IM1019 L7 Pricing - Understanding and Capturing Customer Value

PRICING
UNDERSTANDING AND CAPTURING CUSTOMER VALUE
IM1019 Principles of Marketing

Sem 2, 2023-2024
Adapted from Kotler P. T. & Amstrong G. 2018, Principles of Marketing (17th Global Edition), Pearson.
Learning objectives
1. Answer the question “What is a price?” and discuss the importance of pricing in
today’s fast-changing environment.
2. Identify the three major pricing strategies and discuss the importance of
understanding customer-value perceptions, company costs, and competitor
strategies when setting prices.
3. Identify and define the other important external and internal factors affecting a
firm’s pricing decisions.
Discussion question
In a small group, discuss your perceptions of value and how much you are willing
to pay for a pair of athletic shoes.
Are there differences among members of your group? Explain why those
differences exist.
What is price
 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.
 Price is one of the most flexible marketing mix elements.

How to set price?
Major pricing strategies
The “right” pricing strategy is one that delivers

both value to the customer and profits to the company.
Major pricing strategies
Customer value-based pricing
 Value-based pricing uses the buyers’ perceptions of value rather than the
seller’s cost as the key to pricing.
 Value-based pricing is customer driven.
 Cost-based pricing is product driven.
 Price is set to match perceived value.
 Good-value pricing: offer just the right combination of quality and good
service at a fair price.
 High-low pricing: charging higher prices on an everyday basis but running
frequent promotions to lower prices temporarily on selected items.
 Everyday low pricing (EDLP): charging a constant everyday low price with few or
no temporary price discounts.
 Value-added pricing attaches value-added features and services to
differentiate the companies offers and thus their higher prices.
Cost-based pricing
 Cost-based pricing sets prices

based on the costs for producing,
distributing, and selling the
product plus a fair rate of return for
effort and risk.
 Whereas customer-value
perceptions set the price ceiling,
costs set the floor for the price that
the company can charge.
Types of cost
 Fixed costs (overhead) are the costs

that do not vary with production or
sales level.
 Ex: rent, interest, executive salaries
 Variable costs vary directly with the
level of production.
 Ex: raw materials, packaging
 Total costs are the sum of the fixed
and variable costs for any given level
of production.
Cost-based pricing
 Cost-plus pricing adds a standard markup to the cost of the product.

 Benefits
 Sellers are certain about costs.
 Price competition is minimized.
 Buyers feel it is fair.
 Disadvantages
 Ignores demand and competitor prices
Cost-based pricing
 Break-even pricing
(target return pricing) is
setting price to break
even on costs or to make
a target return.
Competition-based pricing
 Competition-based pricing is 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.
 No matter what price you charge relative to the competition - high, low, or in-
between - be certain to give customers superior value for that price.
Other considerations affecting price decisions
 Internal factors: the company’s overall marketing strategy, objectives, and

marketing mix, as well as organizational considerations.
 External factors: the nature of the market and demand and environmental
factors such as the economy, reseller needs, and government actions.
Overall marketing strategy, objectives, and mix
 Pricing strategy is largely determined by decisions on market positioning.
 Price decisions must be coordinated with product design, distribution, and

promotion decisions to form a consistent and effective integrated marketing
mix program.
 Companies often position their products on price and then tailor other
marketing mix decisions to the prices they want to charge.
Overall marketing strategy, objectives, and mix
 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.
 “Can we sell it for that?”

Organizational considerations
 Who should set prices?

 Who can influence prices?
e.g. Top management/ marketing department/ product line manager/

salesperson?
The market and demand
 Before setting prices, the marketer must understand the relationship

between price and demand for its products.
 Different types of market:
The price-demand relationship
 The demand curve shows the number of units the market will buy in a given
period at different prices
 Demand and price are inversely related.
 Higher price = lower demand

Price elasticity of demand
 Price elasticity is a measure of the sensitivity of demand to changes in price.
 Inelastic demand is when demand hardly changes with a small change in price.
 Elastic demand is when demand changes greatly with a small change in price.
 If demand is elastic rather than inelastic, sellers will consider lowering their
prices. A lower price will produce more total revenue.
Price elasticity of demand
 Buyers are less price sensitive when

 the product they are buying is unique or when it is high in quality, prestige, or
exclusiveness
 substitute products are hard to find or when they cannot easily compare the
quality of substitutes
 the total expenditure for a product is low relative to their income or when the cost
is shared by another party
The economy and other external factors
 Economic conditions
 Reseller’s response to price
 Government
 Social concerns

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PRICING

UNDERSTANDING AND CAPTURING CUSTOMER VALUE

IM1019 Principles of Marketing

 Price is one of the most flexible marketing mix elements.

The “right” pricing strategy is one that delivers

 Cost-based pricing sets prices

 Fixed costs (overhead) are the costs

 Cost-plus pricing adds a standard markup to the cost of the product.

 Price competition is minimized.

 Buyers feel it is fair.

 Competition-based pricing is setting prices based on competitors’ strategies,

 Internal factors: the company’s overall marketing strategy, objectives, and

 Pricing strategy is largely determined by decisions on market positioning.

 Price decisions must be coordinated with product design, distribution, and

 “Can we sell it for that?”

 Who should set prices?

e.g. Top management/ marketing department/ product line manager/

 Before setting prices, the marketer must understand the relationship

 Higher price = lower demand

 Price elasticity is a measure of the sensitivity of demand to changes in price.

 Buyers are less price sensitive when

 Reseller’s response to price

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