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PRICING

PRICING

e is the only P in the Marketing-Mix that brings in the reve

wer of Pricing;

Companys profit Margin is 3% of sales;

n, a 1 % increase in Price will result in 33.33% increase in Pro

PRICING IS A STRATEGIC DECISION

A no. of factors influence the decision;

Price sensitivity of different market segments

Market position of the product and the firm

Stage of life cycle the product is in

Cost leadership

Channels of distribution

Price moves by competitors

Changes in economic condition

Purpose and occasion to buy the product

PRICING OBJECTIVES

rmally set by top management and revolves around;

Market share

OI

rofit

rice stability

wever;
Scope is restricted
im is to build a successful brand
mphasis is on improving efficiency of operations in Mfg. & Mktg.
ll pricing objectives have one thing in common: A Healthy Bottom Line

SETTING THE PRICE


1. Selecting the pricing objective
2. Determining demand
3. Estimating Costs
4. Analyzing competitors costs, prices and offers
5. Selecting a pricing method
6. Selecting the final price

1. SIX MAJOR PRICING OBJECTIVES


SURVIVAL
MAXIMUM CURRENT PROFIT or TARGET ROI or
Skimming
MAXIMUM CURRENT REVENUE or MARKET SHARE or
Penetration
PRODUCT QUALITY LEADERSHIP
UNDERMINE or DESTROY COMPETITION or Predatory
ANY OTHER - SOCIAL OBLIGATIONS ETC.

2. DETERMINING DEMAND
- Each price will have a different level of demand
- Higher the price, lower the demand (except in prestige
goods)
- Price band width
- Price Sensitivity factors
- Estimating demand curves through
a) Statistical analysis
b) Price experiments
c) Surveys of purchase intentions
- Price elasticity of demand

2. DETERMINING DEMAND
FACTORS LEADING TO LESS PRICE SENSITIVITY

The product is more distinctive.


Buyers are less aware of substitutes.

Buyers cannot easily compare the quality of substitutes.(Eg. Carpets,


Doctors)
The expenditure is a smaller part of the buyers total income. (Eg. Salt)
The expenditure is small compared to the total cost of the end product.
Part of the cost is borne by another party.
The product is used in conjunction with assets previously bought.
The product is assumed to have more quality, prestige, or exclusiveness.
Buyers cannot store the product.

How to over come price sensitivity of the buyer?

Create a perceptible product differentiation

Strengthen the personal selling by making the sales force more effective and
persuasive

Position the company to achieve Quality image in the minds of users

Build brands through aggressive, effective and sustained promotion

2. DETERMINING DEMAND
What is price Inelasticity / Elasticity?

This determines the changes in demand with unit


change in price
If there is little or no change in demand, it is said
to be price inelastic.
If there is significant change in demand, then it is
said to be price elastic.

2. DETERMINING DEMAND
What is price Inelasticity / Elasticity?

Price Inelastic:
% change in Q < % change in P
e.g. A 5% increase in price would be met by a fall in sales of
something less than 5% Revenue would rise
A 7% reduction in price would lead to a rise in sales of something
less than 7% Revenue would fall

2. DETERMINING DEMAND
What is price Inelasticity / Elasticity?

Price Elastic:
% change in quantity demanded > % change in price
e.g. A 4% rise in price would lead to sales falling by something
more than 4% Revenue would fall
A 9% fall in price would lead to a rise in sales of something more
than 9% Revenue would rise

3. ESTIMATING COSTS
- Types of costs (variable, fixed/overhead,
total costs, average cost)
- Accumulated
production
experience or learning curve
- Activity Based Cost
- Target Costing

leads

to

4. ANALYZING COMPETITORS COSTS, PRICE


& OFFERS
- Input cost estimation (Technology, Sourcing etc.)
- Competitors product type
- Competitors reaction to price changes
- Competitors product sales and customer loyalty
- Competitors corporate objective
- Market standing

