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Chapter 10: Pricing: understanding and capturing customer value - Coggle…
Chapter 10: Pricing: understanding and capturing customer value
“What is price?” and the importance of pricing in today’s fast-changing environment.
Definition of price
Narrow definition: The amount of money charged for a product or service.
Broader definition: The sum of all values customers give up to gain the benefits of a product or service.
Importance of Pricing in Today's Fast-Changing Environment: Pricing is a critical element in determining a firm's market share and profitability. It is often described as the "moment of truth" in marketing because it is the only element in the marketing mix that directly translates the value created for customers into revenues and profits for the company.
Value Translation:
Pricing is the mechanism through which the value created by innovation, product development, advertising, distribution, and packaging is converted into financial returns for the company.
Poor pricing decisions can negate the benefits of these efforts by either driving away profitable customers (if priced too high) or leaving too much value on the table (if priced too low).
Flexibility of Pricing:
Prices can be adjusted quickly in response to market developments, unlike product features and channel commitments.
Strategic Tool:
Smart managers use pricing as a key strategic tool to capture customer value and influence consumer perceptions.
A small improvement in price can lead to a significant increase in profitability.
Competitive Advantage:
Effective pricing strategies provide a competitive edge by building strong customer relationships and enhancing perceived value.
Managerial Focus:
Successful companies recognize the strategic importance of pricing and integrate it into their overall value proposition.
The major pricing strategies
Cost-based pricing
Cost-Based Pricing:
Prices are based on production, distribution, and selling costs plus a fair return.
Types of Costs:
Fixed Costs: Do not vary with production or sales level.
Variable Costs: Vary directly with production level.
Total Costs: Sum of fixed and variable costs.
Experience Curve:
Costs decrease with accumulated production experience, leading to lower prices over time.
Cost-Plus Pricing:
Adding a standard markup to the cost of the product.
Break-Even Pricing:
Setting a price to break even or achieve a target return.
Price Ceiling and Floor:
Customer value perceptions set the price ceiling.
Costs set the price floor.
Competition-based pricing:
Setting prices based on competitors' strategies, costs, prices, and market offerings.
Consumers are influenced by competitors' prices for similar products.
Competitor Strength and Strategies:
Evaluate competitors' strength and pricing strategies.
Charge lower prices to drive weaker competitors out or target niches with value-added products at higher prices if dominated by larger competitors.
Value-Based Pricing:
Set prices according to relative value, not just to match or beat competitors' prices.
Higher prices are justified if the company creates greater value for customers.
Assessing Competitors:
Compare the company's offering with competitors' in terms of delivered value.
Charge higher prices if providing greater value; charge lower prices or enhance perceptions if less value is perceived.
Guiding Principle:
Ensure customers receive superior value for the price charged, regardless of whether the price is high, low, or in between.
Customer value–based pricing:
Pricing decisions must start with customer value.
Effective pricing involves understanding how much value consumers place on the benefits they receive and setting a price that captures that value.
Good-Value Pricing:
Offering the right combination of quality and good service at a fair price.
Examples include introducing less expensive versions of established products or redesigning existing brands to offer more quality for the same price.
Value-Added Pricing:
Adding quality, services, and value-added features to differentiate offers and support higher prices.
Example: Canada Goose creates high-quality products that justify premium prices.
Challenges of Measuring Value:
Measuring the value customers attach to products can be difficult, as it involves subjective factors like taste, environment, and status.
Companies may use consumer surveys or experiments to gauge perceived value.
Importance of Pricing:
Pricing is a strategic tool for capturing customer value and driving profitability.
Companies must manage the balance between costs and prices to maximize profit.
Value-Based vs. Cost-Based Pricing:
Cost-Based Pricing:
Often product-driven, setting prices based on the cost of making the product plus a target profit.
Value-Based Pricing:
Starts with assessing customer needs and value perceptions, then sets the target price based on these perceptions
Other internal and external consideration affecting price decisions
Internal factors
Objectives: Common objectives include customer retention, building profitable relationships, preventing competition, and gaining reseller support.
Marketing Mix: Pricing decisions must align with product design, distribution, and promotion.
Marketing Strategy: Pricing is part of the broader marketing strategy, influenced by target market and positioning.
Organizational Considerations: Management must decide who is responsible for setting and managing prices.
External factors
Environmental Factors: Economic conditions, reseller needs, and government actions impact pricing decisions.
Customer Perception: Customers decide if the price is right based on perceived value.
Market and Demand: The nature of the market and demand influences pricing.
Economic Conditions: Events like the Great Recession and COVID-19 pandemic affect consumer price sensitivity and pricing strategies.