MKTG301 CHAPTER 10

Figure 10.1

*see book* Image is about considerations when setting a price.

What are the 3 major pricing strategies?

1. Customer-Value Based Pricing 2. Cost-Based Pricing 3. Competition-Based Pricing

Pricing in different types of markets. What are the 4 types of markets?

1. Pure competition 2. Monopolistic competition 3. Oligopolistic competition 4. Pure monopoly

EDLP

Everyday Low Pricing: involves charging a constant everyday low price with few or no temporary price discounts.

Monopolistic competition

Market consists of many buyers and *many sellers trading over a range of prices rather than a single market price (like pure comp.)*. This price range occurs because *sellers try to differentiate their products from one another*. Sellers really try to develop differentiated market offers for different market segments. Rely heavily on marketing/advertising and branding to set their product apart. Companies use branding to try and make products seem different from others in the market. Not perfect substitutes.

Price Floor

No profits below this price. Product costs set the price floor.

Good-Value Pricing (apart of value-based pricing)

Offering just the right combination of quality and good service at a fair price. Introducing less-expensive versions of an established brand name products or a new line with rock bottom prices. Example: the Mercedes CLA introduced to offer the Mercedes brand quality and experience at the very, very lowest price possible. This can also be redesigning existing brands to offer more quality at a given price or the same quality for less. Everyday Low Pricing (EDLP): Walmart!

Chapter 10

Pricing: Understanding and Capturing Value

Cost-Based Pricing

Sets the prices based on the costs for producing, distributing, and selling the products plus a fair rate of return/profit margin. This means pricing strategy is based on the PRODUCT and what it costs to make + profit. In this segment, whoever can achieve the lowest cost to product will be able to offer the lowest price. Related to the *price floor* because the price is based on hard production numbers, can't sell for below these costs or you'll lose money. Some companies may even intentionally keep input costs high so that they can maintain high quality product.

Figure 10.1: Considerations in Setting Price

The "right" price is between two extremes: the product cost and the customer perceptions of value. If customers perceive that a product's price is greater than its value, they won't buy it. If the company prices the product below its costs then profits will suffer. The "right" pricing strategy is one that delivers both value to the customer and profits to the company. The balance between a price that is too low to produce a profit and one that is too high to produce any demand.

Customer-Value Based Pricing (2/2)

The company FIRST assesses the customer needs and value perceptions. Then they set a target price based on this perception of value. Based on this price that customers are willing to pay, the company can decide how much money they have to invest in actually making the product (while also making sure their target profit is covered along with costs to make). Therefore the entire pricing strategy is *based on the price ceiling/what customers are willing to pay*. This price strategy is hard because it is difficult to measure value! Everyone's perception of value is different and is different in different situations.

Price Ceiling

There will be no demand above this price. The customers perception of the products value sets the ceiling because they will not pay anything more than that price.

Competition-based pricing example

Why should I buy a Caterpillar bulldozer for $500,000 when I can buy a Komatsu for $420,000. Because $420,000 (equivalent product cost) + $50,000 (value added from reliability) + $40,000 (lower operating costs) + $40,000 (superior service) + $20,000 (long time parts warranty) = $570,000 in actual value when compared to Komatsu brand. Therefore by paying the original $80,000 premium for a Caterpillar you are actually still receiving a $70,000 discount. Caterpillar provides higher value than Komatsu therefore they can charge $80,000 extra for their product.

Cost-plus pricing (apart of Cost-based pricing)

adds a standard markup to the cost of the product. The benefits are that sellers are certain about costs (they are less certain about demand), price competition is minimized (because everyone in the market is doing the same thing), buyers feel it is fair. The disadvantage is that it ignores demand and competitor prices. Sellers earn a fair return on investment but do not take advantage of buyers when buyers' demand becomes great.

Value-Added Pricing (apart of value-based pricing)

attaches value-added features and services to differentiate the companies offers and thus their higher prices. Differentiates their offers and thus supports their higher prices. Gives customers a reason to justify why they are spending more. Ex: the yarn shop on Bainbridge (Churchmouse Yarn and Teas). This shop doesn't provide any extra value in terms of yarn, but the experience is what makes people flock to the store.

High-low pricing

involves charging higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected items. Increases sales in the short term in hopes this will spark customer loyalty and increase sales in the LONG RUN. You will wait to buy these products until they come on sale (Nordstrom Anniversary Sale). These sales give you a reason to finally part with your cash.

Competition-Based Pricing

is setting prices based on competitors' strategies, costs, prices, and market offerings. *This method uses the customers perceived value of the product in comparison to competitors product perceived value and their price.* This means that if a customer perceives your product to be more valuable than your competitors, you can charge a higher price for your item than your competitors can. *The goal is NOT to match or beat competitors' based on prices rather it meant to set prices according to the relative value created versus competitors.* Your price should reflect where your products value lies within the competition of the market offerings.

Break-even pricing/target return pricing (apart of cost-based pricing)

is setting the price to break even on costs or to make a target return. *see figure 10.5 in book*. Break even volume: fixed costs/price-variable costs. You are trying to find the volume at which you will break even while holding all your costs and target marginal revenue the same. As price of product increases, the break even volume becomes lower BUT as the price increases the demand also decreases. At higher prices, the lower the break-even units (less you need to sell), however this is lowest demand. At lower prices, the higher the break-even units (need to sell more), however demand is the highest. If you are trying to achieve a target profit then you need to find the price and quantity that provides this amount between the TR and TC lines. BEWARE: if the break-even sales volume is higher than the expected unit demand at that price you don't want to set the price there! This can happen when the price is both too low or too high.

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.

Oligopoplistic Competition

market consists of only a *FEW sellers which mean that sellers are responsive to competitors pricing strategies and marketing moves*. Example: cable giants Comcast, Time Warner, AT&T, and Dish Network who control most of the cable market. To lure someone from Comcast to AT&T you could offer a lower price and consumer will respond, but you want to be careful because then the entire market would be urged to lower their prices and therefore bringing down profit margins for everyone. They prefer to not compete on price, rather they rely on other marketing differentiation strategies. Rarely launch a price war. These are branded products competing with each other that have similar but not identical products.

Pure monopoly

market dominated by ONE seller. The seller can be a government monopoly (like U.S. Postal Service), a private regulated monopoly (power company) or a private unregulated monopoly (De Beers and Diamonds). Price is handled differently in each case. *These people need to be careful because these consumers have no brand loyalty. If a better product or service comes along and renders a monopoly obsolete, they will be screwed.*

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. "what are we going to charge for this?" then "how are we going to target costs that will make this price possible?". Example: the Honda Fit. began with a $13,950 starting price and 33 hw MPG. Then Honda designed a car that would meet these specifications. *not a part of value, cost or competition-based*

Pure competition

the market consists of many buyers and *many sellers trading in a uniform commodity*, such as wheat, copper, or financial securities. *No single buyer or seller has much effect on the going market price*. Thus, sellers in these markets do not spend much time on their marketing strategy.

Customer-Value Based Pricing (1/2)

uses the *buyers perception of value* rather than the seller's cost. *Price is set to match the perceived value.* Value-based pricing is CUSTOMER DRIVEN, where as cost-based pricing is product driven. The trick is about understanding how much value the customer sets on the benefits they received from the product and charging a price that will capture this value. The price is set with all the other marketing mix variables BEFORE the marketing program is set.