5. SELECTING THE PRICING METHOD


Markup pricing: Find Unit Cost = VC + (FC/US), Then; MP = UC/
(1-ROS)

Target return pricing: UC + (desired return X capital


invested)/Unit Sales
Perceived value pricing (how customers perceive the value
of the product)
Value pricing (Low price for high quality offerings thro
operational efficiency eg. EDLP)
Going rate pricing (w.r.t competitors)
Sealed bid pricing (auction)

BASES FOR PRICING

There are Four commonly used bases;


Cost based pricing
Demand based pricing
Competition based pricing
Market based pricing

BASES FOR PRICING

There are Four commonly used bases;


Cost based pricing
Demand based pricing
Competition based pricing
Market based pricing

BASES FOR PRICING

ost Based Pricing

elling Price = COG + O/H + Profit

dvantage:

elps to indicate the minimum price levels

Disadvantage:
does not account the fluctuations in input costs
ignores demand and competitors factors
may lead to wrong decision since it is based on O/H cost allocation

BASES FOR PRICING

emand Based Pricing

heory of pricing & elasticity of demand states;

demand will fall as price increases

demand will rise as price decreases

his approach:
considers the effects that different prices may have on the demand
helps to work out the BEP at different SP and different Volume forecasts
is useful in market that is price sensitive and demand elastic

is it an appropriate approach

BASES FOR PRICING

ompetition Based Pricing

Most commonly used method;

prices can be above competitors

prices can be at par with competitors

prices can be set below competitors

his approach:
has to estimate the competitors cost while considering their prices
has to consider efficiency levels
has to consider cost leadership (vis; backward integration)

BASES FOR PRICING

Market Based Pricing

Deals with judgmental or subjective elements ;


perceptions of customers in terms of value satisfaction (PV)
or bundle of benefits the product has to offer

PV can be a result of:


performance of the product as experienced by the customers
reputation and image of the firm
quality of service rendered

Note:
Accurate assessment of market perception is crucial
Market research is an important tool to assess the PV
Avoids pitfalls of over pricing and/or under pricing

6. SELECTING THE FINAL PRICE


MUST CONSIDER THE FOLLOWING;
Product market position
Company standing
Product quality, services and promotional plans/strategy
Companys pricing policy (?? Airlines, Banks, etc.)
Impact of price on other parties (Channel partners, sales
force, competitors, suppliers, regulatory body

ADAPTING THE PRICE


I. Geographical pricing

II. Pricing discounts & allowance


III. Promotional pricing
IV. Discriminatory pricing
V. Product mix pricing

ADAPTING THE PRICE


I. Geographical pricing

(modifying a list price based on


the geographical location of the buyer. It takes care of the
costs of shipping to different locations. Bread, Cars etc.)

II. Price Discounts -

Cash discounts, Quantity discounts,


Functional discounts, Seasonal discounts, Trade-in allowance,
Promotional allowance, etc.)

ADAPTING THE PRICE


III. Promotional Pricing
1. Loss leader pricing

(popular article sold at or below the market cost to


increase buyers traffic, to generate sales of other items eg. Milk/Sugar/Printer etc.)

2. Special event pricing

(establish special prices in certain seasons to

draw more customers and sales)

3. Low interest financing

(commonly used by automakers, low

interest or even no-interest financing is used to attract customers instead of


cutting prices)

4. Longer payment terms

(extending loans over longer periods of

time to reduce customer monthly payments is a technique often used by


mortgage banks)

5. Warrantees & Service contract


6. Psychological discounting (Rs. 1000/- earlier now Rs. 800 only)

ADAPTING THE PRICE


IV. Discriminatory Pricing
1.Customer segments (airlines, train, hotels, students, senior citizens, Essel World
etc.)

2.Product form (charged differently on the basis of different versions of soaps, mobile phones,
TVs, car etc.)

