UNIVERSITY OF CEBU (UC)

GRADUATE SCHOOL
Sanciangko St., Cebu City

REACTION PAPER IN
MARKETING MANAGEMENT (BM 207)

Masterand: Agnes C. Ampo Course: MBA

Chapter 10 – Pricing: Understanding and Capturing Customer Value

Introduction

Companies today face a fierce and fast-changing pricing environment. Value-

seeking customers have put increased pricing pressure on many companies. Thanks

to recent economic woes, the pricing power of the Internet, and value-driven retailers

are pursuing spend-less strategies. In response, it seems that almost every company

is looking for ways to cut prices. Yet, cutting prices is often not the best answer.

Reducing prices unnecessarily can lead to lost profits and damaging price wars. It

can cheapen a brand by signaling to customers that price is more important than the

customer value a brand delivers. Instead, no matter what the state of the economy,

companies should sell value, not price. In some cases, that means selling lesser

products at rock-bottom prices. But in most cases, it means persuading customers

that paying a higher price for the company’s brand is justified by the greater value

they gain.

Topic Summary

Price can be defined narrowly as the amount of money charged for a product

or service. Or it can be defined more broadly as the sum of the values that

consumers exchange for the benefits of having and using the product or service. The

pricing challenge is to find the price that will let the company make a fair profit by
getting paid for the customer value it creates. Despite the increased role of non price

factors in the modern marketing process, price remains an important element in the

marketing mix. It is the only marketing mix element that produces revenue; all other

elements represent costs. More importantly, as a part of a company’s overall value

proposition, price plays a key role in creating customer value and building customer

relationships. Smart managers treat pricing as a key strategic tool for creating and

capturing customer value. Companies can choose from three major pricing

strategies: customer value-based pricing, cost-based pricing, and competition based

pricing. Customer value-based pricing uses buyers’ perceptions of value as the basis

for setting price. Good pricing begins with a complete understanding of the value that

a product or service creates for customers and setting a price that captures that

value. Customer perceptions of the product’s value set the ceiling for prices. If

customers perceive that a product’s price is greater than its value, they will not buy

the product. Companies can pursue either of two types of value-based pricing.

Good-value pricing involves offering just the right combination of quality and good

service at a fair price. EDLP is an example of this strategy. Value-added pricing

involves attaching value added features and services to differentiate the company’s

offers and support charging higher prices. Cost-based pricing involves setting prices

based on the costs for producing, distributing, and selling products plus a fair rate of

return for effort and risk. Company and product costs are an important consideration

in setting prices. Whereas customer value perceptions set the price ceiling, costs set

the floor for pricing. However, cost-based pricing is product driven rather than

customer driven. The company designs what it considers to be a good product and

sets a price that covers costs plus a target profit. If the price turns out to be too high,

the company must settle for lower markups or lower sales, both resulting in
disappointing profits. If the company prices the product below its costs, its profits will

also suffer. Cost-based pricing approaches include cost-plus pricing and break-even

pricing (or target profit pricing). Competition-based pricing involves setting prices

based on competitors’ strategies, costs, prices, and market offerings. Consumers

base their judgments of a product’s value on the prices that competitors charge for

similar products. If consumers perceive that the company’s product or service

provides greater value, the company can charge a higher price. If consumers

perceive less value relative to competing products, the company must either charge

a lower price or change customer perceptions to justify a higher price. Other internal

factors that influence pricing decisions include the company’s overall marketing

strategy, objectives, and marketing mix, as well as organizational considerations.

Price is only one element of the company’s broader marketing strategy. If the

company has selected its target market and positioning carefully, then its marketing

mix strategy, including price, will be fairly straightforward. Some companies position

their products on price and then tailor other marketing mix decisions to the prices

they want to charge. Other companies deemphasize price and use other marketing

mix tools to create nonprice positions. Other external pricing considerations include

the nature of the market and demand and environmental factors such as the

economy, reseller needs, and government actions. The seller’s pricing freedom

varies with different types of markets. Ultimately, the customer decides whether the

company has set the right price. The customer weighs price against the perceived

values of using the product: If the price exceeds the sum of the values, consumers

will not buy. So the company must understand concepts such as demand curves (the

price-demand relationship) and price elasticity (consumer sensitivity to prices).

Economic conditions can also have a major impact on pricing decisions. The Great
Recession caused consumers to rethink the price-value equation. Marketers have

responded by increasing their emphasis on value-for-the-money pricing strategies.

Even in tough economic times, however, consumers do not buy based on prices

alone. Thus, no matter what price they charge—low or high—companies need to

offer superior value for the money.

Recommendation

The report was understandable. The report provided several examples that fit

to the current market pricing situation. There was no interaction between the reporter

and her co-masterands. It would help to ask them to some questions or some

examples to establish interaction. The voice was well modulated.

Conclusion

The pricing challenge is to find the price that let the company makes a fair

profit by getting paid for the customer value it creates. The price you set sends a

message to some consumers about your business, product or service, creating a

perceived value. This affects your brand, image or position in the marketplace. Thus,

the price plays a key role in creating customer value and building customer relationships.