Principles of Marketing Eighteenth Edition
Chapter 10
Pricing: Understanding and Capturing
Customer Value
Learning Objectives
10-1 Answer the question “What is a price?” and discuss the importance of
pricing in today’s fast-changing environment.
10-2 Identify the three major pricing strategies and discuss the importance of
understanding customer-value perceptions, company costs, and
competitor strategies when setting prices.
10-3 Identify and define the other important external and internal factors
affecting a firm’s pricing decisions.
What is Price?
is the amount of money charged for a product
Price or service, or the sum of all the values that
customers exchange for the benefits of
having or using the product or service.
It is what customers give up to gain the
benefits of having or using the product or
service
Price is the only element in the marketing
mix that produces revenue; all the other
elements represent costs
APPLE: Premium Priced and Worth it?
Apple has always set its prices way above those of
competitors, reaping the rewards of higher Avid fans have long anointed
Apple as the keeper of all
revenues and profits. But as Apple faces stiffer things cool, believing deep
global competition from lower-priced brands, some down that the value they
customers may be questioning just how much receive is worth the premium
more they are willing to pay for the iconic brand. price.
Customer Value-Based Pricing
Understanding how much value
consumers place on the benefits
they receive from the product,
then setting a price that
captures that value
Considerations in Setting Prices
Major Pricing Strategies
Three major pricing strategies:
• customer value-based pricing
• cost-based pricing
• competition-based pricing.
Customer Value-Based Pricing
Value-Based uses the buyers’ perceptions of value rather
Pricing than the seller’s cost.
• Price is set to match perceived value.
• Value-based pricing is customer driven.
• Cost-based pricing is product driven.
Value-Based Pricing VS Cost-Based Pricing
Target Costing
Customer Value-Based Pricing
Two types of value-based pricing are:
• good-value pricing
Every day low pricing
High-low pricing
• value-added pricing
Customer Value-Based Pricing
Good-Value is offering just the right combination of quality
Pricing and good service at a fair price.
Existing brands are being redesigned to offer more quality for the same
price or the same quality for less price (the less-expensive Armani
Exchange fashion line)
Everyday Low involves charging a constant everyday low price
Pricing (EDLP) with few or no temporary price discounts.
involves charging higher prices on an everyday
High-Low Pricing basis but running frequent promotions to lower
prices temporarily on selected items.
Customer Value-Based Pricing
Value-added attaches value-added features and services to
Pricing differentiate offers, support higher prices, and
build pricing power (avoid price competition &
justify higher prices without losing market share)
Cost-Based Pricing
Cost-Based sets prices based on the costs for producing,
Pricing distributing, and selling the product plus a fair
rate of return for effort and risk.
Fixed costs are the costs that do not vary with production or sales level.
•Rent, Interest, Executive salaries
Variable costs vary directly with the level of production.
• Raw materials, Packaging
Total costs are the sum of the fixed and variable costs for any given level of
production.
Competition-Based Pricing
Competition-Based is setting prices based on competitors’
Pricing strategies, costs, prices, and market offerings.
• Comparison of offering in terms of
customer value
• Strength of competitors
• Competition pricing strategies
• Customer price sensitivity
Other Considerations Affecting Price Decisions
Overall Marketing Strategy, Objectives, and Mix
Before setting price, the company must decide on its overall marketing
strategy for the product or service
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.
Organizational Considerations
• Who should set prices?
• Who can influence prices?
Other Considerations Affecting Price Decisions
The Market and Demand
Before setting prices, the marketer must understand the relationship between
price and demand for its products.
Pricing In Different Types of Markets
Pure competition
Monopolistic competition
Oligopolistic competition
Pure monopoly
Other Considerations Affecting Price Decisions
The Market and Demand
Analyzing the Price–Demand Relationship
The demand curve shows the number of units
the market will buy in a given period at different
prices
• Demand and price are inversely related.
• Higher price = lower demand
For prestige (luxury) goods, higher price can
equal higher demand when consumers
perceive that higher prices indicate higher
quality (Gibson Guitar’s upward sloping
demand curve)
Other Considerations Affecting Price Decisions
The Market and Demand
Price Elasticity of Demand
Price elasticity is a measure
of the sensitivity of demand to
changes in price.
Inelastic demand is when demand hardly changes with a small change in
price.
Elastic demand is when demand changes greatly with a small change in
price.
Other Considerations Affecting Price Decisions
The Economy and Other External Factors
Economic conditions
Reseller’s response to price
Government
Social concerns