Poma PPT Slides-Chapter 10-171870

Principles of Marketing: An Asian
Perspective
Instructor Supplements
Created by Geoffrey da Silva
Pricing Products: Understanding and Capturing

Customer Value
2012 Principles of Marketing: An Asian Perspective
10
Chapter 10 Outline
10.1
10.2
What is a Price?
Other Internal and External Considerations Affecting Price Decisions
Opening Case
Cebu Pacific Air
Cebu Pacific
understands its
customers needs
and adds more
customer value.
A cabin crew member of

Cebu Pacific performs
Lady Gagas Just Dance
as part of the in-flight
demonstration.
5
10.1
What is a Price?
10.1
10.1 What is a Price?
Pricing and value

In the narrowest sense, price is the amount of money charged for a
product or service.
More broadly, 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.
Pricing and value

Price is the only element in the marketing mix that produces revenue.
Price is one of the most flexible marketing mix elements.
Pricing and value
No matter what the state of the economy,

companies should sell value, not price.
Considerations in Setting Price
10 2012 Principles of Marketing: An Asian Perspective
Considerations in Setting Price

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.
Product
costs set the floor for prices. If the company prices the product
below its costs, company profits will suffer.
In
setting its price between these two extremes, the company must
consider a number of other internal and external factors, including its
overall marketing strategy and mix, the nature of the market and
demand, and competitors strategies and prices.
Reviewing the Key Concepts

Answer the question What is a price? and discuss the importance of
pricing in todays fast-changing environment .
Value-based pricing versus cost-based pricing
Cost-based pricing
Cost-based
pricing is product-driven.
The
company designs what it considers to be a good product, adds up

the costs of making the product, and sets a price that covers costs
plus a target profit.
Marketing
then convinces buyers that the products value at that price

justifies its purchase.
Cost-based pricing
If
the price turns out to be too high, the company must settle for
lower markups or lower sales, both resulting in disappointing profits.
Customer value-based pricing

Uses
buyers perceptions of value, not

sellers cost, as the key to pricing.
Price
is considered along with the other

marketing mix variables before the
marketing program is set
Good value is not low price
The waiting time for a Hermes Birkin bag ranges

from anywhere between one to two years, and
prices reach six-digit sums if the bag is made of
exotic animal skin. The exclusivity of the bag
makes it even more valuable to consumers who
are willing to fork out money to obtain one.
(www.hemes.com)
Value-based pricing
Value-based pricing
reverses this process. The
company first assesses
customer needs and value
perceptions, then sets its
target price based on
customer perceptions of
value.
Two types of value-based
pricing are good-value
pricing and value-added
pricing.
VALUE ADDED
GOOD VALUE
Good Value pricing

Good-Value Pricing is
offering just the right
combination of quality and
good service at a fair price.
EDLP
HIGH-LOW
EDLP and High-Low Pricing

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.
EDLP
NTUC FairPrice introduced a

basket of Everyday Low Price
(EDLP) essential items priced
equal to or lower than
competitors to ensure
affordability.
Value- Added Pricing

Value-Added Pricing is
the strategy of attaching
value-added features
and services to
differentiate their offers
and thus support higher
prices.
Value- Added Pricing
Rather than dropping prices for

its Stag umbrella brand to
match cheaper imports, Currim
successfully launched umbrella
with funky designs, cool colors,
and value-added features and
sold them at even higher prices.
Cost-based Pricing
Cost-based pricing
involved 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
Types of Cost
Fixed
costs (also known as overhead) are costs that do not vary with
production or sales level.
Variable
costs vary directly with the level of production. They are

called variable because their total varies with the number of units
produced.
Total
costs are the sum of the fixed and variable costs for any given
level of production.
Costs at Different Levels of Production

To
price wisely, management needs to know how its costs vary with
different levels of production.
Figure
10.3A shows the typical short-run average cost curve (SRAC).
Figure
10.3B shows the long-run average cost curve (LRAC).
Cost per unit at different levels of production per period
Cost per unit as a function of accumulated production - The

experience curve
Costs as a Function of Production Experience
single-minded focus on reducing costs and exploiting the experience

curve will not always work. Aggressive pricing might give the product a
cheap image.
Furthermore,
while the company is building volume under one technology,

a competitor may find a lower-cost technology that lets it start at prices
lower than those of the market leader, who still operates on the old
experience curve
Cost + Pricing
The simplest pricing method is costplus pricingadding a standard
markup to the cost of the product.
PRODUCT COST
PRICE
MARKUP
Illustration of mark-up pricing

Variable cost
$10
Fixed costs
$300,000
Expected unit sales 50,000

_________________________________
Then the manufacturers cost per toaster is given by:
Unit Cost = Variable Cost + Fixed Costs = $10 + $300,000 = $16
------------
-----------
Unit Sales
50,000
Now suppose the manufacturer wants to earn a 20 percent markup on sales. The manufacturers markup
price is given by:
Markup Price =
Unit Cost
---------------------
(1 Desired Return on Sales)

