Chapter Ten Pricing Understanding and Capturing Customer Value
- Slides: 66
Chapter Ten Pricing: Understanding and Capturing Customer Value Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide
Pricing Concepts Understanding and Capturing Customer Value Topic Outline • What Is a Price? • Customer Perceptions of Value • Company and Product Costs • Other Internal and External Considerations Affecting Price Decisions Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 2
What Is a Price? The challenge is to find the price that will let the company make a fair profit by getting paid for the customer value it creates. Price is the amount of money charged for a product or service. 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. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 3
What Is a Price? Price is the only element in the marketing mix that produces revenue; all other elements represent costs It is one of the most flexible marketing mix elements Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 4
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 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 5
• One frequent problem is that companies are too quick to reduce prices. • Other common mistake include pricing that is too cost oriented rather than customer value oriented • Pricing that doesn’t take the rest of the marketing mix into account is a big mistake too. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 6
____is the sum of values that consumers exchange for the benefits of having or using a product or service. 1. 2. 3. 4. Place Purchase Price Premium Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 7
____is the sum of values that consumers exchange for the benefits of having or using a product or service. 1. 2. 3. 4. Place Purchase Price Premium Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 8
Factors to Consider When Setting Prices Customer Perceptions of Value Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 9
Factors to Consider When Setting Prices Customer Perceptions of 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. Publishing as Prentice Hall Chapter 10 - slide 10
Setting your price based on your customer’s perception of value rather than on your cost is called _______pricing. 1. 2. 3. 4. value-based cost-based price-based demand-based Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 11
Setting your price based on your customer’s perception of value rather than on your cost is called _______pricing. 1. 2. 3. 4. value-based cost-based price-based demand-based Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 12
Factors to Consider When Setting Prices Customer Perceptions of Value Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 13
Factors to Consider When Setting Prices Customer Perceptions of Value-based pricing Good-value pricing Value-added pricing Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 14
Factors to Consider When Setting Prices Customer Perceptions of Value Good-value pricing offers the right combination of quality and good service to fair price Existing brands are being redesigned to offer more quality for a given price or the same quality for less price Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 15
Factors to Consider When Setting Prices 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 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 16
Factors to Consider When Setting Prices Customer Perceptions of Value • Value-added pricing attaches value-added features and services to differentiate offers, support 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 © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 17
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 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 18
Factors to Consider When Setting Prices Company and Product Costs Cost-based pricing adds a standard markup to the cost of the product Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 19
Factors to Consider When Setting Prices Company and Product Costs Types of costs Fixed costs Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Variable costs Total costs Chapter 10 - slide 20
____costs do not vary with production or sales level. 1. 2. 3. 4. Variable Fixed (overhead) Total Value Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 21
____costs do not vary with production or sales level. 1. 2. 3. 4. Variable Fixed (overhead) Total Value Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 22
Factors to Consider When Setting Prices Company and Product Costs Fixed costs are the costs that do not vary with production or sales level • Rent • Heat • Interest • Executive salaries Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 23
Factors to Consider When Setting Prices Company and Product Costs Variable costs are the costs that vary with the level of production • Packaging • Raw materials Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 24
Factors to Consider When Setting Prices Company and Product Costs 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 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 25
Fixed costs (overhead) plus variable costs equals _____costs. 1. 2. 3. 4. semi-variable equilibrium total semi-fixed Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 26
Fixed costs (overhead) plus variable costs equals _____costs. 1. 2. 3. 4. semi-variable equilibrium total semi-fixed Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 27
Factors to Consider When Setting Prices Costs at Different Levels of Production Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 28
Factors to Consider When Setting Prices Costs as a Function of Production Experience or learning curve is when average cost falls as production increases because fixed costs are spread over more units Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 29
The ____shows the drop in average costs with accumulated production experience. 1. 2. 3. 4. learning curve demand curve cost curve supply curve Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 30
The ____shows the drop in average costs with accumulated production experience. 1. 2. 3. 4. learning curve demand curve cost curve supply curve Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 31
Factors to Consider When Setting Prices 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 competitor prices Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 32
If a reseller buys a product from a manufacturer for $20 and wants to mark it up 50 percent, what will the new price be? 1. 2. 3. 4. $30 $40 $25 None of the above Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 33
If a reseller buys a product from a manufacturer for $20 and wants to mark it up 50 percent, what will the new price be? 1. $30 2. $40 (markup price = unit price/[1 -desired return on sales]) 3. $25 4. None of the above Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 34
Factors to Consider When Setting Prices 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 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 35
