Principles of Marketing

Eighteenth Edition

Chapter 10
Pricing: Understanding and
Capturing Customer Value

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APPLE: Premium Priced and Worth It?
Apple has always set its prices way Avid fans have long anointed
above those of competitors, reaping Apple as the keeper of all things
the rewards of higher revenues and cool, believing deep down that
profits. But as Apple faces stiffer the value they receive is worth
global competition from lower-priced the premium price.
brads, some customers may be
questioning just how much more
they are willing to pay for the iconic
brand.

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Learning Objectives
10.1 Answer the question “What is a price?” and discuss the
importance of pricing in today’s fast-changing
environment.
10.2 Define price, identify the three major pricing strategies,
and discuss the importance of understanding customer-
value perceptions, company costs, and competitor
strategies when setting prices.

Copyright © 2021, 2018, 2016 Pearson Education, Inc.

Learning Objective 1
Answer the question “What is a price?” and discuss the
importance of pricing in today’s fast-changing environment.

Copyright © 2021, 2018, 2016 Pearson Education, Inc.

What Is a 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.

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Major Pricing Strategies (1 of 17)
Figure 10.1 Considerations in Setting Price

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Major Pricing Strategies (2 of 17)
Customer Value-Based Pricing

Value-based pricing uses the buyers’ perceptions of value

rather than the seller’s cost.
• Value-based pricing is customer driven.
• Cost-based pricing is product driven.
• Price is set to match perceived value.

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Major Pricing Strategies (3 of 17)
Figure 10.2 Value-Based Pricing versus Cost-Based Pricing

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Major Pricing Strategies (4 of 17)
Customer Value-Based Pricing

Good-value pricing is offering just the right combination of

quality and good service at a fair price.
• fair in terms of the relation between price and delivered customer
value
• McDonald’s low cost menu items
• Ryanair can be considered to rely on good-value pricing

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Major Pricing Strategies (5 of 17)
Customer Value-Based Pricing

Everyday low pricing (EDL P) involves charging a constant

everyday low price with few or no temporary price discounts.

• brands and retailers promise consumers that their prices will be

consistently low, as opposed to having sporadic discounts or
promotions.
• favorite among consumers who don't want to watch for sales, search
for coupons or watch expiration dates

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Major Pricing Strategies (6 of 17)
Customer Value-Based Pricing

High-low pricing involves charging higher prices on an

everyday basis but running frequent promotions to lower
prices temporarily on selected items.

• Set prices high but then periodically offer consumers lower prices
through sales, promotions or coupons
• Nike & Adidas

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Major Pricing Strategies (7 of 17)
Customer Value-Based Pricing

Value-added pricing attaches value-added features and

services to differentiate a company’s offers and thus their
higher prices.

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Major Pricing Strategies (8 of 17)
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.

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Major Pricing Strategies (9 of 17)
Cost-Based Pricing

Fixed costs are the costs that do not vary with production or
sales level.
• Rent
• Heat
• Interest
• Executive salaries

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Major Pricing Strategies (10 of 17)
Cost-Based Pricing

Variable costs vary directly with the level of production.

• Raw materials
• Packaging

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Major Pricing Strategies (11 of 17)
Cost-Based Pricing

Total costs are the sum of the fixed and variable costs for
any given level of production.

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Major Pricing Strategies (14 of 17)
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

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Major Pricing Strategies (15 of 17)
Cost-Based Pricing
Break-even pricing (target return pricing) is setting price
to break even on costs or to make a target return.

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Major Pricing Strategies (17 of 17)
Competition-Based Pricing
Competition-based pricing is setting prices based on
competitors’ strategies, costs, prices, and market offerings.
Pricing versus competitors: Caterpillar dominates the heavy
equipment industry despite charging premium prices.
Customers believe that Caterpillar gives them a lot more
value for the price over the lifetime of its machines.

Copyright © 2021, 2018, 2016 Pearson Education, Inc.

Principles of Marketing
Eighteenth Edition

Chapter 11
Pricing Strategies: Additional
Considerations

Copyright © 2021, 2018, 2016 Pearson Education, Inc.

New Pricing Strategies (1 of 2)
Market-skimming pricing strategy sets high initial prices to
“skim” revenue layers from the market.
• Product quality and image must support the price.
• Buyers must want the product at the price.

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New Pricing Strategies (2 of 2)
Market-penetration pricing involves setting a low price for a new
product in order to attract a large number of buyers and a large
market share.
Penetration pricing: Amazon used penetration pricing for Amazon
Prime Video in more than 240 international markets to build a
customer base and make headway against higher priced Netflix.

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Learning Objective 2
Explain how companies find a set of prices that maximizes
the profits from the total product mix.

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Product Mix Pricing Strategies
• Product line pricing
• Optional product pricing
• Captive product pricing
• By-product pricing
• Product bundle pricing

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Product Mix Pricing Strategies (1 of 3)
Product Line and Optional Product Pricing
Product line pricing takes into account the cost differences
between products in the line, customer evaluations of their
features, and competitors’ prices.
Optional product pricing takes into account optional or
accessory products along with the main product.

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Product Mix Pricing Strategies (2 of 3)
Captive product pricing sets prices of products that must
be used along with the main product.

Captive-product pricing: Nintendo makes little or no profit on

its Switch video game console but makes up for it through
sales of higher-margin video games.

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Product Mix Pricing Strategies (3 of 3)
Product Line and Optional Product Pricing
By-product pricing sets a price for by-products in order to
make the main product’s price more competitive.
Product bundle pricing combines several products at a
reduced price.

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Learning Objective 3
Discuss how companies adjust their prices to take into
account different types of customers and situations.

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Price Adjustment Strategies (1 of 12)
Discount pricing reduces prices on purchases during a
stated period of time or of larger quantities.
Allowances discount list prices by providing promotional
money in return for an agreement to feature the
manufacturer’s products in some way. Allowances include
trade-in allowances and promotional allowances.

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Price Adjustment Strategies (5 of 12)
Psychological Pricing
Psychological pricing considers the psychology of prices
and not simply the economics; the price is used to say
something about the product.
Reference prices are prices that buyers carry in their minds
and refer to when they look at a given product.

Geographical pricing is used for customers in different

parts of the country or the world.

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Price Adjustment Strategies (6 of 12)
Promotional Pricing
Promotional pricing is characterized by temporarily pricing
products below the list price, and sometimes even below
cost, to increase short-run sales. Examples include:
• special-event pricing
• limited-time offers
• cash rebates
• low-interest financing, extended warranties, or free
maintenance

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