$16
----(1-0.2)
$20
Popularity of markup pricing:

Markup pricing remains popular for many reasons:
a)Sellers
are more certain about costs than about demand.

b)When all firms in the industry use this pricing method, prices tend to
be similar and price competition is thus minimized.
c)Many people feel that costplus pricing is fairer to both buyers and
sellers.
Break-even and target profit pricing
Break-Even Analysis and Target Profit Pricing

Another
costoriented pricing approach is break-even pricing, or a

variation called target profit pricing. The firm tries to determine the
price at which it will break even or make the target profit it is seeking.
Target
pricing uses the concept of a break-even chart that shows the

total cost and total revenue expected at different sales volume levels.
Figure 10.5 shows a break-even chart
Break-even chart for determining target profit price and breakeven volume
The total revenue and total cost curves cross at 30,000 units. This is the break-even volume. At $20,
the company must sell at least 30,000 units to break even; that is, for total revenue to cover total
cost. Break-even volume can be calculated using the following formula:
Break-Even Volume
= Unit Cost
-------------Price Variable Cost

$300,000
----------$20 $10
= 30,000
Break-even chart for determining target profit price and breakeven volume
The manufacturer should consider different prices and estimate breakeven volumes, probable demand, and profits for each. This is shown in
Table 10.1.
Competition-based pricing
involves setting prices
based on competitors
strategies, costs,
prices, and market
offerings
Consumers
will base their judgments of a products value on the

prices that competitors charge for similar products.
No
matter what price you charge relative to the competitionhigh,

low, or in-betweenbe certain to give customers superior value for
that price.
Competition-based pricing: key questions

How
does the companys market offering compare with competitors

offerings in terms of customer value?
How
strong are current competitors, and what are their current pricing
strategies?
How
does the competitive landscape influence customer price sensitivity?

Identify the three major pricing strategies and discuss the importance
of understanding customer-value perceptions, company costs and
competitor strategies when setting prices.
10.2
Other Internal and External Considerations Affecting
Price Decisions
10.2
10.2 Other Internal and External Considerations

Affecting Price Decisions
Other pricing considerations
Overall Marketing Strategy, Objectives, and Mix

Overall Marketing Strategy, Objectives, and Mix
Before setting price, the company must decide on its overall

marketing strategy for the product or service. Pricing strategy is
largely determined by decisions on market positioning.
Price is only one of the marketing mix tools that a company uses to
achieve its marketing objectives.
Price decisions must be coordinated with product design,
distribution, and promotion decisions to form a consistent and
effective integrated marketing program.
Companies often position their products on price and then tailor
other marketing mix decisions to the prices they want to charge.

Impact of Marketing Strategy on Pricing
Compared to the Lexus where a luxury-performance positioning required

a high price be charged, Toyota positioned Yaris as an affordable car that
you actually want to drive.

Positioning on high price
Porsche proudly advertises its curvaceous

Cayman as Starting ay $49,400.

Pricing Objectives

Target Costing
Target costing starts with an ideal selling price based on customervalue considerations, and then targets costs that will ensure that
the price is met.
Companies may de-emphasize price
and use other marketing mix tools
to create non-price positions.

Target Costing

Non-Price Positions
Some companies de-emphasize price and use other marketing mix

tools to create non-price positions.
Often, the best strategy is not to charge the lowest price, but to
differentiate the marketing offer to make it worth a higher price.
Some marketers even feature high prices as part of their products

allure (see Real Marketing 10.1).

Non-Price Positions

Other pricing considerations
ORGANIZATIONAL FACTORS

Organizational Considerations
In small companies, prices are often set by top management rather

than by the marketing or sales departments.
In large companies, pricing is typically handled by divisional or
product line managers.
In industrial markets, salespeople may be allowed to negotiate with
customers within certain price ranges.
In industries in which pricing is a key factor, companies often have
pricing departments to set the best prices or to help others in
setting them.

The Market and Demand
PURE COMPETITION
OLIGOPOLY
MONOPOLISTIC COMPETITION
MONOPOLY

Pricing in Different Types of Markets
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.
In a purely competitive market, marketing research, product
development, pricing, advertising, and sales promotion play little or
no role. Thus, sellers in these markets do not spend much time on
marketing strategy.

Monopolistic competition: The 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 buyers.

Monopolistic Competition
LOreal differentiates its

cosmetics from other brands
through strong branding and
advertising. It uses celebrities
to enhance its image and
reduce the impact of price.
(www.loreal.com)

Oligopolistic competition: The market consists of a few sellers who
are highly sensitive to each others pricing and marketing
strategies.
There are few sellers because it is difficult for new sellers to enter the
market.
Pure monopoly: The market consists of one seller. The seller may be
a government monopoly, a private regulated monopoly, or a private
unregulated monopoly.

Analyzing the PriceDemand Relationship
The relationship between the price charged and the resulting

demand level is shown in the demand curve (Figure 10.8).
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.

