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PRINCIPLES OF MARKETING
Pricing Products:Understanding and Capturing Customer Value
Pricing Products:Pricing Strategies
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Learning Objectives
After studying this chapter, you should be ableto:
1. Answer the question What is price? and discussthe importance of pricing in todays fast-changingenvironment
2. Discuss the importance of understanding customervalue perceptions when setting prices
3. Discuss the importance of company and productcosts in setting prices
4. Identify and define the other important internal andexternal factors affecting a firms pricing decisions
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What Is Price?
Price is the amount of money chargedfor aproduct or service. It is the sum of all the
values that consumers give up in order togain the benefits of having or using aproduct or service.
Price is the only element in the marketing mixthat produces revenue; all other elementsrepresent costs
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Factors to ConsiderWhen Setting Prices
Customer Perception of Value
Value-based pricing uses the buyersperceptions of value, not the sellers
cost, as the key to pricing. Price is
considered before the marketing program
is set.
Value-based pricing is customerdriven
Cost-based pricing isproductdriven 10-6
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Factors to ConsiderWhen Setting Prices
Customer Perception of Value
Value-based pricing
Good-value pricing Offers the right combination of quality
and good service to fair price
Value-addedpricing Existing brands are being redesigned to
offer more quality for a given price orthe same quality for less price
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Factors to ConsiderWhen Setting Prices
Customer Perception of Value (Good-Value
Pricing)
Everyday low pricing (EDLP)involves charging a
constant everyday low price with few or no
temporary price discounts
High-low pricinginvolves charging higher prices
on an everyday basis but running frequent
promotion to lower prices temporarily on
selected items10-9
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Factors to ConsiderWhen Setting Prices
Customer Perception of Value (Value-Added
Pricing)
Value-added pricing attaches value-added
features and services to differentiate offers,
support higher prices, and build pricing power
Pricing poweris the ability to escape pricecompetition and to justify higher prices and
margins without losing market share
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Factors to ConsiderWhen Setting
Prices
Company and Product Costs
Cost-based pricing involves setting pricesbased on the costs for producing,
distributing, and selling the product plus a
fair rate of return for its effort and risk
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Factors to ConsiderWhen Setting Prices
Company and Product Costs
Types of costs
Fixed costs
Rent, salaries etc
Variable costs
Raw materials, packaging etc Total costs
TC = TFC + TVC
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Factors to ConsiderWhen Setting Prices
Company and Product Costs (1) Costs as a
Function of Product Experience, Concept
Experience or learning curve is when the
average cost falls as production
increases because fixed costs are spread
over more units
* Economies of Scale
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Factors to ConsiderWhen Setting
PricesCompany and Product Cost (3) Break-Even
Analysis and Target Profit Pricing
Break-even pricing is the price at which totalcosts are equal to total revenue and thereis no profit.
TC = TR
Target profit pricing is the price at which thefirm will break even or make the profit its
seeking 10-19
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Factors to ConsiderWhen Setting
Prices
break-even = fixed cost
volume (price-variable cost)
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Break-Even Analysis and Target Profit Pricing
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Factors to ConsiderWhen Setting
Prices
Other Internal and External Considerations
Affecting Price Decisions
Customer perceptions of value set the
upper limit for prices, and costs set the
lower limit
Companies must considerinternal and
external factors when setting prices
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Factors to ConsiderWhen Setting
PricesOther Internal and External ConsiderationsAffecting Price Decisions
Internal factors
Marketing strategies Organization Who should set the price and who can influence
Objectives Survival, profit maximization, customer retention etc
Marketing mix 4 Ps (Product, Place, Promotion and Price)External factors
Market demand
Competitors strategies and prices10-22
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Factors to ConsiderWhen Setting
PricesOther Internal and External Considerations
Affecting Price Decisions
Types of markets Pure competition
Monopolistic competition
Oligopolistic competition Pure monopoly
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Factors to ConsiderWhen Setting
PricesOther Internal and External Considerations
Affecting Price Decisions
Pure competition is a market with many buyers andsellers trading uniform commodities where nosingle buyer or sellerhas much effect on marketprice
Monopolistic competition is a market with manybuyers and sellers who trade over a range ofprices rather than a single market price withdifferentiated offers.
