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1. Part 3: Designing a Customer-Driven Strategy and Mix Chapter 10 PRICING: UNDERSTANDING AND CAPTURING CUSTOMER VALUE CHAPTER OVERVIEW Use Power Point Slide 10-1 Here…
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  • 1. Part 3: Designing a Customer-Driven Strategy and Mix Chapter 10 PRICING: UNDERSTANDING AND CAPTURING CUSTOMER VALUE CHAPTER OVERVIEW Use Power Point Slide 10-1 Here Firms successful at creating customer value with the other marketing mix activities must capture this value in the prices they earn. Despite its importance, many firms do not handle pricing well. In this chapter, we begin with the question, What is a price? Next, we look at customer-value perceptions, costs, and other factors that marketers must consider when setting prices. Price can be defined as the sum of all the values that customers give up in order to gain the benefits of having or using a product or service. Pricing decisions are subject to an incredibly complex array of company, environmental, and competitive forces. Finally, we examine pricing strategies for new-product pricing, product mix pricing, price adjustments, and dealing with price changes. CHAPTER OBJECTIVES Use Power Point Slide 10-2 Here 1. Answer the question “What is price?” and discuss the importance of pricing in today’s fast changing environment. 2. Discuss the importance of understanding customer value perceptions when setting prices. 3. Discuss the importance of company and product costs in setting prices. 4. Identify and define the other important external and internal factors affecting a firm’s pricing decisions. CHAPTER OUTLINE P. 289 INTRODUCTION P. 289 Photo: Trader Joe’s Trader Joe’s is not really a gourmet food store. Then again, it’s not a discount food store either. It’s actually a bit of both. One of America’s hottest retailers, Trader Joe’s has Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 48
  • 2. Part 3: Designing a Customer-Driven Strategy and Mix put its own special twist on the food price-value equation – call it “cheap gourmet.” Trader Joe’s describes itself as an “island paradise” where “value, adventure, and tasty treasures are discovered, every day.” Customers don’t just shop at Trader Joe’s, they experience it. Shelves bristle with an eclectic assortment of gourmet- quality grocery items. Trader’ Joe’s stocks only a limited assortment of about 2,000 specialty products (compared with 45,000 items found at a Safeway). However, the assortment is uniquely Trader Joe’s. A special store atmosphere, exclusive gourmet products, helpful and attentive associates – this all sounds like a recipe for high prices. Not so at Trader Joe’s. How does Trade Joe’s keep it gourmet prices so low? It all starts with lean operations and a near-fanatical focus on saving money. Trader Joe’s also saves money by spending almost nothing on advertising. It’s all about value and price – what you get for what you pay.  Opening Vignette Questions 1. What do you believe to be the ‘secret’ to Trader Joe’s success? 2. How does Trader Joe’s keep prices so low (compared to Whole Foods, for example)? 3. Is Trader Joe’s a gourmet store?  Assignments, Resources Use Web Resources 1 and 2 here P. 290 WHAT IS A PRICE? Chapter Objective 1 PPT 10-3 In the narrowest sense, price is the amount of money P. 290 charged for a product or service. Key Term: Price More broadly, price is the sum of all the values that customers give up in order to gain the benefits of having or using a product or service. P. 290 Photo: Panera Bread PPT 10-4 Price is the only element in the marketing mix that produces Company revenue. 49 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
  • 3. Chapter 10: Pricing: Understanding and Capturing Customer Value Price is one of the most flexible marketing mix elements. P. 291 FACTORS TO CONSIDER WHEN SETTING PRICES Chapter Objective 2 Figure 10.1 summarizes the major considerations in setting price. P. 291 P. 291 Customer Perceptions of Value Figure 10.1: Considerations in PPT 10-5 In the end, the customer will decide whether a product’s Setting Price price is right. PPT 10-6 P. 291 Value-Based Pricing Key Term: Value- Based Pricing PPT 10-7 Value-based pricing uses buyers’ perceptions of value, not the seller’s cost, as the key to pricing. Price is considered along with the other marketing mix P. 292 variables before the marketing program is set. Photo: Bentley Cost-based pricing is product driven. P. 292 PPT 10-8 Figure 10.2: Value- “Good value” is not the same as “low price.” Based Pricing Versus Cost-Based Two types of value-based pricing are good-value pricing Pricing PPT 10-9 and value-added pricing. PPT 10-10 1. Good-Value Pricing. Good-value pricing is offering just the right combination of quality and good service at a fair price. P. 293 Key Terms: Good- PPT 10-11 Everyday low pricing (EDLP). EDLP involves Value Pricing, charging a constant, everyday low price with few or no Value-Added temporary price discounts. Pricing High-low pricing involves charging higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected items. PPT 10-12 2. Value-Added Pricing. Value-added pricing is the P. 293 strategy of attaching value-added features and Photo: Value-Added services to differentiate their offers and thus support Pricing higher prices.  Assignments, Resources Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 50
