Principles of Marketing
Nineteenth Edition, Global Edition
Chapter 10
Pricing: Understanding and
Capturing Customer Value
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Learning Objectives
10.1 Answer the question “What is price?” and discuss the
importance of pricing in today’s fast-changing
environment.
10.2 Define price, identify the major pricing strategies, and
discuss the importance of understanding
customer-value perceptions, company costs, and
competitor strategies when setting prices.
10.3 Identify and discuss the other important external and
internal factors affecting a firm’s pricing decisions.
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PELOTON: Premium Priced, But It’s
Not about the Price
Peloton in-home exercise bikes sell
at a steep price of $1,745,
compared with the typical bikes
you’d find at your local sporting
goods store for as little as $200 or
$300.
For the Peloton faithful, it isn’t just
about Peloton’s premium prices. It’s
about the values received from Peloton Interactive
membership in the dynamic, closely
connected Peloton community.
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Learning Objective 1
Answer the question “What is price?” and discuss the
importance of pricing in today’s fast-changing environment.
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What Is a Price?
Price is the amount of money charged for a product or
service, or the sum of all the values that customers
exchange for the benefits of having or using the product or
service.
Pricing: No matter what the
state of the economy,
companies should sell value,
not price.
Price is also one of the most flexible marketing mix
elements; prices can be changed quickly.
Smart managers treat pricing as a key strategic tool for
creating customer value and building customer
relationships.
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Learning Objective 2
Define price, identify the major pricing strategies, and
discuss the importance of understanding customer-value
perceptions, company costs, and competitor strategies when
setting prices.
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Major Pricing Strategies (1 of 17)
Figure 10.1 Considerations in Setting Price
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Major Pricing Strategies (2 of 17)
Customer Value-Based Pricing
Value-based pricing uses the buyers’ perceptions of value
rather than the seller’s cost.
• Value-based pricing is customer driven.
• Cost-based pricing is product driven.
• Price is set to match perceived value.
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Major Pricing Strategies (3 of 17)
Figure 10.2 Value-Based Pricing versus Cost-Based Pricing
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Major Pricing Strategies (4 of 17)
Customer Value-Based Pricing
Good-value pricing is offering just the right combination of quality and good
service at a fair price.
In many cases, this has involved introducing less-expensive versions of
established brand name products or new lower-price lines.
Customer value–based
pricing: A Steinway
piano—any Steinway
piano—costs a lot. But to a
Steinway customer, it’s a
small price to pay for the
value of owning one.
© Westend61 GmbH/Alamy Stock Photo
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Major Pricing Strategies (4 of 17)
Customer Value-Based Pricing
Good-value pricing is offering just the right combination of quality and good
service at a fair price.
In many cases, this has involved introducing less-expensive versions of
established brand name products or new lower-price lines.
In other cases, good-value pricing has involved redesigning existing
brands to offer more quality for a given price or the same quality for
less.
Some companies even succeed by offering less value but at very
low prices. For example, the ALDI supermarket chain has
established an impressive good-value pricing position
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Major Pricing Strategies (5 of 17)
Customer Value-Based Pricing
Everyday low pricing (E D L P) involves charging a constant everyday low price
with few or no temporary price discounts.
So, ALDI keeps costs low so that it can offer customers “impressively high quality
at impossibly low prices” every day.
The king of EDLP is Walmart, which practically defined the concept.
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Major Pricing Strategies (6 of 17)
Customer Value-Based Pricing
High-low pricing involves charging higher prices on an
everyday basis but running frequent promotions to lower
prices temporarily on selected items.
Department stores such as Kohl’s and JCPenney have
historically practiced high-low pricing by having frequent sale
days, early-bird savings, and bonus earnings for store
credit-card holders.
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Major Pricing Strategies (7 of 17)
Customer Value-Based Pricing
Value-added pricing attaches value-added features and services
to differentiate a company’s offers and thus their higher prices.
The Porsche Drive subscription
program promises “Dreams on
demand—a fleet of Porsches at
your fingertips.” That makes the
value well worth the price for the
group of Porsche enthusiasts
who sign up.
North Monaco/Shutterstock
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Value-added pricing
• Rather than cutting prices to match
competitors, they add quality,
services, and value-added features to
differentiate their offers and thus
support their higher prices.
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Major Pricing Strategies (8 of 17)
Cost-Based Pricing
Cost-based pricing sets prices based on the costs for
producing, distributing, and selling the product plus a fair
rate of return for effort and risk.
As we learnt, some companies, such as Walmart or
Southwest Airlines, work to become the low-cost producers
in their industries.
Companies with lower costs can set lower prices that result
in smaller margins but greater sales and profits. However,
other companies—such as Apple, BMW, and
Steinway—intentionally pay higher costs so that they can
add value and claim higher prices and margins.
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Major Pricing Strategies (9 of 17)
Cost-Based Pricing
Fixed costs are the costs that do not vary with production or
sales level.
