Chapter 10 Pricing

Chapter 10
PRICING
UNDERSTANDING AND CAPTURING CUSTOMER VALUE
Topic Outline
 What Is a Price?
 Major Pricing Strategies
 Other Internal and
External Considerations
Affecting Price Decisions
What Is a Price?
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.
What Is a Price?
Price is the only element in the

marketing mix that
produces revenue; all
other elements represent
costs
Factors to Consider When
Setting Prices
Customer Perception of Value
Understanding how
much value
consumers place on
the benefits they
receive from the
product and setting
a price that
captures that value
Setting Prices
Setting Prices
Customer 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
Setting Prices
Major Pricing Strategies
 Major pricing strategies:

 Customer value-based pricing
 Cost-based pricing
 Competition-based pricing
Customer Value Based Pricing
Good-value pricing offers the right combination of quality and good service
at a fair price. This pricing has involved redesigning existing brands to
offer more quality for a given price or the same quality for the less. In
many cases, this has involved introducing less expensive versions of
established brand name products or new lower-price lines
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
 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

Cost Based Pricing
Company and Product Costs
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
Cost Based Pricing
Cost Based Pricing
Types of costs
Fixed Variable Total

costs costs costs
Cost Based Pricing
Fixed costs are the costs that do not vary with production or sales
level
 Rent
 Heat
 Interest
 Executive salaries
Cost Based Pricing
Variable costs are the costs that vary with the level of production
 Packaging
 Raw materials
Cost Based Pricing
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

Cost Based Pricing
 Cost-plus pricing adds a standard markup to the cost of the

product
 Benefits
 Sellers are certain about costs

 Pricesare similar in industry and price
competition is minimized
 Consumers feel it is fair
 Disadvantages
 Ignores demand and competitor prices
Cost Based Pricing
 Cost-plus pricing adds a standard markup to the cost of the

product
 Benefits
 Sellers are certain about costs

 Pricesare similar in industry and price
competition is minimized
 Consumers feel it is fair
 Disadvantages
 Ignores demand and competitor prices
Cost Based Pricing
Break-Even Analysis and Target Profit 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

Competition Based Pricing
 Competition-based pricing involves setting prices based on competitors’

strategies, costs, prices, and market offerings.
 A company must ask several questions for that.
 How does the company’s market offering compare with competitor’s offerings
in terms of customer value?
 How strong are current competitors, and what are their current pricing
strategies?
Other Internal and External Considerations
The Market and Demand
 Internal factors affecting pricing include the

company’s overall marketing strategy,
objectives, and marketing mix as well as
other organizational considerations.
 External factors include the nature of the
market and demand and other
environmental factors.
 Before setting prices, the marketer must
understand the relationship between price
and demand for the company’s product
Other Internal and External Consideration
Pricing in Different Types of Markets
Pure competition
Monopolistic competition
Oligopolistic competition
Pure monopoly
Pricing in Different Types of
Markets Pure competition
 Under 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
 Sellers in these markets do not spend much time on marketing
strategy
Markets Monopolistic competition
 Under monopolistic competition, the market consists of many buyers and

sellers trading over a range of prices rather than single market price
 This is because sellers can differentiate their offers to buyers
Markets Oligopolistic competition
 The market consists of only a few large sellers

 Since there are less sellers, each seller is alert and responsive to
competitors’ pricing strategies and marketing moves
Markets Monopoly
 Market is dominated by one seller

 The seller may be government monopoly, a private regulated monopoly,
or a private unregulated monopoly (diamonds)
 Pricing is handled differently in each case.
Cost Based Pricing
Costs at Different Levels of Production
To price wisely, management needs to

know how its costs vary with
different levels of production. For
example, suppose Lenovo built a
plant to produce 1,000 tablet
computers per day. Figure shows
the typical short-run average cost
curve (SRAC). If Lenovo believed it
could sell 2,000 tablets a day, it
should consider building a larger
plant.
Cost Based Pricing
Costs as a Function of Production Experience
Experience curve
The drop in the average per-unit
production cost that comes with
accumulated production
experience.

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Chapter 10

Price is the amount of money charged for a product or service. It is

Price is the only element in the

 Major pricing strategies:

Everyday low pricing (EDLP) involves charging a constant everyday

High-low pricing involves charging higher prices on an everyday

 Value-added pricing attaches value-added features and

 Major pricing strategies:

Fixed Variable Total

Average cost is the cost associated with a given level of output

 Cost-plus pricing adds a standard markup to the cost of the

 Sellers are certain about costs

 Cost-plus pricing adds a standard markup to the cost of the

 Sellers are certain about costs

 Major pricing strategies:

 Competition-based pricing involves setting prices based on competitors’

 Internal factors affecting pricing include the

 Under pure competition, the market consists of many buyers and

 Under monopolistic competition, the market consists of many buyers and

 The market consists of only a few large sellers

 Market is dominated by one seller

To price wisely, management needs to

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