Principles of Marketing
Global Edition
Kotler and Armstrong
Chapter 10:
Pricing
Understanding and
Capturing Customer Value
Lecturer:
Szilvia Bíró-Szigeti, PhD
Department of Management and Corporate
Economics
Copyright © 2016 Pearson Education, Inc.
Pricing
• Answer the question “What is a price?” and discuss the
importance of pricing in today’s fast-changing
environment.
…so…
What Is a Price?
Copyright © 2016 Pearson Education, Inc.
What Is a Price?
Price is the amount of money charged for a
product or service, or the sum of all the
values that customers exchange for the
benefits of having or using the product or
service.
What is a price?
Price is the sum of all the values that customers
give up to gain the benefits of having or using a
product or service.
• produces revenue
• can be changed quickly
Györgyi Danó
priceline.com
Györgyi Danó
Price categories
• Manufacturing price: the price on which
producers sell their products
• Trade price: manufacturing price + trader’s
markup
• Retail price: trade price + retailer’s markup +
VAT, customs duties, other taxes
Main factors of pricing
Cost
Minimum price
No profits below
this price
Customer demand
internal and external factors
• competitors’ strategies and
prices
• marketing strategy, objectives
and mix
• the nature of the market and
demand
Maximum price
No demand above
this price
The role of price in the marketing mix
Profitability
Positioning
Price
Promotion
Elasticity
Target market pricing strategy
Questions concerning pricing strategy
• How much does the product cost to the company?
•
•
•
•
•
•
How much profit can be planned?
How much the sales price can be?
Should there be any price differentiation?
When should the company apply discounts?
When should the company modify prices?
How should the company adjust price to the periods of the
product life cycle?
Pricing objectives
Profit-oriented objectives:
• Profit maximization
• Target Return on Investment
Sales-oriented objectives:
• Market share
• Sales maximization
Other:
• Competitive objectives
Do higher prices make food taste better?
Researchers found that when charged more for an allyou-can-eat buffet, diners rated the food higher than
when charged less for the same food.
In the study 139 diners in an Italian all-you-can-eat buffet
restaurant were either charged $4 or $8 for the lunch buffet.
The buffet offered pizza, salad, breadsticks, pasta, and soup.
After finishing, diners were asked to rate the taste of the pizza
and how much they enjoyed the dining experience.
http://foodpsychology.cornell.edu/discoveries/buffet-pricing-surprise
Do higher prices make food taste better?
Diners who paid the higher price for the buffet rated
the pizza as being 11% tastier. In contrast, those
paying $4, half as much for the same food, not only
enjoyed the pizza less, but they enjoyed the food less
and less with each additional piece of pizza. In both
situations diners ate an average of three slices of pizza.
People tend to stick to the “you get what you pay
for” mentality and will rate the food lower in quality.
http://foodpsychology.cornell.edu/discoveries/buffet-pricing-surprise
https://www.youtube.com/watch?v=mVKuCbjFfIY (from 2:38)
Major Pricing Strategies
Customer Value-Based Pricing
Value-based pricing uses the
buyers’ perceptions of value
rather than the seller’s cost.
• Value-based pricing is
customer driven.
• Cost-based pricing is
product driven.
• Price is set to match
perceived value.
Major Pricing Strategies
Customer Value-Based Pricing
Good-value pricing is
offering just the
right combination
of quality and
good service at a
fair price.
Major Pricing Strategies
Customer Value-Based Pricing
Everyday low pricing
(EDLP)
involves
charging a constant
everyday low price
with few or no
temporary
price
discounts.
Major Pricing Strategies
Customer Value-Based Pricing
High-low pricing involves charging higher prices
on an everyday basis but running frequent
promotions to lower prices temporarily on
selected items.
Copyright © 2016 Pearson Education, Inc.
Major Pricing Strategies
Customer Value-Based Pricing
Value-added pricing
attaches
valueadded
features
and services to
differentiate the
companies offers
and thus their
higher prices.
Major Pricing Strategies
Cost-Based Pricing
Cost-based pricing
sets prices based
on the costs for
producing,
distributing, and
selling the product
plus a fair rate of
return for effort
and risk.
Major Pricing Strategies
Customer Value-Based Pricing
Figure 10.2: Value-Based Pricing vs. Cost-Based Pricing
Copyright © 2016 Pearson Education, Inc.
Pricing
• Was the Fair and Square strategy customer
value-based, good value-based, or valueadded?
• What is your assessment of this strategy?
Which factors might have affected its
success?
• Why did customers fail to support everyday
Fair and Square prices?
• Given how the campaign played out, what
could JCPenney have done differently?
• CEO Ron Johnson realized it would take a
long time to change the thinking and
behavior of Penney’s customers. He wasn’t
given the time. With more time, is this kind
of change possible and practical? Explain.
