CHAPTER 9: Pricing understanding and capturing customer value

Cost based pricing: setting prices based on the costs of producing, distributing, and selling the product plus a fair rate of return for the company’s effort and risk.

Customer value based pricing: Uses buyers’ perceptions of value as the key to pricing.

• Good value pricing: offering the right combination of quality and good service at a fair price.

• Value-added pricing: Rather than cutting prices to match competitors, they add quality, services, and value-added features to differentiate their offers and thus support their higher prices.

Types of company’s costs:

Fixed cost: costs that do not vary with production or sales level (bills for rent, heat, interest, and executive salaries regardless of the company’s level of output)

Variable costs: Vary directly with the level of production. 

• Although these costs tend to be the same for each unit produced, they are called variable costs because the total varies with the number of units produced. 

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

Cost plus pricing: Adding a standard markup to the cost of the product. 

Break-even pricing: The firm tries to determine the price at which it will break even or make the target return it is seeking. 

Competition-based pricing: Setting prices based on competitors’ strategies, costs, prices, and market offerings.

Many firms support such price-positioning strategies with a technique called Target costing:

setting a target price based on market conditions and customer expectations, then working backward to determine the allowable cost of production.

Economists recognize four types of markets:

Monopolistic competition: Market with many sellers offering differentiated products, competing through branding and advertising rather than price alone.

Oligopolistic competition: Market with few large sellers, where each closely monitors and responds to competitors’ pricing and marketing strategies. Price competition is intense, with firms using discounts and promotions to attract customers.

Pure monopoly: Market dominated by a single seller, which can be a government, regulated, or unregulated monopoly, each with different pricing strategies.

Pure competition: Market with many buyers and sellers trading a uniform commodity, where no single participant influences the price, and marketing plays little to no role.

Demand curve: Shows the number of units the market will buy in a given time period at different prices that might be charged.

Price elasticity: How responsive demand will be to a change in price. If demand hardly changes with a small change in price, we say demand is inelastic. If demand changes greatly, we say the demand is elastic.

Market-skimming pricing: Strategy where companies set high initial prices to maximize revenue from different market segments, then gradually lower prices over time

Market penetration pricing: Companies set a low initial price to penetrate the market quickly and deeply—to attract a large number of buyers quickly and win a large market share. 

• win customers initially and then turn them into loyal long-term customers.

PRODUCT MIX PRICING:
Product line pricing: Setting different price steps between products in a line, considering both cost differences and customer perceptions of the value of various features.

Optional-product pricing: Pricing optional or accessory products alongside the main product. Companies must decide which features to include in the base price and which to offer as additional options, based on customer preferences and cost considerations.

Captive-product pricing: Pricing the main product low while setting high markups on necessary supplementary products. Companies rely on profits from these accessories to make up for low or no profit on the main product.

By-product pricing: Finding a market for by-products to offset disposal costs and reduce the price of the main product. 

Product bundle pricing: Offering several products together at a reduced price. 

• Encourages sales of items that consumers may not buy individually

PRICE ADJUSTMENTS:

Discounts and allowances: Price reductions offered to customers for specific behaviors, such as early payment, large purchases, or off-season buying. 

Segmented pricing: Selling a product or service at different prices to different customer groups, even if the cost difference is not justified. 

• Types of segmented pricing include:

1. Customer-segment pricing: Different prices are charged to different customer groups based on characteristics (Electronic brands offer discounts to military members, and Walgreens offers senior discounts.) 

2. Product form pricing: Different versions of a product are priced differently, not based on cost differences but on customer perception of value. (Economy and business-class seats on a flight are priced differently, despite the lower cost difference for airlines.)

3. Location-based pricing: Prices are varied based on geographic location, even if the cost of offering the product is the same. (State universities charging higher tuition for out-of-state students and theaters varying seat prices based on location preferences.)

4. Time-based pricing: Prices are adjusted depending on the time of year, month, day, or hour. (Happy hour discounts at restaurants or seasonal discounts at resorts.)

Psychological pricing: Uses price to influence consumer perception, with higher prices often signaling better quality. 

• Reference pricing: When consumers compare the price of a product to a price they have in mind, often influenced by past prices or alternatives. Sellers can use this by positioning products next to higher-priced options or offering premium models to make their less expensive models appear more affordable.

Promotional pricing: Temporarily lowering prices to attract buyers and create urgency. (Discounts, limited-time offers, rebates) Overuse can erode brand value and lead to "deal-prone" customers who only buy during sales events, ultimately harming profit margins.

Geographical pricing: When a company needs to decide how to price products for customers in different locations

Five geographical pricing strategies:

1. Uniform Pricing: Charging the same price for the product to all customers, regardless of location. 

2. Zone Pricing: Company divides its market into different zones based on geographical regions. Customers in closer zones pay a lower price, while those in farther zones pay more to cover the additional shipping and handling costs.

3. Freight-Absorption Pricing: Company absorbs some or all of the freight charges to keep the price the same for customers regardless of their location. This can help attract customers from distant regions, but it may reduce profit margins.

4. Basing-Point Pricing: The company sets a base price in one location (usually near its main warehouse or production facility) and then adds shipping charges from that base point to other regions, accounting for the distance or shipping cost involved.

5. Dynamic Pricing: Prices vary based on the exact distance from the company's distribution center or retail location. The farther the customer is from the point of origin, the higher the price due to increased shipping and handling costs.

Dynamic and personalized pricing: Companies adjust prices continuously based on changing market conditions, demand, costs, and competitor prices. 

• Optimize sales based on individual customer data, (buying behavior and location)

International pricing: Deciding whether to set a uniform price globally or adjust it based on local conditions. (Apple uses premium pricing in developed markets but must lower prices in emerging markets, like China, to compete with more affordable local brands such as Huawei and Xiaomi)

Initiating Price Cuts: Firm may aggressively cut prices to boost sales due to excess capacity or falling demand in the face of strong price competition or a weakened economy.

Initiating price increases: Significantly improve profits, especially if sales volume remains unchanged (caused by inflation or over demand)

When responding to a competitor’s price change, a company has four options:

1. Match the competitor’s price: The company could lower its price to retain market share, but this would reduce short-term profits. They might also cut quality or services to maintain margins, though this could harm long-term market share.

2. Maintain the price but raise perceived value: Rather than lowering the price, the company could improve communication and highlight the value of its product. This could be a more cost-effective way to compete without sacrificing margins.

3. Improve quality and raise price: The company could increase quality, thereby justifying a higher price and preserving margins while offering more value to customers.

4. Launch a low-price “fighter brand”: To target price-sensitive customers, the company might introduce a lower-priced brand or product. However, this could harm the main brand’s image and might cannibalize sales from its higher-margin products.