Principles of Marketing

Eighteenth Edition, Global 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.
brands, 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.
10.3 Identify and define the other important external and
internal factors affecting a firm’s pricing decisions.

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

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What Is a Price?
Price is the amount of money charged for a product or
service
Broadly, It is the sum of all the values that customers
exchange for the benefits of having or using the product or
service.

Price is the only element in the marketing mix that produces

revenue (determine a firm’s market share and profitability.);
all other elements represent costs.
 in both good economic times and bad, companies should
sell value, not price.

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Learning Objective 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.

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Major Pricing Strategies (1 of 15)
Figure 10.1 Considerations in Setting Price

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 Major Pricing Strategies

• customer value-based pricing,

• cost-based pricing, and
• competition-based pricing.

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Major Pricing Strategies (2 of 15)
1. Customer Value-Based Pricing

Value-based pricing uses the buyers’ perceptions of value

rather than the seller’s cost.
• When customers buy a product, they exchange something
of value (the price) to get something of value (the benefits
of having or using the product).
 In the end, the customer will decide whether a product’s
price is right.

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 Major Pricing Strategies
1. Customer Value-Based Pricing
• Effective customer-oriented pricing involves understanding
how much value consumers place on the benefits they
receive from the product and setting a price that captures
that value.

 marketers cannot design a product and marketing program

and then set the price. They must consider price along with
all other marketing mix variables before they set a marketing
program.

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Major Pricing Strategies (3 of 15)
Figure 10.2 Value-Based Pricing versus Cost-Based Pricing

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 Major Pricing Strategies

• A company will often find it hard to measure the value

customers attach to its product.
• Still, consumers will use perceived values to evaluate a
product’s price, so the company must work to measure
them.
two types of value-based pricing:
• good-value pricing and
• value-added pricing.

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Major Pricing Strategies (4 of 15)
Customer Value-Based Pricing

A. Good-value pricing is offering 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
or new lower-price lines
Ex: Mercedes Benz CLA class
 In other cases, good-value pricing
involves redesigning existing brands
to offer more quality for a given
price or the same quality for less.

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Major Pricing Strategies (5 of 15)
Customer Value-Based Pricing

Some companies even succeed by

offering less value but at very low
prices.

a. Everyday low pricing (EDL P)

involves charging a constant
everyday low price with few or no
temporary price discounts.

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Major Pricing Strategies (6 of 15)
Customer Value-Based Pricing

b. High-low pricing
involves charging higher
prices on an everyday basis
but running frequent
promotions to lower prices
temporarily on selected
items.

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Major Pricing Strategies (7 of 15)
Customer Value-Based Pricing

B. Value-added pricing attaches value-added features and

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

One of its latest offerings is

connected LED lighting systems
and services, which it claims will
save energy as well as enable
their customers to work more
efficiently and productively.

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Major Pricing Strategies (8 of 15)
2. 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.
• Companies with lower costs can set lower prices that result in smaller
margins but greater sales and profits.
• However, other companies intentionally pay higher costs so that they
can add value and claim higher prices and margins.

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 Major Pricing Strategies (9 of 15)
Cost-Based Pricing: types of costs

Fixed costs are the costs that variable costs vary

do not vary with production or directly with the level
sales level. of production.

• Rent, Heat, Interest • Raw materials

• Executive salaries • Packaging

Total costs are the sum of the fixed and variable costs for
any given level of production.
 Management wants to charge a price that will at least cover
the total production costs at a given level of production.

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Major Pricing Strategies (10 of 15)
To price wisely, management needs to know how its costs vary with
different levels of production.

Figure 10.3 Cost per Unit at Different Levels of Production

per Period
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Major Pricing Strategies (11 of 15)
Figure 10.4 Cost per Unit as a Function of Accumulated Production: The
Experience Curve

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Major Pricing Strategies (12 of 15)
Cost-Based Pricing

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

product (simplest method).
• Benefits
– Sellers are more certain about costs than demand.
– Price competition is minimized.
– Buyers feel it is fair.
• Disadvantages
– Ignores demand and competitor prices

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Major Pricing Strategies (13 of 15)
Cost-Based Pricing
Break-even pricing (target return pricing) is setting price
to break even on costs or to make a target return.
Figure 10.5 Break-Even Chart for Determining Target Return
Price and Break-Even Volume

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Major Pricing Strategies
Cost-Based Pricing

• If the company charges a higher price, it will not need to sell as many
units to achieve its target return. But the market may not buy even this
lower volume at the higher price. Much depends on price elasticity and
competitors’ prices.
 The manufacturer should consider different prices and estimate break-
even volumes, probable demand, and profits for each. This is done in
Table 10.1.

