Marketing Chapter 10: Pricing and Customer Value

Pricing: Understanding and Capturing Customer Value

• Price is the amount of money charged for a product or service, and more broadly, it is the sum of all the values that consumers give up to gain the benefits of having or using a product or service.

Factors to Consider When Setting Prices

• Customer Perceptions of Value: understanding how much value consumers place on the benefits they receive from the product and setting a price that captures that value.

Value-Based Pricing Strategies

• Uses buyers' perceptions of value, not sellers' cost, as the key to pricing.
• Price is considered before the marketing program is set.
• Customer-driven, not product-driven.

Good-Value Pricing

• Offers the right combination of quality and good service at a fair price.
• May involve introducing lesser expensive versions of established brands (e.g. Armani Exchange, Emirate's Fly Dubai).
• Existing brands are being redesigned to offer more quality for a given price or the same quality for less price.

Every Day Low Pricing (EDLP)

• Charging a constant everyday low price with few or no temporary price discounts (e.g. Walmart).

High-Low Pricing

• Charging higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected items.

Value-Added Pricing

• Attaches value-added features and services to differentiate offers, support higher prices, and build pricing power.
• Examples: Stag umbrella with built-in high-power flashlight, models with pre-recorded tunes for music lovers, and Bodyguard model with glare lights, emergency blinkers, and an alarm.

Company and Product Costs

• Cost-based pricing involves setting prices based on the costs for producing, distributing, and selling the product plus a fair rate of return for its effort and risk.

Types of Costs

• Fixed costs: costs that do not vary with production or sales level (e.g. rent, heat, interest, executive salaries).
• Variable costs: costs that vary with the level of production (e.g. packaging, raw materials).
• Total costs: the sum of the fixed and variable costs for any given level of production.
• Average cost: the cost associated with a given level of output.

Cost-Based Pricing Strategies

• Cost-plus pricing: adds a standard markup to the cost of the product.
• Benefits: sellers are certain about costs, prices are similar in industry and price competition is minimized, and consumers feel it is fair.
• Disadvantages: ignores demand and competitor prices.

Break-Even Analysis and Target Profit Pricing

• Break-even pricing: the price at which total costs are equal to total revenue and there is no profit.
• Target profit pricing: the price at which the firm will break even or make the profit it's seeking.

Competition-Based Pricing

• Involves setting prices based on competitors' strategies, costs, prices, and market offerings.
• Consumers will base their judgments of a product's value on the prices that competitors charge for similar products.

Other Internal and External Considerations

• Customer perceptions of value set the upper limit for prices, and costs set the lower limit.
• Companies must consider internal and external factors when setting prices.
• Overall marketing strategy, objectives, and mix: price is only one element of the company's broader marketing strategy.