Lecture Principles of Marketing - Chapter 9: Pricing: Understanding and capturing customer value

Chapter 9 discuss the importance of understanding customer value perceptions and company costs when setting prices, identify and define the other important internal and external factors affecting a firm’s pricing decisions, describe the major strategies for pricing imitative and new products, explain how companies find a set of prices that maximizes the profits from the total product mix, discuss how companies adjust their prices to take into account different types of customers and situations.

Chapter Nine Pricing: Understanding and Capturing Customer Value Roadmap: Previewing the Concepts Discuss the importance of understanding customer value perceptions and company costs when setting prices Identify and define the other important internal and external factors affecting a firm’s pricing decisions Describe the major strategies for pricing imitative and new products Explain how companies find a set of prices that maximizes the profits from the total product mix Discuss how companies adjust their prices to take into account different types of customers and situations Discuss key issues related to initiating and responding to price changes Copyright 2007, Prentice Hall, Inc 9-2 Case Study Toys ‘R’ Us – Pricing for Success The Past The Present  1970s: Toys ‘R’ Us emerges as a toy retailing category killer, offering greater product selection and lower prices than its small store competition  Explosive growth occurs  Late 1990s: Wal-Mart uses toys as a loss leader, pricing lower than Toys ‘R’ Us and becomes the largest toy retailer  Toys ‘R’ Us tries price matching and fails miserably, losing sales, profit, and market share  New ownership closes stores, cut costs, and steps away from the price war  Efforts focus on top-selling, higher margin or exclusive items, store atmosphere, shopper experiences, and customer service What Is a Price?  Narrowly, price is the amount of money charged for a product or service  Broadly, price is the sum of all the values that consumers exchange for the benefits of having or using the product or service Major Considerations in Setting Price  Customer perceptions of value  Other internal and external considerations – Marketing strategy, objectives, mix – Nature of the market and demand – Competitors’ strategies and prices  Product costs Customer Value Perceptions  Customer-oriented pricing: – Involves understanding how much value consumers place on the benefits they receive from the product and setting a price that captures that value  Value-based pricing: – Uses buyers’ perceptions of value, not the seller’s cost, as the key to pricing • Good value pricing • Value-added pricing Internal Factors Affecting Pricing Decisions  Company and Product Costs: – Fixed Costs: • Costs that not vary with production or sales level – Variable Costs: • Costs that vary directly with the level of production Cost-Based Pricing  Cost-plus pricing – Adding a standard markup to the cost of the product  Break-even pricing  Target-profit pricing Internal Factors Affecting Pricing Decisions  Marketing Objectives: – Company must decide on its strategy for the product – General pricing objectives: • Survival • Current profit maximization • Market share leadership • Product quality leadership Internal Factors Affecting Pricing Decisions  Marketing Mix Strategy: – Price decisions must be coordinated with product design, distribution, and promotion decisions to form a consistent and effective marketing program – Target costing: • Pricing that starts with an ideal selling price, then targets costs that will ensure that the price is met Product-Line Pricing  Involves setting price steps between various products in a product line based on: – Cost differences between products – Customer evaluations of different features – Competitors’ prices Optional- and CaptiveProduct Pricing  Optional-Product – Pricing optional or accessory products sold with the main product (e.g., ice maker with the refrigerator)  Captive-Product – Pricing products that must be used with the main product (e.g., replacement cartridges for Gillette razors) By-Product and Product Bundle Pricing Strategies  By-Product Pricing – Pricing low-value by-products to get rid of them (e.g., animal manure from zoo)  Product Bundle Pricing – Pricing bundles of products sold together (software, monitor, PC, and printer) Price Adjustment Strategies        Discount and allowance pricing Segmented pricing Psychological pricing Promotional pricing Geographical pricing Dynamic pricing International pricing Discounts and Allowances  Discounts – Cash – Quantity – Functional – Seasonal  Allowances – Trade-in – Promotional Segmented Pricing  Selling a product or service at two or more prices, where the difference in prices is not based on differences in costs  Types: Customer-segment Product-form Location pricing Time pricing Psychological Pricing  Considers the psychology of prices and not simply the economics  Consumers usually perceive higherpriced products as having higher quality  Consumers use price less when they can judge the quality of a product by examining it or recalling experiences Promotional Pricing  Low-Interest Financing  Longer Warranties  Free Maintenance  Cash Rebates  Special-Event Pricing  Loss Leaders Geographical Pricing      FOB-origin pricing Uniform-delivered pricing Zone pricing Basing-point pricing Freight-absorption pricing Dynamic Pricing  Adjusting prices continually to meet the characteristics and needs of individual customers and situations International Pricing  Price depends on many factors, including: – Economic conditions – Competitive situations – Laws and regulations – Development of the wholesaling and retailing system – Consumer perceptions and preferences – Costs Initiating Price Changes  Price Cuts: – Excess capacity – Falling market share – Dominate market through lower costs  Price Increases: – Cost inflation – Overdemand Responses to Price Changes  Buyer reactions to price changes  Competitor reactions to price changes  Firm responses to price changes: – Reduce price to match competition – Raise the perceived quality of its offer – Improve quality and increase price – Launch a low-price “fighting brand” Public Policy and Pricing      Price fixing Predatory pricing Price discrimination Retail price maintenance Deceptive pricing – Promotion price reductions – Scanner fraud – Price confusion Rest Stop: Reviewing the Concepts Discuss the importance of understanding customer value perceptions and company costs when setting prices Identify and define the other important internal and external factors affecting a firm’s pricing decisions Describe the major strategies for pricing imitative and new products Explain how companies find a set of prices that maximizes the profits from the total product mix Discuss how companies adjust their prices to take into account different types of customers and situations Discuss key issues related to initiating and responding to price changes Copyright 2007, Prentice Hall, Inc 9-31 ... Marketing strategy, objectives, mix – Nature of the market and demand – Competitors’ strategies and prices  Product costs Customer Value Perceptions  Customer- oriented pricing: – Involves understanding. .. understanding how much value consumers place on the benefits they receive from the product and setting a price that captures that value  Value- based pricing: – Uses buyers’ perceptions of value, ... Concepts Discuss the importance of understanding customer value perceptions and company costs when setting prices Identify and define the other important internal and external factors affecting