Pricing Strategies in Marketing (PDF)

Principles of Marketing Global Edition Kotler and Armstrong Chapter 10: Pricing Understanding and Capturing Customer Value Copyright © Pearson Education, Inc. 10-1  What Is a P...

Principles of Marketing Global Edition Kotler and Armstrong Chapter 10: Pricing Understanding and Capturing Customer Value Copyright © Pearson Education, Inc. 10-1  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. Price is the only element in the marketing mix that produces revenue; all other elements represent costs Copyright © Pearson Education, Inc. 10-6  Major Pricing Strategies FIGURE | 10.1 Considerations in Setting Price Copyright © Pearson Education, Inc. 10-9  Major Pricing Strategies Customer Value-Based Pricing Value-based pricing uses the buyers’ perceptions of value rather than the seller’s cost as the key to pricing. Cost-based pricing is product driven. Value-based pricing is customer driven, Price is set to match perceived value. Copyright © Pearson Education, Inc. 10-10  Major Pricing Strategies Customer Value-Based Pricing Figure 10.2: Value-Based Pricing vs. Cost-Based Pricing Copyright © Pearson Education, Inc. 10-11  Major Pricing Strategies Customer Value-Based Pricing Good-value pricing is offering just the right combination of quality and good service at a fair price. Everyday low pricing (EDLP). High-low pricing. Copyright © Pearson Education, Inc. 10-12  Major Pricing Strategies Customer Value-Based Pricing Everyday low pricing (EDLP) involves charging a constant everyday low price with few or no temporary price discounts. Example: Walmart Copyright © 2016 Pearson Education, Inc. 10-13  Major Pricing Strategies 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. Example: Metro, and Carrefour. Copyright © Pearson Education, Inc. 10-14  Major Pricing Strategies Customer Value-Based Pricing Value-added pricing attaches value-added features and services to differentiate the companies offers and thus their higher prices and build pricing power. Pricing power is the ability to escape price competition and to justify higher prices and margins without losing market share Copyright © Pearson Education, Inc. 10-15  Major Pricing Strategies 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 © Pearson Education, Inc. 10-16  Major Pricing Strategies Cost-Based Pricing Fixed costs are the costs that do not vary with production or sales level. Rent Heat Interest Executive salaries Copyright © Pearson Education, Inc. 10-17  Major Pricing Strategies Cost-Based Pricing Variable costs vary directly with the level of production. Raw materials Packaging Copyright © Pearson Education, Inc. 10-18  Major Pricing Strategies Cost-Based Pricing Total costs are the sum of the fixed and variable costs for any given level of production. Copyright © Pearson Education, Inc. 10-19  Major Pricing Strategies Cost-Based Pricing Costs as a Function of Production Experience FIGURE | 10.4 Cost per Unit as a Function of Accumulated Production: The Experience Curve Copyright © Pearson Education, Inc. 10-21  Major Pricing Strategies Cost-Based Pricing Cost-plus pricing (Markup 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 © Pearson Education, Inc. 10-22  Major Pricing Strategies Cost-Based Pricing Break-even pricing (target return pricing) Setting price to break even on the costs of making and marketing a product or setting price to make a target return. Copyright © Pearson Education, Inc. 10-23 Major Pricing Strategies Cost-Based Pricing  Major Pricing Strategies Competition-based pricing Competition-based pricing is 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. Copyright © Pearson Education, Inc. 10-24 Other Internal and External Considerations Affecting Price Decisions 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. Example: when Honda initially designed the Honda Fit, it began with a $13,950 starting price. It then designed a stylish, little car with costs that allowed it to give target customers those values. Copyright © Pearson Education, Inc. 10-27 Other Internal and External Considerations Affecting Price Decisions Organizational Considerations Who should set prices? Who can influence prices? Copyright © Pearson Education, Inc. 10-28 Other Internal and External Considerations Affecting Price Decisions The Market and Demand Before setting prices, the marketer must understand the relationship between price and demand for its products. Copyright © Pearson Education, Inc. 10-29 Other Internal and External Considerations Affecting Price Decisions The Market and Demand Pricing in Different Types of Markets Pure competition Monopolistic competition Oligopolistic competition Pure monopoly Copyright © Pearson Education, Inc. 10-30  Other Internal and External Considerations Affecting Price Decisions The Market and Demand Pure competition: the market consists of many buyers and sellers trading in a uniform commodity, and no single buyer or seller has much effect on the going market price. Example: wheat, milk, and tomatoes. Monopolistic competition: the market consists of many buyers and sellers who trade over a range of prices because sellers can differentiate their offers to buyers. Example: Restaurants.  Other Internal and External Considerations Affecting Price Decisions The Market and Demand Oligopolistic competition is a market with few sellers, each seller is alert and responsive to competitors’ pricing strategies and marketing moves. Example: Orange, Etisalat, Vodafone. Pure monopoly is a market with only one seller. In a regulated monopoly, the government permits a price that will yield a fair return. In a non- regulated monopoly, companies are free to set a market price. Example: Public utilities—gas, electric, water. Other Internal and External Considerations Affecting Price Decisions The Market and 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 For prestige (luxury) goods, higher price can equal higher demand when consumers perceive higher prices as higher quality. Copyright © Pearson Education, Inc. 10-31 Other Internal and External Considerations Affecting Price Decisions 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 © Pearson Education, Inc. 10-33 Other Internal and External Considerations Affecting Price Decisions The Market and Demand Price Elasticity of Demand Copyright © Pearson Education, Inc. 10-32 Other Internal and External Considerations Affecting Price Decisions The Economy and Other External Factors Economic conditions Reseller’s response to price Government Social concerns Copyright © Pearson Education, Inc. 10-34  Other Internal and External Considerations Affecting Price Decisions The Economy and Other External Factors The Economy Economic conditions can have a strong impact on the firm’s pricing strategies. Economic factors such as a boom or recession, inflation, and interest rates affect pricing decisions because they affect consumer spending, consumer perceptions of the product’s price and value, and the company’s costs of producing and selling a product.  Other Internal and External Considerations Affecting Price Decisions The Economy and Other External Factors Other External Factors The company must consider several other factors in its external environment when setting prices. The company should set prices that give resellers a fair profit, encourage their support, and help them to sell the product effectively. The government is another important external influence on pricing decisions. Social concerns may need to be taken into account in setting prices.  Pricing Learning Objective 3 Identify and define the other important external and internal factors affecting a firm’s pricing decisions. Overall Marketing Strategy, Objectives, and Mix Organizational Considerations The Market and Demand The Economy Other External Factors Copyright © Pearson Education, Inc. 10-35