PRICING PRODUCTS UNERSTANING AND CAPTURING CUSTOMER VALUE CHAPTER NO. 10
The amount of money charged for a product or service, or the sum of the values that consumers exchange for the benefits of having or using the product or service.
Amounting of money refers to
Factors to Consider When Setting Prices Customer perceptions of value Other internal and external considerations Marketing strategy, objective and mix. Nature of the market and demand Competitors strategies and prices Product cost Price floor No profits below this price
Setting prices based on the costs for producing distributing and selling the product plus a fair rate of return for effort and risk.
Setting prices based on buyer’s perceptions of value rather than on the seller’s cost.
Types of Value-Based Pricing
Good value pricing
Right combination of quality
Good service at a fair price
Value added pricing
Value-Based Pricing versus Cost-Based Pricing Product Cost Price Value Customers Customers value Price Cost Product Cost-Based Pricing Value-Based Pricing
TYPES OF COST
Cost that do not vary with production or sales level.
factory land, building
Cost that vary directly with the level of production.
direct material cost
direct labor cost
the sum of fixed and variable cost for any given level of production.
Total cost = fixed cost + variable cost
COST AT DIFFERENT LVELS OF PRODUCTION
Total fixed cost = 100,000 Rs.
No. of units = 10
Per unit cost = 100,000/10 = 10,000 Rs.
No. of units = 100
Per unit cost = 100,000/100 = 1000 Rs.
No. of units = 1000
Per unit cost = 100,000/1000 = 100 Rs.
COST PER UNIT AT DIFFERERNT VELS OF PRODUCTION PER PERIOD 10 100 1000 Cost per unit 1 2 3
The drop in the average per unit production cost that comes with accumulated production experience.
10 20 30 1000 2000 3000 Accumulated production Cost per unit LEARNING CURVE
COST BASED PRICING Cost-plus Pricing Adding a standard mark up to the cost of the product.
EXAMPLE Suppose Variable cost = 10 Fixed cost = 3,00,000 Expected unit sales = 50,000 Unit cost = variable cost + Fixed cost Unit sales Unit cost = 10 + 300000 50000 = 16 Mark up price = Unit cost 1 – desired return on sales = 16 1 – 0.2 = 20
BREAK EVEN ANALYSIS AND TARGET PROFIT PRICING
Break Even Pricing
setting price to break even on the cost of making and marketing a product
Break Even Volume
the point at which total revenue and total cost curves cross each other.
Example Break even volume = Fixed cost Price – variable cost = 300000 20 – 10 = 30,000 units Total cost = fixed cost + variable cost
600 800 1000 10 20 30 40 50 Sales volume in units (Thousands) Cost in Rupees (Thousands) Total revenue Target profit Total Cost 200 400 30 40 50 20 30 40 50 10 20 30 40 50
Overall Marketing Strategy
General Pricing Objective
Current profit maximization
Market share leadership
Customer retention and relationship building
Other Internal & External Considerations Affecting Price Decisions
Marketing Mix Tools
Decisions made or other marketing is variables may affect pricing decisions.
The Market An Demand
Pricing in different types of marketing
ANALYZING THE PRIC -DEMAND RELATIONSHIP
A curve that shows the number of units the market will buy in a given time period, at different prices that might be changed.
Demand and price are inversely related; that is, the higher the price and lower the demand.
the demand curve some times slopes up word
If demand are hardly changes with small change in price, we say demand is inelastic.
If demand changes greatly, we say the demand is elastic.
price p 2 P 1 P’ 2 P’ 1 Quantity demanded per period Quantity demanded per period A. Inelastic B. Elastic Q 2 Q 1 Q’ 2 Q’ 1
FORMULA Price elasticity of demand = - % change in quantity demand %change in price