Pricing and value

10
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What is price?
the sum of all the values that consumers give
up in order to gain the benefits of having or
using a product or service.

Price is the only element in the

marketing mix that produces
revenue; all other elements
represent costs.

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 CUSTOMER MARKETING
PERCEPTIONS OF STRATEGY,
VALUE OBJECTIVES, MIX

Setting
Prices
Major
considerations in
MARKET AND setting price PRODUCT
COMPETITION COSTS

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 Setting Price
- Two basic approaches to pricing:
- Value-based pricing is customer driven.
Price is considered before the marketing
program is set.
- Cost-based pricing is product driven.
 Setting Prices
VA L U E - B A S E D COST-BASED
Assess needs and
Design a product
value perceptions

Set target price Determine costs

Determine costs Set price based on cost

Convince buyers of the

Design a product
value
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 Value-based
pricing
uses buyers’ perceptions of value, not sellers’
cost, as the key to pricing.
Customer value-based pricing uses buyers’ perceptions of
value, not the seller’s cost, as the key to pricing. Value-based
pricing means that the marketer cannot design a product and
marketing program and then set the price. Price is considered
along with the other marketing mix variables before the
marketing program is set.

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Value-based pricing
GOOD VALUE VALUE ADDED

Good-value pricing is offering just the right combination

of quality and good service at a fair price. In many
cases good-value pricing includes less expensive items.
Examples include Taco Bell and McDonald’s and their
“value menus.”
Value-added pricing is the strategy of attaching value-
added features and services to differentiate their offers
and thus support higher prices Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall
 Good Value
Everyday low pricing (EDLP)
perceptions
involves charging a constant,
everyday low price with few or
no temporary price discounts.
(Wal-Mart)
EDLP
High-low pricing involves
charging higher prices on an
everyday basis but running HIGH-LOW
frequent promotions to lower
prices temporarily on selected
items. (Kohls)

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Cost-based
pricing

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.
Cost-based pricing adds a standard markup
to the cost of the product.
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 Types of
costs
Types of Costs
Fixed costs (also known as
overhead) are costs that do not
vary with production or sales
FIXED COSTS
+
level. These costs include: rent,
heat, interest.
Variable costs vary directly with
the level of production. They are
VARIABLE COSTS
=
called variable because their
total varies with the number of
units produced. Examples
include packaging and raw
materials.
TOTAL COSTS

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 Costs as a Function of Production Experience

Experience or learning curve is when average cost falls as

production increases because fixed costs are spread over more
units
 Cost + Pricing
MARKUP

PRICE
PRODUCT COST

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The simplest pricing method is cost plus
pricing—adding a standard markup to
the cost of the product.

Markup pricing remains popular because

sellers are more certain about costs than
about demand. This method also keeps
price competition down.
The major downside is that the method
ignores demand and competitors’ prices.
Break-even 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.
Break-even pricing

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 Other pricing considerations

MARKETING STRATEGY AND

OBJECTIVES

Overall Marketing Strategy, Objectives, and Mix

General pricing objectives might include survival, current profit maximization, market
share leadership, or customer retention and relationship building.
Price decisions must be coordinated with product design, distribution, and promotion
decisions to form a consistent and effective integrated marketing program.
Companies often position their products on price and then tailor other marketing mix
decisions to the prices they want to charge.
 Other pricing considerations

TARGET COSTING

Target costing starts with an ideal selling price based on

customer-value considerations, and then targets costs
that will ensure that the price is met.

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 Other pricing considerations
ORGANIZATIONAL FACTORS
Organizational Considerations
In small companies, prices are often set by top
management rather than by the marketing or sales
departments.
In large companies, pricing is typically handled by
divisional or product line managers.
In industrial markets, salespeople may be allowed to
negotiate with customers within certain price ranges.
In industries in which pricing is a key factor, companies
often have pricing departments to set the best prices or to
help others in setting them.
 Other pricing considerations

TYPES OF MARKETS

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PURE COMPETITION OLIGOPOLY
MONOPOLISTIC COMPETITION MONOPOLY

Market types
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 Types Of Markets
Pure competition: The market consists of many buyers and sellers trading in a
uniform commodity. No single buyer or seller has much effect on the going
market price.
In a purely competitive market, sellers do not spend much time on marketing
strategy.

Monopolistic competition: The market consists of many buyers and sellers

who trade over a range of prices rather than a single market price. A range of
prices occurs because sellers can differentiate their offers to buyers.

Oligopolistic competition: The market consists of a few sellers who are highly
sensitive to each other’s pricing and marketing strategies.
There are few sellers because it is difficult for new sellers to enter the market.

Pure monopoly: The market consists of one seller. The seller may be a
government monopoly, a private regulated monopoly, or a private non-regulated
monopoly.
 Other pricing considerations

PRICE AND DEMAND

Normally, demand and 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.
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 Elasticity of demand

Marketers need to know how sensitive customers are to

changes in price and how this change impacts demand.
Elasticity of demand: the percentage change in unit sales
that results from a percentage change in price. When
changes in price have large effects on the amount
demanded, demand is elastic
 Elasticity of demand

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Elastic

Some customers are very sensitive to changes in price,

and a change in price results in a substantial change in
the quantity demanded. In such instances, we have a
case of elastic demand.
Inelastic

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 Other pricing considerations

COMPETITORS

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Competitors’
strategies

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 Other pricing considerations

ECONOMIC CONDITIONS

Economic conditions can have a strong impact on the

firm’s pricing strategies.
The company must also consider what impact its prices
will have on other parties in its environment, such as
resellers and the government.
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