Chapter Nine Pricing Understanding and Capturing Customer Value

Chapter Nine Pricing: Understanding and Capturing Customer Value

What Is a Price? § Narrowly, price is the amount of money charged for a product or service. § Broadly, price is the sum of all the values that consumers exchange for the benefits of having or using the product or service. § Dynamic Pricing: charging different prices depending on individual customers and situations. Copyright 2007, Prentice Hall, Inc. 9 -2

Price Has Many Names ice? § § § Rent Fee Rate Commission Assessment Copyright 2007, Prentice Hall, Inc. § § § Tuition Fare Toll Premium Retainer • Bribe • Salary • Wage • Interest • Tax 9 -3

Dynamic Pricing The Internet is ushering in a new era of fluid pricing. www. travelocity. com is an independent site that provides price comparisons and guides, and searches all airline and hotel sites for the best prices. 9 -4

Factors affecting price decisions Copyright 2007, Prentice Hall, Inc. 9 -5

Customer Value Perceptions Value-based pricing : Ø Involves understanding how much value consumers place on the benefits they receive from the product and setting a price that captures that value. Ø Uses buyers’ perceptions of value, not the seller’s cost, as the key to pricing. – Good value pricing – Value-added pricing Copyright 2007, Prentice Hall, Inc. 9 -6

Value-Based Pricing Vs. Cost-Based Pricing Copyright 2007, Prentice-Hall, Inc. 9 -7

GOOD VALUE PRICING § Offering just the right combination of quality and good service at a fair price. – Mc. Donald’s offer “value menus” – EDLP Strategies of Wal-Mart etc VALUE ADDED PRICING § Attaching value added features and services to differentiate a marketing offer and support higher prices, rather than cutting prices to match competitors. Copyright 2007, Prentice Hall, Inc. 9 -8

GOOD VALUE PRICING Copyright 2007, Prentice Hall, Inc. 9 -9

Value-Added Pricing Caterpillar offers dealers a wide range of value-added services, including training, investment advice, and guaranteed parts delivery. These services justify charging a higher price. Copyright 2007, Prentice-Hall, Inc. 9 -10

Company and Product Costs: – Fixed Costs: • Costs that do not vary with production or sales level. – Salary, room rent etc – Variable Costs: • Costs that vary directly with the level of production. – Sales commission, raw material cost etc Copyright 2007, Prentice Hall, Inc. 9 -11

Cost-Based Pricing § Cost-plus pricing – The simplest pricing model every where used – Adding a standard markup to the cost of the product Example – Fixed cost- 100 Baht/ unit – Variable cost- 50 Baht / Unit Total cost- 150 Baht – Profit margin – 50 Baht/ unit – Selling price – 200 Baht / Unit Copyright 2007, Prentice Hall, Inc. 9 -12

Break Even Analysis § Break-even pricing – Setting price to break even on the costs of making and marketing a product or setting price to make a target profit Copyright 2007, Prentice Hall, Inc. 9 -13

Break-Even Chart for Determining Price Copyright 2007, Prentice-Hall, Inc. 9 -14

Internal Factors Affecting Pricing Decisions § Marketing Objectives: – Company must decide on its strategy for the product. – General pricing objectives: • Survival • Current profit maximization • Market share leadership • Product quality leadership Copyright 2007, Prentice Hall, Inc. 9 -15

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. Copyright 2007, Prentice Hall, Inc. 9 -16

Target costing Tata Nano – Target Price- 75000 Baht Copyright 2007, Prentice Hall, Inc. 9 -17

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. Copyright 2007, Prentice Hall, Inc. 9 -18

External Factors Affecting Pricing Decisions § The Market and Demand: – Costs set the lower limit of prices while the market and demand set the upper limit. – Pricing in different types of markets: • • Pure competition Monopolistic competition Oligopolistic competition Pure monopoly – Analyzing the price-demand relationship – The price elasticity of demand Copyright 2007, Prentice Hall, Inc. 9 -19

Monopoly § Only one company selling product in the market § The seller may be a government monopoly or a private regulated monopoly. Copyright 2007, Prentice Hall, Inc. 9 -20

Oligopoly § The market consists of a few sellers who are highly sensitive to each other’s pricing and other marketing strategies. § The product can be uniform (steel, aluminum etc) or non uniform (cars, computers etc). Copyright 2007, Prentice Hall, Inc. 9 -21

monopolistic competition § Under monopolistic competition, the market consists of many buyers and sellers who trade over a range of prices rather than a single market price. § A range of prices occurs because sellers can differentiate their offers to buyers. § Any physical product can be varied in quality, features, or style or the accompanying services can be varied. Copyright 2007, Prentice Hall, Inc. 9 -22

