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Chapter Ten Pricing: Understanding and Capturing Customer Value  Learning Objectives 1. Answer the question “What is price?” and discuss the importance of pricing in today’s fast-changing environment. 2. Identify the three major pricing s...

Chapter Ten Pricing: Understanding and Capturing Customer Value  Learning Objectives 1. Answer the question “What is price?” and discuss the importance of pricing in today’s fast-changing environment. 2. Identify the three major pricing strategies and discuss the importance of understanding customer-value perceptions, company costs, and competitor strategies when setting prices. 3. Identify and define the other important external and internal factors affecting a firm’s pricing decisions. Copyright © 2010 Pearson Education, Inc. 2 Chapter 10 - slide 2 Publishing as Prentice Hall  What Is a Price? In narrow sense Price is the amount of money charged for a product or service. More Broadly It is the sum of all the values that consumers give up in order to gain the benefits of having or using a product or service. Price is the only element in the marketing mix that produces revenue; all other elements represent costs  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 Customer Perceptions of Value Value-based pricing uses the buyers’ perceptions of value, not the sellers cost, as the key to pricing. Price is considered before the marketing program is set. Value-based pricing is customer driven Cost-based pricing is product driven Copyright © 2010 Pearson Education, Inc. Chapter 10 - slide 6 Publishing as Prentice Hall Value Based Pricing Strategies Customer Perceptions of Value  Good-value pricing Customer Perceptions of Value Good-value pricing offers the right combination of quality and good service to 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 EDLP  Every day low pricing  walmart  Good-value pricing Customer Perceptions of Value Everyday low pricing (EDLP) involves charging a constant everyday low price with few or no temporary price discounts High-low pricing involves charging higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected items  Value-added pricing Value-added pricing attaches value-added features and services to differentiate offers, support higher prices, and build pricing power The monsoon season in Mumbai, India, is three months of near- nonstop rain. For 147 years, most Mumbaikars protected themselves with a Stag umbrella from venerable Ebrahim Currim & Sons. Like Ford’s Model T, the basic Stag was sturdy, affordable, and of any color, as long as it was black. By the end of the twentieth century however, the Stag was threatened by cheaper imports from China. Stag responded by dropping prices and scrimping on quality. It was a bad move: For the first time since the 1940s, the brand began losing money. Finally, however, Stag came to its senses. It abandoned the price war and started innovating. It launched designer umbrellas in funky designs and cool colors. Teenagers and young adults lapped them up. It then launched umbrellas with a built-in highpower flashlight for those who walk unlit roads at night and models with prerecorded tunes for music lovers. For women who walk secluded streets after dark, there’s Stag’s Bodyguard model, armed with glare lights, emergency blinkers, and an alarm. Customers willingly pay up to a 100 percent premium for the new products. Under the new value-added strategy, the Stag brand has now returned to profitability.  Factors to Consider When Setting Prices 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  Cost-based pricing Company and Product Costs Cost-based pricing adds a standard markup to the cost of the product Cost-based pricing Company and Product Costs Types of costs  Cost-based pricing Company and Product Costs Fixed costs are the costs that do not vary with production or sales level Rent Heat Interest Executive salaries  Cost-based pricing Company and Product Costs Variable costs are the costs that vary with the level of production Packaging Raw materials Total costs are the sum of the fixed and variable costs for any given level of production Average cost is the cost associated with a given level of output  Cost Based Pricing Costs as a Function of Production Experience Experience or learning curve is when average cost falls as production increases because fixed costs are spread over more units  Cost Based Pricing Strategies Cost-Plus Pricing 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 – Consumers feel it is fair Disadvantages – Ignores demand and competitor prices  Cost Based Pricing Strategies Break-Even Analysis and Target Profit Pricing Break-even pricing is the price at which total costs are equal to total revenue and there is no profit Target profit pricing is the price at which the firm will break even or make the profit it’s seeking  Competition Based Pricing 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  Factors to Consider When Setting Prices Other Internal and External Considerations Overall Marketing Strategy, Objectives, and Mix Price is only one element of the company’s broader marketing strategy If the company has selected its target market and positioning carefully, then its marketing mix strategy, including price, will be fairly straightforward.