Major Pricing Strategies
Cost-Based Pricing
Fixed costs are the costs that do not vary with
production or sales level.
• Rent
• Heat
• Interest
• Executive salaries
Copyright © 2016 Pearson Education, Inc.
Major Pricing Strategies
Cost-Based Pricing
Variable costs vary directly with the level of
production.
• Raw materials
• Packaging
Copyright © 2016 Pearson Education, Inc.
Major Pricing Strategies
Cost-Based Pricing
Total costs are the sum of the fixed and variable
costs for any given level of production.
Major Pricing Strategies
Cost-Based Pricing
Costs at Different Levels of Production
FIGURE | 10.3 Cost per Unit at Different Levels of Production per Period
Copyright © 2016 Pearson Education, Inc.
Major Pricing Strategies
Cost-Based Pricing
Costs as a Function of Production Experience
FIGURE | 10.4 Cost per Unit as a Function of Accumulated Production:
The Experience Curve
Copyright © 2016 Pearson Education, Inc.
Major Pricing Strategies
Cost-Based Pricing
Cost-plus pricing adds a
standard markup to the cost
of the product.
• Benefits
• Sellers are certain
about costs.
• Price competition is
minimized.
• Buyers feel it is fair.
• Disadvantages
• Ignores demand and
competitor prices
Major Pricing Strategies
Cost-Based Pricing
Break-even pricing
(target
return
pricing)
is
setting price to
break even on
costs or to make
a target return.
Copyright © 2016 Pearson Education, Inc.
Major Pricing Strategies
Cost-Based Pricing
Major Pricing Strategies
Competition-based pricing
Competitionbased pricing is
setting
prices
based
on
competitors’
strategies, costs,
prices,
and
market offerings.
Copyright © 2016 Pearson Education, Inc.
Other Internal and External Considerations
Affecting Price Decisions
Overall Marketing Strategy, Objectives, and Mix
Target costing starts with an ideal selling price
based on consumer value considerations and
then targets costs that will ensure that the
price is met.
Copyright © 2016 Pearson Education, Inc.
Other Internal and External Considerations
Affecting Price Decisions
Organizational Considerations
• Who should set prices?
• Who can influence prices?
Copyright © 2016 Pearson Education, Inc.
Other Internal and External Considerations
Affecting Price Decisions
The Market and Demand
Before setting prices, the marketer must
understand the relationship between price
and demand for its products.
Copyright © 2016 Pearson Education, Inc.
Other Internal and External Considerations
Affecting Price Decisions
The Market and Demand
Pricing in Different Types of Markets
Pure competition
Monopolistic
competition
Oligopolistic
competition
Pure monopoly
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.
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.
The market consists of a few sellers who are highly
sensitive to each other’s pricing and marketing
strategies.
The market consists of one seller. The seller may be
a government monopoly, a private regulated
monopoly, or a private unregulated monopoly.
Pricing in different stages of product life cycle
• Introductory stage:
• penetration pricing
• skimming pricing
• Growth stage: original or
decreasing
price,
according to demand
• Maturity stage: declining
price (discounts, credits,
extra services, etc.)
• Decline stage: decreased
price, higher discounts,
less services, lowering
quality
Other Internal and External Considerations
Affecting Price Decisions
The Market and Demand
Analyzing the Price–Demand Relationship
The demand curve shows the number of units the
market will buy in a given period at different prices
• Demand and price are inversely related.
• Higher price = lower demand
Copyright © 2016 Pearson Education, Inc.
Other Internal and External Considerations
Affecting Price Decisions
The Market and Demand
Price Elasticity of Demand
Price elasticity is a measure of the sensitivity of
demand to changes in price.
Inelastic demand is when demand hardly changes with
a small change in price.
Elastic demand is when demand changes greatly with a
small change in price.
Price elasticity of demand
Price elasticity of
demand (E) =
% change in quantity demand
% change in price
Price
Price
p2
p2
p1
p1
Q2 Q1
Quantity demanded per period
Inelastic demand
if E is less than 1
Q2
Q1
Quantity demanded per period
Elastic demand
if E is greater than 1
What determines the price elasticity of
demand?
Buyers are less price sensitive when:
• the product they are buying is unique or when
it is high in quality, prestige or exclusiveness
• substitute products are hard to find
• they cannot easily compare the quality of
substitutes
• the total expenditure for a product is low
relative to their income
Other Internal and External Considerations
Affecting Price Decisions
The Economy and Other External Factors
Economic conditions
Reseller’s response to price
Government
Social concerns
Copyright © 2016 Pearson Education, Inc.
http://www.chinabusinessreview.c
om/ikea-with-chinesecharacteristics/
http://www.businesstoday.in/mag
azine/lbs-case-study/how-ikeaadapted-its-strategies-to-expandin-china/story/196322.html
Györgyi Danó
Video Test
1: A
2: C
3: A
4: D
5: E
42