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Chapter 10 - slide 1Copyright © 2009 Pearson Education, Inc.
Publishing as Prentice Hall
Chapter Ten
Pricing:
Understanding and Capturing
Customer Value
Chapter 10 - slide 2Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Pricing Concepts
Understanding and
Capturing Customer Value
• What Is a Price?
• Customer Perceptions of Value
• Company and Product Costs
• Other Internal and External
Considerations Affecting Price
Decisions
Topic Outline
Chapter 10 - slide 3Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Price is the amount of money charged for a
product or service. It is 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
What Is a Price?
Chapter 10 - slide 4Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Factors to Consider When Setting
Prices
• Understanding how much value
consumers place on the benefits they
receive from the product and setting a
price that captures that value
Customer Perceptions of Value
Chapter 10 - slide 5Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Factors to Consider When Setting
Prices
Value-based pricing uses the buyers’
perceptions of value, not the sellers
cost, as the key to pricing. Price is
considered before the marketing
program is set.
• Value-based pricing is customer driven
• Cost-based pricing is product driven
Customer Perceptions of Value
Chapter 10 - slide 6Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Factors to Consider When
Setting Prices
Value-based pricing
Good-value pricing
Value-added pricing
Customer Perceptions of Value
Chapter 10 - slide 7Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Factors to Consider When
Setting Prices
Good-value pricing offers the right
combination of quality and good service to
fair price
Existing brands are being redesigned to offer
more quality for a given price or the same
quality for less price
Customer Perceptions of Value
Chapter 10 - slide 8Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Factors to Consider When
Setting Prices
Everyday low pricing (EDLP) involves
charging a constant everyday low price with
few or no temporary price discounts
High-low pricing involves charging higher
prices on an everyday basis but running
frequent promotions to lower prices
temporarily on selected items
Customer Perceptions of Value
Chapter 10 - slide 9Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Factors to Consider
When Setting Prices
Value-added pricing attaches value-added
features and services to differentiate offers,
support higher prices, and build pricing
power
Pricing power is the ability to escape price
competition and to justify higher prices and
margins without losing market share
Customer Perceptions of Value
Chapter 10 - slide 10Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Factors to Consider
When Setting Prices
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
Company and Product Costs
Chapter 10 - slide 11Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Factors to Consider When
Setting Prices
Cost-based pricing adds a standard markup to
the cost of the product
Company and Product Costs
Chapter 10 - slide 12Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Factors to Consider When
Setting Prices
Fixed
costs
Variable
costs
Total
costs
Company and Product Costs
Types of costs
Chapter 10 - slide 13Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Factors to Consider
When Setting Prices
Fixed costs are the costs that do not vary with
production or sales level
• Rent
• Heat
• Interest
• Executive salaries
Company and Product Costs
Chapter 10 - slide 14Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Factors to Consider When
Setting Prices
Variable costs are the costs that vary with the
level of production
• Packaging
• Raw materials
Company and Product Costs
Chapter 10 - slide 15Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Factors to Consider
When Setting Prices
Total costs are the sum of the fixed and
variable costs for any given level of
production
Average cost is the cost associated with a
given level of output
Company and Product Costs
Chapter 10 - slide 16Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Factors to Consider When
Setting Prices
• Experience or learning curve is when
average cost falls as production
increases because fixed costs are
spread over more units
Costs as a Function of Production Experience
Chapter 10 - slide 17Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Factors to Consider When
Setting Prices
• Cost-plus pricing adds a standard markup
to the cost of the product
• Benefits
– Sellers are certain about costs
– Prices are similar in industry and price competition is
minimized
– Consumers feel it is fair
• Disadvantages
– Ignores demand and competitor prices
Cost-Plus Pricing
Chapter 10 - slide 18Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Factors to Consider
When Setting Prices
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 Analysis and Target Profit
Pricing
Chapter 10 - slide 19Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Factors to Consider When
Setting Prices
• Customer perceptions of value set the
upper limit for prices, and costs set the
lower limit
• Companies must consider internal and
external factors when setting prices
Other Internal and External
Considerations
Chapter 10 - slide 20Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Factors to Consider
When Setting Prices
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
Other Internal and External
Considerations
Chapter 10 - slide 21Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Factors to Consider When
Setting Prices
Organizational considerations include:
• Who should set the price
• Who can influence the prices
Other Internal and External
Considerations
Chapter 10 - slide 22Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Factors to Consider When
Setting Prices
• Before setting prices, the marketer must
understand the relationship between
price and demand for its products
Other Internal and External
Considerations
The Market and Demand
Chapter 10 - slide 23Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Factors to Consider When
Setting Prices
Pure competition
Monopolistic competition
Oligopolistic competition
Pure monopoly
Other Internal and External
Consideration
The Market and Demand
Chapter 10 - slide 24Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Factors to Consider When Setting
Prices
Other Internal and External Considerations
Affecting Price Decisions
Pure competition is a market with many buyers and
sellers trading uniform commodities where no single
buyer or seller has much effect on market price
Monopolistic competition is a market with many
buyers and sellers who trade over a range of prices
rather than a single market price with differentiated
offers.