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Factors to ConsiderWhen Setting
Prices
Other Internal and External ConsiderationsAffecting Price Decisions
Oligopolistic competition is a market with fewsellers because it is difficult for sellers to enterwho are highly sensitive to each others pricing andmarketing strategies
Pure monopoly is a market with only one seller. In aregulated monopoly, the government permits aprice that will yield a fair return. In a non-regulatedmonopoly, companies are free to set a marketprice.
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Factors to ConsiderWhen Setting
Prices
Other Internal and External ConsiderationsAffecting Price Decisions
Th
e demand curve shows the number of units themarket will buy in a given period at different prices
Normally, demand and price are inversely related
Higher price = lower demand
For prestige (luxury) goods, higher price can equalhigher demand when consumers perceive higherprices as higher quality
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Factors to ConsiderWhen Setting
Prices
Other Internal and External ConsiderationsAffecting Price Decisions
Price elasticity of demand illustrates theresponse of demand to a change in price
Inelastic demand occurs when demand hardlychanges when there is a small change in price
Elastic demand occurs when demand changesgreatly for a small change in price
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Factors to ConsiderWhen Setting
Prices
Other Internal and External ConsiderationsAffecting Price Decisions
Factors affecting price elasticity of demand Unique product
Quality
Prestige
Substitute products Cost relative to income
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Factors to ConsiderWhen Setting
Prices
Other Internal and External Considerations
Affecting Price Decisions
Competition strategies and prices
Factors to consider
Comparison of offering in terms of customer value Strength of competitors
Competition pricing strategies
Customer price sensitivity
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Factors to ConsiderWhen Setting
Prices
Other Internal and External Considerations
Affecting Price Decisions
Other external factors
Economic conditions
Resellers response to price
Government
Social concerns
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TWO BROAD NEW-PRODUCT
PRICING STRATEGIESMarket skimming pricing
Setting a high price for a newproduct to skim maximum revenues
layer by layer from the segmentswilling to pay the high price.
Sony introduced HDTV, Blu-RayDisc Player
Market penetration pricingSetting a low price for a new
product in order to attract a largenumber of buyers and a large marketshare.
Maybelline High DefinitionMascara
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Product Mix Pricing Strategies
Product line pricing
Optional-product pricing
Captive- product pricing By-product pricing
Product bundle pricing
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1. Product Line Pricing
Setting prices for a closely related set of
products or for a product line.
Different elements of the product line can
be used to appeal to different segments
of the market.
The product can differ in small ways, such
as features or complementary
Example, Coke, Diet Coke, Cherry Coke,
and Vanilla Coke, the prices are quite
similar
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2. Optional-Product Pricing
Offering to sell optional or accessoryproducts along with their main product.
Example, I-Pod buyers may choose extraaccessories such as travel chargers,external transmitters, speakers and
armbands.
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3. Captive-Product Pricing
Applies to products that are used together
when one of the product fills a sustainable
need.
Example, Gillette prices razors rather
modestly but makes huge margins on the
blades.
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4. By-Product Pricing
Manufacturers will seek amarket for its by-productsand should accept anyprice that covers morethat the cost or storingand delivering them.
Meat processes,petroleum, agriculture
products, chemicals etc Example, zoo sells
manure to farmers
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5. Price Bundling (Product Bundle Pricing)
Takes a set of products, offers them to
customers in a package, usually price thepackage lower than sum of the individualcomponents.