• Rent
• Heat
• Interest
• Executive salaries
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Major Pricing Strategies (10 of 17)
Cost-Based Pricing
Variable costs vary directly with the level of production.
• Raw materials
• Packaging
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Major Pricing Strategies (11 of 17)
Cost-Based Pricing
Total costs are the sum of the fixed and variable costs for
any given level of production.
Management wants to charge a price that will at least cover
the total production costs at a given level of production.
The company must watch its costs carefully. If it costs the
company more than its competitors to produce and sell a
similar product, the company will need to charge a higher
price or make less profit, putting it at a competitive
disadvantage.
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Major Pricing Strategies (12 of 17)
Figure 10.3 Cost per Unit at Different Levels of Production
per Period
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Major Pricing Strategies (13 of 17)
Figure 10.4 Cost per Unit as a Function of Accumulated Production: The Experience Curve
This drop in the average cost with accumulated production experience is called the
experience curve (or the learning curve).
Not only will the company’s unit production cost fall, but it will fall faster if the company
makes and sells more during a given time period. But the market has to stand ready to buy
the higher output.
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Major Pricing Strategies (14 of 17)
Cost-Based Pricing (or markup pricing)
Cost-plus pricing adds a standard markup to the cost of the
product.
• Benefits
– Sellers are certain about costs.
– Price competition is minimized.
– Buyers feel it is fair.
• Disadvantages
– Ignores demand and competitor prices
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Major Pricing Strategies (17 of 17)
Competition-Based Pricing
Competition-based pricing is setting prices based on competitors’ strategies, costs,
prices, and market offerings.
In assessing competitors’ pricing strategies, the company should ask:
1. How does the company’s market offering compare with competitors’ offerings in terms of
customer value?
2. How strong are current competitors and what are their current pricing strategies?
Pricing versus competitors: Caterpillar
dominates the heavy equipment
industry despite charging premium
prices. Customers believe that
Caterpillar gives them a lot more value
for the price over the lifetime of its
machines.
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Discussion Question (1 of 2)
Describe the major pricing strategies
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Learning Objective 3
Identify and discuss the other important external and internal
factors affecting a firm’s pricing decisions.
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Other Internal and External Considerations
Affecting Price Decisions (1 of 8)
Overall Marketing Strategy, Objectives, and Mix
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.
Companies often position their products on price and then tailor other marketing
mix decisions to the prices they want to charge.
Brands might build their marketing
strategies around premium pricing or
affordable pricing. Consumer
electronics maker Visio’s aim is “to
make high-quality technology and
content affordable to everyone.”
Andrey_Popov/Shutterstock
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Other Internal and External Considerations
Affecting Price Decisions (2 of 8)
Organizational Considerations
• Who should set prices?
• Who can influence prices?
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Other Internal and External Considerations
Affecting Price Decisions (3 of 8)
The Market and Demand
Before setting prices, the marketer must understand the
relationship between price and demand for its products.
Pricing under monopolistic
competition: Bose sets its
premium audio products apart
not by price but by the power
of its brand and the host of
differentiating features.
Jonathan Weiss/Shutterstock
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Other Internal and External Considerations
Affecting Price Decisions (4 of 8)
The Market and Demand
Pricing In Different Types of Markets
• Under pure competition, the market consists of many buyers and sellers trading in a
uniform commodity, such as wheat, copper, or financial securities. No single buyer or
seller has much effect on the going market price. Thus, sellers in these markets do not
spend much time on marketing strategy.
• Under monopolistic competition, the market consists of many buyers and sellers who
trade over a range of prices because sellers can differentiate their offers to buyers.
• Under oligopolistic competition, the market consists of only a few large sellers. For
example, only four companies—Verizon, AT&T, Sprint, and T-Mobile—control more than
90 percent of the U.S. wireless service provider market. Each seller is alert and
responsive to competitors’ pricing strategies and marketing moves.
• In a pure monopoly, the market is dominated by one seller. The seller may be a
government monopoly (the U.S. Postal Service), a private regulated monopoly (a power
company), or a private unregulated monopoly (De Beers and diamonds). Pricing is
handled differently in each case.
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Other Internal and External Considerations
Affecting Price Decisions (5 of 8)
• The Market Demand
• Analyzing the Price-Demand Relationship
• The demand curve shows the number of units the market
will buy in a given period at different prices
• Demand and price are inversely related
• Higher price = lower demand
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Other Internal and External Considerations
Affecting Price Decisions (6 of 8)
Figure 10.6 Demand Curve
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Other Internal and External Considerations
Affecting Price Decisions (7 of 8)
The Market and Demand
Price Elasticity of Demand
Price elasticity is a measure of the sensitivity of demand to
changes in price.
Inelastic demand is when demand hardly changes with a
small change in price.
Elastic demand is when demand changes greatly with a
small change in price.
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Discussion Question (2 of 2)
What is price elasticity of demand?
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