  • 4. Part 3: Designing a Customer-Driven Strategy and Mix Use Real Marketing 10.1 here Use Discussing the Concepts 1, 2 and 3 here Use Applying the Concepts 1 here Use Video Case here Use Focus on Technology here Use Additional Projects 1, 2, and 3 here Use Individual Assignments 1 and 2 here Use Small Group Assignment 1 here Use Think-Pair-Share 1, 2, 3 here Use Outside Example 1 here Use Web Resources 3 and 4 here  Troubleshooting Tip 1) Even if a few students have worked in a family business, it is a very safe bet that none of them have ever set prices on anything. Even if they are a devotee of eBay and have been buying and selling items for years, they still won’t have set prices because of the auction environment of that and other sites that have sprung up in the years since the explosion of the World Wide Web. So, although the “What Is a Price?” section is very short, it is well worth spending some time talking about the difference between fixed-price policies and dynamic pricing. A discussion of what it’s like to buy a meal at a restaurant, where you cannot typically haggle on price, and buying a car, where you are expected to haggle on price, can drive home the difference between the two. A discussion of what has happened with auctions and exchanges online will also help. 2) Value-based pricing could engender a considerable amount of conversation, particularly if someone thinks it is unethical to charge a price for something that yields the company a very large margin. Why wouldn’t you treat customers “right” by charging them less? A discussion of the meaning of customer focus and of benefits to the customer will help the class to understand that if the customer thinks he is getting value, he will happily pay the price. P. 295 Company and Product Costs Chapter Objective 3 PPT 10-13 Cost-based pricing involved setting prices based on the P. 295 51 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
  • 5. Chapter 10: Pricing: Understanding and Capturing Customer Value costs for producing, distributing, and selling the product Key Terms: Cost- PPT 10-14 plus a fair rate of return for its effort and risk. Based Pricing, Fixed Costs PPT 10-15 Types of Costs (Overhead) PPT 10-16 Fixed costs (also known as overhead) are costs that do not vary with production or sales level. P. 296 PPT 10-17 Variable costs vary directly with the level of production. Key Terms: They are called variable because their total varies with the Variable Costs, number of units produced. Total Costs PPT 10-18 Total costs are the sum of the fixed and variable costs for any given level of production. Costs at Different Levels of Production P. 296 Figure 10.3: Cost To price wisely, management needs to know how its costs Per Unit at Different PPT 10-19 vary with different levels of production. Levels of Production Per Figure 10.3A shows the typical short-run average cost curve Period (SRAC). Figure 10.3B shows the long-run average cost curve (LRAC). Average cost tends to fall with accumulated production P. 296 experience. This is shown in Figure 10.4 (P. 309). This drop Key Term: PPT 10-20 in the average cost with accumulated production experience Experience Curve is called the experience curve (or the learning curve). (Learning Curve) A single-minded focus on reducing costs and exploiting the experience curve will not always work. The aggressive pricing might give the product a cheap image. The strategy P. 297 also assumes that competitors are weak and not willing to Figure 10.4: Cost fight it out by meeting the company’s price cuts. Finally, Per Unit as a while the company is building volume under one Function of technology, a competitor may find a lower-cost technology Accumulated that lets it start at prices lower than those of the market Production: The leader, who still operates on the old experience curve. Experience Curve Cost- Based Pricing P. 297 Key Term: Cost- PPT 10-21 The simplest pricing method is cost-plus pricing—adding a Plus Pricing standard markup to the cost of the product. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 52
