Master in Marketing and Communication. Module 10. Pricing: Understanding and Capturing Customer Value. Module 10 - slide 1

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1 Master in Marketing and Communication Module 10 Pricing: Understanding and Capturing Customer Value Module 10 - slide 1

2 What Is a Price? Pricing: Understanding and Capturing Customer Value Customer Perceptions of Value Company and Product Costs Other Internal and External Considerations Affecting Price Decisions Topic Outline Module 10 - slide 2

3 What Is a Price? Priceis 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. Module 10 - slide 3

4 What Is a Price? Priceis the only element in the marketing mix that produces revenue; all other elements represent costs. Price is also one of the most flexible marketing mix elements. Module 10 - slide 4

5 Factors to Consider When Setting Prices Module 10 - slide 5

6 Customer Perceptions of Value Understanding how much value consumers place on the benefits they receive from the product and setting a price that captures that value Module 10 - slide 6

7 Customer Perceptions of Value Value-based pricinguses the buyers perceptions of value, not the sellers 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 Module 10 - slide 7

8 Customer Perceptions of Value Module 10 - slide 8

9 Customer Perceptions of Value Value-based pricing Good-value pricing Value-added pricing Module 10 - slide 9

10 Customer Perceptions of Value Good-value pricingoffers 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 Module 10 - slide 10

11 Customer Perceptions of Value 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 Module 10 - slide 11

12 Customer Perceptions of Value Value-added pricingattaches value-added features and services to differentiate offers, support higher prices, and build pricing power Pricing poweris the ability to escape price competition and to justify higher prices and margins without losing market share Module 10 - slide 12

13 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 Cost-based pricing adds a standard markup to the cost of the product Module 10 - slide 13

14 Company and Product Costs Types of costs Fixed costs Variable costs Total costs Module 10 - slide 14

15 Company and Product Costs Fixed costsare the costs that do not vary with production or sales level Rent Heat Interest Executive salaries Module 10 - slide 15

16 Company and Product Costs Variable costsare the costs that vary with the level of production Packaging Raw materials Module 10 - slide 16

17 Company and Product Costs Total costsare 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 Module 10 - slide 17

18 Costs at Different Levels of Production Module 10 - slide 18

19 Costs as a Function of Production Experience The experience curve refers to the drop in the average perunit production cost that comes with accumulated production experience. Module 10 - slide 19

20 Cost-plus pricing adds a standard markup to the cost of the product Benefits Sellers are certain about costs Prices are similar in industry and price competition is minimized Consumers feel it is fair Disadvantages Cost-Plus Pricing Ignores demand and competitor prices Module 10 - slide 20

21 Cost-plus pricing Markup Price = unit cost / (1 desired margin on sales) Example If: unit cost = 16 desired margin on sales = 20% Markup price = 16 / (1 0,2) = 20 Module 10- slide 21

22 Break-Even Analysis and Target Profit Pricing Break-even pricing is the price at which total costs are equal to total revenue and there is no profit Target profit pricing is the price at which the firm will break even or make the profit it s seeking Module 10 - slide 22

23 Break-Even Analysis and Target Profit Pricing Module 10 - slide 23

24 Break-even volumes and profits at different price levels Module 10- slide 24

25 How to calculate the break-even volume fixed cost Break-even volume = price variable cost Module 10 - slide 25

26 How to calculate the break-even volume Suppose you sell mobile phones at a price of $ If the unit variable costs for each phone are $ 40 and the manufacturer has fixed costs for a total of $ 200,000, how many phones you have to sell to break even? Break Even Point (BEP) = Fixed costs/(unit Price Variable Costs) Answer: $ / $ 76,50 -$ 40 = mobile phones. Module 10- slide 26

27 Determining breakeven for profit goals Unit volume = Fixed costs + profit goal price variable costs Module 10- slide 27

28 Break-even point for profit objectives Suppose you sell mobile phones at a price of $ If the unit variable costs for each phone are $ 40 and the manufacturer has fixed costs for a total of $ 200,000, how many phones you have to sell to make profits for $ ? Unit volume = (Fixed costs + profit goal) / (price variable costs) Answer: phones. ( / 76,50 40) Module 10- slide 28

29 Target costingstarts with an ideal selling price based on consumer value considerations and then targets costs that will ensure that the price is met Module 10 - slide 29

30 Considerations in Setting Price Module 10 - slide 30

31 Marketing Objectives Marketing objectives are reflected in the pricing decisions and include Survival Current profit maximisation Market share maximisation Product-quality leadership Full cost recovery Partial cost recover Module 10 - slide 31

32 Marketing Mix Strategies Price decisions are coordinated with product design, distribution and promotional decisions to form an effective integrated marketing programme. Various strategiescan be used depending upon the type of product and the environment in which it is involved. Frequently pricing decisions are made first and the marketing mix evolves around that. De-emphasis of priceby using the other marketing mix tools to create non-price positions based upon differentiation and value. Module 10 - slide 32

33 The Market and Demand Before setting prices, the marketer must understand the relationship between price and demand for its products. Module 10 - slide 33

34 The Market and Demand Pure competition Monopolistic competition Oligopolistic competition Pure monopoly Module 10 - slide 34

35 Pricing in different types of market Pure competition markets Many buyers and sellers trading in a uniform commodity (i.e. wheat, copper) No single buyer or seller has much effect on the market price because buyers can obtain as much as they need at the going price. Marketing mix has little impact Monopolistic competition Many buyers and sellers trade over a range of prices A range of prices occur because sellers can differentiate their offers to buyers. Emphasis upon differentiation through the marketing mix Module 10 - slide 35

36 Pricing in different types of market Oligopolistic competition Few sellers highly sensitive to each other s price and marketing strategies. the product can be uniform (steel, aluminium) or non uniform (cars, computers). There are few sellers because it is difficult for new sellers to enter the market. Each seller is alert to competitor s strategies and moves. If a steel company slashes its prices by 10% buyers will quickly switch to this supplier. Pure monopoly Single seller controlling the market. Government (postal); private regulated (a power company); private non regulated (Microsoft Windows). Module 10 - slide 36

37 The demand curve shows the number of units the market will buy in a given period at different prices Normally, demand and 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 Module 10 - slide 37

38 Inelastic and elastic demand Module 10 - slide 38

39 Price elasticity of demandillustrates the response of demand to a change in price Inelastic demandoccurs when demand hardly changes when there is a small change in price Elastic demandoccurs when demand changes greatly for a small change in price Price elasticity of demand = % change in quantity demand % change in price Module 10 - slide 39

40 Competitor's Strategies Comparison of offering in terms of customer value Strength of competitors Competition pricing strategies Customer price sensitivity Module 10 - slide 40

41 Other Internal and External Consideration Affecting Price Decisions Economic conditions Reseller s response to price Government Social concerns Module 10 - slide 41

42 Exercise The Ferrari is developing a new car model. You are required to determine the price. What are the internal and external factors to consider? What are the fixed and variable costs to be assessed? What can you do to increase the perceived value by your potential customers? What general pricing method would you adopt? Costbased, value-based or competition-based? Module 10- slide 42