Factors Marketing Must Consider When Setting Price

Identify and define the other important external and internal factors affecting a firm ; pricing decisions

They should persuade customers that paying a higher price for the company's brand is justified by the greater value they gain. The challenge is to find the price that will let the company make a fair profit by getting paid for the customer value it creates. A "Give people something of value," says Ronald Shaich, CEO of Panera Bread Company, "and they'll happily pay for it."3

Pricing: The challenge is to harvest the customer value the company creates. Says Panera Bread Company's CEO, Ronald Shaich, pictured here, "Give people something of value, and they'll happily pay for it."

Price

The amount of money charged for a product or service, or the sum of the values that customers exchange for the benefits of having or using the product or service.

In the narrowest sense, price is the amount of money charged for a product or service. More broadly, price is the sum of all the values that customers give up in order to gain the benefits of having or using a product or service. Historically, price has been the major factor affecting buyer choice. In recent decades, nonprice factors have gained increasing importance. However, price still remains one of the most important elements determining a firm's market share and profitability.

Price is 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. Unlike product features and channel commitments, prices can be changed quickly. At the same time, pricing is the number-one problem facing many marketing executives, and many companies do not handle pricing well. One frequent problem is that companies are too quick to reduce prices in order to get a sale rather than convincing buyers that their product's greater value is worth a higher price. Other common mistakes include pricing that is too cost oriented rather than customer-value oriented, and pricing that does not take the rest of the marketing mix into account.

Some managers view pricing as a big headache, preferring instead to focus on the other marketing mix elements. However, smart managers treat pricing as a key strategic tool for creating and capturing customer value. Prices have a direct impact on a firm's bottom line. A small percentage improvement in price can generate a large percentage in profitability. More importantly, as

Pricing: The challenge is to harvest the customer value the company creates. Says Panera Bread Company's CEO, Ronald Shaich, pictured here, "Give people something of value, and they'll happily pay for it."

a part of a company's overall value proposition, price plays a key role in creating customer value and building customer relationships. "Instead of running away from pricing," says the expert, "savvy marketers are embracing it."4

Factors to Consider When Setting Prices (pp 315-329)

The price the company charges will fall somewhere between one that is too high to produce any demand and one that is too low to produce a profit. # Figure 10.1 summarizes the major considerations in setting price. Customer perceptions of the product's value set the ceiling for prices. If customers perceive that the price is greater than the product's value, they will not buy the product. Product costs set the floor for prices. If the company prices the product below its costs, company profits will suffer. In setting its price between these two extremes, the company must consider a number of other internal and external factors, including its overall marketing strategy and mix, the nature of the market and demand, and competitors' strategies and prices.

Customer Perceptions of Value

In the end, the customer will decide whether a product's price is right. Pricing decisions, like other marketing mix decisions, must start with customer value. When customers buy a product, they exchange something of value (the price) in order to get something of value (the benefits of having or using the product). Effective, customer-oriented pricing involves understanding how much value consumers place on the benefits they receive from the product and setting a price that captures this value.

Value-Based Pricing

Good pricing begins with a complete understanding of the value that a product or service Value-based pricing creates for customers. Value-based pricing uses buyers' perceptions of value, not the

Setting price based on buyers' seller's cost, as the key to pricing. Value-based pricing means that the marketer cannot perceptions of value rather than on the design a product and marketing program and then set the price. Price is considered along seller's cost. witj1 other marketing mix variables before the marketing program is set.

# Figure 10.2 compares value-based pricing with cost-based pricing. Cost-based pricing is product driven. The company designs what it considers to be a good product, adds up the costs of making the product, and sets a price that covers costs plus a target profit. Marketing must then convince buyers that the product's value at that price justifies its purchase. If the price turns out to be too high, the company must settle for lower markups or lower sales, both resulting in disappointing profits.

Value-based pricing reverses this process. The company first assesses customer needs and value perceptions. It then sets its target price based on customer perceptions of value. The targeted value and price then drive decisions about what costs can be incurred and the resulting product design. As a result, pricing begins with analyzing consumer needs and value perceptions, and price is set to match consumers' perceived value.

Author I Setting the right price is Comment | one 0f the marketer's most difficult tasks. A host of factors come into play. But finding and implementing the right pricing ^strategy is critical to success._

Considerations in Setting Price

If customers perceive (hat a product's price is greater than Its value, they won't buy It. If the company prices a product below its costs, profits will suffer. Between the two extremes, the "right" pricing strategy is one that delivers both value to the customer and profits to the company.

Customer perceptions of value

Price ceiling

No demand above this price

Other internal and external _considerations_

Marketing strategy, objectives, and mix

Nature of the market and demand Competitors' strategies and prices

Price floor

No profits below this price

Price floor

No profits below this price

Value-Based Pricing Versus Cost-Based Pricing

The mj/jiway! Like everything else in marketing, good pricing starts with the customer.

