Principles of Marketing

Seventeenth Edition

Chapter 7

Pricing: Understanding and

Capturing Customer Value

Copyright © 2018 Pearson Education Ltd. All Rights Reserved.

Learning Objectives
10-1 Answer the question “What is a price?” and discuss the importance of
pricing in today’s fast-changing environment.
10-2 Identify the three major pricing strategies and discuss the importance of
understanding customer-value perceptions, company costs, and
competitor strategies when setting prices.
10-3 Identify and define the other important external and internal factors
affecting a firm’s pricing decisions.

Copyright © 2018 Pearson Education Ltd. All Rights Reserved.

• How does a company like Samsung price its products?

Copyright © 2018 Pearson Education Ltd. All Rights Reserved.

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.
the only element in the marketing mix that produces revenue
the most flexible marketing mix elements

Copyright © 2018 Pearson Education Ltd. All Rights Reserved.

Major Pricing Strategies

Copyright © 2018 Pearson Education Ltd. All Rights Reserved.

Major Pricing Strategies

Copyright © 2018 Pearson Education Ltd. All Rights Reserved.

 Major Pricing Strategies
A. 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.
• Whereas Cost-based pricing is product driven.
• Price is set to match perceived value.

Copyright © 2018 Pearson Education Ltd. All Rights Reserved.

Major Pricing Strategies
A. Customer Value-Based Pricing
1. Good-value pricing
2. Value-added pricing

Copyright © 2018 Pearson Education Ltd. All Rights Reserved.

Major Pricing Strategies
A. Customer Value-Based Pricing
1. Good-value pricing is offering just the right combination of
quality and good service at a fair price.
The Great Recession of 2008 to 2009 caused a fundamental and
lasting shift in consumer attitudes toward price and quality
In many cases, this has involved introducing less-expensive versions
of established brand name products or new lower-price lines.
In other cases, good-value pricing has involved redesigning existing
brands to offer more quality for a given price or the same quality for
less.
Copyright © 2018 Pearson Education Ltd. All Rights Reserved.
Major Pricing Strategies
A. Customer Value-Based Pricing
- Less value but at very low prices
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.

Copyright © 2018 Pearson Education Ltd. All Rights Reserved.

Major Pricing Strategies

A. Customer Value-Based Pricing

2. Value-added pricing
Rather than cutting prices to match competitors, they add quality, services and
value-added features to differentiate their offers and thus support their higher
prices.

attaches value-added features and services to differentiate the companies’

offers and thus their higher prices.

Copyright © 2018 Pearson Education Ltd. All Rights Reserved.

Major Pricing Strategies

Copyright © 2018 Pearson Education Ltd. All Rights Reserved.

Major Pricing Strategies

B. 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.

Copyright © 2018 Pearson Education Ltd. All Rights Reserved.

Major Pricing Strategies
B. Cost-Based Pricing
Fixed costs (also known as overhead) are the costs that do not vary
with production or sales level.
• Rent
• Heat
• Interest
• Executive salaries

Copyright © 2018 Pearson Education Ltd. All Rights Reserved.

Major Pricing Strategies
B. Cost-Based Pricing
Variable costs vary directly with the level of production.
• Raw materials
• Packaging

Copyright © 2018 Pearson Education Ltd. All Rights Reserved.

Major Pricing Strategies

B. Cost-Based Pricing
Total costs are the sum of the fixed and variable costs for any given level of
production.

Copyright © 2018 Pearson Education Ltd. All Rights Reserved.

Major Pricing Strategies
1. Costs at different levels of production

short-run average cost curve (SRAC)

long-run average cost (LRAC)
Copyright © 2018 Pearson Education Ltd. All Rights Reserved.
 Major Pricing Strategies
2. Costs as a function of production experience

Copyright © 2018 Pearson Education Ltd. All Rights Reserved.

Major Pricing Strategies

3. Cost-plus pricing (or markup 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

Copyright © 2018 Pearson Education Ltd. All Rights Reserved.

 If the manufacturer wants to earn a 20 percent markup on sales price
 markup price = unit cost/(1 - desired return on sales) =€16/(1 - .2) = €20

Copyright © 2018 Pearson Education Ltd. All Rights Reserved.

Major Pricing Strategies
B. Cost-Based Pricing
4. Break-even pricing (target return pricing) is setting price to break even on costs or to
make a target return.

Figure 10.5 Break-Even Chart for Determining Target Return Price and Break-Even Volume.

Copyright © 2018 Pearson Education Ltd. All Rights Reserved.

Major Pricing Strategies

Copyright © 2018 Pearson Education Ltd. All Rights Reserved.

Major Pricing Strategies

C. Competition-Based Pricing
Competition-based pricing is 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.

Copyright © 2018 Pearson Education Ltd. All Rights Reserved.

11-25

Other internal and external

considerations affecting pricing

Internal Factors

Pricing
Decisions

External Factors

Copyright © 2018 Pearson Education Ltd. All Rights Reserved.