  • 6. Part 3: Designing a Customer-Driven Strategy and Mix Does using standard markups to set prices make sense? Generally, no. Markup pricing remains popular for many reasons. 1. Sellers are more certain about costs than about demand. 2. When all firms in the industry use this pricing method, prices tend to be similar and price competition is thus minimized. 3. Many people feel that cost-plus pricing is fairer to both buyers and sellers. P. 298 Key Term: Break- PPT 10-22 Break-Even Analysis and Target Profit Pricing Even Pricing (Target Profit Another cost-oriented pricing approach is break-even Pricing) pricing, or a variation called target profit pricing. The firm tries to determine the price at which it will break even or make the target profit it is seeking. P. 298 PPT 10-23 Target pricing uses the concept of a break-even chart that Figure 10.5: Break- shows the total cost and total revenue expected at different Even Chart for sales volume levels. Figure 10.5 shows a break-even chart. Determining Target Price PPT 10-24 The manufacturer should consider different prices and estimate break-even volumes, probable demand, and profits P. 299 for each. This is done in Table 10.1. Table 10.1: Break- Even Volume and Profits at Different Prices  Assignments, Resources Use Discussing the Concepts 4 here Use Additional Projects 4 here Use Think-Pair-Share 4 and 5 here  Troubleshooting Tip Students may need further explanation regarding why cost-based pricing isn’t the right way to price everything. It’s simple, it’s easy to apply a formula, and there is no guesswork involved. You need to drive home the point that it ignores the customer completely—cost-based pricing is internally focused, without a thought to the demand parameters or competitors’ prices. You can talk about this from the perspective of a high-cost manufacturer—how much would they be able to sell if their product cost 53 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
  • 7. Chapter 10: Pricing: Understanding and Capturing Customer Value 50% more than the competition simply because the company hadn’t figured out how to manufacture it effectively? P. 299 Other Internal and External Considerations Affecting Chapter Objective 4 Price Decisions PPT 10-25 Overall Marketing Strategy, Objectives, and Mix General pricing objectives might include survival, current profit maximization, market share leadership, or customer retention and relationship building. Price is only one of the marketing mix tools that a company uses to achieve its marketing objectives. Price decisions must be coordinated with product design, distribution, and promotion decisions to form a consistent and effective integrated marketing program. Companies often position their products on price and then tailor other marketing mix decisions to the prices they want to charge. PPT 10-26 Target costing starts with an ideal selling price based on customer-value considerations, and then targets costs that P. 300 will ensure that the price is met. Key Term: Target Costing Companies may deemphasize price and use other marketing mix tools to create nonprice positions. P. 300 PPT 10-27 Organizational Considerations Ad: Titus In small companies, prices are often set by top management rather than by the marketing or sales departments. In large companies, pricing is typically handled by divisional or product line managers. In industrial markets, salespeople may be allowed to negotiate with customers within certain price ranges. In industries in which pricing is a key factor, companies often have pricing departments to set the best prices or to Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 54
  • 8. Part 3: Designing a Customer-Driven Strategy and Mix help others in setting them. PPT 10-28 The Market and Demand PPT 10-29 Pricing in Different Types of Markets. Pure competition: The market consists of many buyers and sellers trading in a uniform commodity. No single buyer or seller has much effect on the going market price. In a purely competitive market, marketing research, product development, pricing, advertising, and sales promotion play little or no role. Thus, sellers in these markets do not spend much time on marketing strategy. Monopolistic competition: The market consists of many buyers and sellers who trade over a range of prices rather than a single market price. A range of prices occurs because sellers can differentiate their offers to buyers. P. 302 Oligopolistic competition: The market consists of a few Ad: Kohler sellers who are highly sensitive to each other’s pricing and marketing strategies. There are few sellers because it is difficult for new sellers to enter the market. Pure monopoly: The market consists of one seller. The seller may be a government monopoly, a private regulated monopoly, or a private nonregulated monopoly.  Assignments, Resources Use Real Marketing 10.2 here Use Discussing the Concepts 5 and 6 here Use Focus on Ethics here Use Additional Projects 5 here Use Outside Example 2 here Use Web Resources 5 here Analyzing the Price-Demand Relationship. P. 303 PPT 10-30 The relationship between the price charged and the resulting Key term: Demand demand level is shown in the demand curve (Figure 10.6). Curve In the case of prestige goods, the demand curve sometimes slopes upward. Consumers think that higher prices mean P. 303 55 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
