Pricing

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Pricing

  1. 1. Pricing Methods & StrategiesG ururajPhatak B.Sc MBA (PhD)
  2. 2. What is Price? Price Has Many Names  Rent Tuition Bribe  Fee Fare Salary  Rate Toll Wage  Commission Premium Interest  Assessment Retainer Tax 10- 2
  3. 3. Definition  Price  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. 10- 3
  4. 4. What is Price? Price and the Marketing Mix:  Only element to produce revenues  Most flexible element  Can be changed quickly Price Competition Common Pricing Mistakes 10- 4
  5. 5. Factors Affecting Price Decisions 10- 5
  6. 6. Factors to Consider When Setting Price  Market positioning influences Internal Factors strategy  Other pricing objectives:  Marketing  Survival objectives  Current profit maximization  Marketing mix  Market share leadership  Product quality leadership strategies  Not-for-profit objectives:  Costs  Partial or full cost recovery  Organizational  Social pricing considerations 10- 6
  7. 7. Factors to Consider When Setting Price  Pricing must be carefully Internal Factors coordinated with the other marketing mix elements  Marketing  Target costing is often used objectives to support product  Marketing mix positioning strategies based strategies on price  Nonprice positioning can  Costs also be used  Organizational considerations 10- 7
  8. 8. Factors to Consider When Setting Price  Types of costs: Internal Factors  Variable  Marketing  Fixed  Total costs objectives  How costs vary at different  Marketing mix production levels will strategies influence price-setting  Costs  Experience (learning) curve  Organizational effects on price considerations 10- 8
  9. 9. Factors to Consider When Setting Price  Who sets the price? Internal Factors  Small companies: CEO or top management  Marketing  Large companies: Divisional or objectives product line managers  Marketing mix  Price negotiation is strategies common in industrial  Costs settings  Organizational  Some industries have pricing departments considerations 10- 9
  10. 10. Factors to Consider When Setting Price  Types of marketsExternal Factors  Pure competition  Nature  Monopolistic competition of market  Oligopolistic competition and demand  Pure monopoly  Competitors’  Consumer perceptions of costs, prices, price and value and offers  Price-demand relationship  Other  Demand curve environmental  Price elasticity of demand elements 10- 10
  11. 11. Factors to Consider When Setting Price  Consider competitors’ costs,External Factors prices, and possible reactions when developing a pricing strategy  Nature of market  Pricing strategy influences the nature of competition and demand  Low-price low-margin strategies  Competitors’ inhibit competition  High-price high-margin strategies costs, prices, attract competition and offers  Benchmarking costs against the competition is recommended  Other environmental elements 10- 11
  12. 12. Factors to Consider When Setting Price  Economic conditionsExternal Factors  Affect production costs  Affect buyer perceptions of price  Nature of market and value and demand  Reseller reactions to prices  Competitors’ must be considered costs, prices,  Government may limit or restrict pricing options and offers  Social considerations may be  Other taken into account environmental elements 10- 12
  13. 13. Major Considerations in Setting Price 10- 13
  14. 14. Setting the Price-Pricing Process1. Defining the Pricing Objective.2. Determining the Demand .3. Estimating the Cost.4. Analyzing Competitors’ Cost, Prices and Offers.5. Selecting a Pricing Method.6. Selecting the Final Price.7. Adapting the Price.
  15. 15. 1. Defining the Pricing Objective Pricing will be straight forward if a company has selected its target market and market positioning carefully. Pricing Strategy largely determined by decision on ‘Market Positioning’. Each price will have a different impact on: Profits, Sales Revenues and Market Share. 5 Main Pricing objectives : Survival Maximum Current Profit Maximum Sales Growth Maximum Market Skimming Product Quality Leadership
  16. 16. Survival This objective is pursued in case of a companies plagued with: 1. Overcapacity 2. Intense Competition 3. Changing Customer wants. Prices often cut down, with less importance to profits to keep the plant going and inventories turning over. Companies stay in business as long as prices cover variable costs and some fixed costs. It’s definitely a short run objective !!!
  17. 17. Maximum Current Profit Setting prices that maximize current profits Estimate demand and costs associated with alternative prices and choose the price that produces maximum current profit, cash flow or ROI Disadvantages: Assumes that the firm has knowledge of its demand and cost functions More emphasis on current financial performance rather than long run performance Ignores effects of other marketing mix variables, competitors reactions and legal restraints on price.
