Pricing:
Understanding and Capturing
Customer Value
Pricing:
Understanding and
Capturing Customer Value
Topic Outline
• What Is a Price?
• Customer Perceptions of Value
• Company and Product Costs
• Other Internal and External Considerations
Affecting Price Decisions
What Is a Price?
Price is the amount of money charged for
a product or service. It is the sum of all
the values that consumers give up in
order to gain the benefits of having or
using a product or service.
What Is a Price?
Price is the only element in the marketing
mix that produces revenue; all other
elements represent costs
Factors to Consider When
Setting Prices
Customer Perceptions of Value
Understanding how much value consumers place
on the benefits they receive from the product and
setting a price that captures that value
Factors to Consider When
Setting Prices
Customer Perceptions of Value
Factors to Consider When
Setting Prices
Customer Perceptions of Value
Value-based pricing uses the buyers’
perceptions of value, not the sellers’ cost,
as the key to pricing. Price is considered
before the marketing program is set.
• Value-based pricing is customer driven
• Cost-based pricing is product driven
Factors to Consider When
Setting Prices
Customer Perceptions of Value
Factors to Consider When
Setting Prices
Customer Perceptions of Value
Factors to Consider When
Setting Prices
Customer Perceptions of Value
Good-value pricing offers the right
combination of quality and good service at
a fair price
Existing brands are being redesigned to
offer more quality for a given price or the
same quality for a lower price
Factors to Consider When
Setting Prices
Customer Perceptions of Value
Everyday low pricing (EDLP) involves charging
a constant everyday low price with few or
no temporary price discounts
High-low pricing involves charging higher
prices on an everyday basis but running
frequent promotions to lower prices
temporarily on selected items
Factors to Consider
When Setting Prices
Customer Perceptions of Value
Value Added Pricing:
• Value-added pricing attaches value-added
features and services to differentiate offers,
support higher prices, and build pricing
power
• Pricing power is the ability to escape price
competition and to justify higher prices and
margins without losing market share
Factors to Consider
When Setting Prices
Company and Product Costs
Cost-based pricing involves setting prices
based on the costs for producing,
distributing, and selling the product plus a
fair rate of return for its effort and risk
Factors to Consider When
Setting Prices
Company and Product Costs
Cost-based pricing adds a standard markup to
the cost of the product
Factors to Consider When
Setting Prices
Company and Product Costs
Types of costs
Factors to Consider
When Setting Prices
Company and Product Costs
Fixed costs are the costs that do not vary
with production or sales level
• Rent
• Heat
• Interest
• Executive salaries
Factors to Consider When
Setting Prices
Company and Product Costs
Variable costs are the costs that vary with
the level of production
• Packaging
• Raw materials
Factors to Consider
When Setting Prices
Company and Product Costs
Total costs are the sum of the fixed and
variable costs for any given level of
production
Average cost is the cost associated with a
given level of output
Factors to Consider When
Setting Prices
Cost-Plus Pricing
• Cost-plus pricing adds a standard markup to
the cost of the product
• Benefits
– Sellers are certain about costs
– Prices are similar in industry and price competition is
minimized
– Consumers feel it is fair
• Disadvantages
– Ignores demand and competitor prices
Factors to Consider
When Setting Prices
Break-Even Analysis and Target Profit Pricing
Break-even pricing is the price at which total
costs are equal to total revenue and there
is no profit
Target profit pricing is the price at which the
firm will break even or make the profit it’s
seeking
Factors to Consider When
Setting Prices
Break-Even Analysis and Target Profit Pricing
Considerations in Setting Price
Factors to Consider When
Setting Prices
Other Internal and External Considerations Affecting Price Decisions
• Customer perceptions of value set the
upper limit for prices, and costs set
the lower limit
• Companies must consider internal and
external factors when setting prices
Factors to Consider When
Setting Prices
Other Internal and External Considerations
Affecting Price Decisions
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
Factors to Consider When
Setting Prices
Other Internal and External Considerations
Affecting Price Decisions
The Market and Demand
• Before setting prices,
the marketer must
understand the
relationship between
price and demand for
its products
Factors to Consider When
Setting Prices
Other Internal and External Consideration Affecting Price Decisions
Competition
