Chapter 10 Marketing

3 Major Pricing Strategies

1. Customer value-based pricing 2. Cost-based pricing 3. Competition-based pricing

Other External Factors

1. Resellers, the government, social concerns

Cost-based vs value-based pricing

Although costs are an important consideration in setting prices, cost-based pricing is often product driven. The company designs what it considers to be a good product, adds up the costs of making the product, and sets a price that covers costs plus a target profit. Marketing must then convince buyers that the product's value at that price justifies its purchase. If the price turns out to be too high, the company must settle for lower markups or lower sales, both resulting in disappointing profits. Value-based pricing reverses this process. The company first assesses customer needs and value perceptions. It then sets its target price based on customer perceptions of value. The targeted value and price drive decisions about what costs can be incurred and the resulting product design. As a result, pricing begins with analyzing consumer needs and value perceptions, and the price is set to match perceived value.

EDLP

An important type of good-value pricing at the retail level is called EDLP involves charging a constant, everyday low price with few or no temporary price discounts. Walmart Contrast: high-low pricing

Break-even pricing/analysis

Break-even pricing is the price at which total costs are equal to total revenue and there is no profit The firm sets a price at which it will break even or make the target return on the costs of making and marketing a product. Target return pricing uses the concept of a break-even chart, which shows the total cost and total revenue expected at different sales volume levels. fixed cost/price - variable cost

Demand Curve

Each price the company might charge will lead to a different level of demand. The relationship between the price charged and the resulting demand level is shown in the

Types of Value Based Pricing

Good-value pricing Value-added pricing

Experience curve

This drop in the average cost with accumulated production experience is called the If a downward-sloping experience curve exists, this is highly significant for the company. Not only will the company's unit production cost fall, but it will fall faster if the company makes and sells more during a given time period. B

Internal Factors affecting price decision

company's overall marketing strategy, objectives, and marketing mix

Cost-plus pricing

dding a stan- dard markup to the cost of the product.

Price Elasticity

how responsive demand will be to a change in price. If demand hardly changes with a small change in price, we say demand is inelastic. If demand changes greatly, we say the demand is elastic. If demand is elastic rather than inelastic sellers will consider lowering their prices.

High-low pricing

involves charging higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected items. Department stores such as Kohl's and JCPenney practice high-low pricing by having frequent sale days, early-bird savings, and bonus earnings for store credit-card holders.

Competition-based pricing

involves 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. First, how does the company's market offering compare with competitors' offerings in terms of customer value? Next, how strong are current competitors, and what are their current pricing strategies? Importantly, the goal is not to match or beat competitors' prices. Rather, the goal is to set prices according to the relative value created versus competitors.

Cost-based pricing

involves setting prices based on the costs of producing, distributing, and selling the product plus a fair rate of return for the company's effort and risk. A company's costs may be an important element in its pricing strategy. - low cost producers - cost-plus pricing - break-even pricing

price

is the amount of money charged for a product or a service.

Target Profit Pricing

is the price at which the firm will break even or make the profit it's seeking

Good-value pricing

offering the right combination of quality and good service at a fair price Mercedes-Benz recently released its CLA Class, entry-level models starting at $31,500. From its wing-like dash and diamond-block grille to its 208-hp turbo inline-4 engine, the CLA Class gives customers "The Art of Seduction. At a price reduction." In other cases, good-value pricing involves redesigning existing brands to offer more quality for a given price or the same quality for less. Some companies even succeed by offering less value but at very low prices.

Target costing

reverses the usual process of first designing a new product, determining its cost, and then asking, "Can we sell it for that?"

Pure competition

the market consists of many buyers and 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

Monopolistic competition

the market consists of many buyers and sellers trading over a range of prices rather than a single market price. A range of prices occurs because sell- ers can differentiate their offers to buyers.

Oligopolistic competition

the market consists of only a few large sellers. For example, only a hand- ful of providers—Comcast, Time Warner, AT&T, and Dish Network—control a lion's share of the cable/ satellite television market. Because there are few sell- ers, each seller is alert and responsive to competitors' pricing strategies and marketing moves.

Pure monopoly

the market is dominated by one seller. The seller may be a government monop- oly (the U.S. Postal Service)

External Factors affecting price decision

the nature of the market and demand and other environmental factors

Value-added pricing

to pay or setting low prices to meet competition. Instead, many companies adopt value-added pricing strategies. Rather than cutting prices to match competitors, they add quality, ser- vices, and value-added features to differentiate their offers and thus support their higher prices.

Customer value-based pricing

uses buyers' perceptions of value as the key to pricing. Value-based pricing means that the marketer cannot design a product and market- ing program and then set the price. Price is considered along with all other marketing mix variables before the marketing program is set.