  18. 18. Maximum Sales Growth Higher sales volume leads to lower unit costs and higher long run profits. Set lowest prices assuming is price sensitive [ Market Penetration Pricing] Requisites: Low price discourages actual and potential competition.
  19. 19. Maximum Market Skimming Setting high prices to ‘skim’ the market. Estimate highest price that can be charged given the comparative benefits of its new product v/s available substitutes. Each time sales slow down, the company lowers down the price to draw in the next price sensitive layer of customers. Thus the company skims maximum amount of revenue from the various market segments.
  20. 20. Product Quality Leadership Employed in case of company aiming to be product quality leader in the market Pricing slightly higher than competitors because of the above feature.
  21. 21. 2. Estimating The Demand Each price set leads to a different level of demand Demand schedule depicts the relation between current price charged and resulting demand. Demand schedule shows the number of units the market will buy in a given time period at alternative prices that may be charged during the period. … In normal cases, demand and price are inversely related.
  22. 22. Demand curve shows markets overall reaction to alternativeprices that might be charged. Can also be perceived as sum of reactions of manyindividuals who have different price sensitivities.PRICE SENSITIVITY OF DEMAND = % CHANGE IN QUANTITY DEMANDED ------------------------------------------------------ % CHANGE IN PRICE
  23. 23. @ Elastic Demand : Demand changes considerably with price@ Inelastic Demand : Demand hardly changes with a small change in price.…. Less elastic the demand, more flexibility for the seller to ‘Raise the Price’.
  24. 24. Demand less elastic under the following conditions – * There are a few or no substitutes/competitors * Buyers do not readily notice the higher price * Buyers are slow to change their buying habits tosearch for low prices * Buyers think the higher prices are justified by qualityimprovements / normal inflation.
  25. 25. 3.Estimating the Cost Demand’ sets ‘CEILING’ to the Price that the company can charge for its product WHILE Company ‘Costs’ set the ‘ FLOOR’ !!! Company wants to charge a price that covers its cost of producing, distributing and selling the product PLUS a fair return for its efforts and risk taken.
  26. 26. Types of Costs Fixed Costs - Do not vary with production or sales volume. These costs go on irrespective of production levels. Ex: Rental Charges, Interests to be paid to banks, Salaries Variable Costs - Vary directly with the level of production. These costs tend to be constant per unit produced and their total varies with the number of units produced. Total Costs – It is a summation of the fixed costs and variable costs at any given level of production.
  27. 27. Management charges a price that at least covers total production costsat a given level of production.ACCUMULATED PRODUCTION EXPERIENCE [ Benefits ] * Better methods of production are employed * Flow of materials is improved * Cut in procurement costs… Average cost tends to fall with accumulated production experience.This decline of average costs with accumulated production experienceis called “EXPERIENCE /LEARNING CURVE”.
  28. 28. 4. Analyzing Competitors Price & Offers Competitor prices and possible price reactions help the firm establish the prices and level of setting the price. Company learns price and quality of each competitor offer Use competitors price as an orienting point for your own pricing.
  29. 29. 5. Selecting a Pricing Method Markup pricing Target return pricing Perceived value pricing Going rate pricing Sealed bid pricing
  30. 30. Markup Pricing Adding a standard mark up to the cost of the product Mark up’s generally higher on seasonal items to cover risk of low sales, specialty items, slow moving items and demand inelastic items. Mark up pricing works only if that price actually brings in the expected level of sales. High mark up strategy fatal if competitors prices are low.
  31. 31. Illustration Variable Cost [VC] = Rs.10 Fixed Cost [FC] = Rs.3,00,000 Expected Unit Sales = 50,000 ----------------------------------------------------------------------------------- Manufacturing cost per unit = VC + FC --------- Unit Sales = 10 + 3,00,000 ----------- 50,000 = Rs.16/-
  32. 32. Assuming 20% mark up expectations from the Management,Mark up Price = Unit Cost --------------------------- { 1 – Desired Return on Sales } 16 = ------- { 1- 0.2 } = Rs.20/- •Advantages •Sellers more certain about costs than demand • No frequent adjustments as demand change •Minimizes price competition as they tend to be similar if all firms in this industry use this method. •General feeling that ‘Cost Plus Pricing’ fair to both Buyers and Sellers
  33. 33. Target Return Pricing Firm determines the price that would yield its target rate of return on its investment [ ROI ] Target Return Price = {Unit Cost + Desired return x Invested Capital} Unit Sales A Company has invested Rs.10,00,000 in business and wants to set price on its products to earn 20% ROI . Estimated Sales = 50,000 Unit Price estimated at Rs.16/- ----------------------------------------------------------------------------------- .. Target Return Price = 16 + { 0.2 x 10,00,000 } -------------------- 50,000 = Rs.20/- Manufacturer realizes this 20% ROI provided its costs and estimated sales turnover are accurate.