10-29
Chapter 10 - slide 25Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Factors to Consider When Setting
Prices
Other Internal and External Considerations
Affecting Price Decisions
Oligopolistic competition is a market with few sellers
because it is difficult for sellers to enter a market
who are highly sensitive to each other’s pricing and
marketing strategies
Pure monopoly is a market with only one seller. In a
regulated monopoly, the government permits a price
that will yield a fair return. In a non-regulated
monopoly, companies are free to set a market price.
10-30
Chapter 10 - slide 26Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Chapter 10 - slide 27Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Factors to Consider When
Setting Prices
The demand curve shows the number of units
the market will buy in a given period at
different prices
• 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
Other Internal and External
Considerations
Chapter 10 - slide 28Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Factors to Consider When Setting
Prices
Price elasticity of demand illustrates the response of
demand to a change in price
Inelastic demand occurs when demand hardly changes when there
is a small change in price
Elastic demand occurs when demand changes greatly for a small
change in price
Price elasticity of demand = % change in quantity demand
% change in price
Other Internal and External
Considerations
Chapter 10 - slide 29Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Factors to Consider When Setting
Prices
• Comparison of offering in terms of
customer value
• Strength of competitors
• Competition pricing strategies
• Customer price sensitivity
Other Internal and External Considerations
Competitor's Strategies
Chapter 10 - slide 30Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Factors to Consider
When Setting Prices
Economic conditions
Reseller’s response to price
Government
Social concerns
Other Internal and External
Consideration

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Chapter #10

  • 1. Chapter 10 - slide 1Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Chapter Ten Pricing: Understanding and Capturing Customer Value
  • 2. Chapter 10 - slide 2Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Pricing Concepts Understanding and Capturing Customer Value • What Is a Price? • Customer Perceptions of Value • Company and Product Costs • Other Internal and External Considerations Affecting Price Decisions Topic Outline
  • 3. Chapter 10 - slide 3Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Price is the amount of money charged for a product or service. It is 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 What Is a Price?
  • 4. Chapter 10 - slide 4Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Factors to Consider When Setting Prices • Understanding how much value consumers place on the benefits they receive from the product and setting a price that captures that value Customer Perceptions of Value
  • 5. Chapter 10 - slide 5Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Factors to Consider When Setting Prices Value-based pricing uses the buyers’ perceptions of value, not the sellers cost, as the key to pricing. Price is considered before the marketing program is set. • Value-based pricing is customer driven • Cost-based pricing is product driven Customer Perceptions of Value
  • 6. Chapter 10 - slide 6Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Factors to Consider When Setting Prices Value-based pricing Good-value pricing Value-added pricing Customer Perceptions of Value
  • 7. Chapter 10 - slide 7Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Factors to Consider When Setting Prices Good-value pricing offers the right combination of quality and good service to fair price Existing brands are being redesigned to offer more quality for a given price or the same quality for less price Customer Perceptions of Value
  • 8. Chapter 10 - slide 8Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Factors to Consider When Setting Prices Everyday low pricing (EDLP) involves charging a constant everyday low price with few or no temporary price discounts High-low pricing involves charging higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected items Customer Perceptions of Value
  • 9. Chapter 10 - slide 9Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Factors to Consider When Setting Prices Value-added pricing attaches value-added features and services to differentiate offers, support higher prices, and build pricing power Pricing power is the ability to escape price competition and to justify higher prices and margins without losing market share Customer Perceptions of Value
  • 10. Chapter 10 - slide 10Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Factors to Consider When Setting Prices 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 Company and Product Costs
  • 11. Chapter 10 - slide 11Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Factors to Consider When Setting Prices Cost-based pricing adds a standard markup to the cost of the product Company and Product Costs
  • 12. Chapter 10 - slide 12Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Factors to Consider When Setting Prices Fixed costs Variable costs Total costs Company and Product Costs Types of costs
  • 13. Chapter 10 - slide 13Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Factors to Consider When Setting Prices Fixed costs are the costs that do not vary with production or sales level • Rent • Heat • Interest • Executive salaries Company and Product Costs
