Major Pricing Strategies
Pricing–Understanding and Capturing Customer Value In the chapter 10, the authors answer the question of “What is a price? “, discuss the importance of pricing in today’s fast-changing environment, identify three major pricing strategies, point out the importance of understanding customer-value perceptions, company cost, and competitor strategies when setting prices, and define the other important internal and external factors affecting a firm’s pricing decisions. The authors remind us of that No matter what the state of the economy, companies should sell value, not price.
First, what is a price and what is the importance of pricing “Price can be defined narrowly as the amount of money charged for a product or service; and it can be defined more broadly as the sum of the values that consumer exchange for the benefits of having and using the product or service.
“(Kotler & Armstrong, 2012: p. 290) The pricing challenge is to find the price that let the company make a fair profit by getting paid for the customer value it creates. what is the importance of pricing -Historically, price has been a major factor affecting buyer choice. –Now price still remainsone of the most important elements that determines a firms market share and profitability, although in recent decades non-price factors have gained increasing importance. —
Price is the only element in the marketing mix that produces revenue and the most flexible marketing mix elements.
–Price is the number-one problem facing many marketing executives. Smart managers treat pricing as a key strategic tool for creating and capturing customer value. -As a part of company’s overall value proposition, price plays a key role in creating customer value and building customer relationships. Second, three major pricing strategies and the importance of understanding customer-value perceptions, company cost, and competitor strategies when setting price “Setting the right price is one of the marketer’s most difficult tasks. A host of factors come into play.
But finding and implementing the right price strategy is critical to success. “(Kotler ;amp; Armstrong, 2012: p. 291)
The authors introduce three major pricing strategies. (1) The first one is Customer Value-Based Pricing that means setting price based on buyer’s perceptions of value rather than on the seller’s costs. 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 will not buy the product.
Thus good pricing begins with a complete understanding of the value that a product or service creates for customers and customer perceptions of the value.
In addition, the authors examine two types of value-based pricing: Good-Value Pricing which includeseveryday low pricing and high-low pricing, and Value-Added Pricing which means attaches value-added features and services to differentiate a company’s offer and charging higher prices. (2) The second one is Cost-Based Pricing that means setting prices based on the costs for producing, distributing, and selling the product plus a fair rate of return for effort and risk. Company and product costs are an important consideration in setting prices because these costs set the floor of pricing while customer value perceptions set the price ceiling.
Cost-Based Pricing including Cost-Plus Pricing and Break-Even Pricing is a product driven rather than customer driven. Both Cost-Plus Pricing and Break-Even Pricing have their own advantages and disadvantages or assumptions mainly because any pricing method that ignores demand and competitor prices is not likely to lead to the best price.
(3) The third one is Competition-Based Pricing that means setting prices based on competitors’ strategies, prices, costs, and market offerings. Customers or consumers base their judgments of a product’s value on the prices that competitors charge for similar products.
Whether the company can charge a higher price depends on customer perception that the company’s product or service provides greater value than those of its competitors. Otherwise, the company must find methods to change customer perception to justify a higher price. When talking about Cost-Based Pricing, the authors specifically examine types of costs, costs at different levels of production, costs as a function of production experience.
Also, the authors tell us what questions should a company ask while assessing competitors’ pricing strategies.? Third, the internal and external considerations that affect pricing decisions
Setting prices is a complex problem, which is also affected by many other internal and external factors. Internal factors affecting pricing include the company’s overall marketing strategy, objectives, and marketing mix, as well as organizational considerations. The authors point out that (1) 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 because 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 marketing positioning.
(2) Pricing may play an important role in helping to accomplish company objectives at many levels— Why and how price helps company to accomplish its objectives at many levels? (3) 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.
Decisions made for other marketing mix variables may affect pricing decisions. (4) Some companies use price as a crucial product-positioning factor. Many of them use a technique called Target Costing: Pricing that starts with an ideal selling price and then targets costs that will ensure that the price is met.
Some companies position a product on price and then tailor other marketing mix decisions to the prices they want to charge, while other companies de-emphasize price and use other marketing mix tools to create non-price positions.
External pricing considerations include the nature of the market and demand, and other environmental factors such as the economy, re-seller needs, and government actions. The authors point out that before setting prices, marketers must understand the relationship between price and demand for the company’s product because both consumers and industrial buyers balance the price of a product or service against the benefits of own it. Then, they dig into the relationship between price and demand and how the price-demand relationship varies for different types of markets.
Moreover, they introduce four types of markets under the knowledge of economy: (1) pure competition, (2) monopolistic competition, (3) oligopolistic competition, and (4) pure monopoly, each type of them representing a different pricing challenge and the methods for analyzing the price-demand relationship such as Price Elasticity of Demand.
“Marketers need to work harder than ever to differentiate their offerings when a dozen competitors are selling virtually the same product at a comparable or low price.
More than ever, companies need to understand the price sensitivity of their customers and the trade-offs people are willing to make between price and product characteristics. ” (Kotler ;amp; Armstrong, 2012: p. 303) “Economic conditions can 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 consumers’ spending, consumer perceptions of the product’s price and value, and the company’s costs of producing and selling a product.
In the aftermath of the Great Recession, consumers have rethought the price-value equation.
Many consumers have tightened their belts and become more value conscious. ” (Kotler ;amp; Armstrong, 2012: p. 303) “The most obvious response to the new economic realities is to cut prices and offer deep discounts. ” (Kotler ;amp; Armstrong, 2012: p. 304) Thousands of companies have done just like that. However, such price cuts can have undesirable long-term consequences because it cheapens a brand in consumers’ eyes.
Is it also true in the worldwide economic recession period? ). Instead of cutting prices, many other companies are shifting their marketing focus to more affordable items in their product mixes. “Remember, even in tough economic times, consumers do not buy based on prices alone. They balance the price they pay against the value they receive. For example, according to a recent survey, despite selling its shoes for as much as $150 a pair, Nike commands the highest consumer loyalty of any brand in the footwear segment.
Customer perceive the value of of Nike’s products and the Nike ownership experience to be well worth the price……
Thus, no matter what price they charges–low or high–companies need to offer great value for the money. ” (Kotler & Armstrong, 2012: p. 304) Beyond the market and the economy, several other external factors such as the impact of the price of a product, the factors related to sellers, government policies, and social concerns should be taken into consideration when setting prices.
