UNIVERSITY OF CAGAYAN VALLEY
(Formerly Cagayan Colleges Tuguegarao)
Tuguegarao City, Cagayan, Philippines
SCHOOL OF BUSINESS ADMINISTRATION AND GOVERNANCE
Name: ______________________________________Year/Section: _____________
Subject: ______________________________________Teacher_________________
Module No. 2
Title Pricing, Strategy & Value Creation
Overview Pricing is one of the most important decisions that businesses
make in their efforts for profit
maximization. The course is a foundation for effective pricing
decisions by teaching key
economic, analytical, and behavioral concepts associated with
costs, customer behavior and
competition. In addition, advanced pricing techniques that aim to
create additional value are
introduced to the students.
Learning By the end of the course, the student should be able to:
Outcomes Know how effective pricing supports marketing and firm
strategy.
Justify why price is the most important factor in the market
Explain the Pricing Pyramid as well as the different pricing
strategies and identify what strategic pricing requires.
Learning
Objectives Upon the conclusion of this course, the students will be able to
Explain and apply how effective pricing supports marketing
and firm strategy.
Develop and evaluate proper philosophy on pricing
strategies
Apply the components of a pricing pyramid
INTRODUCTION
Pricing is not a choice an organization can make; every company has to price its
products and services - even commodity producers and firms that operate in a
regulated and price-controlled environment. Pricing is the only element of the
marketing mix that generates revenue. The other marketing instruments typically
drive cost in the process of creating customer value, which is being recaptured
through effective pricing. In today’s dramatically more complex and rapidly changing
environment of globalized economies, unlimited consumer choice and explosive
technology innovation, pricing strategies and tactics are essential determinants of
the competitive position, success and ultimately profitability of an organization.
Pricing and yield management are some of the most important, however often least
understood and developed marketing decisions. Organizations and marketing
professionals today face many challenges in optimizing pricing strategies, processes
and tactics. Straight-forward, simplistic, often cost-based or rule-of-thumb pricing
methods are no longer sufficient and need to be replaced with sophisticated,
dynamic and evolving pricing tools and processes.
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UNIVERSITY OF CAGAYAN VALLEY
(Formerly Cagayan Colleges Tuguegarao)
Tuguegarao City, Cagayan, Philippines
SCHOOL OF BUSINESS ADMINISTRATION AND GOVERNANCE
What is Price and How Effective Pricing Supports Marketing and Firm
Strategy?
Pricing involves the understanding of both the supply (e.g. cost) and demand (e.g.
customer value) side of the value creation process. According to Kotler and
Armstrong (2009, p. 263) the price is “the amount of money charged for a product
or service, or the sum of all the values that customers give up in order to gain the
benefit of having or using a product or service.”
As price is the only element in the marketing mix that produces revenue; all other
elements represent costs. Furthermore, the price is one of the most flexible
elements in the marketing mix, as unlike distribution channel or product feature,
prices can be changed quickly (Kotler and Armstrong 2009, pp. 261-263). As
companies today face a fierce and fast-changing price-environment, increasing
customer price-consciousness companies may have to adapt quickly to price changes
or may suffer from losing market share (Kuß 2006, p. 264). This customer price-
consciousness leads to the question how the customer perceives the value of the
product or service according to the price.
Price as most important factor of the market
Critics opened the debate on the importance of price in the market in which a
company wants to be, and how this company can be competitive with the
competition with prices and quality offered to consumers.
For Philip Kotler, not all consumers have access to high prices for products or
services that companies offer in the market. He believes it is important for
organisations to intelligently consider other price versions for those who want to
save more in their pocket or who cannot access high prices.
Many people think about the following question: if you buy something cheaper, will
the product or service you want to provide be of low or poor quality? How does the
company handle an economic balance if prices are lower?
With these basic questions, Kotler generates two options for controlling dams or
price pressure:
One is to offer some goods or services at a low price and the other is not to change
the price but to add value to that product that will benefit the customer.
According to Philip Kotler there should be three versions of a good, better and best
product, these could be called price points as they have several levels of offers and
could be more welcomed by the different types of customers that are presented.
Different Pricing Strategies
In order to set a price, the product or service must be based on the three C’s:
customers, corporation and competition. These elements interact with the Pricing
Strategies Model. According to Kotler there are three strategies to achieve price.
These three strategies are taken from Philip Kotler‘s 1967 book “Marketing
Management: Analysis, Planning, and Control”.
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UNIVERSITY OF CAGAYAN VALLEY
(Formerly Cagayan Colleges Tuguegarao)
Tuguegarao City, Cagayan, Philippines
SCHOOL OF BUSINESS ADMINISTRATION AND GOVERNANCE
Pricing based on customer value
This means that the customer is the one who chooses in the end whether to agree
to the price or not. The price must show the value that customers have for the
product or service.
Competitive pricing
This is when the customer analyses the prices of the competition offering a product
or service with the same or similar characteristics at lower or higher prices.
Cost-based pricing: This includes the total costs with production, distribution and
sales achieving the perfect balance the company wants according to the costs.
Psychological pricing
The psychological price is to make the client see what he wants to take care of his
economy. This is called the level effect, which, by not rounding off a figure, helps
the customer visually process the information from left to right and ignore the
rightmost digit.
Example $6.99 compared to $7.00 which is positive for numbers ending in 9. It gives
the customer the illusion that the product or service they want to have is cheaper
since they do not notice the change by the mental game of numbers by lowering the
price and not rounding it.
What is Strategic Pricing - and Why Is It Important?
