978-0134149530 Chapter 9 Lecture Note Part 1

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Chapter 9 Pricing: Understanding and Capturing Customer Value

CHAPTER 9

PRICING: UNDERSTANDING AND CAPTURING CUSTOMER VALUE

PREVIEWING THE CONCEPTS – CHAPTER OBJECTIVES

1. Identify the three major pricing strategies and discuss the importance of understanding

customer-value perceptions, company costs, and competitor strategies 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 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 the key issues related to initiating and responding to price changes.

JUST THE BASICS

CHAPTER OVERVIEW

Firms successful at creating customer value with the other marketing mix activities must capture

this value in the prices they earn.

Despite its importance, many firms do not handle pricing well.

In this chapter, we begin with the question, “What is a price?” Next, we look at three major

pricing strategies – customer value-based, cost-based, and competition-based pricing – and at

other factors that affect pricing decisions.

Finally, we examine pricing strategies for new-product pricing, product mix pricing, price

adjustments, and dealing with price changes.

ANNOTATED CHAPTER NOTES/OUTLINE

FIRST STOP

Amazon versus Walmart: A Price War for Online Supremacy

Each side is formidable in its own right. Walmart dominates offline retailing. It’s price-driven

positioning has made it far and away the world’s biggest retailer.

In turn, Amazon is the “Walmart of the Web”—our online general store. By one estimate,

Amazon captures a full one-third of all U.S. online buying.

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Chapter 9 Pricing: Understanding and Capturing Customer Value

If Amazon’s expansion continues and online sales spurt as predicted, the digital merchant will eat

further and further into Walmart’s bread-and-butter store sales.

Amazon’s online assortment outstrips even Walmart’s, and the online and mobile shopping

wizard is now moving into groceries, an area that currently accounts for 55 percent of Walmart’s

sales.

Walmart came late to online selling. It’s still trying to figure out how to efficiently deliver goods

into the hands of online shoppers. To catch up, Walmart is investing heavily to create a

next-generation fulfillment network.

Who will win the battle for the hearts and dollars of online buyers? Certainly, low prices will

continue to be important. But achieving online supremacy will involve much more than just

waging and winning an online price war.

It will require delivering low prices plus selection, convenience, and a world-class online buying

experience—something that Amazon perfected long ago. For Walmart, catching and conquering

Amazon online will require time, resources, and skills far beyond its trademark everyday low

prices.

INTRODUCTION

Companies today face a fierce and fast-changing pricing environment.

Yet, cutting prices is often not the best answer.

WHAT IS A PRICE?

In the narrowest sense, price is the amount of money charged for a product or service.

Use Key Term Price here.

More broadly, price is the sum of all the values that customers give up in order to gain the

benefits of having or using a product or service.

Price is the only element in the marketing mix that produces revenue.

Price is one of the most flexible marketing mix elements.

MAJOR PRICING STRATEGIES

Figure 9.1 summarizes the major considerations in setting price.

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Chapter 9 Pricing: Understanding and Capturing Customer Value

Use Chapter Objective 1 here.

Use Figure 9.1 here.

Use Discussion Question 9-1 here.

Customer Value-Based Pricing

In the end, the customer will decide whether a product’s price is right.

Figure 9.1 suggests three pricing strategies: customer value-based pricing, cost-based pricing,

and competition-based pricing.

Use Figure 9.2 here.

Customer value-based pricing uses buyers’ perceptions of value, not the seller’s cost, as the

key to pricing.

Price is considered along with the other marketing mix variables before the marketing program is

set.

Figure 9.2 compares value-based pricing with cost-based pricing.

Cost-based pricing is product driven.

“Good value” is not the same as “low price.”

Two types of value-based pricing are good-value pricing and value-added pricing.

Use Key Terms Customer Value-Based Pricing and Good-Value Pricing here.

Use Marketing Ethics here.

1. Good-value pricing involves offering just the right combination of quality and good

service at a fair price.

Everyday low pricing (EDLP). 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.

2. Value-added pricing is the strategy of attaching value-added features and services to

differentiate their offers and thus support higher prices.

Use Key Term Value-Added Pricing here.

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Chapter 9 Pricing: Understanding and Capturing Customer Value

Use Discussion Question 9-2 here.

Use Marketing at Work 9.1 here.

Cost-Based Pricing

Whereas customer-value perceptions set the price ceilings, costs set the floor for the price that

the company can charge.

Cost-based pricing involves setting prices based on the costs for producing, distributing, and

selling the product plus a fair rate of return for effort and risk.

Types of Costs

Fixed costs (also known as overhead) are costs that do not vary with production or sales level.

Variable costs vary directly with the level of production. They are called variable because their

total varies with the number of units produced.

Use Key Terms Cost-Based Pricing, Fixed Costs (Overhead), and Variable Costs here.

Total costs are the sum of the fixed and variable costs for any given level of production.

Use Key Term Total Costs here.

Cost-Plus Pricing

Use Key Term Cost-Plus Pricing (Markup Pricing) here.

The simplest pricing method is cost-plus pricing (markup pricing) – adding a standard

markup to the cost of the product.

Does using standard markups to set prices make sense? Generally, no.

Markup pricing remains popular for many reasons.

1. Sellers are more certain about costs than about demand.

2. When all firms in the industry use this pricing method, prices tend to be similar and price

competition is thus minimized.

Another cost-oriented pricing approach is break-even pricing, or a variation called target

profit pricing. The firm tries to determine the price at which it will break even or make the

target profit it is seeking.

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Chapter 9 Pricing: Understanding and Capturing Customer Value

Target return pricing uses the concept of a break-even chart, which shows total cost and total

revenue expected at different sales volume levels.

The major problem with this analysis is that it fails to consider customer value and the

relationship between price and demand.

Typically, as the price increases, demand decreases.

Use Key Term Break-even Pricing (Target Return Pricing) here.

Use Figure 9.3 here.

Competition-Based Pricing

Competition-based pricing involves setting prices based on competitors’ strategies, costs, prices,

and market offerings.

What principle should guide decisions about what price to charge relative to those of

competitors? The answer is simple in concept but difficult in practice.

Be certain to give customers superior value for the price.

Use Key Term Competition-Based Pricing here.

OTHER INTERNAL AND EXTERNAL CONSIDERATIONS AFFECTING PRICE

DECISIONS

Overall Marketing Strategy, Objectives, and Mix

Price is only one of the marketing mix tools that a company uses to achieve its marketing

objectives.

Price decisions must be coordinated with product design, distribution, and promotion decisions

to form a consistent and effective integrated marketing program.

Companies often position their products on price and then tailor other marketing mix decisions to

the prices they want to charge.

Target costing starts with an ideal selling price based on customer-value considerations, and

then targets costs that will ensure that the price is met.

Use Chapter Objective 2 here.

Use Key Term Target Costing here.

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Chapter 9 Pricing: Understanding and Capturing Customer Value

Companies may deemphasize price and use other marketing mix tools to create nonprice

positions.

Organizational Considerations

In small companies, prices are often set by top management rather than by the marketing or sales

departments.

In large companies, pricing is typically handled by divisional or product line managers.

In industrial markets, salespeople may be allowed to negotiate with customers within certain

price ranges.

In industries in which pricing is a key factor, companies often have pricing departments to set the

best prices or to help others in setting them.

The Market and Demand

Pricing in Different Types of Markets

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.

In a purely competitive market, marketing research, product development, pricing, advertising,

and sales promotion play little or no role. Thus, sellers in these markets do not spend much time

on marketing strategy.

Monopolistic competition: The market consists of many buyers and sellers who trade over a

range of prices rather than a single market price. A range of prices occurs because sellers can

differentiate their offers to buyers.

Oligopolistic competition: The market consists of a few sellers who are highly sensitive to

each other’s pricing and marketing strategies.

There are few sellers because it is difficult for new sellers to enter the market.

Pure monopoly: The market consists of one seller. The seller may be a government monopoly, a

private regulated monopoly, or a private nonregulated monopoly.

Analyzing the Price-Demand Relationship

The relationship between the price charged and the resulting demand level is shown in the

demand curve (Figure 9.4).

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Chapter 9 Pricing: Understanding and Capturing Customer Value

Use Key Term Demand Curve here.

Use Discussion Question 9-2 here.

Use Figure 9.4 here.

In a normal case, demand and price are inversely related; that is, the higher the price, the lower

the demand.

In a monopoly, the demand curve shows the total market demand resulting from different prices.

If the company faces competition, its demand at different prices will depend on whether

competitors’ prices stay constant or change with the company’s own prices.

Price Elasticity of Demand

Price elasticity: How responsive demand will be to a change in price.

If demand hardly changes with a small change in price, we say demand is inelastic.

If demand changes greatly with a small change in price, we say the demand is elastic.

Use Key Term Price Elasticity here.

Use Discussion Question 9-3 here.

Use Marketing by the Numbers here.

The Economy

Economic conditions can have a strong impact on the firm’s pricing strategies.

In the aftermath of the recent Great Recession, consumers have rethought the price-value

equation. Many consumers have tightened their belts and become more value conscious.

The most obvious response to the new economic reality is to cut process. Rather than cutting

prices, many companies are shifting their marketing to focus on more affordable items in their

product mixes.

Remember, even in tough economic times, consumers do not buy based on price alone.

The key is to offer great value for the money.

Other External Factors

The company must also consider what impact its prices will have on other parties in its

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Chapter 9 Pricing: Understanding and Capturing Customer Value

environment, such as resellers and the government.

Social concerns may have to be taken into account.

Use Linking the Concepts here.

NEW-PRODUCT PRICING STRATEGIES

Market-Skimming Pricing

Market-skimming pricing (or price skimming) is setting high initial prices to “skim”

revenues layer by layer from the market.

Market skimming makes sense under certain conditions.

1. The product’s quality and image must support its higher price and enough buyers must

want the product at that price.

2. The costs of producing a smaller volume cannot be so high that they cancel the advantage

of charging more.

3. Competitors should not be able to enter the market easily and undercut the high price.

Use Key Term Market-Skimming Pricing (Price Skimming) here.

Use Chapter Objective 3 here.

Market-Penetration Pricing

Market-penetration pricing is setting a low initial price in order to penetrate the market

quickly and deeply—to attract a large number of buyers quickly and win a large market share.

Several conditions must be met for this strategy to work.

1. The market must be highly price sensitive so that a low price produces more market

growth.

2. Production and distribution costs must fall as sales volume increases.

3. The low price must help keep out the competition, and the penetration pricer must

maintain its low-price position.

Use Discussion Question 9-4 here.

Use Key Term Market-Penetration Pricing here.

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Chapter 9 Pricing: Understanding and Capturing Customer Value

PRODUCT MIX PRICING STRATEGIES (Table 9.1)

In product line pricing, management must decide on the price steps to set between the various

products in a line.

Use Table 9.1 here.

The price steps should take into account cost differences between the products in the line.

Use Key Term Product Line Pricing here.

Use Chapter Objective 4 here.

Optional product pricing is offering to sell optional or accessory products along with a main

product.

Use Key Term Optional Product Pricing here.

In captive product pricing, companies make products that must be used along with a main

product.

Use Discussion Question 9-3 here.

Use Key Term Captive Product Pricing here.

In the case of services, captive-product pricing is called two-part pricing. The price of the

service is broken into a fixed fee plus a variable usage rate.

Using by-product pricing, the company seeks a market for the by-products produced in the

generation of some products and services.

Use Key Term By-Product Pricing here.

Using product bundle pricing, sellers often combine several of their products and offer the

bundle at a reduced price.

Use Key Term Product Bundle Pricing here.

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