Pricing Decisions

What is Pricing To a manufacturer pricing represents the quantity of money, received by the firm or seller for its product. To a customer, it represents a monetary sacrifice. Quantity of money received by the seller PRICE = ---------------------------------------------------------Quantity of goods & services received by buyer

In this equation both the parts are important for price decisions.

Points to learn
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How to set the price of a new product/ service How to adapt the price How to respond to competitors price change

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Common pricing mistakes

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Too cost oriented Price is not revised often Price is seen as independent of the other elements of marketing mix Price is not varied enough.

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How companies price

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Small companies- Person incharge Large companies- Division & product line managers which is in sink with the pricing objectives set by the top management. Industries where pricing is key factor (petroleum, aerospace etc) Pricing department

14.5

Pricing

Pricing( a complex task) : There is a science side & art side to it

Factors influencing pricing

Internal factors Corporate objective The image sought Nature of the product Stage in the plc Usage pattern Cost of manufacturing Extent of differentiation Other elements of the marketing mix

Factors influencing pricing

External factors
Market characteristics Price elasticity of the demand Buying behavior of the customer Bargaining power of supplier/customer Competitors pricing Government control Price cartels

Pricing Framework
Demand Corporate objective Price Competitor reactions Barriers in industry like technology Exit barrier Government policy

Costs

14.10

Consumer Psychology & pricing

Reference pricing Price quality inference Price cues

Possible Consumer Reference Prices

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Fair price Typical price Last price paid

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Competitor prices Expected future price Usual discounted price

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Price Cues
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Left to right pricing (Rs. 2999 versus Rs. 3000) Ending prices with 0 or 5 Sale written next to price

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Steps in setting the price

Selecting the pricing objectives Determining demand Estimating costs Analyzing Competitors cost prices & offers Selecting a pricing method Selecting the final price

Step 1: Selecting the pricing objective

Survival Maximum current profit Maximum market share Maximum market skimming Product quality leadership

Step 2 :Determining Demand

Price sensitivity Price elasticity of demand Estimating demand curves

Price Sensitivity
The factors that contribute to price sensitivity are: s Unique value effect s Substitute awareness effect s Difficult comparison effect s End-benefit effect s Price quality effect s Inventory effect

Price Elasticity
Elastic demand s Inelastic demand Demand is likely to be less elastic in following conditions: s There are few or no substitutes or competition s Buyer do not readily notice the higher price s Buyers are slow to change their buying habits s Buyers finds the higher price justified
s

14.19

Estimating demand curves

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Statistical analysis Price experiments Surveys

Step 3 :Estimating Costs

Costs
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It is important for marketers to estimate the costs of manufacturing and marketing the product. Also important to know how costs behave over a period of time & quantities produced. Another factor to be considered is that different firms, within the same industry, operate at different levels of efficiency, reflecting their cost structures. Some costs do not change over production volumes. These are rents, salaries, depreciation, plant & machinery costs etc. These are called sunk or fixed costs.

Estimating Costs
Types of costs:
1) 2) 3)

1)Fixed costs 2) Variable cost 3) Total costs Experience / Learning Curve : ABC Accounting Target Costing

4) 5) 6)

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Step 4 :
Analyzing Competitors costs, prices and offers; 1) Nearest competitors price 2) Value of the offering 3) Worth of the extra to be added 4) Features which competition has & I dont value is to be deleted.

Step5: Pricing Methods

1) 2) 3) 4) 5) 6) 7) 8)

Cost based pricing Mark up pricing Target rate of return pricing Demand based pricing What the traffic can bear pricing Skimming pricing Penetration pricing

Step5: Pricing Methods

1) 2) 3) 4) 5) 6) 7) 8) 9) 10)

Competition oriented pricing Premium pricing Discount pricing Going rate pricing Perceived value pricing Product line pricing Auction type pricing pricing Affordability pricing Differentiated pricing Promotional pricing

Step 5: Selecting a Pricing Methods

Mark up pricing the total cost of production is estimated & a mark up or the margin that the firm wants is further added: Unit cost = Variable cost + Fixed Cost Unit Sales Mark up price = Unit cost (1- Desired return on sales ) Easy to determine the cost Price tends to be similar Fair to both seller & buyer

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Step 5: Selecting a Pricing Methods

Target return Pricing Determining the price which would yield the target return on investment :

