COMM 223 — Marketing Management
Chapter 9: Pricing — Understanding and Capturing
Customer Value
Based on: Armstrong, Kotler et al., Marketing: An Introduction, 7th Canadian Edition
Chapter Overview: Pricing is the only element of the marketing mix that produces
revenue — everything else is a cost. This chapter covers: the three major pricing
strategies (value-based, cost-based, competition-based), internal and external factors
affecting pricing, new product pricing, product mix pricing, price adjustment strategies, and
public policy constraints. The central thesis: always sell value, not just price.
1. Major Pricing Strategies
The Pricing Framework — Price Ceiling and Floor
The price a company charges will fall somewhere between a price too low to produce a profit and a
price too high to produce any demand. Two forces define this range:
• Price CEILING: Set by customer perceptions of value. If price > perceived value, customers
won't buy.
• Price FLOOR: Set by product costs. If price < costs, the company loses money.
• Between these extremes, the company must consider competitors' strategies and prices, the
overall marketing strategy and mix, and the nature of the market and demand.
The Golden Rule: Price is the only element of the marketing mix that produces revenue
— all other elements represent costs. A small % improvement in price can generate a
large % increase in profitability. Smart managers treat pricing as a KEY STRATEGIC
TOOL, not a headache.
The Three Major Pricing Strategies — Master Comparison Table
Customer Value-Based Cost-Based Competition-Based
Customer needs & value Product design & production Competitors' prices,
Starts with
perceptions costs strategies & market offerings
Price What customer is willing to Cost + desired markup or Relative value vs. competing
driven by pay profit products
Ceiling / Consumer perceived value = Positioned relative to
Total costs = floor
Floor ceiling competitor value/price
, Goal is NOT to simply
Hard to measure perceived May ignore demand; price
Pitfall match/beat—it's to price for
value accurately may be too high or too low
relative value
Caterpillar vs. Komatsu:
Patek Philippe watches Retailer markup: buy
justifies $80K premium via
Example (value = passion, investment, controller at $20, sell at $30
$150K in added lifetime
legacy); Apple Watch (+50%)
value
1A. Customer Value-Based Pricing
Customer value-based pricing uses buyers' perceptions of value as the key to pricing. The critical
difference from cost-based pricing is the direction of the process:
Cost-Based Pricing Process → Value-Based Pricing Process →
Assess customer needs & value → Set target
Design product → Determine costs → Set price price to match perceived value → Determine
based on cost → Convince buyers of value costs that can be incurred → Design product to
deliver value at target price
Key Insight: 'Good value' is NOT the same as 'low price.' A Patek Philippe watch
($20,000–$500,000) is considered by its owners a real bargain because of passion,
investment value, multi-generational sentimental value, and craftsmanship. The company
says: 'You never actually own a Patek Philippe, you merely look after it for the next
generation.'
Two Subtypes of Value-Based Pricing:
Subtype Definition & When Used Examples
Loblaw's PC, No Name, and Life
Offering the right combination of Brand lines. EDLP: Walmart, Lidl.
quality and good service at a fair price. High-Low: Hudson's Bay, JCPenney.
Good-Value
Responds to consumer demand for Off-price retailing: Winners (20-60%
Pricing
value-for-money. Includes EDLP and below regular department store
high-low pricing at retail level. prices). Airlines: Swoop/Spirit 'Bare
Fare' pricing.
Adding quality, services, and value- Bose: 50+ years of R&D investment in
Value-Added added features to differentiate offers premium audio quality — charges
Pricing and support higher prices, rather than more because it delivers more. The
cutting prices to match competitors. premium price itself signals quality.
, 1B. Cost-Based Pricing
Cost-based pricing involves setting prices based on the costs of producing, distributing, and selling the
product plus a fair rate of return. Costs set the FLOOR for pricing.
Types of Costs
Cost Type Definition Example
Do NOT vary with production or sales
Fixed Costs Rent, heat, interest payments,
level. Must be paid regardless of
(Overhead) executive salaries.
output.
Vary DIRECTLY with the level of Computer chips, wires, plastic,
Variable Costs production. Same per unit, but total packaging in each Samsung
varies with volume. smartphone.
Sum of fixed + variable costs at a
TC = Fixed Costs + (Variable Cost per
Total Costs given production level. Price must at
unit × Quantity)
least cover total costs.
Cost-Plus (Markup) Pricing
The simplest pricing method: add a standard markup to the cost of the product.
• Example: Retailer buys gaming controller for $20 → marks up 50% → sells for $30. Gross
margin = $10. If operating costs = $8, profit = $2.
• Why it's popular: (1) Sellers are more certain about costs than demand; (2) When all industry
players use it, prices are similar and price competition is minimized.
• Why it's flawed: Ignores consumer demand and competitor prices — not the best approach for
maximizing profit.
Break-Even / Target Return Pricing
The firm determines the price at which it will break even or achieve a desired target return on
investment. Uses a break-even chart plotting total costs and total revenue against sales volume.
• Break-Even Point: The sales volume at which total revenue = total costs (zero profit).
• Target Return: A higher sales volume needed to earn the target profit above break-even.
Key Limitation: Break-even analysis does NOT account for the price-demand
relationship. As price rises, demand typically falls — so the market may not buy the
volume needed to break even at the higher price. Always combine break-even analysis
with demand analysis.
1C. Competition-Based Pricing
Competition-based pricing involves setting prices based on competitors' strategies, costs, prices, and
market offerings. Consumers judge a product's value partly by what competitors charge.
