Chapter 10 – Pricing, understanding and capturing customer ...



Chapter 10 – Pricing, understanding and capturing customer value WHAT IS PRICE Price is the amount of money charged for a product or a serviceSum of all the values that customers give up to gain the benefits of having or using a product or service Major factor affecting buyer choice Non-price factors have gained increasing importance Remains one of the most important elements that determines a firm’s market share and profitability Only element in the marketing mix that produces revenues Others represent costs Most flexible marketing mix elements Can be changed quickly Number one problem facing marketing executives Direct impact on a firm’s bottom line Key role in creating customer value and building customer relationships MAJOR PRICING STRATEGIES Customer Value-based price Uses buyers’ perceptions of value, not the seller’s cost as the key to pricing Marketer cannot design a product and marketing program and then set the pricePrice is considered along with all other marketing mix variables before the marketing program is set First assesses customer needs and value perceptions Then sets a target price based on customer perceptions of value Pricing begins with analysing consumer needs and value perceptions Cost-based pricing Product driven Company designs what it considers to be a good product, adds up the costs of making it and sets a price that covers those costs + a target profit Marketing must then convince buyers that the product’s value at that price justifies its purchaseIf price is too high company must settle for lower mark-ups or lower sales 1663702286000Good-value pricing Combination of quality and good service at a fair price Involved introducing less-expensive versions of established brand name productsInvolves redesigning existing brands to offer more quality for a given price or the same quality for less Some companies also succeed in offering less value but at rock-bottom prices (ie Ryanair) Everyday low pricing (EDLP) – involves charging a constant, everyday low price with a 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. Value-Added pricing Doesn’t mean simply charging what customers want to pay or setting low prices to meet competition Rather than cutting prices to match competitors, they attach value-added features and services to differentiate their offers and thus support higher pricesTypes of costs Two forms: Fixed (overhead) and variable FixedDo not vary with production or sales level Variable Varies directly with the level of production Total varies with the number of units produced Total costs:Sum of the fixed and variable costs for any given level of production Costs at different levels of productionTo price wisely, management needs to know how its costs vary with different levels of production Figures below show the typical short-run average cost curve (SRAC)If production moves up per day, the average cost per unit decreases Fixed costs are spread over more units with each one bearing a smaller share of the fixed cost If they increase their production per day too much, the average cost per unit will increase because their plant will be too small Costs as a function of production experienceAs a company gains experience in producing a product, it learns how to do it better Workers learn shortcuts and become more familiar with their equipment Work becomes better organized They find better equipment and production processes Becomes more efficient and gains economies of scale Result: average cost tends to decrease with accumulated production experience The drop in the average cost with accumulated production experience is called the experience curve or the learning curve If a downward-sloping curve exists, this is highly significant for the company Company’s unit production cost fall will fall faster if the company makes and sells more during a given time period Cost-Plus Pricing The simplest pricing method is cost-plus pricing Adding a standard mark-up to the cost of the product Unit cost = variable cost + fixed costsunit sales Mark up price = unit cost1-desired return on sales Break-even analysis and target profit pricing Cost-oriented pricing approach is break-even pricing Firm tries to determine the price at which it will break even or make the target return it is seeking Target return pricing uses the concept of a break-even chart, which shows the total cost and total revenue expected at different sales volume levels Break even volume = fixed costprice-variable costCompetition-based pricing Setting prices based on competitors’ strategies, costs, prices and market offerings Consumers will base their judgements of a product’s value on the prices that competitors charge for similar products Consumers perceive that the company’s product or service provides greater value the company can charge a higher priceConsumers perceived less value relative to competing products, the company must either charge a lower price or change customer perceptions to justify a higher priceIf the company faces a host of smaller competitors, charging high prices relative to the value they deliver, it might charge lower prices to drive weaker competitors from the market.If the market is dominated by larger, low price competitors, the company may decide to target unserved market niches with value-added products at higher prices OTHER INTERNAL AND EXTERNAL CONSIDERATIONS AFFECTING PRICE DECISIONS Overall marketing strategy, objectives and mix Before setting a price, the company must decide on its overall marketing strategy for the product or service Important role in helping to accomplish company objectives at many levels. Firm can set prices to attract new customers or profitably retain exisiting ones Set prices low to prevent competitions from entering the market or set prices at competitors’ levels to stabilize the market It can price to keep the loyalty and support of resellers or avoid government interventionPrices can be reduced temporarily to create excitement for a brand One product may be priced to help the sales of other products in the company’s line Price decisions must be coordinated with product design, distribution and promotion decisions to form a consistent and effective integrated marketing programCompanies often position their products on price and then tailor other marketing mix decisions to the prices they want to charge Target costing reverses the usual process of first designing a new product, determining its cost and then setting a price. starts with an ideal selling price based on customer value considerations and then targets costs that will ensure that the price is met Organizational considerations Managers must decide who within the organization should set prices Companies handle pricing in a variety of ways:Small companies: prices are set by top management Large companies: prices are set by divisional or product line managers Industrial markets: salespeople may be allowed to negotiate with customers within certain price ranges Industries like airlines etc.: they have their own pricing department to set the best prices or help others in setting them THE MARKET AND DEMAND Pricing in different types of markets Pure competitionThe market consists of many buyers and sellers trading in a uniform commodity, such as wheat, copper or financial securities No single buyer or seller has much effect on the going market price Purely competitive market: marketing research, product development, pricing, advertising, and sales promotion play little or no role sellers in these markets do not spend much time on marketing strategy Monopolistic competitionThe 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 buyersSellers try to develop differentiated offers for different customer segments and, in addition to price, freely use branding, advertising and personal selling to set their offers apart Oligopolistic competitionThe market consists of a few sellers who are highly sensitive to each other’s pricing and marketing strategies. Because there are few sellers, each seller is alert and responsive to competitors’ pricing strategies and moves Pure monopoly Market consists of one sellerThe seller may be government monopoly, a private regulated monopoly or a private non-regulated monopoly Pricing is handled differently in each case Analysing the price-demand relationship Each price the company might charge will lead to a different level of demand Relationship between the price charged and the resulting demand level is shown in the demand curves (below) It shows that the number of units the market will buy in a given time period at different prices that might be charged In the normal case, demand and price are inversely related the higher the price, the lower the demand Companies try to measure their demand curves by estimating demand at different prices type of market makes a difference Monopoly: the demand curve shows the total market demand resulting from different prices With competition: its demand at different prices will depend on whether competitors’ prices stay constant or change with the company’s own prices. Elasticity of demand % change in quantity demanded % change in priceThe economy Strong impact on the firm’s pricing strategies 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 valuethe company’s costs of producing and selling a product lowering prices make products more affordable and help spurt short-term sales undesirable long-term consequences Lower prices = lower marginsDeep discounts cheapen a brand in consumers’ eyes If prices are cut it is different to raise them again when the economy recovers Rather than cutting prices companies are shifting their marketing focus to more affordable items in their product mixesOthers are redefining the value in their value propositionsOther external factors Impact prices will have on other parties in its environment how will resellers react to various prices? Company should set prices that give resellers a fair profit, encourage their support and help them to sell the product effectively Government Social concerns ................
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