Lecture Principles of Marketing - Chapter 9: Pricing: Understanding and capturing customer value

Chapter 9 discuss the importance of understanding customer value perceptions and company costs when setting prices, identify and define the other important internal and external factors affecting a firm’s pricing decisions, describe the major strategies for pricing imitative and new products, explain how companies find a set of prices that maximizes the profits from the total product mix, discuss how companies adjust their prices to take into account different types of customers and situations.
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Lecture Principles of Marketing - Chapter 9: Pricing: Understanding and capturing customer value Chapter Nine Pricing: Understanding and Capturing Customer Value Roadmap: Previewing the Concepts 1. Discuss the importance of understanding customer value perceptions and company costs 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 imitative and 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 key issues related to initiating and responding to price changes. Copyright 2007, Prentice Hall, Inc. 9-2 Case Study Toys ‘R’ Us – Pricing for Success The Past The Present  1970s: Toys ‘R’ Us  Toys ‘R’ Us tries price emerges as a toy retailing matching and fails category killer, offering miserably, losing sales, greater product selection profit, and market share. and lower prices than its  New ownership closes small store competition. stores, cut costs, and steps  Explosive growth occurs. away from the price war.  Late 1990s: Wal-Mart  Efforts focus on top-selling, uses toys as a loss higher margin or exclusive leader, pricing lower than items, store atmosphere, Toys ‘R’ Us and becomes shopper experiences, and the largest toy retailer. customer service. What Is a Price?  Narrowly, price is the amount of money charged for a product or service.  Broadly, price is the sum of all the values that consumers exchange for the benefits of having or using the product or service. Major Considerations in Setting Price  Customer perceptions of value  Other internal and external considerations – Marketing strategy, objectives, mix – Nature of the market and demand – Competitors’ strategies and prices  Product costs Customer Value Perceptions  Customer-oriented pricing: – Involves understanding how much value consumers place on the benefits they receive from the product and setting a price that captures that value.  Value-based pricing: – Uses buyers’ perceptions of value, not the seller’s cost, as the key to pricing. • Good value pricing • Value-added pricing Internal Factors Affecting Pricing Decisions  Company and Product Costs: – Fixed Costs: • Costs that do not vary with production or sales level. – Variable Costs: • Costs that vary directly with the level of production. Cost-Based Pricing  Cost-plus pricing – Adding a standard markup to the cost of the product  Break-even pricing  Target-profit pricing Internal Factors Affecting Pricing Decisions  Marketing Objectives: – Company must decide on its strategy for the product. – General pricing objectives: • Survival • Current profit maximization • Market share leadership • Product quality leadership Internal Factors Affecting Pricing Decisions  Marketing Mix Strategy: – Price decisions must be coordinated with product design, distribution, and promotion decisions to form a consistent and effective marketing program. – Target costing: • Pricing that starts with an ideal selling price, then targets costs that will ensure that the price is met. Internal Factors Affecting Pricing Decisions  Organizational Considerations: – Must decide who within the organization should set prices. – This will vary depending on the size and type of company. External Factors Affecting Pricing Decisions  The Market and Demand: – Costs set the lower limit of prices while the market and demand set the upper limit. – Pricing in different types of markets: • Pure competition • Monopolistic competition • Oligopolistic competition • Pure monopoly – Analyzing the price-demand relationship – The price elasticity of demand External Factors Affecting Pricing Decisions  Competitors’ Strategies and Prices – How does the market offering compare? – How strong is competition and what is their pricing strategy? – How does competition influence price sensitivity?  Other External Factors New-Product Pricing Strategies  Market Skimming:  When to Use: – Set a high price for a – Product’s quality and new product to image must support “skim” revenues its higher price. layer by layer from – Costs of low volume the market. cannot be so high – Company makes they cancel the fewer, but more advantage of profitable sales. charging more. – Competitors should not be able to enter market easily and undercut the price. New-Product Pricing Strategies  Market Penetration:  When to Use: – Set a low initial price – Market is highly in order to price sensitive so a “penetrate” the low price produces market quickly and more growth. deeply. – Costs must fall as sales volume – Can attract a large increases. number of buyers – Need to keep quickly and win a competition out or la ...