Key Questions to Ask:
Chapter 9: Pricing — Understanding and Capturing
Customer Value
Based on: Armstrong, Kotler et al., Marketing: An Introduction, 7th Canadian Edition
Chapter Overview: Pricing is the only element of the marketing mix that produces
revenue — everything else is a cost. This chapter covers: the three major pricing
strategies (value-based, cost-based, competition-based), internal and external factors
affecting pricing, new product pricing, product mix pricing, price adjustment strategies, and
public policy constraints. The central thesis: always sell value, not just price.
1. Major Pricing Strategies
The Pricing Framework — Price Ceiling and Floor
The price a company charges will fall somewhere between a price too low to produce a profit and a
price too high to produce any demand. Two forces define this range:
• Price CEILING: Set by customer perceptions of value. If price > perceived value, customers
won't buy.
• Price FLOOR: Set by product costs. If price < costs, the company loses money.
• Between these extremes, the company must consider competitors' strategies and prices, the
overall marketing strategy and mix, and the nature of the market and demand.
The Golden Rule: Price is the only element of the marketing mix that produces revenue
— all other elements represent costs. A small % improvement in price can generate a
large % increase in profitability. Smart managers treat pricing as a KEY STRATEGIC
TOOL, not a headache.
The Three Major Pricing Strategies — Master Comparison Table
Customer Value-Based Cost-Based Competition-Based
Customer needs & value Product design & production Competitors' prices,
Starts with
perceptions costs strategies & market offerings
Price What customer is willing to Cost + desired markup or Relative value vs. competing
driven by pay profit products
Ceiling / Consumer perceived value = Positioned relative to
Total costs = floor
Floor ceiling competitor value/price
, Goal is NOT to simply
Hard to measure perceived May ignore demand; price
Pitfall match/beat—it's to price for
value accurately may be too high or too low
relative value
Caterpillar vs. Komatsu:
Patek Philippe watches Retailer markup: buy
justifies $80K premium via
Example (value = passion, investment, controller at $20, sell at $30
$150K in added lifetime
legacy); Apple Watch (+50%)
value
1A. Customer Value-Based Pricing
Customer value-based pricing uses buyers' perceptions of value as the key to pricing. The critical
difference from cost-based pricing is the direction of the process:
Cost-Based Pricing Process → Value-Based Pricing Process →
Assess customer needs & value → Set target
Design product → Determine costs → Set price price to match perceived value → Determine
based on cost → Convince buyers of value costs that can be incurred → Design product to
deliver value at target price
Key Insight: 'Good value' is NOT the same as 'low price.' A Patek Philippe watch
($20,000–$500,000) is considered by its owners a real bargain because of passion,
investment value, multi-generational sentimental value, and craftsmanship. The company
says: 'You never actually own a Patek Philippe, you merely look after it for the next
generation.'
Two Subtypes of Value-Based Pricing:
Subtype Definition & When Used Examples
Loblaw's PC, No Name, and Life
Offering the right combination of Brand lines. EDLP: Walmart, Lidl.
quality and good service at a fair price. High-Low: Hudson's Bay, JCPenney.
Good-Value
Responds to consumer demand for Off-price retailing: Winners (20-60%
Pricing
value-for-money. Includes EDLP and below regular department store
high-low pricing at retail level. prices). Airlines: Swoop/Spirit 'Bare
Fare' pricing.
Adding quality, services, and value- Bose: 50+ years of R&D investment in
Value-Added added features to differentiate offers premium audio quality — charges
Pricing and support higher prices, rather than more because it delivers more. The
cutting prices to match competitors. premium price itself signals quality.
, 1B. Cost-Based Pricing
Cost-based pricing involves setting prices based on the costs of producing, distributing, and selling the
product plus a fair rate of return. Costs set the FLOOR for pricing.
Types of Costs
Cost Type Definition Example
Do NOT vary with production or sales
Fixed Costs Rent, heat, interest payments,
level. Must be paid regardless of
(Overhead) executive salaries.
output.
Vary DIRECTLY with the level of Computer chips, wires, plastic,
Variable Costs production. Same per unit, but total packaging in each Samsung
varies with volume. smartphone.
Sum of fixed + variable costs at a
TC = Fixed Costs + (Variable Cost per
Total Costs given production level. Price must at
unit × Quantity)
least cover total costs.
Cost-Plus (Markup) Pricing
The simplest pricing method: add a standard markup to the cost of the product.
• Example: Retailer buys gaming controller for $20 → marks up 50% → sells for $30. Gross
margin = $10. If operating costs = $8, profit = $2.
• Why it's popular: (1) Sellers are more certain about costs than demand; (2) When all industry
players use it, prices are similar and price competition is minimized.
• Why it's flawed: Ignores consumer demand and competitor prices — not the best approach for
maximizing profit.
Break-Even / Target Return Pricing
The firm determines the price at which it will break even or achieve a desired target return on
investment. Uses a break-even chart plotting total costs and total revenue against sales volume.
• Break-Even Point: The sales volume at which total revenue = total costs (zero profit).
• Target Return: A higher sales volume needed to earn the target profit above break-even.
Key Limitation: Break-even analysis does NOT account for the price-demand
relationship. As price rises, demand typically falls — so the market may not buy the
volume needed to break even at the higher price. Always combine break-even analysis
with demand analysis.
1C. Competition-Based Pricing
Competition-based pricing involves setting prices based on competitors' strategies, costs, prices, and
market offerings. Consumers judge a product's value partly by what competitors charge.
Key Questions to Ask:
