Pricing6
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  • 1. PRICING …
  • 2. Structure of the Session … • Essentials about pricing • Basic concepts revisited • Key questions which a brand manager faces • Recommending an approach to pricing • Developing the pricing strategy
  • 3. Essentials about pricing • Price is the only element in the marketing mix that produces ‘revenue’; the other elements produce ‘costs’ • Also, it is one of the two mix elements (along with packaging) with a public face. The packaging says what the brand is while the price should say what it is worth or what is its value. • Price is also the most flexible elements of the marketing mix. It can be changed quickly, unlike product features and channel commitments.
  • 4. Essentials about pricing … • Price can also convey image connotations regarding the brand to its consumers. • Finally, price is not only absolute but comparative and is linked with the brand offer which is being made.
  • 5. Basic Economic Concepts Demand curve: The relationship between a given set of prices and the quantity bought at each price point. Market demand curve: Represents the sum total of the quantity demanded by all individuals in that market at each price point. Supply curve: The relationship between the market price and the amount of commodity that marketers are willing to market at that price .
  • 6. Basic elements of supply and demand • Factors affecting demand:  Average income  Population  Price of related products  Preferences  ‘Other’ influences on demand.
  • 7. Basic elements of supply and demand (contd.) Price of automobiles (thousands of Rupees per unit) P D D’ The role of marketing (or product differentiation) D D’ Quantity demanded of automobiles (millions per year) Q
  • 8. Basic elements of supply and demand (contd.) • Factors affecting supply:  Production availability  Cost of production (prices of inputs & technological advances)  Prices of related goods  Government policies  ‘Other’ influences on supply
  • 9. Elasticity of demand • The price elasticity of demand measures how much the quantity demanded of a good changes when its price changes  Price elasticity of demand = Ep  Ep = Percentage change in quantity demanded Percentage change in price
  • 10. Elasticity and revenue Value of demand Description elasticity Definition Impact on revenues Greater than Elastic demand one (Ep>1) % change in demand greater than the % change in price Equal to one (Ep=1) % change in demand similar to the change in price Unit-elastic demand Less than one Inelastic demand % change in demand (Ep<1) less than % change in (relative) price Revenues increase when price decreases or decreases when price increases Revenues unchanged when price decreases Revenues decrease when price decreases
  • 11. Implications on Pricing • Consumer price value relationship needs to be assessed and price positioned accordingly. • We need to recognise that price insensitivity can be generated
  • 12. Main approaches to pricing … • • • • Premium pricing, Penetration pricing Economy pricing, Price skimming
  • 13. Nine Price-Quality Strategies High High Product .. Quality Low Price .. Low
  • 14. Price Positioning Options Products Quality High Super bargain strategy (Air Deccan) Medium Bargain Strategy (Big Bazaar) Low Economy Strategy Low Penetration strategy (Motorola) Average quality strategy Shoddy – goods Medium Price Premium strategy (Benz) Overpricing strategy Hit-and-run strategy High
  • 15. Other approaches to pricing … • Pschycological pricing • Geographic pricing • Product Line pricing • Value pricing • Captive pricing • Optional procing • Bundling
  • 16. Price insensitivity can be generated • How? : Desensitising factors can be used to diminish the impact of price changes • Desensitizing factors may either be through an understanding of consumer behaviour / impacting consumer pschycgraphics and point-of-sale variations • Where favourable desensitising differentials exist in a particular sale, the sale will not be lost until the price is increased more than the value of the desensitising differentials
  • 17. Price insensitivity can be generated (Contd.) • Insensitivity will tend to be greater where:  Point of Sale effectiveness  After Sales  Consumer loyalties are significant  There are multiple dimensions of product quality  Unit price is low  The product is more sophisticated or not fully understood by the consumer
  • 18. Some Concepts in Pricing …
  • 19. Factors Influencing Price Internal Factors • • • • • Marketing objectives Marketing mix strategies Costs Organizational considerations Market positioning influences pricing strategy • Other pricing objectives:  Survival  Profit maximization  Market share leadership  Product quality leadership • Non Profit objectives:  Partial or full cost recovery  Social pricing
  • 20. Factors to Consider When Setting Price Internal Factors • • • • • Marketing objectives Marketing mix strategies Costs Organizational considerations Pricing must be carefully coordinated with the other marketing mix elements. • Target costing is often used to support product positioning strategies based on price • Non Price positioning can also be used
  • 21. Factors to Consider When Setting Price Internal Factors • • • • • Marketing objectives Marketing mix strategies Costs Organizational considerations Types of costs:  Variable  Fixed  Total costs • How costs vary at different production levels will influence price setting • Experience (learning) curve effects on price
  • 22. Factors to Consider When Setting Price Internal Factors • • • • Marketing objectives Marketing mix strategies Costs Organizational considerations • Who sets the price?  Small companies: CEO or top management  Large companies: Divisional or product line managers • Price negotiations
  • 23. Factors to Consider When Setting Price External Factors • Types of markets  Pure competition  Monopolistic competition  Oligopolistic competition  Pure monopoly • Consumer perceptions of price and value • Price-demand relationship  Demand curve  Price elasticity of demand • • Nature of market and demand Competitors’ costs, prices, and offers • Other environmental elements
  • 24. Factors to Consider When Setting Price External Factors • • Nature of market and demand Competitors’ costs, prices, and offers • Other environmental elements • Consider competitors’ costs, prices, and possible reactions when developing a pricing strategy • Pricing strategy influences the nature of competition  Low-price low-margin strategies inhibit competition  High-price high-margin strategies attract competition • Benchmarking costs against the competition is recommended
  • 25. Factors to Consider When Setting Price External Factors • Economic conditions  Affect production costs  Affect buyer perceptions of price and value • Reseller reactions to prices must be considered • Government may restrict or limit pricing options • Social considerations may be taken into account • • Nature of market and demand Competitors’ costs, prices, and offers • Other environmental elements
  • 26. Key issues which a manager faces .. • How should a brand be priced for the first time? • How should the price be changed over time to meet varying circumstances and opportunities? • When should the company initiate a price change, and how should it respond to a competitor’s price change?
  • 27. Recommended approach to pricing (contd.) Stage I : Select a market target Stage II : Choose a Brand Position • Need to select a price which establishes the image Stage III : Develop a marketing mix • Determine the role which price has to play
  • 28. Recommended approach to pricing (contd.) Stage IV : Select a pricing policy • Questions that need to answered are :  How should price compare with “average” prices in the industry ? » How ‘above’ or ‘below’ ? » Who comprises the ‘average’?  How fast will we meet price reductions or increases by rivals ?  How frequently is it advisable to vary price?  To what extent is stability of price advantageous?  How frequently should ‘price promotions’ be run?
  • 29. Recommended approach to pricing (contd.) Stage V : Determine a pricing strategy • Formulate a strategy to guide management in setting price during the time that the special situation endures. Stage IV : Select specific price • However, the ideal situation does not happen too often ….. What happens is :  Price calculated/selected is not in line with ideal price so hence : » Re-examine assumptions » Re-examine costs » Re-examine sales plan
  • 30. Finally … The Procedure for Price setting Select the pricing objective Estimate costs Estimate margins Establish Company price Calculate excise,local taxes and regional margins Establish price
  • 31. Procedure for Price setting (contd) Establish price Compare with competition Confirm if in line with strategy Establish final price
  • 32. Further … • Parity pricing , Cost + pricing … etc • ‘Market clearing price’ • Modern pricing concepts .. ‘reference price’ , ‘EDLP’ ..