Chapter 10
PRICING: UNDERSTANDING AND CAPTURING
CUSTOMER VALUE
MARKETING STARTER: CHAPTER 10
Amazon vs. Walmart: A Price War for Online Supremacy
Synopsis
Less than a decade ago, no one considered that Amazon might someday give Walmart something to worry about.
But today, Amazon is a $107 billion a year company. Walmart, though, brings in about 4.5 times more sales, at $482
billion. However, Amazon has grown 20 percent annually over the past four years, while Walmart’s growth over the
same time period has been essentially flat. Already, Amazon is cutting in to Walmart’s sales. And, if this pace keeps
up, Amazon could be the one to ultimately dethrone the king of retail. At the center of the battle is price. While low
price may ultimately declare a winner in this game of cat and mouse, both parties also need to take extreme caution
when it comes to overdoing it. Reckless price-cutting will likely do more damage than good to both companies. In
the process, both companies are trying to find other ways of outdoing each other, like personalized service and
delivery options. Amazon seems to have the upper hand in this area, but Walmart is making strides by investing
heavily in its fulfillment network and combining the best of its online and off-line operations. The winner will have
to do more than offer the lowest price. Selection, convenience, and buying experience will be vital to winning
online.
Discussion Objective
A focused 10-minute discussion of the chapter-opening Amazon vs. Walmart story will show students that a proper
price/value equation will ring true with customers and produce strong sales and profits. Both Walmart and Amazon
strongly focus on pricing in their appeals to customers. However, the two companies are not identical in how they
use pricing to provide value to customers. Walmart promotes “Everyday Low Prices” with the tagline of “Save
Money, Live Better.” Amazon uses its website to provide not only pricing information on products, but product
information, product reviews from purchases, and alternative product solutions. As people define value in different
ways, the two companies design their approaches to target customers and take advantage of those differences.
Starting the Discussion
Start by asking what students know about Amazon and Walmart, and how their experiences with the two behemoths
fit with the opening vignette. Next, give the students a feel for each company by visiting their websites at
www.amazon.com and www.walmart.com. You can also enter the company names on www.YouTube.com and check
out several of their videos. Once you’ve captured the essence of the online experience for each company, you can
explore the competition between the two firms.
Discussion Questions
1. For Amazon and Walmart, is it more important to have lower prices or the perception of lower prices? (As
the famous Jack Trout quote goes, “There are no best products. All that exists in the world of marketing are
perceptions in the minds of the customer or prospect. The perception is reality. Everything else is an
illusion.” For the most part, this is true. While there exists a correlation between reality and perception to
some extent, consumers do not make decisions based on realities that do not match their perceptions.)
2. What pricing strategies do Amazon and Walmart each use? Do they use the same ones? In what ways do
their strategies match and in what ways do they differ? Review Figures 10.1 and 10.2 in discussing Amazon
and Walmart’s pricing strategies. (Do product costs matter more than consumer perceptions of value in
setting prices for these companies? Or not? Explain.)
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3. In the battle for online dominance, just how important is low price? How important are the other benefits
that Amazon and Walmart each deliver? (In today’s world of shopping-app enabling price shopping, it
would seem that having the lowest price is essential. However, a current trend in retailing is providing a full
plate of options and providing a seamless transition from any one of them to another. As the case points out,
Walmart has an advantage in developing and offering more ways to buy (and return) products since it has
locations everywhere. If Walmart can develop a reliable delivery service out of each of its stores, it can
promise same-day delivery, which Amazon has been unable to do. However, Amazon has the benefit of
endless inventories and a logistics system that selects, packages, and ships products in record time. It also
has much stronger relationships with shippers like UPS and has created a seamless process where packages
leave its fulfillment centers and are directly transferred to a UPS plane.)
CHAPTER OVERVIEW
Use Power Point Slide 10-1 Here
Firms successful at creating customer value with the other marketing mix activities must capture
this value in the prices they earn.
This chapter addresses the importance of pricing, explores three major pricing strategies, and
looks at internal and external considerations that affect pricing decisions.
Companies today face a fierce and fast-changing pricing environment. Value-seeking customers
have put increased pricing pressure on many companies. Yet, cutting prices is often not the best
answer. No matter what the state of the economy, companies should sell value, not price.
CHAPTER OBJECTIVES
Use Power Point Slide 10-2 here
1. Answer the question “What is a price?” and discuss the importance of pricing in today’s fast-
changing environment.
2. Identify the three major pricing strategies and discuss the importance of understanding
customer-value perceptions, company costs, and competitor strategies when setting prices.
3. Identify and define the other important external and internal factors affecting a firm’s pricing
decisions.
CHAPTER OUTLINE
p. 282 INTRODUCTION
Less than 15 years ago, no one considered that Amazon
might someday give Walmart something to worry about.
Today, Amazon is a $107 billion a year company. Walmart
still leads by about 4.5 times, at $482 billion.
But consider that Amazon has been growing by double digits
– 20 percent annually for the past four years. Walmart’s
growth, on the other hand, is flat for the same period.