  • 9. Chapter 10: Pricing: Understanding and Capturing Customer Value more quality. Figure 10.6: PPT 10-31 Demand Curve In a monopoly, the demand curve shows the total market demand resulting from different prices. If the company faces competition, its demand at different prices will depend on whether competitors’ prices stay constant or change with the company’s own prices. PPT 10-32 Price Elasticity of Demand. P. 304 Price elasticity is how responsive demand will be to a Key Term: Price change in price. Elasticity If demand hardly changes with a small change in price, we P. 303 say demand is inelastic. Ad: Gibson Guitars If demand changes greatly with a small change in price, we say the demand is elastic. PPT 10-33 Competitors’ Strategies and Prices P. 305 In assessing competitors’ pricing strategies, the company Ad: Annie Bloom’s should ask several questions. Books 1. How does the company’s market offering compare with competitors’ offerings in terms of customer value? 2. How strong are current competitors and what are their current pricing strategies? 3. How does the competitive landscape influence customer price sensitivity? PPT 10-34 Other External Factors Economic conditions can have a strong impact on the firm’s pricing strategies. The company must also consider what impact its prices will have on other parties in its environment, such as resellers and the government. Social concerns may have to be taken into account.  Assignments, Resources Use Applying the Concepts 2 and 3 here Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 56
  • 10. Part 3: Designing a Customer-Driven Strategy and Mix Use Marketing by the Numbers here Use Company Case here Use Small Group Assignment 2 here Use Web Resources 6 here END OF CHAPTER MATERIAL Discussing the Concepts 1. What is price? List five other words that mean the same thing as price (for example, tuition). (AACSB: Communication; Reflective Thinking) Answer: In the narrowest sense, price is the amount of money charged for a product or service. More broadly, price is the sum of all the values that customers give up in order to gain the benefits of having or using a product or service. Examples of other terms used for price are rent, fee, rate, tax, toll, commission, and assessment. 2. Explain the differences between value-based pricing and cost-based pricing. (AACSB: Communication) Answer: Cost-based pricing is 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 then 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 price is set to match consumers’ perceived value. 3. Name and describe the two types of value-based pricing methods. (AACSB: Communication) Answer: There are two types of value-based pricing: good-value pricing and value-added pricing. Good-value pricing strategies offer just the right combination of quality and good service at a fair price. In many cases, this has involved introducing less-expensive versions of established, brand name products. In other cases, good-value pricing has involved redesigning existing brands to offer more quality for a given price or the same quality for 57 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
  • 11. Chapter 10: Pricing: Understanding and Capturing Customer Value less. An important type of good-value pricing at the retail level is everyday low pricing (EDLP). EDLP involves charging a constant, everyday low price with few or no temporary price discounts. To increase their pricing power, many companies adopt value-added pricing strategies. Rather than cutting prices to match competitors, they attach value-added features and services to differentiate their offers and thus support higher prices. 4. Compare and contrast fixed and variable costs and give an example of each. (AACSB: Communication) Answer: Fixed costs (also known as overhead) are costs that do not vary with production or sales level. For example, a company must pay each moth’s bills for rent, heat, interest, and executive salaries, whatever the company’s output. Variable costs vary directly with the level of production. Each product manufacturer involves costs related to raw materials and parts. These costs tend to be the same for each unit produced. They are called variable because their total varies with the number of units produced. 5. Discuss other internal and external considerations besi
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