Chapter 10 - Pricing Products: Understanding and Capturing Customer Value

Companies today face a fierce and fast-changing pricing environment because of increasing customer price consciousness. Many companies are looking for ways to slash prices. However, reducing process unnecessarily can
• lead to lost profits and damaging price wars.
• signal to customers that the price is more important than the customer value a brand delivers.
The challenge is to find a price that will let the company make a fair profit by getting paid for the customer value it creates.

What is a price?
Price is the amount of money charged for a product or service. More broadly, price is the sum of all the values that customers 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.
• Price is one of the most flexible marketing mix elements since it can be changed quickly unlike other elements.

Common mistakes that companies make on pricing:
• Companies are too quick to reduce prices in order to get a sale rather than convincing buyers that their product's greater value is worth a higher price.
• Pricing by companies are too cost oriented rather than customer value oriented.
• Pricing that does not take the rest of marketing mix into account.

Factors to consider when setting prices:
• The price will fall somewhere between one that is too high to produce any demand and one that is too low to produce a profit.
• Customer perceptions of the products value set the ceiling for prices.
• Product costs set the floor for prices.

Value-Based Pricing
Value-based pricing uses buyer's perceptions of value, not the seller's cost as the key to pricing. Price is considered along with the other marketing mix variables before the marketing program is set. The company sets its target price based on customer perceptions of the product value. The target value and price then drive decisions about product design and what costs can be incurred.

Cost-based Pricing: It is product driven. The company designs what it considers a good product, adds up the cost of making the product, and sets a price that covers costs plus a target profit. Marketing must then convince buyers that the product's price is justified by its value.

Good-Value Pricing
It has involved redesigning existing brands to offer more quality for a given price or the same quality for less. It involves introducing less-expensive versions of established brand name products. There are two types of Good-Value pricing:
• Everyday Low Pricing (EDLP): involves charging a constant, everyday low price with few or no temporary price discounts. E.g. Wal-Mart.
• High-Low Pricing: Involves charging higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected items.
Value-Added Pricing
Attaching value-added features and services to differentiate offers and thus support higher prices than competitors rather than cutting prices.

Company and product costs
Cost-Based Pricing: Involves setting prices based on the costs for producing, distributing, and selling thre product plus a fair rate of return for its effort and risk.

Types of costs: Two types
• Fixed costs (overhead): Costs that do not vary with production or sales level.
• Variable costs: vary directly with the level of production.
Total costs: Fixed costs + Variable costs

Costs at different levels of Production
To price wisely, management needs to know how its costs vary with different levels of production.
See figure 10.3
• Short-run average cost curve: At least one fixed cost
• Long-run average cost curve: All costs are variable
Experience curve/learning curve: Fig 10.4
The drop in the average cost with accumulated production experience is called the experience curve or the learning curve.
Cost-plus pricing: Adding a standard markup to the cots of the product.
Suppose, a manufacturer wants to earn a 20 percent markup on sales. The manufacturer's markup price is given by:

Markup price = Unit cost .
(1- desired return on sales)

Problems of cost-plus pricing:
• Ignores demand of product in the market
• Ignores competitor prices
• Wrongly assumes that prices can be set without affecting sales volume
Why cost-plus pricing is popular:
• Sellers are more certain about costs than about demand. Sellers do not have to make frequent price adjustments as demand changes.