Principles of Marketing PDF

Principles of Marketing Nineteenth Edition, Global Edition Chapter 10 Pricing: Understanding and Capturing Customer Value Copyright © 2024 Pearson E...

Principles of Marketing Nineteenth Edition, Global Edition Chapter 10 Pricing: Understanding and Capturing Customer Value Copyright © 2024 Pearson Education Ltd. All Rights Reserved. Learning Objectives 10.1 Answer the question “What is price?” and discuss the importance of pricing in today’s fast-changing environment. 10.2 Define price, identify the major pricing strategies, and discuss the importance of understanding customer- value perceptions, company costs, and competitor strategies when setting prices. 10.3 Identify and discuss the other important external and internal factors affecting a firm’s pricing decisions. Copyright © 2024 Pearson Education Ltd. All Rights Reserved. PELOTON: Premium Priced, But It’s Not about the Price Peloton in-home exercise bikes sell at a steep price of $1,745, compared with the typical bikes you’d find at your local sporting goods store for as little as $200 or $300. For the Peloton faithful, it isn’t just about Peloton’s premium prices. It’s about the values received from Peloton Interactive membership in the dynamic, closely connected Peloton community. Copyright © 2024 Pearson Education Ltd. All Rights Reserved. Learning Objective 1 Answer the question “What is price?” and discuss the importance of pricing in today’s fast-changing environment. Copyright © 2024 Pearson Education Ltd. All Rights Reserved. What Is a Price? Price is the amount of money charged for a product or service, or the sum of all the values that customers exchange for the benefits of having or using the product or service. Pricing: No matter what the state of the economy, companies should sell value, not price. magicoven/Shutterstock Copyright © 2024 Pearson Education Ltd. All Rights Reserved. Learning Objective 2 Define price, identify the major pricing strategies, and discuss the importance of understanding customer-value perceptions, company costs, and competitor strategies when setting prices. Copyright © 2024 Pearson Education Ltd. All Rights Reserved. Major Pricing Strategies (1 of 17) Figure 10.1 Considerations in Setting Price Copyright © 2024 Pearson Education Ltd. All Rights Reserved. Major Pricing Strategies (2 of 17) Customer Value-Based Pricing Value-based pricing uses the buyers’ perceptions of value rather than the seller’s cost. Value-based pricing is customer driven. Cost-based pricing is product driven. Price is set to match perceived value. Copyright © 2024 Pearson Education Ltd. All Rights Reserved. Major Pricing Strategies (3 of 17) Figure 10.2 Value-Based Pricing versus Cost-Based Pricing Copyright © 2024 Pearson Education Ltd. All Rights Reserved. Major Pricing Strategies (4 of 17) Customer Value-Based Pricing Good-value pricing is offering just the right combination of quality and good service at a fair price. Customer value–based pricing: A Steinway piano— any Steinway piano—costs a lot. But to a Steinway customer, it’s a small price to pay for the value of owning one. © Westend61 GmbH/Alamy Stock Photo Copyright © 2024 Pearson Education Ltd. All Rights Reserved. Major Pricing Strategies (5 of 17) Customer Value-Based Pricing Everyday low pricing (EDLP) involves charging a constant everyday low price with few or no temporary price discounts. Copyright © 2024 Pearson Education Ltd. All Rights Reserved. Major Pricing Strategies (6 of 17) Customer Value-Based Pricing High-low pricing involves charging higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected items. Copyright © 2024 Pearson Education Ltd. All Rights Reserved. Major Pricing Strategies (7 of 17) Customer Value-Based Pricing Value-added pricing attaches value-added features and services to differentiate a company’s offers and thus their higher prices. The Porsche Drive subscription program promises “Dreams on demand—a fleet of Porsches at your fingertips.” That makes the value well worth the price for the group of Porsche enthusiasts who sign up. North Monaco/Shutterstock Copyright © 2024 Pearson Education Ltd. All Rights Reserved. Major Pricing Strategies (8 of 17) Cost-Based Pricing Cost-based pricing sets prices based on the costs for producing, distributing, and selling the product plus a fair rate of return for effort and risk. Copyright © 2024 Pearson Education Ltd. All Rights Reserved. Major Pricing Strategies (9 of 17) Cost-Based Pricing Fixed costs are the costs that do not vary with production or sales level. Rent Heat Interest Executive salaries Copyright © 2024 Pearson Education Ltd. All Rights Reserved. Major Pricing Strategies (10 of 17) Cost-Based Pricing Variable costs vary directly with the level of production. Raw materials Packaging Copyright © 2024 Pearson Education Ltd. All Rights Reserved. Major Pricing Strategies (11 of 17) Cost-Based Pricing Total costs are the sum of the fixed and variable costs for any given level of production. Copyright © 2024 Pearson Education Ltd. All Rights Reserved. Major Pricing Strategies (12 of 17) Figure 10.3 Cost per Unit at Different Levels of Production per Period Copyright © 2024 Pearson Education Ltd. All Rights Reserved. Major Pricing Strategies (13 of 