  • 14. Chapter 10 - slide 14Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Factors to Consider When Setting Prices Variable costs are the costs that vary with the level of production • Packaging • Raw materials Company and Product Costs
  • 15. Chapter 10 - slide 15Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Factors to Consider When Setting Prices Total costs are the sum of the fixed and variable costs for any given level of production Average cost is the cost associated with a given level of output Company and Product Costs
  • 16. Chapter 10 - slide 16Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Factors to Consider When Setting Prices • Experience or learning curve is when average cost falls as production increases because fixed costs are spread over more units Costs as a Function of Production Experience
  • 17. Chapter 10 - slide 17Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Factors to Consider When Setting Prices • Cost-plus pricing adds a standard markup to the cost of the product • Benefits – Sellers are certain about costs – Prices are similar in industry and price competition is minimized – Consumers feel it is fair • Disadvantages – Ignores demand and competitor prices Cost-Plus Pricing
  • 18. Chapter 10 - slide 18Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Factors to Consider When Setting Prices 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 Analysis and Target Profit Pricing
  • 19. Chapter 10 - slide 19Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Factors to Consider When Setting Prices • Customer perceptions of value set the upper limit for prices, and costs set the lower limit • Companies must consider internal and external factors when setting prices Other Internal and External Considerations
  • 20. Chapter 10 - slide 20Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Factors to Consider When Setting Prices 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 Other Internal and External Considerations
  • 21. Chapter 10 - slide 21Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Factors to Consider When Setting Prices Organizational considerations include: • Who should set the price • Who can influence the prices Other Internal and External Considerations
  • 22. Chapter 10 - slide 22Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Factors to Consider When Setting Prices • Before setting prices, the marketer must understand the relationship between price and demand for its products Other Internal and External Considerations The Market and Demand
  • 23. Chapter 10 - slide 23Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Factors to Consider When Setting Prices Pure competition Monopolistic competition Oligopolistic competition Pure monopoly Other Internal and External Consideration The Market and Demand
  • 24. Chapter 10 - slide 24Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Factors to Consider When Setting Prices Other Internal and External Considerations Affecting Price Decisions Pure competition is a market with many buyers and sellers trading uniform commodities where no single buyer or seller has much effect on market price Monopolistic competition is a market with many buyers and sellers who trade over a range of prices rather than a single market price with differentiated offers. 10-29
  • 25. Chapter 10 - slide 25Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Factors to Consider When Setting Prices Other Internal and External Considerations Affecting Price Decisions Oligopolistic competition is a market with few sellers because it is difficult for sellers to enter a market who are highly sensitive to each other’s pricing and marketing strategies Pure monopoly is a market with only one seller. In a regulated monopoly, the government permits a price that will yield a fair return. In a non-regulated monopoly, companies are free to set a market price. 10-30
  • 26. Chapter 10 - slide 26Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
  • 27. Chapter 10 - slide 27Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Factors to Consider When Setting Prices The demand curve shows the number of units the market will buy in a given period at different prices • 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 Other Internal and External Considerations
  • 28. Chapter 10 - slide 28Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Factors to Consider When Setting Prices Price elasticity of demand illustrates the response of demand to a change in price Inelastic demand occurs when demand hardly changes when there is a small change in price Elastic demand occurs when demand changes greatly for a small change in price Price elasticity of demand = % change in quantity demand % change in price Other Internal and External Considerations
  • 29. Chapter 10 - slide 29Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Factors to Consider When Setting Prices • Comparison of offering in terms of customer value • Strength of competitors • Competition pricing strategies • Customer price sensitivity Other Internal and External Considerations Competitor's Strategies
  • 30. Chapter 10 - slide 30Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Factors to Consider When Setting Prices Economic conditions Reseller’s response to price Government Social concerns Other Internal and External Consideration