Price setting, customer value and cost based pricing

What is a Price?

• Price represents the monetary charge for a product or service.
• Customer value is the sum of values customers exchange to gain the benefits of owning/using an item or service.
• Customer's View: Price = Customer Value.

Factors in Price Setting

• Customer perception helps in setting price ceilings ie the max amount of demand can exist
• A price floor will be defined by the product costs ie the lowest price where no profit occurs

Customer Value-Based Pricing

• Key element: uses the buyer's perceived value to set price.
• Value-Based Pricing: Price aligns with perceived value.
• Cost-Based Pricing: Price covers production, distribution, sales costs in addition to providing a fair return.
• Value-Based Pricing Types: Good-value and value-added pricing.
• Good-Value Pricing balances quality/service with a fair price.
• Value-Added Pricing enhances offers using features/services to justify higher prices.

Cost-Based Pricing Details

• Costs determine the price and should include a profit
• Fixed Costs: independent of production level.
• Variable Costs: Vary directly with production.
• Total Costs equal variable plus the fixed costs.
• Cost-Plus Pricing: Adds a standard markup to product cost.
• Break-Even Pricing sets price to cover production/marketing or to achieve target return.

Competition-Based Pricing

• Considers competitors' pricing strategies, costs, and market offerings.
• The company's market compared: Assesses the market offering relative to customer value.
• Competitor strength informs and involves assessing rivals' strength with their respective pricing strategies.

Internal & External Factors

Internal Factors

• Overall marketing strategy, objectives, and mix
• Organizational considerations need to be taken into account

External Factors

• Nature of the market and demand affects pricing
• The economy plays a large role
• Impact on other involved parties is important

Pricing in Different Markets

• Pure Competition: Many uniform commodity traders.
• Monopolistic Competition: Many different prices instead of one.
• Oligopolistic Competition: Very few sellers.
• Single seller describes: Pure Monopoly

Price-Demand Analysis

• Demand Curve: Illustrates how quantity demanded changes with price over a time.
• Price Elasticity of Demand indicates: Demand sensitivity to price changes.
• Inelastic Demand shows demand does not change much with slight price change.
• Elastic Demand exhibits great demand changes with slight price change.

New Product Pricing

• Market-Skimming Pricing: sets high initial prices to maximize revenue
• This usually skims the most prepared customers
• Market-Penetration Pricing: involves low prices to quickly build market share.

Product Mix Pricing Strategies

• Product Line Pricing: involves pricing steps between products
• It is based between features and competitors
• Optional-Product Pricing: is pricing of accessories with the main product.
• Captive-Product Pricing: applies to products that need to be used with main product.
• By-Product Pricing can increase competitiveness.
• Product Bundle Pricing bundles numerous products for better value.

Short Term Price Adjustments

• Discount and Allowance Pricing lower prices for actions like early payment.
• Segmented Pricing adjusts for location differences.
• Psychological Pricing is adjusting prices for a better psychological effect.
• Promotional Pricing temporarily reduces prices for quick sales.
• Geographical Pricing adjusts to customers location.
• Dynamic Pricing is continually adjusting prices in response to individual customers and also situations.
• International Pricing adjusts for variations based on international markets.

Price Change Initiation

Price Cuts may come from:

• Excess capacity
• Falling demand
• Attempt to dominate the market. Price Increases relate to:
• Cost inflation
• Increased demand
• Limited supply.

Buyer Reactions to Price Changes

Price Cuts may suggest:

• New model coming.
• Product not selling well.
• Potential quality concerns. Price Increases may mean:
• Exclusivity
• Exploitation

Competitor Price Change Analysis

• Understand "Why the Change?"
• Is "It Temporary or Permanent?"
• What "Insiders Know?"
• "How to Respond?"

Responding to Price Changes

• Option 1: Reduce price to match competitors
• Option 2: Offer a higher perceived value
• Option 3: Enhance quality but increase price
• Option 4: Introduce a budget-friendly "fighter brand"

Ethical Guidelines

• No price fixing among competitors
• Don't use predatory pricing to harm another or unfairly dominate
• No deceptive pricing meant to mislead consumers
• Prevent scanner fraud by maintaining accurate prices in the system
• Avoid price discrimination
• Provide consumers with access to similar pricing