Target return price = Unit cost + Desired return * Invested capital Unit Sales

Skimming pricing
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Association of quality with price Ready to pay higher price to be opinion leader Related to status Competition is low Perceived to be high tech product Objective is to carve out profits from niche

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Penetration pricing
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Size of the market is large & growing Customer switch is common Intense competition An entry strategy Price quality association is week

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Customer-oriented or perceived value pricing

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(i) Acquisition value and (ii) Transaction value Acquisition value of a product:

Perceived benefits

-----------------------------------------Perceived sacrifice

Transaction value determined by comparing buyers reference price to actual price To measure perceived value, a marketer may use any of the following methods: Direct price rating method Direct perceived value rating Economic value to the customer EDLP High low pricing

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Product Line Pricing Strategies

(a) Price Bundling (b) Premium Pricing (c) Image Pricing (d) Complementary Pricing
Captive pricing strategy x Loss leader strategy x Two-part pricing
x

AUCTION TYPE PRICING

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Ascending Bids Descending Bids Sealed bid auctions

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Differentiated pricing
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Customer segment pricing Product form pricing Image pricing Channel pricing Location pricing Time pricing

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Discounts
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Cash discount Quantity discount Functional discount Seasonal discount Allowances

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Promotional pricing
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Loss leader pricing Special event pricing Cash rebates Low interest financing Longer payment terms Warranties & service contracts Physiological discounting

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Information Needed for Price Change

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Customers ability & willingness to buy; customer lifestyle; benefits sought; characteristics of the product e.g.
When the kopi tiams, local coffee shops in Singapore tried to raise the price of a cup of coffee by 10 cents in March 1994, the grass-root reaction was stormy x When Starbucks Coffee and Spinellis raised their prices in the beginning of 1998 by a hefty 20%, nobody raised an eyelit
x
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Information Needed for Price Change (contd)

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Need to know everything about the competitors

How would competitors react to our price change? x In obtaining competitors information, remember the value of the information
x

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Initiating price cuts..

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Low quality trap Fragile market share trap Shallow pocket trap

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Initiating price increase

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Delayed quotation pricing Escalator clauses Unbundling Reduction of discounts

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Strategies to avoid price rise

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Shrink the product Substituting less expensive material Reducing or removing features Reducing product service Creating new economy brands

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Responding to Competitors Price Change price for homogenous If competitors lower

products
Try augmenting the product x If it doesnt work or if it is not likely to work, then meet the price cut head-on
x

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Responding to Competitors Price Change (contd) If competitors raise price

In a homogeneous market, follow if you think the whole market is likely to follow x In a non-homogeneous market, evaluate
x

The reason for the competitor price change 3 If the price increase is temporary 3 The effect on your market share & profit 3 The likely response(s) from the other competitors
3

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When a Market Leader is Being Attacked on Price

Options available:
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Maintain price Raise perceived quality Match competitors price Increase price and improve quality

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New-Product Pricing Strategies

1.

Skimming pricing
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Charging a high price initially and reducing the price over time Commonly used when introducing innovative products Charging a low price when entering the market to capture market share Used when competitors are closing in with similar or better products
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1.

Penetration pricing
x

New-Product Pricing Strategies (contd)

3.

Intermediate pricing
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Pricing somewhere in between the skimming strategy and the penetration strategy

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Pricing Strategies for Established Products

Three strategic alternatives: s Maintain the price if you are the leader e.g.
x

In 1999, Shell in Singapore maintained its price when other petrol companies engaged in a price war until towards the end of the engagement SIA regularly reduce its airfare in anticipation of the developing market situations during inflation, or if demand is expected to increase or if you wish to harvest 47

Reduce the price e.g.

x

Increase the price

x

Price-Flexibility Strategy
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One-price policysetting one fixed price for all markets Flexible-price policysetting different prices in different markets based on:
Geographic Location, x Time of delivery, or x The complexity of the product
x

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How much flexibility in price?

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Depends on the Demand-Cost gap and the influence of competition, social, legal and ethical considerations Example: Life-saving drugs

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Pricing Strategies Across Customer Groups

Objective of Firm Characteristics of consumers Varying Prices Among Consumer Segments Exploit Competitive Position Balance Pricing over Product Line Image Pricing

Some have High Search Costs Some have Low Reservation Price

Random Discounting Price Signaling

Random Discounting Penetrating Price Bundling Pricing Premium Pricing Experience Curve Pricing Second Market Discounting Geographic Pricing Complementary Pricing

All have Special Transaction Costs

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