The Pricing Pyramid
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UNIVERSITY OF CAGAYAN VALLEY
(Formerly Cagayan Colleges Tuguegarao)
Tuguegarao City, Cagayan, Philippines
SCHOOL OF BUSINESS ADMINISTRATION AND GOVERNANCE
Pricing is the single greatest lever you have to improve profitability, and your profits
will increase further when you price strategically. Strategic pricing is about
proactively creating the conditions under which better and more-profitable pricing
outcomes are the natural result. So, what exactly is Strategic Pricing?
Some define Strategic Pricing as value creation. Some define it as being
competitively aware. Others will use it to describe establishing a company’s price
levels and bands. There are therefore a number of definitions and slight differences
in opinion but generally strategic pricing incorporates best practices in pricing and
ensures that your pricing strategies, analytics and pricing processes complement
your business strategy.
Strategic pricing sets a product's price based on the product's value to the customer,
or on competitive strategy, rather than on the cost of production. This approach
recognizes that people often make purchasing decisions based more on psychology
than on logic, and that what is most valuable to the customer may not be what's
most expensive to produce. By creating strategic pricing policies, analytics, and
processes, you can directly capture customer value and turn that value into
shareholder value.
The Pricing Pyramid
A comprehensive pricing strategy is comprised of many layers creating a foundation
for price setting that minimises erosion and maximises profits over time. These
layers combine to form a strategic pricing pyramid. Value creation forms the
foundation of the pyramid. A deep understanding of how products and services
create value for customers is the key input to the development of a price structure
that determines how your offerings should be priced.
Significance of Strategic Pricing
What customers are willing to pay for a product may be vastly more, or less, than a
company would charge if it simply priced based on cost. Discovering what
consumers value about your product can allow a company to increase its price – or,
alternatively, might even suggest that a new product has no chance of being
profitable.
Alternatives to Strategic Pricing
Traditional pricing is set either based on the cost of production or on the price that
competitors are
charging. Sometimes this is a reasonable approach but when multiple competitors
produce the same product at the same price, the only way to compete is to offer a
discount. Pricing a company's product strategically is therefore key to avoiding price
wars.
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UNIVERSITY OF CAGAYAN VALLEY
(Formerly Cagayan Colleges Tuguegarao)
Tuguegarao City, Cagayan, Philippines
SCHOOL OF BUSINESS ADMINISTRATION AND GOVERNANCE
Example
Software companies often use strategic pricing because they cannot price on cost.
They usually don't know how many copies they will sell, and there is virtually no
incremental cost for producing more units. Suppose they poll their potential
customers and determine that some people want to use the software a little bit
every day, and some want to use it intensely a few times a year? This may lead the
company to offer two different pricing plans for the same software, e.g. a £19.99
monthly subscription and a £4.95 per use fee.
Tips for Strategic Pricing
1. Strategic pricing is a marketing decision, which means it should be informed
by dialogue with your customers.
2. Keeping a close eye on your competitors is important, but remember they are
not the ones purchasing your product, and they may be making mistakes in
their own pricing.
3. Recognize what your customers value and charge them accordingly rather
than going head to head on price with competitors.
How to Measure Value
Is it possible to put a price on importance or satisfaction? Does the fact that your
product scores 10% higher on satisfaction than your competitor's product always
mean that customers will be willing to pay a 10% higher price? The answer is
generally a "no" – but there are exceptions – see the Intel example below.
When the Intel Premium chip was first introduced and competitors rose to the
competitive challenge, Intel's research showed that end-customers were more likely
to purchase a computer when they knew that the processor was made by Intel –
because they valued the Intel chip so highly. In addition, customers were willing to
pay more for a computer with an Intel chip. Intel launched the "Intel Inside"
campaign in order to command a price premium for its chips.
Measuring the value of your product requires an intimate knowledge of your
customer's needs which can then be translated into a value estimate - and in
business the value estimate generally centers on the economic impact a product or
service has on the customer's costs and revenues.
Price and Value Communication
Poor communication of value results in higher price sensitivity and more intense
price negotiations. Customers might not understand the value of your product or
service because they may be unaware of new features, lack knowledge about how
to use them, or not understand how a particular feature might satisfy an unmet
need. Your marketing department needs to address these issues through effective
price and value communications.
Conclusion
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UNIVERSITY OF CAGAYAN VALLEY
(Formerly Cagayan Colleges Tuguegarao)
Tuguegarao City, Cagayan, Philippines
SCHOOL OF BUSINESS ADMINISTRATION AND GOVERNANCE
One reason companies find pricing challenging is because they lack a systematic
process to translate such diverse inputs as customer value, costs, broad strategic
objectives and competitor prices into the right price.
Building a strategic pricing capability requires more than a common understanding of
the elements of an effective strategy. It requires careful development of organization
structure, systems, individual skills, and ultimately culture. These things represent
the foundation upon which the strategic pricing pyramid rests and must be
developed in tandem with the pricing strategy.
The first step towards strategic pricing is to understand each level of the pyramid
and how it supports those above it.
Sources
[Link]
[Link]
[Link]
The Strategy and Tactics of Pricing, Tom Nagle and John Hogan 2016
What is Strategic Pricing? John Hogan and Thomas Nagle, 2005
Pricing with Confidence: 10 ways to stop leaving money on the table by Reed K
Holden and Mark Burton, 2014
Pricing Strategy: tactics and strategies for pricing with confidence by Warren D.
Hamilton, 2014
Pricing Strategy: how to price a product by Bill McFarlane, 2012
Pricing for Profit: how to develop a powerful pricing strategy for your business by
Peter Hill, 2013
[Link] Posted
by Moira McCormick on March 29, 2016
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