Lecture 7: Pricing: Understanding and Capturing Customer Value

Question 1

Considerations When Setting a Price

Answer 1

1. Product Costs: Sets the price floor—the minimum price to avoid losses
   2. Competition and External Factors: Competitors’ prices and market conditions influence pricing
   3. Marketing Strategy and Objectives: Price aligns with overall marketing goals and brand positioning
   4. Nature of the Market and Demand: Market structure and demand elasticity affect pricing
   5. Consumer Perceptions of Value: Sets the price ceiling—the highest price consumers are willing to pay based on perceived value

Question 2

Major pricing strategies

Answer 2

1. Value-Based Pricing
   
   • Company sets its target price based on customer’s perception of the product value
2. Cost-Based Pricing
   
   • Sets price based on the costs of producing, distributing and selling the product plus mark-up
     
     • Price = Cost + % mark-up
3. Competition-Based Pricing
   
   • Based on competitors’ strategies, prices, costs, and market offerings

Question 3

Factors affecting pricing decisions

Answer 3

Internal Factors
1. Marketing Strategy, Objectives, and Mix:
Pricing can aim to attract new customers or prevent market entry by competitors

2.	Organizational Considerations:
•	Small companies: Price set by top management
•	Large companies: Price set by divisional or product managers

External Factors:
1. Nature of the Market and Demand: Consumer perceptions of price vs. value influence demand
• Price > Value: No demand
• Value > Price: High demand

2.	Economy: Economic conditions like boom or recession impact pricing strategies
•	Post-recession: Companies may cut prices or offer discounts

3.	Other External Factors:
•	Resellers: Pricing must allow resellers to make a fair profit
•	Social Concerns: Issues like smoking may reduce demand for related products

Question 4

New-product pricing strategies

Answer 4

• Market-skimming pricing
  
  • Set high price to skim maximum revenues from the segments willing to pay the high price; the company makes fewer but more profitable sales
• Market-penetration pricing
  
  • Set a low price to attract a large number of buyers and a large market share

Question 5

Product mix pricing tactics

Answer 5

1) Product line pricing
- Set prices across the entire product line
- First class
- Business class
- Economy class

2) Optional product pricing
- Pricing optional or accessory products sold with main product
- iPhone wireless charging pad
- Leather phone case

3) Captive product pricing
- Pricing products that must be used with main product

4) Product bundle pricing
- Pricing bundles of products sold together

Question 6

Price Adjustment

Answer 6

• Discount and allowance pricing
  
  • Reducing prices to reward customer responses
    
    • Early bird purchases, bulk purchases, country club membership
• Segmented pricing
  
  • Adjusting prices to allow for differences in customers, products or locations
    
    • Student meals
• Psychological pricing
  
  • Adjusting prices for psychological effect
• Promotional pricing
  
  • Temporarily reducing prices to spur short-run sales