welcome to the principles of marketing global edition chapter 10 pricing understanding and
capturing customer value let's get started jcpenney faces a serious pricing challenge one
that many retailers face today it can't live with sale prices but it can't live without them either
desperate for a turnaround jcpenney set out to radically reinvent itself but it's a risky new
fair and square pricing strategy that failed dismally leaving the retailer in a desperate
struggle to find the right pricing formula jc penney's very survival hangs in the balance
objective one answer the question what is the price and discuss the importance of
pricing in today's fast changing environment objective 2 identify the three major pricing
strategies and discuss the importance of understanding customer value perceptions
company costs and competitor strategies when setting prices objective three identify and
define the other important external and internal factors affecting a firm's pricing decisions
learning objective one answer the question what is the price and discuss the importance
of pricing in today's fast changing environment price is a major factor affecting buyer choice
in recent decades however non-price factors have gained increasing importance in the narrowest
sense price is the amount of money charged for a product or service it is the sum of
all the values that customers give up to gain the benefits of having or using a product or
service price is the only element in the marketing mix that produces revenue learning objective 1
summary price can be defined narrowly as the amount of money charged for a product or service
or it can be defined more broadly as to some of the values that consumers exchange
for the benefits of using a product or service the pricing challenge is to find the price
that will let the company make a fair profit by getting paid for the customer value it creates
learning objective two identify the three major pricing strategies and discuss the importance
of understanding customer value perceptions company costs and competitor strategies when
setting prices figure 10.1 suggests three major pricing strategies customer value based pricing
cost based pricing and competition based pricing the price the company charges will fall somewhere
between one that is too low to produce a profit and one that is too high to produce any demand
customer perceptions of the product's value sets the ceiling for prices customer value
based pricing in the end the customer will decide whether a product's price is right
pricing decisions like other marketing mix decisions must start with customer value
effective customer oriented pricing involves understanding how much value customers place
on the benefits they receive from the product and setting a price that captures that value
cost based pricing is often product driven price is often set to match the perceived value
figure 10.2 this shows value based pricing versus cost based pricing alternatives
the great recession of 2008 caused a shift in consumer attitudes towards price and quality
in response many companies have changed their pricing approaches
to bring them in line with changing economic conditions and consumer price perceptions
more and more marketers have adopted the strategy of good value pricing offering
the right combination of quality and good service at a fair price good value pricing
aldi keeps costs low so that it can offer customers impressively high quality and
impossibly low prices every day department stores such as sears and macy's practice high low pricing
by having frequent sale days early bird savings and bonus earnings for store credit card holders
value base pricing doesn't mean simply charging what customers want to pay or setting low prices
to meet competition instead many companies adopt value added pricing strategies
rather than cutting prices for example some movie theater chains are adding amenities and
charging more rather than cutting services to maintain lower admission prices customer value
perceptions set the price ceiling costs set the floor for the price that the company can charge
some companies such as walmart and southwest airlines work to become the low-cost producers
in their industries companies with lower costs can set lower prices that result in smaller margins
but greater sales and profits others like apple bmw and steinway intentionally pay higher costs
so they can add value and claim higher prices and margins
fixed costs also known as overhead are costs that do not vary with production or sales level they
include rent heat interest and executive salaries variable cost depends on the level of production
each pc produced by hp involves a cost of computer chips wires plastic packaging and other inputs
although these costs tend to be the same for each unit produced they are called variable
costs because the total varies directly with the number of units produced management wants to
charge a price that will at least cover the total production costs at a given level of production
the company must watch costs carefully if it costs a company more than its competitors to produce and
sell a similar product the company will need to charge a higher price or make less profit
suppose texas instruments build a plan to produce 1 000 calculators per day figure 10.3 a shows the
typical short run average cost curve or srac it shows that the cost per calculator is high
if ti's factory produces only a few per day but as production moves up to 1 000 calculators per
day for example average cost falls this is because fixed costs are spread over more units with each
one bearing a similar share or smaller share of the fixed cost this is known as cost based pricing
if ti believed it could sell 2 000 calculators a day it should consider building a larger plant
the plant would use more efficient machinery and work arrangements in fact a 3 000 capacity plant
would even be more efficient according to figure 10.3 b but a 4 000 daily production plant would be
less efficient because of increasing diseconomies of scale too many workers to manage paperwork
slowing things down and so forth suppose ti runs a plant that produces 3 000 calculators a day
as ti gains experience in producing calculators it learns how to do it better this drop in the
average cost with accumulated production experience is called the experience curve
or we also refer to it as the learning curve if a downward sloping experience curve exists
this is highly significant for the company not only will the company's unit production cost
fall but it will fall faster if the company makes and sells more during a given time period
the simplest pricing method is cost plus pricing or markup pricing price is calculated by adding
a standard markup to the manufacturer's costs to illustrate markup pricing suppose a manufacturer
of toasters has a cost of 16 bucks a unit if the manufacturer wants to earn a 20 markup on sales
the price is calculated by the following markup price equals unit cost or one desired return on