Thus, the company would sell less if it raised its price from P1 to P2.
In short, consumers with limited budgets probably will buy less of

something if its price is too high.
In the normal case, demand and price are inversely relatedthat is,
the higher the price, the lower the demand.

In a monopoly, the demand curve shows the total market demand

resulting from different prices.
If the company faces competition, its demand at different prices will

depend on whether competitors prices stay constant or change with
the companys own prices.

Inverse demand-price relation
Gibson was surprised to learn that

its high-quality instruments didnt
sell as well at lower prices.

Elasticity of demand
Price elasticity is how
responsive demand will
be to a change in price

Demand Curves

Price Elasticity
If
demand hardly changes with a small change in price, we say

demand is inelastic. If demand changes greatly with a small change
in price, we say the demand is elastic
Buyers
are less price sensitive when the product they are buying is
unique or when it is high in quality, prestige, or exclusiveness;
substitute products are hard to find or when they cannot easily
compare the quality of substitutes; and the total expenditure for a
product is low relative to their income or when the cost is shared by
another party.

Price Elasticity
If
demand is elastic rather than inelastic, sellers will consider

lowering their prices. A lower price will produce more total revenue.

The internet and impact on price elasticity
Instant price comparisons on the

internet provided by companies
like zuji.com have increased
consumer price sensitivity towards
air tickets. (www.zuji.com.sg)

The Economy
Economic
conditions can have a strong impact on the firms pricing
strategies.
A
boom or recession, inflation, and interest rates affect consumer

spending, consumer perceptions of the products price and value, and
the companys costs of producing and selling a product.
In
the aftermath of the recent recession, consumers have rethought

the price-value equation.

Effect of the economy on pricing
Seiyu Not long ago, the Japanese bought
so many $100 melons and $1000 handbags
that it was the only country in the world
where luxury goods were considered mass
market. However, a long-drawn recession
has turned them into Wal-Mart shoppers. Its
supermarket subsidiary Seiyu had never
profitable until 2009. Seiyu ignited a price
war with its bento lunch-in-a-box of rice and
grilled salmon for Yen 298. abandoning a
custom for supermarkets to make their
bento boxes on site, Seiyu cut costs by
assembling the lunches as a centralized
factory. Seiyu bet that Japans frugal
consumers would not care about the change,
as long as the bentos were chap. It was
right: the bentos have set off aligned of
imitation supermarket bentos.

Other External Factors
The
company must also consider what impact its prices will have on
other parties in its environment. How will resellers react to various
prices?
The company should set prices that 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.

Other External Factors
Finally,
social concerns may have to be taken into account. In setting

prices, a companys short-term sales, market share, and profit goals
may have to be tempered by broader societal considerations.

Identify and define the other important internal and external factors
affecting a firms pricing decisions.
Thank
you

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Principles of Marketing: An Asian

Pricing Products: Understanding and Capturing

2012 Principles of Marketing: An Asian Perspective

2012 Principles of Marketing: An Asian Perspective

A cabin crew member of

2012 Principles of Marketing: An Asian Perspective

2012 Principles of Marketing: An Asian Perspective

10.1 What is a Price?

Pricing and value

2012 Principles of Marketing: An Asian Perspective

10.1 What is a Price?

Pricing and value

2012 Principles of Marketing: An Asian Perspective

10.1 What is a Price?

Pricing and value

No matter what the state of the economy,

2012 Principles of Marketing: An Asian Perspective

10.1 What is a Price?

Considerations in Setting Price

10 2012 Principles of Marketing: An Asian Perspective

10.1 What is a Price?

Considerations in Setting Price

perceptions of the products value set the ceiling for prices. If

10.1 What is a Price?

Reviewing the Key Concepts

12 2012 Principles of Marketing: An Asian Perspective

10.1 What is a Price?

Value-based pricing versus cost-based pricing

13 2012 Principles of Marketing: An Asian Perspective

10.1 What is a Price?

company designs what it considers to be a good product, adds up

then convinces buyers that the products value at that price

14 2012 Principles of Marketing: An Asian Perspective

10.1 What is a Price?

15 2012 Principles of Marketing: An Asian Perspective

10.1 What is a Price?

Customer value-based pricing

buyers perceptions of value, not

is considered along with the other

16 2012 Principles of Marketing: An Asian Perspective

10.1 What is a Price?

Good value is not low price

The waiting time for a Hermes Birkin bag ranges

17 2012 Principles of Marketing: An Asian Perspective

10.1 What is a Price?

10.1 What is a Price?

Good Value pricing

10.1 What is a Price?

EDLP and High-Low Pricing

low pricing (EDLP) involves charging a constant, everyday

pricing involves charging higher prices on an everyday basis

20 2012 Principles of Marketing: An Asian Perspective

10.1 What is a Price?

NTUC FairPrice introduced a

10.1 What is a Price?

Value- Added Pricing

22 2012 Principles of Marketing: An Asian Perspective

10.1 What is a Price?

Value- Added Pricing

Rather than dropping prices for

10.1 What is a Price?

24 2012 Principles of Marketing: An Asian Perspective

10.1 What is a Price?