Already, Amazon is cutting in to Walmart’s sales. If this pace
keeps up, Amazon could be the one to ultimately dethrone
p. 283
Photo: Walmart and
Amazon
Copyright©2018 Pearson Education
the king of retail.
At the center of the battle is price. While low price may
ultimately declare a winner in this game of cat and mouse,
both parties also need to take extreme caution when it comes
to overdoing it. Reckless price-cutting will likely do more
damage than good to both companies.
In the process, both companies are trying to find other ways
of outdoing each other, like personalized service and
delivery options. Amazon seems to have the upper hand in
this area, but Walmart is making strides by investing heavily
in its fulfillment network and combining the best of its
online and off-line operations. The winner will have to do
more than offer the lowest price. Selection, convenience,
and buying experience will be vital to winning online.
Opening Vignette Questions
1. For Amazon and Walmart, is it more important to
have lower prices or to have the perception of lower
prices?
2. What pricing strategies do the two companies use?
Do they use the same ones? Why or why not?
3. In the battle for online dominance, just how important
is low price? How important are other benefits that
Amazon and Walmart each deliver?
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PPT 10-3
PPT 10-4
Answer the question “What is a price?” and discuss the
importance of pricing in today’s fast-changing
environment.
WHAT IS A PRICE?
In the narrowest sense, price is the amount of money
charged for a product or service.
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.
Review Learning Objective 1: Answer the question “What
is a price?” and discuss the importance of pricing in today’s
fast-changing environment.
Learning Objective
1
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Key Term: Price
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Photo: Pricing
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PPT 10-5
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Identify the three major pricing strategies and discuss the
importance of understanding customer-value
perceptions, company costs, and competitor strategies
when setting prices.
MAJOR PRICING STRATEGIES
Figure 10.1 summarizes the major considerations in setting
price.
Customer Value-Based Pricing
In the end, the customer will decide whether a product’s
price is right.
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.
Cost-based pricing is often product driven.
Value-based pricing reverses this process. The company first
assesses customer needs and value perceptions, and then sets
its target price based on customer perceptions of value.
Two types of value-based pricing are good-value pricing and
value-added pricing.
Good-value pricing involves offering just the right
combination of quality and good service at a fair price.
Everyday low pricing (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.
Value-Added Pricing
Value-added pricing is the strategy of attaching
value-added features and services to differentiate their offers
Learning Objective
2
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Figure 10.1:
Considerations in
Setting Price
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Key Term:
Customer
value-based pricing
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Figure 10.2:
Value-Based Pricing
Versus Cost-Based
Pricing
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Photo: Patek
Philippe, perceived
value
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Key Terms:
Good-value pricing,
Value-added pricing
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Ad: Mercedes-Benz
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Photo: Bose
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Photo: Spirit
Airlines
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and thus support higher prices.
Assignments, Resources
Use Real Marketing 10.1 here
Use Discussion Question 10-1 here
Use Video Case here
Use Online, Mobile, and Social Media Marketing
here
Use Additional Projects 1, 2, and 3 here
Use Individual Assignments 1 and 2 here
Use Small Group Assignment 1 here
Use Think-Pair-Share 1, 2, and 3 here
Use Outside Example 1 here
Troubleshooting Tip
1) Even if a few students have worked in a family
business, it is unlikely that they have ever set
prices on products or services. Although the
“What Is a Price?” section is very short, it is
worth spending some time talking about the
difference between fixed-price policies and
dynamic pricing. A discussion of what it’s like to
buy a meal at a restaurant, where you cannot
typically haggle on price, and buying a car, where
you are expected to negotiate a price, can clarify
the difference between the two. A discussion of
what has happened with auctions and exchanges
online will also help.
2) Value-based pricing could generate considerable
discussion, particularly if someone thinks it is
unethical to charge a price for something that
yields the company a very large margin. Why
wouldn’t you treat customers “right” by charging
them less? A discussion of the meaning of
customer focus and of benefits to the customer
will help students understand that if the customer
thinks he or she is receiving good value, that
customer will happily pay the price.
Copyright©2018 Pearson Education
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PPT 10-17
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PPT 10-18
Cost-Based Pricing
Cost-based pricing involves setting prices based on the
costs for producing, distributing, and selling the product plus
a fair rate of return for its 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.
Total costs are the sum of the fixed and variable costs for
any given level of production.
Costs at Different Levels of Production
To price wisely, management needs to know how its costs
vary with different levels of production.
Figure 10.3A shows the typical short-run average cost curve
(SRAC).
Figure 10.3B shows the long-run average cost curve
(LRAC).
Costs as a Function of Production Experience
Average cost tends to fall with accumulated production
experience, as shown in Figure 10.4. This drop in the
average cost with accumulated production experience is
called the experience curve (or the learning curve).
A single-minded focus on reducing costs and exploiting the
experience curve will not always work. Aggressive pricing
might give the product a cheap image.
Furthermore, while the company is building volume under
one technology, a competitor may find a lower-cost
technology that lets it start at prices lower than those of the
market leader, who still operates on the old experience curve.
