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9-1Prentice Hall, Copyright 2009
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Ch
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Pricing: Understanding and Capturing Customer
Value
9-2Prentice Hall, Copyright 2009
Discuss the importance of understanding customer-value perceptions and company costs when setting prices.
Identify and define the other important internal and external factors affecting a firm’s pricing decisions.
Describe the major strategies for pricing imitative and new products.
Explain how companies find a set of prices that maximizes the profits from the total product mix.
Discuss how companies adjust their prices to take into account different types of customers and situations.
Discuss key issues related to initiating and responding to price changes.
Rest Stop: Previewing the Concepts
9-3Prentice Hall, Copyright 2009
Background Company: Ryanair is one of
Europe’s most popular carriers, flying 42.5 million passengers to 100+ European destinations.
Profitability: Profits have increased at double-digit rates for the past 3 years; average fare is $53 and profit margin is 17% compared to Southwest’s $92 and 7%.
Future Goal: CEO Michael O’Leary says that more than half of Ryanair’s customers will fly free by 2010.
Ryanair – FREE Air Travel?Case Study
How can they do this? Frugal cost structure: Constantly
looking for new ways to cut costs— removed seat back pockets to reduce weight and cleaning costs. Sells 98% of tickets online, reducing commissions. Flight crews buy their own uniforms.
Charges for amenities: Customers pay for refreshments, snacks, and baggage check-in services.
Generates revenue creatively: Planes serve as giant billboards; sells in-plane seatback advertising; merchandising in-flight. In the future, in-flight gaming is planned.
9-4Prentice Hall, Copyright 2009
What Is a Price?
Narrowly defined, price is the amount of money charged for a product or service.
Broadly defined, price is the sum of all of the values that consumers give up in order to gain the benefits of having or using the product or service.
9-5Prentice Hall, Copyright 2009
Factors to Consider When Setting Price
Customer perceptions of value► Price ceiling inhibits demand
Other internal and external considerations:► Marketing strategy, objectives, mix► Nature of the market and demand► Competitors’ strategies and prices
Product costs► No profits are available below the price floor
9-6Prentice Hall, Copyright 2009
Customer Perceptions of Value
Value-based pricing:►Uses buyers’ perceptions of value, not the
seller’s cost, as the key to pricing.►Price is considered along with the other
marketing mix variable before the marketing program is set.
►Types of value-based pricing:• Good value pricing• Value-added pricing
9-7Prentice Hall, Copyright 2009
Internal Factors Affecting Pricing Decisions
Cost-based pricing:► Setting prices based on the costs for producing,
distributing, and selling the product plus a fair rate of return for its effort and risk.
► Fixed costs:• Costs that do not vary with production or sales level.
► Variable costs:• Costs that vary directly with the level of production.
9-8Prentice Hall, Copyright 2009
Internal Factors Affecting Pricing Decisions
Types of cost-based pricing:►Cost-plus pricing:
• Adding a standard markup to the cost of the product.
►Break-even pricing►Target-profit pricing
9-9Prentice Hall, Copyright 2009
Internal Factors Affecting Pricing Decisions
Overall marketing strategy, objectives, and the marketing mix:►Company must decide on its overall
marketing strategy for the product.►General pricing objectives:
• Survival• Current profit maximization• Market share leadership• Product quality leadership
9-10Prentice Hall, Copyright 2009
Internal Factors Affecting Pricing Decisions
Marketing mix strategy:►Price decisions must be coordinated with
product design, distribution, and promotion decisions to form a consistent and effective marketing program.
►Target costing:• Pricing that starts with an ideal selling price,
then targets costs that will ensure that the price is met.
9-11Prentice Hall, Copyright 2009
Internal Factors Affecting Pricing Decisions
Organizational considerations:►Must decide who within the organization
should set prices.►This will vary depending on the size and
type of company.
9-12Prentice Hall, Copyright 2009
External Factors Affecting Pricing Decisions
The market and demand:►Costs set the lower limit of prices while the
market and demand sets the upper limit.►Pricing in different types of markets:
• Pure competition
• Monopolistic competition
• Oligopolistic competition
• Pure monopoly
9-13Prentice Hall, Copyright 2009
External Factors Affecting Pricing Decisions
The market and demand:►Analyzing the price-demand relationship:
• Different prices result in different levels of demand, as illustrated by the demand curve.
►The price elasticity of demand refers to how responsive demand will be to a change in price. Demand may be characterized as:• Inelastic• Elastic
9-14Prentice Hall, Copyright 2009
External Factors Affecting Pricing Decisions
Competitors’ strategies and prices:►How does the market offering compare to
competitive products in terms of value?►How strong is the competition and what is
their pricing strategy?►How does the competitive landscape
influence customer price sensitivity? Other external factors
9-15Prentice Hall, Copyright 2009
When to use:► Product’s quality and
image must support its higher price.