3.Image (perfumes, high-end cars, designer dress, based on brand image)


4.Location (Movie halls, Bread, Real estate
5.Time (movie tickets, advance airline tickets, off season hotel rates)
6.Channel Pricing (price depends on the means of delivery of a good or service. Price
on internet may be lower than the price in a store)

V. Product-Mix Pricing
1.Product line pricing (one product with various class distinctions. A car model that
has various model types)

2.Optional feature pricing


3.Captive product pricing (item made for use with another item, shaving blades for
a razor, parts for a machine, software for a computer)

4.Two parts pricing (Fixed + Variable) e.g. telephone operators


5.Byproduct pricing (pet foods, animal feed)
6.Product bundling pricing (Fast food, Cable TV, Computer softwares)

PRICING STRATEGIES

is no fixed formula for arriving at single pricing strategy that suits all

hoice of a right pricing depends on;

tives
of products
perceptions
et segment
t of competition

PRICING STRATEGY
MARKET PENETRATION PRICING : Low Price
High Volume

1. Profits possible only through volumes Economies


of Scale
2. Helps in capturing quick sales and market share
3.
4.
5.
6.
7.
8.

Price sensitive market Elastic Demand


High competition / Fragmented market
No / Less product differentiation
Anticipated longer PLC
Is resorted in the growth & maturity phase of PLC
At times when put to use can create entry barrier

Drawback:
. Pay-back period is longer due to low profit return
. If the PLC is short, the result can be disastrous
. It is often difficult to increase the price

PRICING STRATEGY
MARKET SKIMMING PRICING : High Price
Low Volume

1. Profit is independent of volumes


2. Helps in quickly recovering the cost
3. Price insensitive market Inelastic Demand
4. Little or no competition / Monopoly market /
Niche
5. Product is highly differentiated or High-end
product
6. Anticipated shorter PLC
7. Is resorted in the introductory phase of PLC
8. Perceived quality relationship
Drawback:
.Increases vulnerability since it attracts competition
.Can result in under utilisation of plant capacities

FOUR INTRODUCTORY PRICING


STRATEGIES
Promotio
n

Pric
e

Hig
h

Low

Hig
h
Rapidskimming
strategy

Slowskimming
strategy

Rapidpenetratio
n strategy

Slowpenetratio
n strategy

Low

PRICING STRATEGIES
MARGINAL COST PRICING

ply stated means the cost of producing one more unit.

cost of producing one more unit implies the cost of producing the extra
consists only of the VC since the FC are already covered with the existing
s volume.

adequate even if the firm make a small profit on the additional sales
ause this small profits would not be there had it not been for the extra sales.

tional orders at small profits will improve capacity utilisation.

is used particularly for highly competitive business situation like institutional ten
help decide should the company accept this order
en used where production capacity is high and high sales volumes are needed
eep the FC low and where the demand is price elastic.

PRICING STRATEGIES
Marginal Cost Pricing
Aircraft flying from Mumbai to Chennai Total Cost (including normal
profit) = Rs. 15,000 of which Rs. 13,000 is fixed cost
Number of seats = 160, average price =15000/160 = Rs. 93.75
MC of each passenger = 2000/160 = Rs. 12.50
If flight not full, better to offer passengers chance of flying at Rs.
12.50 and fill the seat than not fill it at all!

PRICING STRATEGIES
PRODUCT QUALITY LEADERSHIP
Is where a company aims to provide
the best quality product in the
market, and therefore charges more
than its competitors.
These companies are usually market
They
rely heavily on innovative,
leaders.
exciting, status-conferring new
products to hold customer interest.
Eg. Apple, Sony

PRICING STRATEGIES

Quality

Price-Quality Strategies

Super value

High value

Premium

Good value

Medium value

Overcharging

Economy

False economy

Rip off

Price

INITIATING PRICE CHANGES


INITIATING PRICE CUT

REASONS
1. Excess capacity
2. Declining market share
3. Aggressive pricing when co.
want to be market share
leader
4. Economic recession
5. Govt. policies or guidelines
Risks
- Low quality trap
- Fragile market share trap.
Buyer loyalty is not ensured
- Shallow pocket trap. Reserves
are less. Staying power is less.

