4/17/2021

Principles of Marketing
Seventeenth Edition

Chapter 10
Pricing: Understanding and
Capturing Customer Value

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Learning Objectives
10-1 Answer the question “What is a price?” and discuss the importance of
pricing in today’s fast-changing environment.
10-2 Identify the three major pricing strategies and discuss the importance of
understanding customer-value perceptions, company costs, and
competitor strategies when setting prices.
10-3 Identify and define the other important external and internal factors
affecting a firm’s pricing decisions.

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4/17/2021

Learning Objective 1
Answer the question “What is a price?” and discuss the importance of pricing
in today’s fast-changing environment.

Copyright © 2018 Pearson Education Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education Ltd. All Rights Reserved.

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4/17/2021

What Is a Price?
Price is the amount of money charged for a product or service, or the sum of
all the values that customers exchange for the benefits of having or using the
product or service.
Price is the only element in the marketing mix that produces revenue;
all other elements represent costs.

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Learning Objective 2
Identify the three major pricing strategies and discuss the importance of
understanding customer-value perceptions, company costs, and competitor
strategies when setting prices.

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4/17/2021


Major Pricing Strategies

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Major Pricing Strategies
Customer Value-Based Pricing
Value-based pricing uses the buyers’ perceptions of value rather than the
seller’s cost.
• Value-based pricing is customer driven.
• Cost-based pricing is product driven.
• Price is set to match perceived value.

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Major Pricing Strategies

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Major Pricing Strategies
Customer Value-Based Pricing
Good-value pricing is offering just the right combination of
quality and good service at a fair price.
Everyday low pricing (EDLP) involves charging a constant
everyday low price with few or no temporary price discounts.


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4/17/2021

Major Pricing Strategies
Customer Value-Based Pricing
High-low pricing
involves charging higher
prices on an everyday
basis but running frequent
promotions to lower
prices temporarily on
selected items.
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Major Pricing Strategies
Customer Value-Based Pricing
Value-added pricing attaches value-added features and services to
differentiate the companies offers and thus their higher prices.

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Value-added pricing

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Major Pricing Strategies
Cost-Based Pricing
Cost-based pricing sets prices based on the costs for producing, distributing,
and selling the product plus a fair rate of return for effort and risk.

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Major Pricing Strategies
Cost-Based Pricing
Fixed costs are the costs that do not vary with production or sales level.
• Rent
• Heat
• Interest
• Executive salaries

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Major Pricing Strategies
Cost-Based Pricing
Variable costs vary directly with the level of production.
ã Raw materials

ã Packaging

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Major Pricing Strategies
Cost-Based Pricing
Total costs are the sum of
the fixed and variable costs
for any given level of
production.

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Major Pricing Strategies

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Major Pricing Strategies

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Major Pricing Strategies
Cost-Based Pricing

Suppose a manufacturer of toasters has
a cost of $16/unit. If the manufacturer
wants to earn a 20 percent markup on
sales, the price is calculated by the
following:
markup price = unit cost/(1 - desired return
on sales) = $16/(1 - .2) = $20

Cost-plus pricing adds a standard
markup to the cost of the product.
• Benefits
 Sellers are certain about costs.
 Price competition is minimized.
 Buyers feel it is fair.
• Disadvantages
 Ignores demand and competitor prices
 Sellers earn a fair return but do not
take advantage of buyers if demand
becomes great.

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4/17/2021


Many luxury sheets cost less than $200 to
make but sell for more than $500 in retail
stores. Some cost even more—consumers pay
almost $3,000 for Frett’e “Tangeri Pizzo” kingsize luxury linens. The creators of a new brand
of luxury linens, called Boll & Branch, have
entered this market and are determining the
price at which to sell their sheets directly to
consumers online. They want to price their
sheets lower than most brands but still want to
earn an adequate margin on sales. The sheets
come in a luxurious box that can be reused to
store lingerie, jewelry, or other keepsakes. The
Boll & Branch brand touts fair trade practices
when sourcing its high-grade long-staple
organic cotton from India. Given the cost
information below.

Raw Cotton
Spinning/Weaving/Dyeing
Cut/Sew/Finishing
Material Transportation
Factory Fee
Inspection and Import Fees
Ocean Freight/Insurance
Warehousing
Packaging
Promotion
Customer Shipping


Cost/Kingsize Set
$28.00
$12.00
$10.00
$ 3.00
$16.00
$14.00
$ 5.00
$ 8.00
$15.00
$30.00
$15.00

Given the cost per king-size sheet set above, and
assuming the manufacturer has total fixed costs of
$500,000 and estimates first year sales will be
50,000 sets, determine the price to consumers if the
company desires a 40 percent margin on sales.
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The simplest method of cost-based pricing is
cost-plus pricing (or markup pricing) which
simply adds a standard markup to the cost
of the product. Boll & Branch must
specify expected unit sales so that total
unit costs can be determined.
Cost per unit is:
Unit cost = variable cost + fixed costs/unit
sales =$156 + $500,000/50,000 = $166
To earn a 40% profit on sales, Boll &

Branch’s markup price is:

Raw Cotton
Spinning/Weaving/Dyeing
Cut/Sew/Finishing
Material Transportation
Factory Fee
Inspection and Import Fees
Ocean Freight/Insurance
Warehousing
Packaging
Promotion
Customer Shipping

Cost/Kingsize Set
$28.00
$12.00
$10.00
$ 3.00
$16.00
$14.00
$ 5.00
$ 8.00
$15.00
$30.00
$15.00

Markup price = unit cost/(1-desired return on
sales) = $166/(1-0.4) = $166/0.6 = $276.67


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Major Pricing Strategies
Cost-Based Pricing
Break-even pricing (target return pricing) is setting
price to break even on costs or to make a target return.
Figure 10.5 Break-Even Chart for Determining Target
Return Price and Break-Even Volume.

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Major Pricing Strategies

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Major Pricing Strategies
Competition-Based Pricing
Competition-based pricing is setting prices
based on competitors’ strategies, costs, prices,
and market offerings.

In assessing competitors’ pricing strategies, the
company should ask:
1.How does the company’s market offering
compare with competitors’ offerings in terms of
customer value?
2.How strong are current competitors and what
are their current pricing strategies?
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Learning Objective 3
Identify and define the other important external and internal factors affecting a
firm’s pricing decisions.

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Other Considerations Affecting Price Decisions
Overall Marketing Strategy, Objectives, and Mix
Target costing starts with an
ideal selling price based on
consumer value considerations
and then targets costs that will
ensure that the price is met.

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Other Considerations Affecting Price Decisions
Organizational Considerations
• Who should set prices?
• Who can influence prices?

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Other Considerations Affecting Price Decisions
The Market and Demand
Before setting prices, the marketer must understand the relationship between
price and demand for its products.

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Other Considerations Affecting Price Decisions
The Market and Demand
Pricing In Different Types of Markets

Pure competition
Monopolistic competition
Oligopolistic competition
Pure monopoly
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Other Considerations Affecting Price Decisions
The Market and Demand
Analyzing the Price–Demand Relationship
The demand curve shows the number of units the market will buy in a given
period at different prices
• Demand and price are inversely related.
ã Higher price = lower demand

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Other Considerations Affecting Price Decisions
The Market and Demand
Price Elasticity of Demand
Price elasticity is a measure of the sensitivity of demand to changes in price.
Inelastic demand is when demand hardly changes with a small change in price.
Elastic demand is when demand changes greatly with a small change in price.

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4/17/2021

Other Considerations Affecting Price Decisions
The Economy and Other External Factors

Economic conditions
Reseller’s response to price
Government
Social concerns

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