► Costs of low volume cannot be so high they cancel the advantage of charging more.
► Competitors should not be able to enter market easily and undercut price.
Market skimming:► Setting a high price
for a new product to “skim” revenues layer-by-layer from those willing to pay the high price.
► Company makes fewer, but more profitable sales.
New-Product Pricing Strategies
9-16Prentice Hall, Copyright 2009
When to use:► Market is highly price
sensitive so a low price produces more growth.
► Costs must fall as sales volume increases.
► Competition must be kept out of the market or the effects will be only temporary.
Market penetration:► Setting a low initial
price in order to “penetrate” the market quickly and deeply.
► Can attract a large number of buyers quickly and win a large market share.
New-Product Pricing Strategies
9-17Prentice Hall, Copyright 2009
Product line pricing Optional-product pricing Captive-product pricing By-product pricing Product bundle pricing
Product Mix Pricing Strategies
9-18Prentice Hall, Copyright 2009
Product Mix Pricing Strategies
Product-line pricing:►Involves setting price steps between
products in a product line based on cost differences between products and customer perceptions of value.
Optional-product pricing:►Pricing optional or accessory products sold
with the main product (e.g., ice maker with the refrigerator).
9-19Prentice Hall, Copyright 2009
Product Mix Pricing Strategies
Captive-product pricing:► Pricing products that must be used with the main
product (e.g., replacement cartridges for Gillette razors)
By-product pricing:► Pricing low-value by-products to get rid of them
(e.g., animal manure from zoo) Product bundle pricing:
► Pricing bundles of products sold together (software, monitor, PC, and printer)
9-20Prentice Hall, Copyright 2009
Price Adjustment Strategies
Discount and allowance pricing Segmented pricing Psychological pricing Promotional pricing Geographical pricing Dynamic pricing International pricing
9-21Prentice Hall, Copyright 2009
Price Adjustment Strategies
Discounts►Cash►Quantity►Functional►Seasonal
Allowances►Trade-in►Promotional
9-22Prentice Hall, Copyright 2009
Price Adjustment Strategies
Segmented pricing:► Selling a product or service at two or more prices,
where the difference in prices is not based on differences in costs.
Types:1. Customer-segment2. Product-form3. Location pricing4. Time pricing
9-23Prentice Hall, Copyright 2009
Price Adjustment Strategies
Psychological pricing:►Considers the psychology of prices and not
simply the economics.►Consumers usually perceive higher-priced
products as having higher quality.►Consumers use price less when they can
judge the quality of a product by examining it or recalling experiences.
9-24Prentice Hall, Copyright 2009
Price Adjustment Strategies
Geographical pricing:► FOB-origin pricing► Uniform-delivered
pricing► Zone pricing► Basing-point pricing► Freight-absorption
pricing
Promotional pricing:► Loss leaders► Special-event pricing ► Low-interest financing► Longer warranties► Free maintenance► Discounts
9-25Prentice Hall, Copyright 2009
Price Adjustment Strategies
Dynamic pricing:►Adjusting prices continually to meet the
characteristics and needs of individual customers and situations.
International pricing:►Adjusting prices for international markets
requires consideration of many factors.
9-26Prentice Hall, Copyright 2009
Price Adjustment Strategies
Factors influence international pricing:► Economic conditions► Competitive situations► Laws and regulations► Development of the wholesaling and retailing
system► Consumer perceptions and preferences► Different marketing objectives► Costs
9-27Prentice Hall, Copyright 2009
Price Changes
Price cuts may be initiated due to:►Excess capacity►Falling demand in face of strong
competitive price►Dominate market through lower costs
Price increases may be initiated due to:►Cost inflation►Overdemand
9-28Prentice Hall, Copyright 2009
Responses to Price Changes
Buyer reactions to price changes. Competitor reactions to price changes. Firm responses to price changes by
competition:►Reduce price to match competition►Raise the perceived quality of its offer►Improve quality and increase price►Launch a low-price “fighting brand”
9-29Prentice Hall, Copyright 2009
Public Policy and Pricing
Price fixing Predatory pricing Price discrimination Retail price maintenance Deceptive pricing:
►Promoted price reductions►Scanner fraud►Price confusion
9-30Prentice Hall, Copyright 2009
Discuss the importance of understanding customer-value perceptions and company costs when setting prices.
Identify and define the other important internal and external factors affecting a firm’s pricing decisions.
Describe the major strategies for pricing imitative and new products.
Explain how companies find a set of prices that maximizes the profits from the total product mix.
Discuss how companies adjust their prices to take into account different types of customers and situations.
Discuss key issues related to initiating and responding to price changes.
Rest Stop: Reviewing the Concepts
9-31Prentice Hall, Copyright 2009
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic,
mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.
Copyright © 2009 Pearson Education, Inc. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice HallPublishing as Prentice Hall