INITIATING PRICE INCREASE

REASONS
1. Expected improved profitability
2. Cost Inflation
3. Demand exceeds supply

BETTER METHOD THAN INCREASING


PRICE
(ESPECIALLY PRICE SENSITIVE MARKET)
1. Shrink pack size for same price
2. Substitute less expensive materials
3. Reduce or remove product features / services
4. Less expensive packaging or promoting larger pack sizes.
5. Reducing number of models / sizes / packs
6. Creating new economy brands

REACTIONS TO PRICE CHANGES


CUSTOMERS REACTIONS

TO PRICE CUT
1. Product might be faulty
2. Not selling well
3. Financial trouble. Company
may go out of business.
4. Prices may fall further. Hence
wait.
5. Quality is reduced
6. New model
TO PRICE INCREASE

COMPETITORS REACTIONS

Competitor will react when? Few firms,


product homogeneous, buyers highly
informed. It is important to estimate the
competitors likely reactions before
affecting a price change.
The factors to be considered are :
1. Competitors Financial Position
2. Competitors Sales and Capacity
3. Competitors Corporate Objectives
Market Share

1. Item is hot

Profit Maximisation - Likely to improve


Quality & Sales Efforts

2. Item has good value

4. Customer Loyalty

3. Seller is greedy

RESPONDING TO COMPETITORS PRICE CHANGES


Analyse the problem on the following lines:
Why was the price reduced?
Is it permanent?
How are other competitors likely to respond?
What will happen to companys market share and profits if it does not
respond?
Response varies with situation - importance of product in Cos portfolio, stage
of PLC, markets price sensitivity, behaviour of costs with volume. It is better to
anticipate than to react.
Non-homogeneous product Market
Homogeneous-product
Factors
Market
Little choice but to match price
cut
However, price increase need
not be matched. Ultimately
competitors will be forced to
reduce.

Price
Quality
Service

Reliability

Strength of these factors may


desensitize
buyers to price changes

RESPONDING TO COMPETITORS PRICE CHANGES


Reaction to price changes

Customer reaction
Competitor reaction
Price Setting

Low Price
No possible
profit at
this price

Costs

Competitors
prices and
prices of
substitutes

Customers
assessment
of unique
product
features

High Price
No possible
demand at
this price

RESPONDING TO COMPETITORS PRICE CHANGES

Responding to competitor price changes

Maintain price
Maintain price and add value
Reduce price
Increase price and quality
Launch a low price fighter

RESPONDING TO COMPETITORS PRICE CHANGES


Responding to competitor price changes

No

Has competitor
cut his price?

No

Yes
Is the price
likely to
significantly
hurt our sales?

Yes

By less than 2%
Include a
discount coupon
for the next
purchase

No

Is it likely to be
a permanent
price cut?

By 2-4%
Drop price by
half of the
competitors
price cut

Hold our price


at present level;
continue to watch
competitors
price

Yes

How much has


his price been
cut?

By more than 4%
Drop price to
competitors
price

RESPONDING TO COMPETITORS PRICE CHANGES

Three strategic alternatives:


1. Maintain the price if you are the leader
2.
3.

Reduce the price


Increase the price (during inflation, or if demand is expected to
increase or if you wish to harvest)

nally, Periodically Carryout Price Audit


Review the cost and price of the product periodically
Identify scope for process improvement or find alternate sourcing ofRM/PM for cost reduction.
Evaluate packaging & manufacturing cost to identify areas of improvement
Increase productivity and build the brand to achieve cost leadership
NOTE: COST EFFECTIVENESS is preferred over COST CONTROL
Pricing the product RIGHT and INVESTING on BRAND PROMOTION
is a better trade off than
Pricing the product LOW and COMPROMISE on BRAND PROMOTION

MERCI