Mastering Pricing Strategies for Customer Value

Chapter Ten: Pricing

Understanding and Capturing Customer Value

What Is a Price?

Price is the amount of money charged for a product or service. It is 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.

Major Pricing Strategies

Customer Value-Based Pricing

Value-based pricing uses the buyers’ perceptions of value, not the seller's cost, as the key to pricing.

• Value-based pricing is customer-driven.
• Cost-based pricing is product-driven.
• Price is considered before the marketing program is set.

Cost-Based Pricing Process

• Design a good product.
• Determine product costs.
• Set price based on cost.
• Convince buyers of the product's value.

Value-Based Pricing Process

• Assess customer needs and value perceptions.
• Set target price to match customer-perceived value.
• Determine costs that can be incurred.
• Design product to deliver desired value at target price.

Pricing Variations

• Good-value pricing: Offers the right combination of quality and good service at a fair price.
• Everyday low pricing (EDLP): Charging a constant everyday low price with few or no temporary price discounts.
• High-low pricing: Charging higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected items.
• Value-added pricing: Attaches value-added features and services to differentiate offers, support higher prices, and build pricing power.

Cost-Based Pricing

Cost-based pricing involves setting prices based on the costs for producing, distributing, and selling the product plus a fair rate of return for effort and risk. It typically adds a standard markup to the cost of the product.

Types of Costs

• Fixed costs: Costs that do not vary with production or sales levels (e.g., rent, heat, interest, executive salaries).
• Variable costs: Costs that vary directly with the level of production (e.g., packaging, raw materials).

Costs as a Function of Production Experience

The experience or learning curve occurs when the average cost falls as production increases because fixed costs are spread over more units.