Pricing: Understanding and Capturing Customer Value
1. What is price? Identify the major pricing strategies and provide examples.
Price is one of the most important element of marketing mix and is defined as the sum of value the customers exchange for the benefits of using the product or services.
There are two major pricing strategies and they are:
• Customer value- Based pricing
• Cost – Based pricing
• Competition based pricing
A) Customer value- Based pricing: The pricing strategy in which the perception of the customers value is considered rather than the seller’s cost Therefore, the marketer cannot design a product and marketing programme and afterwards set the price. Instead, price is an integral part of the marketing mix and is determined before the marketing programme is set.
There are two types of Customer Value-based Pricing
• Good-value Pricing and
• Value-added Pricing
1) Good- value pricing: Good-value pricing is the first customer value-based pricing strategy. It refers to offering the right combination of quality and good service at a lower price.
Example: Ryanair can be considered to rely on good-value pricing. Granted, they offer less value at lower price.
2) Value-added pricing: Adding value-added features and services to differentiate the product and charging higher prices.
Example: Emirates use value added pricing strategy by adding more values to customers by charging higher prices and customers are willing to pay those prices to enjoy the given values. Providing Wi-Fi in the flight can be considered as an additional value provided to customers at certain price.
B) Cost- Based pricing: The pricing strategy which involves the cost of producing, distributing and selling the product
Example: Firms such as Walmart work to become the low-cost producers in their industries. By constantly reducing costs wherever possible, these companies are able to set lower prices. Certainly, that leads to smaller margins, but greater sales and profits on the other hand.
C) Competition-Based pricing: In this strategy the prices are set based on competitor’s strategies, prices, costs and market offering.
2. Discuss the importance of understanding customer-value perceptions, company costs, and competitor strategies when setting prices. Provide company examples to support your discussion.
According to me the most difficult task for the marketer is to set the right price and there are many considerations to keep in mind like customer value perception as the price should match with the values customer will receive from the product. If a firm set a price that is higher than the value of a product; then that means, the demand for that product will go down which consequently will lead to decline in the volume of sales. In the same way company’s costs should be included in setting the price which includes variable cost and fixed cost and all the other costs. Competitor pricing is very important to look at because if the company is providing the same values at higher price then competitor will have the advantage and which will lead to decline in profits.
3. Name and describe the types of costs marketers must consider when setting prices. Describe the types of cost –based pricing and the methods of implementing each. You may need to provide further research for this area.
The types of costs marketers must consider when setting prices are:
The different types of costs are:
• Fixed cost
• Variable cost
• Total cost
? Fixed cost: It is also known as overhead cost which do not vary with the production or sales level.
? Variable cost: Costs that vary directly with the level of production.
? Total cost: The sum of fixed and variable costs is known as total cost for any level of production.
Types of cost-based pricing are:
? Cost-Plus pricing
? Break-even pricing
A) Cost-Plus pricing: Adds a standard markup to the cost of the product.
Cost-Plus pricing = Unit cost / (1-desired return on sales)
where Unit cost = variable+ cost fixed cost/ unit sales
B) Break- Even pricing: when total costs are equal to total revenue and there is no profit then it is called Break-even pricing.
Break-even volume= fixed cost/ price-variable cost
4. Identify and define other internal and external considerations affecting a firm’s pricing decisions. Provide real-life examples to support your answers.
Companies must consider internal and external factors when setting the prices and the different internal and external considerations are mentioned below.
A) Internal factors:
? Marketing strategy, Objectives and marketing mix.
? Organizational Considerations: Management should decide who in the organizations should set the price.
B) External factors:
? The market and the demand: An effective pricing starts with an understanding of how customer’s perceptions of value effect the price they are willing to pay.
Pricing different types of markets:
• Pure competition
• Monopolistic competition
• Oligopolistic competition
• Pure Monopoly
? Analyzing the price-demand relationship
? Competitors’ strategies and prices
? Other environmental factors: economic conditions, government actions, social concerns.
Companies examples of different types of markets are:
? Pure competition: All the agricultural industries are example of pure competition.
? Monopolistic competition: McDonald’s has a monopoly on the “Happy Meal” but has much competition in the market to feed kid’s burgers and fries.
? Oligopolistic competition: a situation in a market where there are very few discernible competitors and Airline companies are examples of oligopolistic competitions.
? Pure Monopoly: In this the single company is the only source in the market and all the public utilities comes under pure monopoly.