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Major Pricing Strategies (14 of 15)
Table 10.1 Break-Even Volume and Profits at Different
Prices

Price Unit Demand Expected Unit Total Revenue Total Profit

Needed Demand (1) × (3) Costs* (4) - (5)
to Break Even at Given Price
$14 75,000 71,000 $994,000 $1,010,000 –$16,000
16 50,000 67,000 1,072,000 970,000 102,000
18 37,500 60,000 1,080,000 900,000 180,000
20 30,000 42,000 840,000 720,000 120,000
22 25,000 23,000 506,000 530,000 –24,000

*Assumes fixed costs of $300,000 and constant unit variable costs of $10.
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Major Pricing Strategies (15 of 15)
3. Competition-Based Pricing
Competition-based pricing is setting prices based on
competitors’ strategies, costs, prices, and market offerings.

In assessing competitors’ pricing strategies, the company should

1.How does the company’s market offering compare with compe
2.How strong are current competitors and what are their current

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 Major Pricing Strategies
3. Competition-Based Pricing
Importantly, the goal is not to match or beat competitors’
prices. Rather, the goal is to set prices according to relative
value. If a company creates greater value for customers,
higher prices are justified.
.
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

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Major Pricing Strategies
3. Competition-Based Pricing

• What principle should guide decisions about prices to

charge relative to those of competitors?
• The answer is simple in concept but often difficult in
practice:
 No matter what price you charge—high, low, or in between
—be certain to give customers superior value for that price.

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Learning Objective 3
Identify and define the other important external and internal
factors affecting a firm’s pricing decisions.

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Other Considerations Affecting Price
Decisions
Internal:
•
The company’s overall marketing strategy, objectives, and marketing
mix,
•
Organizational considerations.

External:
•
The nature of the market and demand and
•
Environmental factors such as the economy, reseller needs, and
government actions

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Other Considerations Affecting Price
Decisions
Overall Marketing Strategy, Objectives, and Mix
Pricing help companies achieve objectives:
•
Attract new customers or satisfying existing ones
•
lower prices to rise entry barriers and face competition
•
Set price like competition to stabilize the market
•
supporting resellers and gaining their support
•
 Price decisions must be coordinated with product design, distribution,
and promotion decisions to form a consistent and effective marketing
program.

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Other Considerations Affecting Price
Decisions
Overall Marketing Strategy, Objectives, and Mix
Companies often position their products on price and then
tailor other marketing mix decisions to the prices they want
to charge.
Here, price is a crucial product-positioning factor that defines
the product’s market, competition, and design.
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.

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Other Considerations Affecting Price
Decisions
Organizational Considerations
• Who should set prices?
• Who can influence prices?

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Other Considerations Affecting Price
Decisions
The Market and Demand
Before setting prices, the marketer must understand the
relationship between price and demand for its products.

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Other Considerations Affecting Price
Decisions
The Market and Demand
Pricing In Different Types of Markets
• Pure competition: No single buyer or seller has much
effect on the going market price.
• Monopolistic competition: prices vary a lot because of
product differentiation.
• Oligopolistic competition: Each seller is alert and
responsive to competitors’ pricing strategies and marketing
moves.
• Pure monopoly: Pricing is handled differently from
government to private regulated/ unregulated monopoly.
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Other Considerations Affecting Price
Decisions
The Market and Demand
Analyzing 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

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Other Considerations Affecting Price
Decisions
The Market and 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.

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Other Considerations Affecting Price
Decisions
The Economy
Economic factors such as a boom or recession, inflation, and
interest rates affect pricing decisions because they affect:
• consumer spending,
• consumer perceptions of the product’s price and value,
• the company’s costs of producing and selling a product.

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Other Considerations Affecting Price
Decisions
Other External Factors

• Reseller’s response to price

• Government
• Social concerns

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