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Chapter 10

A price is the amount charged for a product or service and is how customers exchange value for benefits. Price is the only marketing element that generates revenue. Setting the right price is complex and depends on customer perceptions of value rather than just production costs. Value-based pricing assesses customer needs and sets a target price to match perceived value while covering costs and desired profit. Cost-based pricing sets price based on costs of production, distribution and marketing plus a profit margin. Many factors like customer perceptions, costs, competition and demand influence optimal pricing strategies.

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43 views2 pages

Chapter 10

A price is the amount charged for a product or service and is how customers exchange value for benefits. Price is the only marketing element that generates revenue. Setting the right price is complex and depends on customer perceptions of value rather than just production costs. Value-based pricing assesses customer needs and sets a target price to match perceived value while covering costs and desired profit. Cost-based pricing sets price based on costs of production, distribution and marketing plus a profit margin. Many factors like customer perceptions, costs, competition and demand influence optimal pricing strategies.

Uploaded by

tasfia2829
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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What is a good definition of "price"?

A price is the amount of money charged for a product or a service, the sum of the values that customers exchange
for the benefits of having or using the product or service. Price is the only element in the marketing mix that
produces revenue; all others are costs. Setting the right price is one of the most complex tasks. Good pricing starts
with customers and their perception of the value of the product.

What are pricing strategies?

Customer value-based pricing: setting price based on buyer’s perceptions of value rather than on the seller’s cost.
“STARTS WITH CUSTOMERS IN MIND”. Steps of value-based pricing:

1. Assess customer needs and value perception


2. Set a target price to match customer perceived value
3. Determine cost that can be incurred
4. Design product to deliver desired value at target price

The value customers attach to a product might be difficult to measure due to subjectivity & situation. So, the
company must work hard to establish estimates. They should ask customers or conduct experiments.

Product Cost --- Sets the price floor [No profit below this price]
Consumer’s perception of value --- Sets the price ceiling [No demand above this price]

There are two other types of value-based pricing:

1. Good-value pricing: Offering the right combination of quality and good service at a fair price.
- Might include introducing a less-expensive version or lowered priced line.
- GOOD VALUE is not the same as LOW PRICE.
2. Value-added pricing: Attaching value-added features and services to differentiate a company’s offers and
charging higher prices.
- You should only go for value added pricing when you can ensure the justification through service and
other aspects.

There are several differences between value-based pricing and cost-based pricing.

Cost-based pricing: setting prices based on the cost for producing, distributing and selling the product plus a fair
rate of return for effort and risk. There are two forms of costs:

- Fixed costs (overhead) are costs that do not vary with production or sales level.
- Variable costs are costs that vary directly with the level of production.
Total costs are the sum of the fixed and variable costs for any given level of production.

The experience curve (learning curve) is the drop in the average per-unit production costs that comes with
accumulated production experience. Put more simply: as workers become more experienced, they become more
efficient and costs drop.

Cost-plus pricing or mark-up pricing: it means adding a standard mark-up to the cost of the product.
CONS- This method ignores demand and competitors’ prices and is therefore unlikely to lead to the best price. It is
the simplest pricing method.
Break-even pricing (target return pricing) means setting the price to break even on the costs of making and
marketing a product or setting price to make a target return. The break-even volume is the number of units that need
to be sold to break even.

Competition-based pricing means setting prices based on competitor’s strategies, prices, costs and market
offerings.

What are other factors to consider?

Beyond customer value perceptions, costs and competitor prices, the firm must also think of other factors. Price is
only one element of the marketing mix and the overall marketing strategy must be determined first. Target
costing is pricing that starts with an ideal selling price and then targets costs that ensure the price is met. Good
pricing is based on an understanding of the relationship between price and demand for the product.

Pricing can differ in different types of markets.

 Pure competition markets: there are numerous buyers and sellers that all have a small effect on the
price.
 Monopolistic competition market: there are many buyers and sellers who trade over multiple prices.
 Oligopolistic competition market: there are few sellers who are highly sensitive to each other’s
pricing strategies.
 Pure monopoly Market: the company is the only seller and can set any price.

Demand curve: shows the number of units the market will buy in a given time period, at different prices that might
be charged.

The price elasticity is a measure of sensitivity of demand to changes in price. It is given by the following formula:
price elasticity of demand = (% change in quantity demanded/ % change in price).
If demand hardly changes with a small change in price, demand is inelastic. If demand changes greatly, we say the
demand is elastic.

Elastic --- Demand changed greatly


Inelastic --- Demand hardly changes

Economic conditions can have a strong impact on the firm’s pricing strategies. Beyond the market and the economy,
the company must consider several other factors in its external environment when setting prices.
Especially resellers, the government and social concerns need to be taken into account.

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