Cost-based pricing

Design a good product

Value-based pricing

Assess customer needs and value perceptions

Determine product costs

Set target price to match customer perceived value

Set price based on cost

Determine costs that can be incurred

Convince buyers of product's value

Design product to deliver desired value at target price

It's important to remember that "good value" is not the same as "low price." AFor example, some car buyers consider the luxurious Bentley Continental GT automobile a real value, even at an eye-popping price of $175,000:5

Stay with me here, because I'm about to [tell you why] a certain automobile costing $175,000 is not actually expensive, but is in fact a tremendous value. Every Bentley GT is built by hand, an Old World bit of automaking requiring 160 hours per vehicle. Craftsmen spend 18 hours simply stitching the perfectly joined leather of the GT's steering wheel, almost as long as it takes to assemble an entire VW Golf. The results are impressive: Dash and doors are mirrored with walnut veneer, floor pedals are carved from aluminum, window and seat toggles are cut from actual metal rather than plastic, and every air vent is perfectly chromed____The sum of all this is a fitted cabin that approximates that of a $300,000 vehicle, matched to an engine the equal of a $200,000 automobile, within a car that has brilliantly incorporated ... technological sophistication. As I said, the GT is a bargain. [Just ask anyone on the lengthy waiting list.] The waiting time to bring home your very own GT is currently half a year.

A company using value-based pricing must find out what value buyers assign to different competitive offers. However, companies often find it hard to measure the value customers will attach to its product. For example, calculating the cost of ingredients in a meal at a fancy restaurant is relatively easy. But assigning a value to other satisfactions such as taste, environment, relaxation, conversation, and status is very hard. And these values will vary both for different consumers and different situations.

Still, consumers will use these perceived values to evaluate a product's price, so the company must work to measure them. Sometimes, companies ask consumers how much they would pay for a basic product and for each benefit added to the offer. Or a company might conduct experiments to test the perceived value of different product offers. According to an old Russian proverb, there are two fools in every market— one who asks too much and one who asks too little. If the seller charges more than the buyers' perceived value, the company's sales will suffer. If the seller charges less, its products sell very well. But they produce less revenue than they would if they were priced at the level of perceived value.

Value-based pricing: "Good value" is not the same as "low price." Some car buyers consider the luxurious Bentley Continental GT automobile a real value, even at an eye-popping price of $175,000.

We now examine two types of value-based pricing: good-value pricing and value-added pricing.

Good-Value Pricing. During the past decade, marketers have noted a fundamental shift in consumer attitudes toward price and quality. Many companies have changed their pricing approaches to bring them into line with changing economic conditions and con-Good-value pricing sumer price perceptions. More and more, marketers have adopted good-value pricing

Offering just the right combination of strategies—offering just the right combination of quality and good service'at a fair price, quality and good service at a fair price. ^ many cases, this has involved introducing less-expensive versions of established, brand-name products. To meet the tougher economic times and more frugal consumer spending habits, some fast-food restaurants offer "value menus." Armani offers the less-expensive, more-casual Armani Exchange fashion line. Alberto-Culver's TRESemmé hair care line promises "Curls you'll love. A price you'll adore." And Volkswagen recently reintroduced the Rabbit, an economical car with a base price under $16,000, because "The people want an entry-level price and top-level features."6

In other cases, good-value pricing has involved redesigning existing brands to offer more quality for a given price or the same quality for less. Some companies even succeed by offering less value but at rock-bottom prices. For example, passengers flying low-cost European airline Ryanair won't get much in the way of free amenities, but they'll like the airline's unbelievably low prices (see Real Marketing 10.1).

An important type of good-value pricing at the retail level is everyday low pricing (EDLP). EDLP involves charging a constant, everyday low price with few or no temporary price discounts. In contrast, high-low pricing involves charging higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected items. In recent years, high-low pricing has given way to EDLP in retail settings ranging from Saturn car dealerships to Costco warehouse retail clubs to furniture stores such as Room & Board. The king of EDLP is Wal-Mart, which practically defined the concept. Except for a few sale items every month, Wal-Mart promises everyday low prices on everything it sells.

Value-added pricing: Rather than dropping prices for its venerable Stag umbrella brand to match cheaper imports, Currims successfully launched umbrellas with funky designs, cool colors, and value-added features and sold them at even higher prices.

Value-added pricing

Attaching value-added features and services to differentiate a company's offers and charging higher prices.

Value-Added Pricing. Value-based pricing doesn't mean simply charging what customers want to pay or setting low prices to meet the competition. In many marketing situations, the challenge is to build the company's pricing power—its power to escape price competition and to justify higher prices and margin. To increase pricing power, a firm must retain or build the value of its market offering. This is especially true for suppliers of commodity products, which are characterized by little differentiation and intense price competition.

To increase their pricing power, many companies adopt value-added pricing strategies. Rather than cutting prices to match competitors, they attach value-added features and services to differentiate their offers and thus support higher prices. AConsider this example:

The monsoon season in Mumbai, India, is three months of near-nonstop rain. For 147 years, most Mumbaikars protected themselves with a Stag umbrella from venerable Ebrahim Currim & Sons. Like Ford's Model T [automobile], the basic Stag was sturdy, affordable, and of any color, as long as it was black. By the end of the twentieth century, however, the Stag was threatened by cheaper imports from China. Stag responded by dropping prices and scrimping on quality. It was a bad move: For the first time since the 1940s, the brand began losing money. Finally, however, the company came to its senses. It abandoned the price war and vowed to improve quality. Surprisingly, even at higher prices, sales of the improved Stag umbrellas actually increased.

Continue reading here: Private Nonregulated Monopoly Example

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