Often consisting of models that slow
sellers, specially priced to eliminateinventory
But, some of the bundle can be priceshigher than the sum of the product,
example, McD-Happy Meals
Nevertheless, you as a product managershall seek ways to unbundledthe productpackage to allow customers to choosewhat they want to pay for
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Price Adjustment Strategies
Discount and allowance pricing
Segmented pricing
Psychological pricing Promotional pricing
Geographical pricing
International pricing
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Price Adjustment Strategies
Pricing Strategies
Discounts Cash discount for paying promptly
Quantity discount for buying in large volume
Functional (trade) discount for selling,storing, distribution, and record keeping
Allowances Trade in allowance for turning in an old item
when buying a new one
Promotional allowance to reward dealers forparticipating in advertising or sales support
programs 11-14
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Price Adjustment Strategies
Pricing Strategies
Discount and allowance pricing reducesprices to reward customer responses such
as paying early or promoting the product
Discounts
Allowances
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Price Adjustment StrategiesPricing Strategies
Segmented pricing is used when acompany sells a product at two or moreprices even though the difference is not
based on cost
Customer segment pricing
Product form segment pricing Different versions of the product are priced
differently
Location pricing
Charge different price for different location11-16
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Price Adjustment Strategies
Pricing Strategies
Psychological pricing occurs when sellersconsider the psychology of prices and not simplythe economics, the price is used to say somethingabout the product.
Reference prices areprices that buyers carry intheir minds and refer to when looking at a given
product Noting current prices
Remembering past prices
Assessing the buying situations
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Price Adjustment
Strategies
Promotional pricing is when prices aretemporarily priced below list price or cost to
increase demand.
Loss leaders
Special event pricing
Cash rebates Low interest financing
Longer warrantees
Free maintenance11-21
Pricing Strategies
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Price Adjustment Strategies
Pricing Strategies
Risks of promotional pricing Used too frequently, and copies by
competitors can create deal-prone
customers who will wait for promotions and
avoid buying at regular price
Creates price wars
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Price Adjustment Strategies
Pricing Strategies
Geographical pricing is used for customers in
different parts of the country or the world FOB (Free-On-Board) pricing
Uniformed delivery pricing
Zone pricing
Basing point pricing Freight absorption pricing
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Price Adjustment Strategies
Pricing Strategies
Dynamic pricing when prices are adjusted continually to meet the
characteristics and needs of the individual
customer and situations
International pricing prices are set in a specific country based on
country-specific factors Economic conditions
Competitive conditions
Laws and regulations
Infrastructure
Company marketing objective11-28
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Price Changes
Initiating Pricing Changes
Price cuts is a reduction in price
Excess capacity Increase market share
Price increases is an increase in selling price
Cost inflation Increased demand and lack of supply
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Price Changes
Buyer Reactions to Pricing Changes
Price cuts
New models will be available
Models are not selling well
Quality issues
Price increases Product is hot Company greed
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Price Changes
Responding to Price Changes
Questions Why did the competitor change the price?
Is the price cut permanent or temporary?
What is the effect on market share and
profits?
Will competitors respond?
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Price Changes
Responding to Price Changes
Solutions Reduce price to match competition
Maintain price but raise the perceived value
through communications
Improve quality and increase price
Launch a lower-price fighting brand
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Public Policy and Pricing
Pricing Within Channel Levels
Price fixing: Sellers must set prices withouttalking to competitors
Predatory pricing is prohibited.
Selling below cost with the intention ofpunishing a competitor or gaining higher long-term profits by putting competitors out ofbusiness
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Public Policy and Pricing
Pricing Across Channel Levels
Robinson Patman Act prevents unfairprice
discrimination by ensuring that sellers offer thesame price terms to customers at a given level oftrade
Price discrimination is allowed: If the seller can prove that costs differ when selling to
different retailers
If the seller manufactures different qualities of the sameproduct for different retailers
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Public Policy and Pricing
Pricing Across Channel Levels
Retail (resale) price maintenance is when a
manufacturer requires a dealer to charge aspecific retail price for its products.
Deceptive pricing occurs when a seller states prices
or price savings that mislead consumers or are notactually available to consumers
Both are prohibited under the LAW!
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Public Policy and Pricing
Pricing Across Channel Levels
Deceptive pricing occurs when a seller states prices
or price savings that mislead consumers or are notactually available to consumers
Scanner fraud failure of the seller to enter currentor sale prices into the computer system
Price confusion results when firms employ pricingmethods that make it difficult for consumers tounderstand what price they are really paying
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