Chapter9: Pricing: Understanding And Capturing Customer Value Flashcards
Price
Amount of money charged for a product or service.
Determines a firm’s market share and profitability.
Only one of the 4P’s that produces revenue. All others represent costs.
Considerations in setting price (see figure 9.1)
Product costs (price floor: no profits below this price) <—> competition and other external factors (competitors’ strategies and prices, marketing strategy, objectives, and mix, nature of the market and demand) <—> consumer perceptions of value (price ceiling: no demand above this price).
If customers perceive that a product’s price is greater than its value, they won’t buy it. If the company prices the product below its costs, profits will suffer. Between the two extremes, the “right” pricing strategy is one that delivers both value to the customer and profits to the company.
Major pricing strategies
Three major pricing strategies:
1. Customer value-based pricing
2. Cost-based pricing
3. Competition-based pricing
Customer value-based pricing
Based on buyers’ perceptions of value rather than on the seller’s cost.
Types of value-based pricing:
- Good-value pricing
- Value-added pricing
Good-value pricing
Offers just the right combination of quality and good service at a fair price.
Can involve introducing less expensive versions of established brand name products.
An important type of good-value pricing at retail is: EDLP (Walmart)
Value-added pricing
Rather than cutting prices to match competitors, firms add quality, services, and value-added features to differentiate their offers and thus support their higher prices.
Cost-based pricing
Based on the costs of producing, distributing, and selling the product plus a fair rate of return for effort and risk.
Types of cost-based pricing:
1. Cost-plus pricing (markup pricing)
2. Break-even pricing (target return pricing)
Types of costs
Fixed costs (overhead)
Variable costs
Total costs
Cost-plus pricing (markup pricing)
Adding a standard markup to the cost of the product.
Break-even pricing (target return pricing) (see figure 9.3)
Setting price to break even on the costs of making and marketing a product, or setting price to make a target return.
Value-based pricing versus cost-based pricing
Cost-based pricing: design a good product —> determine product costs —> set price based on cost —> convince buyers of product’s value.
Value-based pricing: asses customer needs and value perceptions —> set target price to match customer-perceived value —> determine costs that can be incurred —> design product to deliver desired value at target price.
Competition-based pricing
Setting prices based on competitors’ strategies, costs, prices, and market offerings.
Company should ask several questions to assess competitors’ pricing strategies:
- how does the company’s market offering compare in terms of customer value?
- how strong are current competitors?
- what are their current pricing strategies?
The goal is not to match or beat competitors’ prices. Rather, the goals is to set prices according to the relative value.
Other internal and external considerations affecting price decisions
Internal factors:
- overall marketing strategy, objectives, and mix.
- organizational considerations.
External factors:
- market and demand
- economy
- impact on other parties in its environment.
Overall marketing strategy, objectives, and mix
Pricing decisions must coordinate with packaging, promotion, and distribution decisions.
—> Prices can be set to: attract new customers, profitably serve existing customers, prevent competition from entering the market, stabilize the market.
Positioning may be based on price: target costing starts with an ideal selling price, then target costs that ensure the price is met.
Organizational considerations
Management decides who should set prices.
Varies depending on the size and type of company:
- small companies — top management
- large companies — divisional or product managers
— industries with price as the key factor (e.g., airline, aerospace, steel, railroads, and oil companies) — set by pricing departments.