11-26

Internal Factors Affecting Pricing Decisions

Marketing objectives

Overall Marketing Strategy,

Objectives, and Mix
Organizational
Considerations

The cost

Copyright © 2018 Pearson Education Ltd. All Rights Reserved.

11-27

Marketing Objectives that Affect Pricing Decisions

Survival
Low Prices to Cover Variable Costs and
Some Fixed Costs to Stay in Business.

Current Profit Maximization

Choose the Price that Produces the
Marketing Maximum Current Profit, Cash Flow or ROI.

Objectives Market Share Leadership

Low as Possible Prices to Become
the Market Share Leader.

Product Quality Leadership

High Prices to Cover Higher
Performance Quality and R & D.

Copyright © 2018 Pearson Education Ltd. All Rights Reserved.

Other 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 © 2018 Pearson Education Ltd. All Rights Reserved.

Other Considerations Affecting Price Decisions

Organizational Considerations
• Who should set prices?
• Who can influence prices?

Copyright © 2018 Pearson Education Ltd. All Rights Reserved.

11-30

External Factors Affecting Pricing

Decisions

Market and
Demand

Competitors’ Costs,
Prices, and Offers

Other External Factors

Economic Conditions
Reseller Needs
Government Actions
Social Concerns

Copyright © 2018 Pearson Education Ltd. All Rights Reserved.

Other 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 © 2018 Pearson Education Ltd. All Rights Reserved.

11-32

Market and Demand Factors that Affect Pricing Decisions

wheat,
Pure Competition Monopolistic Competition
copper, or Many Buyers and Sellers Who
Many Buyers and Sellers Who
financial Have Little Effect on the Price.
Trade Over a Range of Prices.
securities Uniform commodity

Pricing in Different Types of Markets

Oligopolistic Competition Pure Monopoly

wireless Few large Sellers Sensitive to Each
Single Seller a power company
service Other’s Pricing/ Marketing Strategies
provider
Copyright © 2018 Pearson Education Ltd. All Rights Reserved.
Other 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 © 2018 Pearson Education Ltd. All Rights Reserved.

 Other 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 = % change in quantity demand

% change in price

Copyright © 2018 Pearson Education Ltd. All Rights Reserved.

11-35

Price Elasticity of Demand

A. Inelastic Demand -
Demand Hardly Changes With
a Small Change in Price.
P2

Price
P1

Q2 Q1
Quantity Demanded per Period
B. Elastic Demand -
Demand Changes Greatly With
a Small Change in Price.
P’2
Price

P’1

Q2 Q1
Quantity Demanded per Period
Copyright © 2018 Pearson Education Ltd. All Rights Reserved.
Other Considerations Affecting Price Decisions
The Economy and Other External Factors

Economic conditions

Reseller’s response to price

Government

Social concerns

Copyright © 2018 Pearson Education Ltd. All Rights Reserved.

11-37

Setting Initial Product Prices

Market Skimming Market Penetration

> Setting a High Price > Setting a Low Price

for a New Product for a New Product in
to Skim Maximum Order to Attract a
Revenues from the Large Number of
Target Market. Buyers.
> Results in Fewer, > Results in a Larger
More Profitable Market Share.
Sales.
> Walmart
> Intel’s $1,000 Chip

Copyright © 2018 Pearson Education Ltd. All Rights Reserved.

11-38

Price-Adjustment Strategies

• Adjusting Prices for

Psychological Pricing Psychological Effect.
• Price Used as a Quality
Indicator.
• Reference Prices i.e.
Clothing.

• Temporarily Reducing Prices

Promotional Pricing to Increase Short-Run Sales.
• i.e. Loss Leaders, for
Special-Events, Cash Rebates

Copyright © 2018 Pearson Education Ltd. All Rights Reserved.

11-39

Price-Adjustment Strategies

• AdjustingPrices to Account
for the Geographical Location
Geographical Pricing of Customers.
i.e. FOB-Origin, Uniform-•
Delivered, Zone Pricing, etc.

• Adjusting Prices for

International Markets.
International Pricing • Price Depends on Costs,
Consumers, Economic
Conditions & Other Factors.

Copyright © 2018 Pearson Education Ltd. All Rights Reserved.

11-40

Initiating and Responding to Price Changes

Competitor
Reactions Initiating
to Price Cuts
Price Changes

Price
Changes

Buyer Reactions Initiating

to Price
Price Increases
Changes

Copyright © 2018 Pearson Education Ltd. All Rights Reserved.

11-41

Assessing and Responding to Competitors’

Price Changes

Copyright © 2018 Pearson Education Ltd. All Rights Reserved.

11-42

Kellogg’s Responds to
Price Cuts
• In 1996, Kraft
announced 20%
across the board
price cut.
• Kellogg’s
followed with
19% cut.
• Kellogg’s also
introduced lower
price bagged
cereal.
Copyright © 2018 Pearson Education Ltd. All Rights Reserved.