sales equals sixteen dollars one minus point two equaling twenty dollars the manufacturer would
charge dealers twenty dollars per unit and make a profit of four dollars per unit the dealers
in turn will mark up the toaster if dealers want to earn fifty percent on the sales price
they will mark up the toaster to forty dollars twenty dollars plus fifty percent of forty dollars
this number is equivalent to a markup on the cost of one hundred percent or twenty dollars slash
twenty dollars does using standard markups to set prices make sense generally no any
pricing method that ignores demand and competitor prices is not likely to lead to the best price
another cost-oriented pricing approach is break-even pricing or a variation called
target return pricing the 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
from the toaster example on the previous two slides the manufacturer should consider
different prices and estimate break-even volumes probable demand and profits this is done in table
10.1 the table shows that as price increases the break even volume drops or take a look at
column two but as price increases the demand for toasters also decreases check out column three
pricing against larger lower price competitors pharmaca targets small niches with value
added services at higher prices it's the relationships with pharmacos highly
qualified professional staff not low prices that bring customers back competition based pricing
involves setting prices based on competitors strategies costs prices and market offerings
consumers will base their judgments of a product's value on the prices the competitors charge
for similar products learning objective 2 summary companies can choose from three major pricing
strategies customer value based pricing cost based pricing and competition based pricing customer
value based pricing uses buyers perceptions of value as the basis for setting price good
pricing begins with a complete understanding of the value that a product or services creates for
customers and setting a price that captures that value customer perceptions of the product's value
set the ceiling for prices if customers perceive that a product's price is greater than its value
they simply will not buy the product learning objective three identify and define the other
important external and internal factors affecting a firm's pricing decisions
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 products market competition and design target costing reverses the usual process of first
designing a new product determining its cost and then asking can we sell it for that top management
sets the pricing objectives and policies and it often approves the prices proposed by lower level
management or sales people in industries in which pricing is a key factor like airlines aerospace
steel railroads and oil companies companies often have pricing departments to set the best prices
or help others set them these departments report to the marketing department or
top management others who have an influence on pricing include sales managers production managers
finance managers and accountants as noted earlier good pricing starts with an understanding of how
customers perceptions of value affect the prices they're willing to pay both consumer and
industrial buyers balance the price of a product or service against the benefits of owning it
under pure competition the market consists of many buyers and sellers trading in a uniform commodity
no single buyer or seller has much effect on the going market
price the sellers in these markets do not spend much time on marketing strategy
under monopolistic competition the market consists of many buyers and sellers who trade over a range
of prices because sellers can differentiate their offers to buyers under oligopolistic competition
the market consists of only a few large sellers for example only four companies verizon a t sprint
and t-mobile control more than 90 percent of the us wireless service provider market
in a pure monopoly the market is dominated by one seller the seller may be a government
monopoly a private regulated monopoly or a private unregulated monopoly
each price the company might charge will lead to a different level of demand
the relationship between the price charged and the resulting demand level is shown in
the demand curve in figure 10.6 the demand curve shows 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 that is the higher the price the lower the demand
consider the two demand curves in figure 10.6 in figure 10.6a a price increase from p1 to p2
leads to a relatively small drop in demand from q1 to q2 in figure 10.6 b however the same price
increase leads to a large drop in demand from q1 to q2 if demand hardly changes with a small change
in price we say the demand is inelastic if demand changes greatly we say the demand is elastic
marketers also need to know price elasticity how response demand will be to a change
if demand is elastic versus inelastic sellers will consider lowering their prices lower price
will produce more total revenue at the same time most firms want to avoid pricing that
turns their products into commodities in some consumers eyes economic conditions could have a
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
price and value consumers have tightened their belts to become more value conscious
the most obvious response to the new economic realities is to cut prices and offer discounts
many companies have done just that to help spur short-term sales rather than cutting prices many
companies have instead shifted their marketing focus or added more affordable lines to their
product mixes other companies are holding their price positions but redefining the
value in their value propositions other external factors the company must consider several other
factors in its external environment when setting prices the company should set prices to give
resellers a fair profit encourage their support and help them to sell the product effectively
the government is another important external influence on pricing decisions
social concerns may need to be taken into account in setting prices accompanies short-term sales
market share and profit goals may need to be tempered by broader societal considerations
other internal factors that influence pricing decisions include the company's overall
marketing strategy objectives and marketing mix as well as organizational considerations
price is only one element of the company's broader marketing strategy if the company has selected its
target market and positioning carefully then its marketing mix strategy including price
will be fairly straightforward other external pricing considerations include
the nature of the market and demand and environmental factors such as the economy
reseller needs and government actions ultimately the customer decides whether the company has
set the right price the customer weighs the price against the perceived values of using the product
thank you for reviewing this video please check out the other videos in this series thanks again