Chapter Nine

Pricing: Understanding and

Capturing Customer Value
Roadmap: Previewing the Concepts
1. Discuss the importance of understanding
customer value perceptions and company costs
when setting prices.
2. Identify and define the other important internal
and external factors affecting a firm’s pricing
decisions.
3. Describe the major strategies for pricing imitative
and new products.
4. Explain how companies find a set of prices that
maximizes the profits from the total product mix.
5. Discuss how companies adjust their prices to
take into account different types of customers
and situations.
6. 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  Toys ‘R’ Us tries price
emerges as a toy retailing matching and fails
category killer, offering miserably, losing sales,
greater product selection profit, and market share.
and lower prices than its  New ownership closes
small store competition. stores, cut costs, and steps
 Explosive growth occurs. away from the price war.
 Late 1990s: Wal-Mart  Efforts focus on top-selling,
uses toys as a loss higher margin or exclusive
leader, pricing lower than items, store atmosphere,
Toys ‘R’ Us and becomes shopper experiences, and
the largest toy retailer. customer service.

Copyright 2007, Prentice Hall, Inc. 9-3

 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.

Copyright 2007, Prentice Hall, Inc. 9-4

 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

Copyright 2007, Prentice Hall, Inc. 9-5

 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
Copyright 2007, Prentice Hall, Inc. 9-6
 Internal Factors Affecting
Pricing Decisions

 Company and Product Costs:

– Fixed Costs:
• Costs that do not vary with production
or sales level.
– Variable Costs:
• Costs that vary directly with the level of
production.

Copyright 2007, Prentice Hall, Inc. 9-7

 Cost-Based Pricing

 Cost-plus pricing
– Adding a standard markup to the cost of
the product
 Break-even pricing
 Target-profit pricing

Copyright 2007, Prentice Hall, Inc. 9-8

 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

Copyright 2007, Prentice Hall, Inc. 9-9

 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.

Copyright 2007, Prentice Hall, Inc. 9-10

 Internal Factors Affecting
Pricing Decisions

 Organizational Considerations:
– Must decide who within the organization
should set prices.
– This will vary depending on the size and
type of company.

Copyright 2007, Prentice Hall, Inc. 9-11

 External Factors Affecting
Pricing Decisions
 The Market and Demand:
– Costs set the lower limit of prices while the
market and demand set the upper limit.
– Pricing in different types of markets:
• Pure competition
• Monopolistic competition
• Oligopolistic competition
• Pure monopoly
– Analyzing the price-demand relationship
– The price elasticity of demand
Copyright 2007, Prentice Hall, Inc. 9-12
 External Factors Affecting
Pricing Decisions

 Competitors’ Strategies and Prices

– How does the market offering compare?
– How strong is competition and what is
their pricing strategy?
– How does competition influence price
sensitivity?

 Other External Factors

Copyright 2007, Prentice Hall, Inc. 9-13

 New-Product Pricing Strategies

 Market Skimming:  When to Use:

– Set a high price for a – Product’s quality and
new product to image must support
“skim” revenues its higher price.
layer by layer from – Costs of low volume
the market. cannot be so high
– Company makes they cancel the
fewer, but more advantage of
profitable sales. charging more.
– Competitors should
not be able to enter
market easily and
undercut the price.
Copyright 2007, Prentice Hall, Inc. 9-14
 New-Product Pricing Strategies

 Market Penetration:  When to Use:

– Set a low initial price – Market is highly
in order to price sensitive so a
“penetrate” the low price produces
market quickly and more growth.
deeply. – Costs must fall as
sales volume
– Can attract a large increases.
number of buyers – Need to keep
quickly and win a competition out or
large market share. effects are only
temporary.

Copyright 2007, Prentice Hall, Inc. 9-15

 Product Mix Pricing Strategies

 Product line pricing

 Optional-product pricing
 Captive-product pricing
 By-product pricing
 Product bundle pricing

Copyright 2007, Prentice Hall, Inc. 9-16

 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

Copyright 2007, Prentice Hall, Inc. 9-17

 Optional- and Captive-
Product 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).
Copyright 2007, Prentice Hall, Inc. 9-18
 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).

Copyright 2007, Prentice Hall, Inc. 9-19

 Price Adjustment Strategies

 Discount and allowance pricing

 Segmented pricing
 Psychological pricing
 Promotional pricing
 Geographical pricing
 Dynamic pricing
 International pricing

Copyright 2007, Prentice Hall, Inc. 9-20

 Discounts and Allowances

 Discounts
– Cash
– Quantity
– Functional
– Seasonal
 Allowances
– Trade-in
– Promotional

Copyright 2007, Prentice Hall, Inc. 9-21

 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:
1. Customer-segment
2. Product-form
3. Location pricing
4. Time pricing

Copyright 2007, Prentice Hall, Inc. 9-22

 Psychological Pricing

 Considers the psychology of prices

and not simply the economics.
 Consumers usually perceive higher-
priced products as having higher
quality.
 Consumers use price less when they
can judge the quality of a product by
examining it or recalling experiences.

Copyright 2007, Prentice Hall, Inc. 9-23

 Promotional Pricing

 Low-Interest  Cash Rebates

Financing  Special-Event
 Longer Pricing
Warranties  Loss Leaders
 Free Maintenance

Copyright 2007, Prentice Hall, Inc. 9-24

 Geographical Pricing

 FOB-origin pricing
 Uniform-delivered pricing
 Zone pricing
 Basing-point pricing
 Freight-absorption pricing

Copyright 2007, Prentice Hall, Inc. 9-25

 Dynamic Pricing

 Adjusting prices continually to meet

the characteristics and needs of
individual customers and situations.

Copyright 2007, Prentice Hall, Inc. 9-26

 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
Copyright 2007, Prentice Hall, Inc. 9-27
 Initiating Price Changes

 Price Cuts:
– Excess capacity
– Falling market share
– Dominate market through lower costs

 Price Increases:
– Cost inflation
– Overdemand

Copyright 2007, Prentice Hall, Inc. 9-28

 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”

Copyright 2007, Prentice Hall, Inc. 9-29

 Public Policy and Pricing

 Price fixing
 Predatory pricing
 Price discrimination
 Retail price maintenance
 Deceptive pricing
– Promotion price reductions
– Scanner fraud
– Price confusion
Copyright 2007, Prentice Hall, Inc. 9-30
Rest Stop: Reviewing the Concepts
1. Discuss the importance of understanding
customer value perceptions and company costs
when setting prices.
2. Identify and define the other important internal
and external factors affecting a firm’s pricing
decisions.
3. Describe the major strategies for pricing
imitative and new products.
4. Explain how companies find a set of prices that
maximizes the profits from the total product mix.
5. Discuss how companies adjust their prices to
take into account different types of customers
and situations.
6. Discuss key issues related to initiating and
responding to price changes.
Copyright 2007, Prentice Hall, Inc. 9-31