MKTG1025 Lecture Notes - Lecture 9: Pricing Strategies, Customer Retention, Marketing Mix
CHAPTER 9 – PRICING : CAPTURING CUSTOMER VALUE
Identify the three main pricing strategies, and discuss the importance of understanding customer value
perceptions, company costs and computer strategies when setting prices.
A price is the sum of all the values that customers give up in order to gain the benefits of having
or using a product or service. The three main pricing strategies include customer value-based
pricing, cost-based pricing and competition-based pricing. Good pricing begins with a complete
understanding of the value that a product or service creates for customers and setting a price
that captures that value. The price the company charges will fall somewhere between one that is
too high to produce any demand and one that is too low to produce a profit. Customer
perceptions of the products value set the ceiling for prices. If customers perceive that the price is
greater than the products value, they will not buy the product. At the other extreme, company
and product costs set the floor for prices. If the company prices the product below its costs, its
profits will suffer. Between these two extremes, consumers will base their judgments of a
products value on the prices that competitors charge for similar products. Thus, in setting prices,
companies need to consider all three factors – customers perceived value, costs and
competitors pricing strategies. Costs are an important consideration in setting prices. However,
cost-based pricing is often product-driven. The company designs what it considers to be a good
product and sets a price that covers costs plus a target profit. If the price turns out to be too high,
the company must settle for lower markups or lower sales, both resulting in disappointing profits.
Value-based pricing reverses this process. The company assesses customer needs and value
perceptions and then sets a target price to match targeted value. The targeted value and price
then drive decisions about product design and what costs can be incurred. As a result, price is
set to match customers perceived value.
Identify and define the other important external and internal factors impacting a firms pricing decisions.
Other internal factors that influence pricing decisions include the companys overall marketing
strategy, objectives and marketing mix, as well as organisational considerations. Price is only
one element of the companys 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. Some companies position their products on price and then tailor other marketing
mix decisions to the prices they want to charge. Other companies de-emphasise price and use
other marketing mix tools to create non-price positions. Common pricing objectives might include
customer retention and building profitable customer relationships, preventing competition,
supporting resellers and gaining their support, or avoiding government intervention. Price
decisions must be coordinated with product design, distribution and promotion decisions to form
a consistent and effective marketing program. Finally, in order to coordinate pricing goals and
decisions, management must decide who within the organisation is responsible for setting price.
Other external pricing considerations include the nature of the market and demand, and
environmental factors such as the economy, reseller needs and government actions. The sellers
pricing freedom varies with different types of markets. 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 – if the price exceeds the sum of the values, consumers will not buy. So, the
company must understand concepts such as demand curves (the price– demand relationship)
and price elasticity (consumer sensitivity to prices). Economic conditions can also have a major
impact on pricing decisions. The recent recession caused consumers to rethink the price– value
equation. Marketers have responded by increasing their emphasis on value-for-the-money
pricing strategies. Even in tough economic times, however, consumers do not buy based on
prices alone. Thus, no matter what price they charge – low or high – companies need to offer
superior value for the money.
Describe the main strategies for pricing new products.
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Document Summary
Chapter 9 pricing : capturing customer value. Identify the three main pricing strategies, and discuss the importance of understanding customer value perceptions, company costs and computer strategies when setting prices. A price is the sum of all the values that customers give up in order to gain the benefits of having or using a product or service. The three main pricing strategies include customer value-based pricing, cost-based pricing and competition-based pricing. Good pricing begins with a complete understanding of the value that a product or service creates for customers and setting a price that captures that value. The price the company charges will fall somewhere between one that is too high to produce any demand and one that is too low to produce a profit. Customer perceptions of the product(cid:1685)s value set the ceiling for prices. If customers perceive that the price is greater than the product(cid:1685)s value, they will not buy the product.