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Pure competition § Under pure competition, the market consists of many buyers and sellers trading in a uniform commodity such as wheat, copper, or financial securities such as stocks or bonds. § No single buyer or seller has much effect on the going market place. Copyright 2007, Prentice Hall, Inc. 9 -24

Perfect Competition ��������� • Many sellers offer many buyers an identical (homogeneous) product; no seller can influence price

New-Product Pricing Strategies § Market Skimming: – Set a high price for a new product to “skim” revenues layer by layer from the market. – Company makes fewer, but more profitable sales. Copyright 2007, Prentice Hall, Inc. 9 -26

Price Skimming § 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 the price. Copyright 2007, Prentice Hall, Inc. 9 -27

New-Product Pricing Strategies § Market Penetration: – Set 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. Copyright 2007, Prentice Hall, Inc. § When to Use: – Market is highly price sensitive so a low price produces more growth. – Costs must fall as sales volume increases. – Need to keep competition out or effects are only temporary. 9 -28

Product Mix Pricing Strategies § § § Product line pricing Optional-product pricing Captive-product pricing By-product pricing Product bundle pricing Copyright 2007, Prentice Hall, Inc. 9 -29

Product Line Pricing § Sets price steps between various items in a product line based on: – Cost differences between products – Customer evaluations of different features – Competitors’ prices Copyright 2007, Prentice-Hall, Inc. 9 -30

Optional- and Captive. Product Pricing § Optional-Product – Pricing optional or accessory products sold with the main product (e. g. , ice maker with the refrigerator). § Captive-Product – Pricing products that must be used with the main product (e. g. , replacement cartridges for Gillette razors). Copyright 2007, Prentice Hall, Inc. 9 -31

By-Product and Product Bundle Pricing Strategies § 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). Copyright 2007, Prentice Hall, Inc. 9 -32

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Marketing in Action Product-Bundle Pricing Travelers who book flight, hotel, and car together can save on average $189. 00 from Expedia. com Copyright 2007, Prentice-Hall, Inc. 9 -34

Price Adjustment Strategies § § § § Discount and allowance pricing Segmented pricing Psychological pricing Promotional pricing Geographical pricing Dynamic pricing International pricing Copyright 2007, Prentice Hall, Inc. 9 -35

Discounts and Allowances § Discounts – Cash – Quantity – Seasonal § Allowances – Trade-in – Promotional Christmas cards purchased out of season, such as in March or July, are often sold at a discount. Copyright 2007, Prentice-Hall, Inc. 9 -36

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-segment 2. Product-form 3. Location pricing 4. Time pricing Copyright 2007, Prentice Hall, Inc. 9 -37

Psychological Pricing § Considers the psychology of prices and not simply the economics. § Consumers usually perceive higherpriced products as having higher quality. § Consumers use price less when they can judge the quality of a product by examining it or recalling experiences. Copyright 2007, Prentice Hall, Inc. 9 -38

Promotional Pricing Companies offer promotional pricing to create excitement and a sense of urgency. Copyright 2007, Prentice-Hall, Inc. 9 -39

Geographical Pricing § § § FOB-origin pricing Uniform-delivered pricing Zone pricing Basing-point pricing Freight-absorption pricing Copyright 2007, Prentice Hall, Inc. 9 -40

FOB-origin pricing § This practice means that the goods are placed free on board a carrier. § At that point the title and responsibility pass to the customer, who pays the freight from the factory to the destination. § Free On Board means it is the buyer’s responsibility to select the mode of transportation, choose the specific carrier, handle any damage claims, and pay all shipping charges Copyright 2007, Prentice Hall, Inc. 9 -41

Uniform-delivered pricing § Uniform delivered pricing is the opposite of FOB pricing. § Here the company charges the same price plus freight to all customers, regardless of their location. § The freight charge is set at the average freight cost. Copyright 2007, Prentice Hall, Inc. 9 -42

Zone pricing § Zone pricing falls between FOB origin pricing and uniform delivered pricing. The company sets two or more zones. All customers within a given zone pay a single total price, the more distant the zone, the higher the price. Copyright 2007, Prentice Hall, Inc. 9 -43

Basing-point pricing § Using the basing point pricing, the seller selects a given city as basing point and charges all customers the freight cost from that city to the customer location regardless of the city from which the goods are actually shipped. Copyright 2007, Prentice Hall, Inc. 9 -44

Product Price = $100 Basing-Point Pricing System $20 Actual Freight Customer pays $120 Base Mill X $30 Actual Freight $10 Actual Freight Mill Z Mill Y $10 Freight Absorption $10 Phantom Freight Adopted from: Monroe (1990), Pricing: Making Profitable Decisions, 2 ed. , New York: Mc. Graw-Hill Publishing Company.

Freight-absorption pricing § Using this strategy, the seller absorbs all or part of the actual freight charges in order to get the desired business Copyright 2007, Prentice Hall, Inc. 9 -46