Chapter Ten

Pricing:
Understanding and Capturing
Customer Value
Copyright © 2009 Pearson Education, Inc.  
Chapter 10- slide 1
Publishing as Prentice Hall
 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.

Copyright © 2010 Pearson Education, Inc.  

Chapter 10- slide 2
 What Is a Price?

Price is the only

element in the
marketing mix
that produces
revenue; all other
elements
represent costs

Copyright © 2010 Pearson Education, Inc.  

Chapter 10- slide 3
 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

Copyright © 2010 Pearson Education, Inc.  

Chapter 10- slide 4
 Factors to Consider When
Setting Prices
Customer Perceptions of Value

Copyright © 2010 Pearson Education, Inc.  

Chapter 10- slide 5
 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

Copyright © 2010 Pearson Education, Inc.  

Chapter 10- slide 6
 Factors to Consider When
Setting Prices
Customer Perceptions of Value

Copyright © 2010 Pearson Education, Inc.  

Chapter 10- slide 7
 Factors to Consider When
Setting Prices
Customer Perceptions of Value

Copyright © 2010 Pearson Education, Inc.  

Chapter 10- slide 8
 Factors to Consider When
Setting Prices
Customer Perceptions of Value

Good-value pricing offers the right

combination of quality and good service
to fair price
Existing brands are being redesigned to offer
more quality for a given price or the same
quality for less price
Copyright © 2010 Pearson Education, Inc.  
Chapter 10- slide 9
 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
Copyright © 2010 Pearson Education, Inc.  
Chapter 10- slide 10
 Factors to Consider
When Setting Prices
Customer Perceptions of Value

• 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
Copyright © 2010 Pearson Education, Inc.  
Chapter 10- slide 11
 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

Copyright © 2010 Pearson Education, Inc.  

Chapter 10- slide 12
 Factors to Consider When
Setting Prices
Company and Product Costs

Cost-based pricing adds a standard markup

to the cost of the product

Copyright © 2010 Pearson Education, Inc.  

Chapter 10- slide 13
 Factors to Consider When
Setting Prices Company and Product Costs
Types of costs

Copyright © 2010 Pearson Education, Inc.  

Chapter 10- slide 14
 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
• Interest
• Executive salaries

Copyright © 2010 Pearson Education, Inc.  

Chapter 10- slide 15
 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

Copyright © 2010 Pearson Education, Inc.  

Chapter 10- slide 16
 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

Copyright © 2010 Pearson Education, Inc.  

Chapter 10- slide 17
 Factors to Consider When
Setting Prices
Costs at Different Levels of Production

Copyright © 2010 Pearson Education, Inc.  

Chapter 10- slide 18
 Factors to Consider When
Setting Prices
Costs as a Function of Production Experience
Experience or learning curve is when average cost falls as
production increases because fixed costs are spread over
more units

Copyright © 2010 Pearson Education, Inc.  

Chapter 10- slide 19
 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

Copyright © 2010 Pearson Education, Inc.  

Chapter 10- slide 20
 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
Copyright © 2010 Pearson Education, Inc.  
Chapter 10- slide 21
 Factors to Consider When
Setting Prices
Break-Even Analysis and Target Profit Pricing

Copyright © 2010 Pearson Education, Inc.  

Chapter 10- slide 22
 Considerations in Setting Price

Copyright © 2010 Pearson Education, Inc.  

Chapter 10- slide 23
 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
Copyright © 2010 Pearson Education, Inc.  
Chapter 10- slide 24
 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

Copyright © 2010 Pearson Education, Inc.  

Chapter 10- slide 25
 Factors to Consider When
Setting Prices
Other Internal and External Considerations Affecting Price Decisions

Organizational considerations include:

• Who should set the price
• Who can influence the prices

Copyright © 2010 Pearson Education, Inc.  

Chapter 10- slide 26
 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
Copyright © 2010 Pearson Education, Inc.  
Chapter 10- slide 27
 Factors to Consider When
Setting Prices
Other Internal and External Consideration Affecting Price Decisions

Competition

Copyright © 2010 Pearson Education, Inc.  

Chapter 10- slide 28
 Factors to Consider When
Setting Prices
Other Internal and External Considerations Affecting Price Decisions

The demand curve shows the number of units the market

will buy in a given period at different prices
• Normally, demand and price are inversely related
• Higher price = lower demand
• For prestige (luxury) goods, higher price can equal
higher demand when consumers perceive higher prices
as higher quality

Copyright © 2010 Pearson Education, Inc.  

Chapter 10- slide 29
 Factors to Consider When
Setting Prices
Other Internal and External Considerations
Affecting Price Decisions

Copyright © 2010 Pearson Education, Inc.  

Chapter 10- slide 30
 Factors to Consider When
Setting Prices
Other Internal and External
Considerations Affecting Price
Decisions
Price elasticity of demand illustrates the response of demand to a
change in price

Inelastic demand occurs when demand hardly changes when there is a small
change in price

Elastic demand occurs when demand changes greatly for a small change in price

Price elasticity of demand = % change in quantity demand

% change in price

Copyright © 2010 Pearson Education, Inc.  

Chapter 10- slide 31
 Factors to Consider When
Setting Prices
Other Internal and External Considerations
Competitor's Strategies

• Comparison of offering in
terms of customer value
• Strength of competitors
• Competition pricing strategies
• Customer price sensitivity

Copyright © 2010 Pearson Education, Inc.  

Chapter 10- slide 32
 Factors to Consider
When Setting Prices
Other Internal and External Consideration Affecting Price Decisions

Copyright © 2010 Pearson Education, Inc.  

Chapter 10- slide 33
 All rights reserved. No part of this publication may be reproduced, stored in a
retrieval system, or transmitted, in any form or by any means, electronic,
mechanical, photocopying, recording, or otherwise, without the prior written
permission of the publisher. Printed in the United States of America.

Copyright © 2010 Pearson Education, Inc.  

Publishing as Prentice Hall

Copyright © 2010 Pearson Education, Inc.  

Chapter 10- slide 34