17) Figure 10.4 Cost per Unit as a Function of Accumulated Production: The Experience Curve Copyright © 2024 Pearson Education Ltd. All Rights Reserved. Major Pricing Strategies (14 of 17) Cost-Based Pricing Cost-plus pricing adds a standard markup to the cost of the product. Benefits – Sellers are certain about costs. – Price competition is minimized. – Buyers feel it is fair. Disadvantages – Ignores demand and competitor prices Copyright © 2024 Pearson Education Ltd. All Rights Reserved. Major Pricing Strategies (15 of 17) Cost-Based Pricing Break-even pricing (target return pricing) is setting price to break even on costs or to make a target return. Figure 10.5 Break-Even Chart for Determining Target Return Price and Break-Even Volume Copyright © 2024 Pearson Education Ltd. All Rights Reserved. Major Pricing Strategies (16 of 17) Table 10.1 Break-Even Volume and Profits at Different Prices Price Unit Demand Expected Unit Total Revenue Total Costs* Profit Needed Demand (1) × (3) (4) – (5) to Break Even at Given Price $14 75,000 71,000 $994,000 $1,010,000 −$16,000 16 50,000 67,000 1,072,000 970,000 102,000 18 37,500 60,000 1,080,000 900,000 180,000 20 30,000 42,000 840,000 720,000 120,000 22 25,000 23,000 506,000 530,000 −24,000 *Assumes fixed costs of $300,000 and constant unit variable costs of $10. Copyright © 2024 Pearson Education Ltd. All Rights Reserved. Major Pricing Strategies (17 of 17) Competition-Based Pricing Competition-based pricing is setting prices based on competitors’ strategies, costs, prices, and market offerings. Pricing versus competitors: Caterpillar dominates the heavy equipment industry despite charging premium prices. Customers believe that Caterpillar gives them a lot more value for the price over the lifetime of its Kristoffer Tripplaar/Alamy Stock Photo machines. Copyright © 2024 Pearson Education Ltd. All Rights Reserved. Discussion Question (1 of 2) Describe the major pricing strategies Copyright © 2024 Pearson Education Ltd. All Rights Reserved. Learning Objective 3 Identify and discuss the other important external and internal factors affecting a firm’s pricing decisions. Copyright © 2024 Pearson Education Ltd. All Rights Reserved. Other Internal and External Considerations Affecting Price Decisions (1 of 8) Overall Marketing Strategy, Objectives, and Mix Target costing starts with an ideal selling price based on consumer value considerations and then targets costs that will ensure that the price is met. Brands might build their marketing strategies around premium pricing or affordable pricing. Consumer electronics maker Visio’s aim is “to make high-quality technology and content affordable to everyone.” Andrey_Popov/Shutterstock Copyright © 2024 Pearson Education Ltd. All Rights Reserved. Other Internal and External Considerations Affecting Price Decisions (2 of 8) Organizational Considerations Who should set prices? Who can influence prices? Copyright © 2024 Pearson Education Ltd. All Rights Reserved. Other Internal and External Considerations Affecting Price Decisions (3 of 8) The Market and Demand Before setting prices, the marketer must understand the relationship between price and demand for its products. Pricing under monopolistic competition: Bose sets its premium audio products apart not by price but by the power of its brand and the host of differentiating features. Jonathan Weiss/Shutterstock Copyright © 2024 Pearson Education Ltd. All Rights Reserved. Other Internal and External Considerations Affecting Price Decisions (4 of 8) The Market and Demand Pricing In Different Types of Markets Pure competition Monopolistic competition Oligopolistic competition Pure monopoly Copyright © 2024 Pearson Education Ltd. All Rights Reserved. Other Internal and External Considerations Affecting Price Decisions (5 of 8) The Market Demand Analyzing the Price-Demand Relationship The demand curve shows the number of units the market will buy in a given period at different prices Demand and price are inversely related Higher price = lower demand Copyright © 2024 Pearson Education Ltd. All Rights Reserved. Other Internal and External Considerations Affecting Price Decisions (6 of 8) Figure 10.6 Demand Curve Copyright © 2024 Pearson Education Ltd. All Rights Reserved. Other Internal and External Considerations Affecting Price Decisions (7 of 8) The Market and Demand Price Elasticity of Demand Price elasticity is a measure of the sensitivity of demand to changes in price. Inelastic demand is when demand hardly changes with a small change in price. Elastic demand is when demand changes greatly with a small change in price. Copyright © 2024 Pearson Education Ltd. All Rights Reserved. Discussion Question (2 of 2) What is price elasticity of demand? Copyright © 2024 Pearson Education Ltd. All Rights Reserved. Other Internal and External Considerations Affecting Price Decisions (8 of 8) The Economy and Other External Factors Economic conditions Reseller’s response to price Government Social concerns Pricing and the economy: To meet the needs of cost-conscious customers with tighter budgets, JD.com introduced lower-priced private label brands such as Cute Pet and Best Home. Sundry Photography/Alamy Stock Photo Copyright © 2024 Pearson Education Ltd. All Rights Reserved.