What is the break-even unit volume for a company with fixed costs of $50 k, variable costs of $20, and a price of $30/unit? 1. 2. 3. 4. 500 1, 000 5, 000 2, 500 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 36
What is the break-even unit volume for a company with fixed costs of $50 k, variable costs of $20, and a price of $30/unit? 1. 2. 3. 4. 500 1, 000 5, 000 (BE volume = FC/[price–VC]) 2, 500 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 37
The addition of a standard markup to the cost of your product is the simplest pricing method referred to as _____pricing. 1. 2. 3. 4. cost-plus markup-plus price-plus elasticity Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 38
The addition of a standard markup to the cost of your product is the simplest pricing method referred to as _____pricing. 1. 2. 3. 4. cost-plus markup-plus price-plus elasticity Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 39
Factors to Consider When Setting Prices Break-Even Analysis and Target Profit Pricing Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 40
Considerations in Setting Price Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 41
Factors to Consider When 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 consider internal and external factors when setting prices Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 42
Factors to Consider When Setting Prices Other Internal and External Considerations Affecting Price Decisions 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 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 43
Factors to Consider When Setting Prices Other Internal and External Considerations Affecting Price Decisions Organizational considerations include: • Who should set the price • Who can influence the prices Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 44
Factors to Consider When Setting Prices 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 © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 45
Which of the following is not an internal factor affecting pricing? 1. 2. 3. 4. Marketing objectives Marketing mix strategy Costs Competition Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 46
Which of the following is not an internal factor affecting pricing? 1. 2. 3. 4. Marketing objectives Marketing mix strategy Costs Competition Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 47
Factors to Consider When Setting Prices Other Internal and External Consideration Affecting Price Decisions Competition Pure competition Monopolistic competition Oligopolistic competition Pure monopoly Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 48
Which type of market consists of many buyers and sellers who trade over a range of prices rather than a single market price? 1. 2. 3. 4. Pure competition Monopolistic competition Oligopolistic competition Pure monopoly Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 49
Which type of market consists of many buyers and sellers who trade over a range of prices rather than a single market price? 1. 2. 3. 4. Pure competition Monopolistic competition Oligopolistic competition Pure monopoly Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 50
Which type of market has few sellers who are very sensitive to each other’s prices? 1. 2. 3. 4. Pure competition Monopolistic competition Oligopolistic competition Monopoly Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 51
Which type of market has few sellers who are very sensitive to each other’s prices? 1. 2. 3. 4. Pure competition Monopolistic competition Oligopolistic competition Monopoly Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 52
According to the text, competition-based pricing is popular in _____markets. 1. 2. 3. 4. pure competition monopoly monopolistic competition oligopolistic competition Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 53
According to the text, competition-based pricing is popular in _____markets. 1. 2. 3. 4. pure competition monopoly monopolistic competition oligopolistic competition Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 54
Factors to Consider When Setting Prices Other Internal and External Considerations Affecting Price Decisions The demand curve shows the number of units the market will buy in a given period at different prices • Normally, demand 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 © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 55
Factors to Consider When Setting Prices Other Internal and External Considerations Affecting Price Decisions Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 56
A(n) ____curve shows the number of units the market will buy in a given time period at different prices that might be charged. 1. 2. 3. 4. demand elastic experience supply Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 57
A(n) ____curve shows the number of units the market will buy in a given time period at different prices that might be charged. 1. 2. 3. 4. demand elastic experience supply Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 58
Factors to Consider When Setting Prices Other Internal and External Considerations Affecting Price Decisions Price elasticity of demand illustrates the response of demand to a change in price Inelastic demand occurs when demand hardly changes when there is a small change in price Elastic demand occurs when demand changes greatly for a small change in price Price elasticity of demand = % change in quantity demand % change in price Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 59
If demand changes greatly with a small change in price, we say the demand is _______. 1. 2. 3. 4. inelastic sensitive reversed Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 60
If demand changes greatly with a small change in price, we say the demand is _______. 1. 2. 3. 4. inelastic sensitive reversed Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 61
Factors to Consider When Setting Prices Other Internal and External Considerations Competitor's Strategies • Comparison of offering in terms of customer value • Strength of competitors • Competition pricing strategies • Customer price sensitivity Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 62
Factors to Consider When Setting Prices Other Internal and External Consideration Affecting Price Decisions Economic conditions Reseller’s response to price Government Social concerns Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 63
Which of the following is(are) not an external consideration when setting prices? 1. 2. 3. 4. Costs Federal government Social responsibility Resellers Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 64
Which of the following is(are) not an external consideration when setting prices? 1. 2. 3. 4. Costs Federal government Social responsibility Resellers Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 65
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 © 2010 Pearson Education, Inc. Publishing as Prentice Hall Chapter 10 - slide 66
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