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Pricing Products:Understanding and

Capturing CustomerValue

A Global PerspectiveA Global Perspective

1010

Philip KotlerPhilip KotlerGary ArmstrongGary ArmstrongSwee Hoon AngSwee Hoon Ang

Siew Meng LeongSiew Meng LeongChin Tiong TanChin Tiong Tan

Oliver Yau HonOliver Yau Hon--MingMing

PowerPoint slides adapted byPeggy Su

Copyright 2009 Pearson Education South Asia Pte Ltd 10-1

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Learning Objectives

After studying this chapter, you should be able to:

1. Answer the question What is price? and discuss theimportance of pricing in todays fast-changingenvironment

2. Discuss the importance of understanding customervalue perceptions when setting prices

3. Discuss the importance of company and productcosts in setting prices

4. Identify and define the other important internal andexternal factors affecting a firms pricing decisions

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Chapter Outline

1. What Is Price?

2. Factors to Consider When Setting Prices

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Factors to Consider When

Setting PricesCustomer Perception of Value

Effective customer-oriented pricing involves

understanding how much value consumers placeon the benefits they receive from the product andsetting a price that captures that value.

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Factors to Consider When

Setting PricesCustomer Perception of Value

Value-based pricing uses the buyers perception

of value, not the sellers cost, as the key topricing. Price is considered before the marketingprogram is set.

Value-based pricing is customer-driven.

Cost-based pricing is product-driven.

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Factors to Consider When

Setting PricesCustomer Perception of Value

Value-based pricing

Good-value pricing

Value-added pricing

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Factors to Consider When

Setting PricesCustomer Perception of Value

Good-value pricing offers the right combination

of quality and good service to fair price.

Existing brands are being redesigned to offermore quality for a given price or the same qualityfor less price.

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Factors to Consider When

Setting PricesCustomer Perception of Value

Everyday low pricing (EDLP) involves charging

a constant everyday low price with few or notemporary price discounts.

High-low pricing involves charging higherprices on an everyday basis but running frequent

promotions to lower prices temporarily onselected items.

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Factors to Consider When

Setting PricesCustomer Perception of Value

Value-added pricing attaches value-added

features and services to differentiate offers,support higher prices, and build pricing power.

Pricing poweris the ability to escape pricecompetition and to justify higher prices and

margins without losing market share.

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Factors to Consider When

Setting PricesCompany 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 returnfor its effort and risk.

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Factors to Consider When

Setting PricesCompany and Product Costs

Types of costs

Fixed costs

Variable costs

Total costs

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Factors to Consider When

Setting PricesCompany and Product Costs

Fixed costs are the costs that do not vary

with production or sales level.

Rent

Utilities

Interest

Executive salaries

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Factors to Consider When

Setting PricesCompany and Product Costs

Variable costs are the costs that vary with

the level of production.

Packaging

Raw materials

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Factors to Consider When

Setting PricesCompany and Product Costs

Total costs are the sum of the fixed and

variable costs for any given level ofproduction.

Average cost is the cost associated with a

given level of output.

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Factors to Consider When

Setting PricesCompany and Product Costs

Experience or learning curve is when the

average cost falls as production increasesbecause fixed costs are spread over moreunits.

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Factors to Consider When

Setting Prices

Company and Product Costs

Cost-based pricing adds a standard markup

to the cost of the product.

Sales)onReturnDesired-(1

CostUnitPriceMarkup !

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Factors to Consider When

Setting Prices

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 noprofit.

Target profit pricing is the price at which thefirm will break even or make the profit it is

seeking.

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Factors to Consider When

Setting Prices

Break-Even Analysis and Target Profit Pricing

cost)Variable-(Price

costFixed

volumeeven-Break!

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Factors to Consider When

Setting Prices

Other Internal and External ConsiderationsAffecting Price Decisions

Customer perceptions of value set the upper limitfor prices, and costs set the lower limit.

Companies must consider internal and externalfactors when setting prices.

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Factors to Consider When

Setting Prices

Other Internal and External ConsiderationsAffecting Price Decisions

Internal factors

Marketing strategy, objectives, andmarketing mix

Organizational considerations

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Factors to Consider When

Setting Prices

Overall Marketing Strategy, Objectives and Mix

Pricing objectives include:

Survival

Profit maximization

Market share leadership

Customer retention and relationship building

Attracting new customers

Opposing competitive threats

Increasing customer excitement

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Factors to Consider When

Setting Prices

Overall Marketing Strategy, Objectives and Mix

Target costing starts with an ideal selling price

based on consumer value considerations andthen targets costs that will ensure that the priceis met.

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Factors to Consider When

Setting Prices

Overall Marketing Strategy, Objectives and Mix

Non-price strategies differentiate the

marketing offer to make it worth a higherprice.

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Factors to Consider When

Setting Prices

Organizational Considerations

Organizational considerations include

Who should set the price

Who can influence prices

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Factors to Consider When Setting

Prices

Other Internal and External ConsiderationsAffecting Price Decisions

External factors The market and demand

Types of markets

Analyzing the price-demand relationship

Competitors strategies and prices

Other environmental factors

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Factors to Consider When

Setting Prices

The Market and Demand

Types of markets

Pure competition

Monopolistic competition

Oligopolistic competition

Pure monopoly

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Factors to Consider When

Setting Prices

Types of Markets

Pure competition is a market with many buyers

and sellers trading uniform commodities whereno single buyer or seller has much effect onmarket price.

Monopolistic competition is a market with

many buyers and sellers who trade over arange of prices rather than a single marketprice with differentiated offers.

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Factors to Consider When

Setting Prices

Types of Markets

Oligopolistic competition is a market with few

sellers because it is difficult for sellers to enterwho are highly sensitive to each others pricingand marketing strategies.

Pure monopoly is a market with only one seller.

In a regulated monopoly, the governmentpermits a price that will yield a fair return. Ina non-regulated monopoly, companies arefree to set a market price.

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Factors to Consider When

Setting Prices

Analyzing the Price-Demand Relationship

Before setting prices, the marketer must

understand the relationship between priceand demand for its products.

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Factors to Consider When

Setting Prices

Analyzing the Price-Demand Relationship

The demand curve shows the number of units

the market will buy in a given period at differentprices.

Normally, demand and price are inversely related.

Higher price = lower demand

For prestige (luxury) goods, higher price can equalhigher demand when consumers perceive higherprices as higher quality.

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Factors to Consider When

Setting Prices

Price Elasticity ofDemand

Price elasticity of demand illustrates the

response of demand to a change in price.

Inelastic demand occurs when demandhardly changes when there is a small change

in price. Elastic demand occurs when demand

changes greatly for a small change inprice.

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Factors to Consider When

Setting Prices

Price Elasticity ofDemand

priceinchange%

demandedquantityinchange%demandofelasticityPrice !

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Factors to Consider When

Setting Prices

Price Elasticity ofDemand

Factors affecting price elasticity of demand

Unique product

Quality

Prestige

Substitute products

Cost relative to income

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Factors to Consider When

Setting Prices

Competitors Strategies and Prices

Factors to consider:

Comparison of offering in terms of customervalue

Strength of competitors

Competition pricing strategies

Customer price sensitivity

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Factors to Consider When

Setting Prices

OtherExternal Factors Affecting PriceDecisions

Other external factors Economic conditions

Resellers response to price

Government

Social concerns