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A Global Perspective 10 Pricing Products: Understanding and Capturing Customer Value Philip Kotler Gary A Global Perspective 10 Pricing Products: Understanding and Capturing Customer Value Philip Kotler Gary Armstrong Swee Hoon Ang Siew Meng Leong Chin Tiong Tan Oliver Yau Hon-Ming 1

Learning Objectives After studying this chapter, you should be able to: 1. Answer the Learning Objectives After studying this chapter, you should be able to: 1. Answer the question “What is price? ” and discuss the importance of pricing in today’s fast-changing environment 2. Discuss the importance of understanding customer value perceptions when setting prices 3. Discuss the importance of company and product costs in setting prices 4. Identify and define the other important internal and external factors affecting a firm’s pricing decisions 2

Chapter Outline 1. What Is Price? 2. Factors to Consider When Setting Prices 3 Chapter Outline 1. What Is Price? 2. Factors to Consider When Setting Prices 3

What is Price? • Price is the amount of money charged for a product What is Price? • Price is the amount of money charged for a product or service. • The sum of all the values that consumers give up in order to gain the benefits of having or using a product or service. • Price is the only element in the marketing mix that produces revenue; all other elements represent costs. 4

Factors to Consider When Setting Prices A company’s pricing decisions are affected by both Factors to Consider When Setting Prices A company’s pricing decisions are affected by both internal company factors and external environment factors • Customer value – Value-oriented pricing strategies: valuebased, good-value, and value-added pricing • Product Costs – Cost-based pricing strategies: cost-plus pricing, break-even pricing and target profit pricing • Internal – Company marketing objectives; marketing mix strategy and organizational factors • External – The nature of market and demand, competition, the economy, reseller needs, and government actions 5

A model for price 1 Demand Factors Elasticity of demand • Cross elasticities 2 A model for price 1 Demand Factors Elasticity of demand • Cross elasticities 2 Cost Factors • Costs now • Anticipated costs • Economic objectives 3 Competitive Factors • Structure of competition • Barriers to entry • Intent of rivals • Customer value perceptions 4 Strategy Issues • Target market selection • Product positioning • Price objectives • Marketing program 5 Trade Factors • Power in the channel • Traditions and roles • Margins 6 Legal Factors • Vertical restrictions • Price discrimination Evaluation and Formation of Prices & policy 6

Factors to Consider When Setting Prices Customer Perception of Value • Effective customer-oriented pricing Factors to Consider When Setting Prices Customer Perception of Value • 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. • Value-based pricing uses the buyers’ perception of value, not the seller’s 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. 7

Factors to Consider When Setting Prices Customer Perception of Value • Good-value pricing offers Factors to Consider When Setting Prices Customer Perception 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. • 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. 8

Factors to Consider When Setting Prices Customer Perception of Value • Pricing power is Factors to Consider When Setting Prices Customer Perception of Value • Pricing power is the ability to escape price competition and to justify higher prices and margins without losing market share (especially important in B 2 B). • Value-added pricing attaches value-added features and services to differentiate offers, support higher prices, and build pricing power. 9

Factors to Consider When Setting Prices Company and Product Costs • Cost-based pricing involves 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. • Types of costs • Fixed costs • Variable costs • Total costs 10

Factors to Consider When Setting Prices Company and Product Costs • Fixed costs are 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; Utilities, Interest and Executive salaries • Variable costs are the costs that vary with the level of production – Packaging; Raw materials • 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. – Experience or learning curve is when the average cost falls as production increases because fixed costs are spread over more units. 11

Factors to Consider When Setting Prices Company and Product Costs - Cost-based pricing • Factors to Consider When Setting Prices Company and Product Costs - Cost-based pricing • Cost-plus pricing adds a standard markup to the cost of the product. • Break-even pricing is the price at which total costs are equal to total revenue and there is no profit. • Target profit pricing (a variation of break-even) is the price at which the firm will break even or make the profit it is seeking. 12

Factors to Consider When Setting Prices Other Internal and External Considerations Affecting Price Decisions 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. 13

Price pressures Competition creates down pressure POTENTIAL PERCEIVED VALUE Marketing communication can raise perceived Price pressures Competition creates down pressure POTENTIAL PERCEIVED VALUE Marketing communication can raise perceived value CONSUMER’S WILLINGNESS TO PAY Feasible price Consumer’s incentive to buy range PRICE Producer’s reward (contribution to fixed cost) VARIABLE COST 14 14

Factors to Consider When Setting Prices Other Internal Considerations Affecting • Marketing strategy, objectives, Factors to Consider When Setting Prices Other Internal Considerations Affecting • Marketing strategy, objectives, and marketing mix General pricing objectives include: – – – – Survival Profit maximization Market share leadership Customer retention and relationship building Attracting new customers Opposing competitive threats Increasing customer excitement • Organizational considerations – – Who should set the price Who can influence prices 15

Factors to Consider When Setting Prices Overall Marketing Strategy, Objectives and Mix • Target Factors to Consider When Setting Prices Overall Marketing Strategy, Objectives and Mix • 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. • Non-price strategies differentiate the marketing offer to make it worth a higher price. 16

Factors to Consider When Setting Prices Other External Considerations • The market and demand Factors to Consider When Setting Prices Other External Considerations • The market and demand Types of markets: Seller’s pricing freedom varies – Pure competition – Monopolistic competition – Oligopolistic competition – Pure monopoly • Analyzing the price-demand relationship • Competitors’ strategies and prices • Other environmental factors: economic conditions, government actions, social concerns… 17

Factors to Consider When Setting Prices Types of Markets • Pure competition is a Factors to Consider When Setting Prices Types of Markets • Pure competition is a market with many buyers and sellers trading uniform commodities where no single buyer or seller has much effect on market price. • Monopolistic competition is a market with many buyers and sellers who trade over a range of prices rather than a single market price with differentiated offers. • Oligopolistic competition is a market with few sellers because it is difficult for sellers to enter who are highly sensitive to each other’s pricing and marketing strategies. • Pure monopoly is a market with only one seller. In a regulated monopoly, the government permits a price that will yield a fair return. In a non-regulated monopoly, companies are free to set a market price. 18

Factors to Consider When Setting Prices Analyzing the Price-Demand Relationship • Before setting prices, Factors to Consider When Setting Prices Analyzing the Price-Demand Relationship • Before setting prices, the marketer must understand the relationship between price and demand for its products. • The demand curve shows the number of units the market will buy in a given period at different prices. • Normally, demand 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. 19

Factors to Consider When Setting Prices Price Elasticity of Demand • Price elasticity of Factors to Consider When Setting Prices Price Elasticity of Demand • 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. 20

Factors to Consider When Setting Prices Price Elasticity of Demand • Factors affecting price Factors to Consider When Setting Prices Price Elasticity of Demand • Factors affecting price elasticity of demand Buyers are less price sensitive when • Unique product • High in quality, prestige • Substitute products are hard to find • Total expenditure is low relative to income • Sellers consider lowering prices if the demand is elastic 21

Factors to Consider When Setting Prices Competitors’ Strategies and Prices • Comparison of offering Factors to Consider When Setting Prices Competitors’ Strategies and Prices • Comparison of offering in terms of customer value • Strength of competitors • Competition pricing strategies • Customer price sensitivity 22