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Pricing: understanding and capturing customer value

Chapter 9 . Pricing: understanding and capturing customer value. Objectives . Understanding the factors that affect the pricing strategies Learn the major strategies and approaches for pricing. Know about the New-Product Pricing Strategies

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Pricing: understanding and capturing customer value

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  1. Chapter 9 Pricing: understanding and capturing customer value

  2. Objectives • Understanding the factors that affect the pricing strategies • Learn the major strategies and approaches for pricing. • Know about the New-Product Pricing Strategies • Learn how companies adjust their prices to take into account different types of customers and situations.

  3. What Is Price? • Definition: “The amount of money charged for a product or service. More broadly price is the sum of the values that consumers exchange for the benefits of having or using the product or service.”

  4. What Is Price? • Price and the Marketing Mix: • Only element to produce revenues • Most flexible element • Can be changed quickly • Common Pricing Mistakes • Reducing prices too quickly to get sales • Pricing based on costs, not customer value • Not taking the rest of the marketing mix into account. As part of company’s overall value proposition, price plays a key role in creating customer value and building customer relationship

  5. Factors To Consider When Setting Price Other internal and external consideration ____________ Marketing strategy, objectives and mix Nature of the market and demand Competitors’ strategies and price Customer perception of value Product cost Price ceiling No demand above this price Price floor No profits below this price

  6. Value-Based Pricing Versus Cost-Based Pricing Cost-based Pricing value-based Pricing

  7. Value-Based Pricing Versus Cost-Based Pricing Cost-based Pricing value-based Pricing

  8. General Pricing Approaches • Buyer-Based pricing - Value-Based Pricing: • Uses buyers’ perceptions of value rather than seller’s costs to set price. • Measuring perceived value can be difficult. • Good-Value Pricing: offering just the right combination of quality and good service at a fair price • Introducing less-expensive versions (value menus) • Redesigning existing brands for less price (more quality for the same, or the same quality for less) • Value-Added Pricing: attaching value-added features and services to differentiate a marketing offer and support higher price, rather than cutting price to match competitions. spicily in B2B (Shifting the focus from price to value)

  9. General Pricing Approaches • Buyer-Based pricing - Competition-Based Pricing: • Going-rate pricing: is setting the price based largely on following competitors’ price rather then on company cost or demand. • May price at the same level, above, or below the competition (different fast-food chains) • Sealed-Bid Pricing: setting price based on how the firm thinks competitors will price rather than on its own cost or demand • Used when company bids for jobs.

  10. General Pricing Approaches • Cost-Based Pricing: Types of Cost

  11. General Pricing Approaches • Cost-Based Pricing: Cost-Plus Pricing Adding standard MARKUP to the cost of the product Markup pricing: Calculating all the costs associated with a product and then determining a markup percentage to cover the costs and expected profits. Example: Variable costs: $20Fixed costs: $ 500,000 Expected sales: 100,000 unitsDesired Sales Markup: 20% Variable Cost + Fixed Costs/Unit Sales = Unit Cost $20 +$500,000/100,000= $25 per unit Unit Cost/(1 – Desired Return on Sales) = Markup Price $25 / (1 - 0.20) = $31.25

  12. General Pricing Approaches • Cost-Based Pricing: Cost-Plus Pricing • Ignores demand and competition • Popular pricing technique because: • It simplifies the pricing process • Price competition may be minimized • It is perceived as more fair to both buyers and sellers

  13. Factors to Consider When Setting Price • Internal Factors • Overall Marketing Strategy, Objectives And Mix • Market positioning influences pricing strategy • Pricing must be carefully coordinated with the other marketing mix elements

  14. Factors to Consider When Setting Price • Pricing objectives: • Profit-oriented • To achieve a target return, or to maximise profits. • Sales-oriented • To increase sales volume, or to maintain or increase market share. • Status-quo oriented • To stabilise prices, or to meet competition. • Customer retention • Relationship building, attract new customers, and profitably retain existing ones

  15. New-Product Pricing Strategies • Market-Skimming Pricing • Setting a high price for a new product to skim maximum revenues layer by layer from segments willing to pay the high price. • Normally used to introduce new products to the market that attract the innovator market. • The product quality and image must support its higher price • Competitors should not be able to enter the market easily.

  16. New-Product Pricing Strategies • Market-Penetration Pricing • Setting a low price for a new product in order to attract a large number of buyers and large market share. • Usually to reach mass markets and discourage competition. • The market should be highly price sensitive

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