10
Principles of Marketing
Pricing Products:
Understanding Customer
Value & Pricing Strategies
What Is Price?
Price is the amount of money charged for a
product or service. It is the sum of all the
values that consumers 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; all other elements
represent costs
Factors to Consider When
Setting Prices
Customer Perception of Value
Value-based pricing uses the buyers’ perceptions of
value, not the seller’s cost, as the key to pricing. Price
is considered before the marketing program is set. GT
Automobiles.
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 & risk.
Southeast Airlines, Dell.
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Value-based pricing is customer driven
Cost-based pricing is product driven
Factors to Consider When
Setting Prices
Value-based pricing
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Good-value pricing offers the right
combination of quality and good service to fair
price. Wal-Mart, McDonalds
Value-added pricing: Attaching value added
features & services to differentiate a
company’s offers & to support higher prices.
GrameenPhone, Caterpillar.
Factors to Consider When
Setting Prices
Everyday low pricing (EDLP) involves charging
a constant everyday low price with few or no
temporary price discounts. (Wal-mart)
High-low pricing involves charging higher prices
on an everyday basis but running frequent
promotion to lower prices temporarily on
selected items
Factors to Consider When
Setting Prices
Types of costs
Fixed costs are the costs that do not vary with
production or sales level. Rent, Interest Expense,
Executive salaries
Variable costs are the costs that vary with the level of
production. Packaging, Raw materials.
Total costs are the sum of the fixed and variable costs
for any given level of production
Factors to Consider When
Setting Prices
Experience or learning curve is the drop in
the average per unit production cost that
comes
with
accumulated
production
experience.
Cost Plus Pricing is adding a standard markup
to the cost of the product.
(Pricing strategies page 291-292)
Cost Plus Pricing
A marker manufacturer’s
Variable cost : tk. 10
Fixed Cost : tk. 300,000
Expected Unit sales: tk 50,000
Then the manufacturer’s cost per marker is given by:
Fixed cost
Unit cost = Variable cost +
Unit sales
= tk.10 + (tk300,000 / 50,000)
= tk. 16
 Now suppose the manufacturer
wants to
earn a 20% markup on sales. The
manufacturers markup price is given by:
Unit Cost
Markup Price =
(1- Desired Return on Sales)
= tk 16 / (1 - 0.2)
= tk 20.
The manufacturer would charge dealers /wholesalers
/retailers tk 20 per marker & make a profit of tk 4 per
unit. Markup pricing works in the cases when price
actually brings in the expected level of sales.
New-Product Pricing Strategies
Pricing Strategies
Market skimming pricing is a strategy with
high initial prices to “skim” revenue layers from
the market. (Sony’s HDTV in Japanese market)
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Product quality & image must support the price
Buyers must want the product at the price
Competitors should not be able to enter the
market easily
New-Product Pricing Strategies
Market penetration pricing sets a low
initial price in order to penetrate the
market quickly & deeply to attract a large
number of buyers quickly to gain market
share. (Banglalink, Dell vs. IBM & Apple)
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Price sensitive market
Product Mix Pricing Strategies
Product line pricing takes into account the cost
differences between products in the line, customer
evaluation of their features, and competitors’ prices.
(Unilever, Fit & Elegance suits)
Optional product pricing takes into account optional or
accessory products along with the main product.
(Refrigerators with icemakers, Cars with CD changers)
Captive product pricing involves products that must be
used along with the main product (blades for a razor,
flim for a camera, Gillette, HP)
Price Adjustment Strategies
By-product pricing refers to products with little
or no value produced as a result of the main
product. Producers will seek little or no profit
other than the cost to cover storage and
delivery. (Petroleum, agricultural & chemical
by products)
Product bundle pricing combines several
products & offering the bundle at a reduced
price. (Fast food restaurants)
Price Adjustment Strategies
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Discount & allowance pricing
Segmented pricing
Psychological pricing
Promotional pricing
Geographical pricing
Dynamic pricing
International pricing
Price Adjustment Strategies
Discount & allowance pricing reduces prices
to reward customer responses such as paying
early or promoting the product
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Discounts
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Cash discount for paying promptly
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Quantity discount for buying in large volume
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Functional (trade) discount for selling,
storing, distribution, and record keeping
Price Adjustment Strategies
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Allowances
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Trade in allowance for turning in an old item
when buying a new one
Promotional allowance to reward dealers for
participating in advertising or sales support
programs
Price Adjustment Strategies
Segmented pricing is used when a company
sells a product at two or more prices even
though the difference is not based on cost
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Customer segment pricing
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Product form segment pricing
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Location pricing
Geographic Pricing setting prices for
customers located in different parts of the
country or world.
Price Adjustment Strategies
Customer segment pricing is when different
customers pay different prices for the same
product or service
Product form segment pricing is when different
versions of the product are priced differently
but not according to differences in cost
Location pricing is when the product is sold in
different geographic areas and priced differently
in those areas, even thought the cost is the
same
Price Adjustment Strategies
Psychological pricing occurs when sellers
consider the psychology of prices and not
simply the economics
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Reference prices are prices that buyers carry
in their minds and refer to when looking at a
given product
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Noting current prices
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Remembering past prices
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Assessing the buying situation
Price Adjustment Strategies
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Promotional Pricing: Temporarily pricing
products below the list price, & sometimes even
below cost, to increase short run sales.
Risks of promotional pricing
• Used too frequently, and copies by competitors
can create “deal-prone” customers who will wait
for promotions and avoid buying at regular price
• Creates price wars
Price Adjustment Strategies
Dynamic pricing is when prices are adjusted continually
to meet the characteristics and needs of the individual
customer and situations
International pricing is when prices are set in a specific
country based on country-specific factors
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Economic conditions
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Competitive conditions
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Laws and regulations
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Infrastructure
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Company marketing objective
Price Changes
Initiating Pricing Changes
Price cuts is a reduction in price
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Excess capacity
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Increase market share
Price increases is an increase in selling price
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Cost inflation
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Increased demand and lack of supply
Price Changes
Buyer Reactions to Pricing Changes
Price cuts
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New models will be available
Models are not selling well
Quality issues
Price increases
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Product is “hot”
Company greed