Cost-Plus Pricing
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Key Term:
Cost-based pricing
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Key Terms: Fixed
costs (overhead),
variable costs, total
costs
p. 290
Figure 10.3: Cost
Per Unit at
Different Levels of
Production per
Period
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Figure 10.4: Cost
per Unit as a
Function of
Accumulated
Production: The
Experience Curve
p. 290
Key Term:
Experience curve
(learning curve)
Copyright©2018 Pearson Education
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The simplest pricing method is cost-plus 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 minimized.
3. Many people feel that cost-plus pricing is fairer to
both buyers and sellers.
Break-Even Analysis and Target Profit Pricing
Another cost-oriented pricing approach is break-even
pricing, or a variation called target return pricing. The
firm tries to determine the price at which it will break even
or make the target profit it is seeking.
Target return pricing uses the concept of a break-even chart
that shows the total cost and total revenue expected at
different sales volume levels. Figure 10.5 shows a
break-even chart.
The manufacturer should consider different prices and
estimate break-even volumes, probable demand, and profits
for each. This is shown in Table 10.1.
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Key Term:
Cost-plus pricing
(markup pricing)
p. 291
Key Term:
Break-even pricing
(target return
pricing)
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Figure 10.5:
Break-Even Chart
for Determining
Target Return Price
and Break-Even
Volume
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Table 10.1:
Break-Even Volume
and Profits at
Different Prices
Assignments, Resources
Use Discussion Question 10-2 and 10-3 here
Use Critical Thinking Exercise 10-6 here
Use Marketing by the Numbers here
Use Additional Projects 4 here
Use Think-Pair-Share 4 and 5 here
Troubleshooting Tip
Students may need further explanation regarding why
cost-based pricing is not always the right way to price
products and services. It’s simple, it’s easy to apply a
formula, and there is no guesswork involved. You
need to drive home the point that it ignores the
customer completely—cost-based pricing is
internally focused, without a thought to the demand
Copyright©2018 Pearson Education
parameters or competitors’ prices. You can talk about
this from the perspective of a high-cost manufacturer
—how much would they be able to sell if their
product cost 50 percent more than the competition
simply because the company hadn’t figured out how
to manufacture it effectively?
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PPT 10-23
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Competition-Based Pricing
Competition-based pricing involves setting prices based on
competitors’ strategies, costs, prices, and market offerings.
Consumers will base their judgments of a product’s value on
the prices that competitors charge for similar products.
No matter what price you charge relative to the competition
—high, low, or in-between—be certain to give customers
superior value for that price.
Review Learning Objective 2: Identify the three major
pricing strategies and discuss the importance of
understanding customer-value perceptions, company costs,
and competitor strategies when setting prices.
Identify and define the other important external and
internal factors affecting a firm’s pricing decisions.
Other Internal and External Considerations Affecting
Price Decisions
Overall Marketing Strategy, Objectives, and Mix
Before setting price, the company must decide on its overall
marketing strategy for the product or service. Pricing
strategy is largely determined by decisions on market
positioning.
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 mix program.
Companies often position their products on price and then
tailor other marketing mix decisions to the prices they want
to charge.
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Key Term:
Competition-based
pricing
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Photo: Caterpillar
Learning Objective
3
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Photo: Trader Joe’s
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Photo: Whole Foods
Copyright©2018 Pearson Education
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PPT 10-27
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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.
Companies may de-emphasize price and use other marketing
mix tools to create non-price 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
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Key Term: Target
costing
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Ad: Sleep Number
beds
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Ad: DirecTV
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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 unregulated monopoly.
Assignments, Resources
Use Real Marketing 10.2 here
Use Critical Thinking Question 10-8 here
Use Marketing Ethics here
Use Additional Projects 5 here
Use Outside Example 2 here
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PPT 10-29
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Analyzing the Price-Demand Relationship
The relationship between the price charged and the resulting
demand level is shown in the demand curve (Figure 10.6).
In the 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 is 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.
Buyers are less price sensitive when the product they are
buying is unique or when it is high in quality, prestige, or
exclusiveness; when substitute products are hard to find or
when they cannot easily compare the quality of substitutes;
and when the total expenditure for a product is low relative
to their income or when the cost is shared by another party.
If demand is elastic rather than inelastic, sellers will consider
lowering their prices. A lower price will produce more total
revenue.
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Key term: Demand
curve
p. 298
Figure 10.6:
Demand Curves
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Key Term: Price
elasticity
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PPT 10-30
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The Economy
Economic conditions can have a strong impact on the firm’s
pricing strategies.
A boom or recession, inflation, and interest rates affect
consumer spending, consumer perceptions of the product’s
price and value, and the company’s costs of producing and
selling a product.
In the aftermath of the recent Great Recession, consumers
have rethought the price-value equation.
Other External Factors
The company must also know what impact its prices will
have on other parties in its environment, such as resellers and
the government.
Social concerns may have to be taken into account.
Review Learning Objective 3: Identify and define the
other important external and internal factors affecting a
firm’s pricing decisions.
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Ad: Charmin
Assignments, Resources
Use Discussion Questions 10-4 and 10-5 here
Use Critical Thinking Exercises 10-7 here
Use Company Case here
Use Small Group Assignment 2 here
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