus on a value proposition ensures pricing is appropriate and appealing to customers. E.g., Steinway pianos- while expensive, their value-based approach addresses a customer segment who see value beyond the price.

• Everyday Low Pricing (EDLP): A consistent low price without temporary discounts. This approach aims for sustainable pricing, helping with business stability.

• High-Low Pricing: Pricing higher during most of the time, but using promotions and temporary discounts to draw customers. This creates greater sales promotion activity.

• Value-Added Pricing: Attaching value-added features or services to products and justify a higher price. This adds value to a product in ways beyond its intrinsic value and helps justify a higher price.

Learning Objective 3: Other Internal/External Factors

• Overall Marketing Strategy: Target costing begins with market analysis—defining an ideal selling price based on customer value considerations. Then the cost to produce it is targeted to align with the selling price aim.

• Organizational Considerations: Who should set prices? Who can influence prices? Determine the decision-making processes in price management to understand various responsibilities and potential impact.

• The Market and Demand (Price Elasticity): Understand the relationship between price and demand for a certain product or service in the market. Identify how much the demand changes based on the price being charged.

• Market and Demand Analysis: Analyzing price-demand relationships with specific examples of demand curves illustrating how demand changes in relation to the price of a product. Price changes will relate inversely with demand.

• Price Elasticity of Demand: A measure of how sensitive demand is to price changes. Inelastic demand means demand doesn't change much with price changes; elastic demand means it is highly sensitive to price changes.

• Economic Conditions: Understand how economic situations like recessions or inflation affect pricing strategies. Businesses must adjust strategies in response to wider economic factors.

• Other External Factors: Understand the considerations surrounding government regulations, reseller responses to pricing, and social concerns on pricing, as they impact the pricing decisions of the business.