  34. 34. Perceived Value Pricing Basing price on product’s ‘Perceived Value’ Impetus on ‘Buyer’s perception of value’ and not the sellers cost as a key to pricing. Use of ‘Non-Price variables’ in Marketing mix to build up perceived value in the buyers mind. Key to perceived value pricing is to accurately determine ‘market’s perception’ to the ‘offer’s value’ Marketing Research needed to establish markets perception of value as a guide to effective pricing.
  35. 35. Going Rate Pricing Firm bases its price largely on “ Competitors price” with less attention paid on its own cost or demand. Firm might charge the same, more or less than its major competitor Smaller firms ‘follow the leader’ …. Change their prices when leaders change theirs’. …. Method popular where costs are difficult to measure OR competitive response is uncertain.
  36. 36. Sealed Bid Pricing Firm bases its price on ‘expectations of how competitors will price’ rather than on a rigid relation of firms cost or demand. Criterion adopted for setting price would be ‘Expected Profit’. Bid the price that would ‘maximize the expected profit’.
  37. 37. 6. Selecting the Final Price Some additional factors influencing selection of final price – [ a ] Psychological Pricing : Prices to end in odd numbers. Ex: Rs.99 instead of Rs.100 [ b ] Image Pricing : Effective with ego sensitive products like perfumes, expensive cars etc.
  38. 38. [ c ] Influence of other Mktg. Mix elements on Price :Final price to take into account – ‘Brand Equity’ and ‘Advertising’ relative to competitionConsumer willing to pay higher prices for ‘known products’ than for unknown productsBrands with low quality and low advertising charge ‘lowest price’.[ d ] Company Pricing PoliciesContemplated price to be consistent with company’s pricing policy.Policy to ensure that salespersons quote prices reasonable to customers and profitable to thecompany[ e ] Impact of Price on other partiesManagement to consider reactions of other parties to stated price.Feelings of ‘Distributor’ / ‘Dealer’/ ‘Sales force’Reaction of CompetitorsWill Suppliers raise their price due to rise in prices from the company?Know laws affecting price and make sure that your pricing policies are defensible.
  39. 39. 7. Adapting the Price Companies do not set a single price, they set a pricing structure that covers different products reflecting …. ‘Variations in geographical demand, Market segment variations, purchase timings etc.
  40. 40. [ a ] Geographical Pricing Pricing products to customers at different locations based on ‘transportation costs’. Types: FOB Origin Pricing: in which goods and services are placed free on board carrier the customer pays the freight from the factory to destination. Uniform Zone Pricing: in which the company charges the same price plus freight to all customers, regardless of their location. Basing Point Pricing: in which seller destinates some city as a basing point and charges all customers from freight cost from that city to the consumer. Freight Absorption Pricing: in which the seller all or part of the freight charges in order to get desired business. Zone Pricing: in which company set up two or more zones. All customers with in that zone pay the same total price, more distant the zone higher the price
  41. 41. [ b ] Price Discounts and Allowances Modification of ‘basic price’ to reward customers for early payments, volume purchases and off-season buying. Discounts and Allowances are ‘Price Adjustments’ for the above. Discount: a strategic reduction in price on purchases during a stated period of a time Types: (1) Cash Discounts - Price reduction to the buyer who promptly pay their bills [ 2% discount if payment made within 30 days ]. Serves purpose of improving sellers liquidity and reduces credit collection costs.
  42. 42. (2) Quantity Discounts - Price reduction to buyers who buy large volumes { Rs.10 per unit for less than 100 units ; Rs.9 per unit for more than 100 units bought }Types:a) Non-Cumulative basis :Discount is applicable on each order placed and is on case to case basis.b) Cumulative Basis :Discount is effected on the number of units ordered over a given time period. Its more ofa policy matter3) Functional Discounts [ Trade Discounts ] : Offered by manufacturer to Trade Channels for performing functions of storing,selling etc.(4) Seasonal Discounts : Price reduction to buyers who buy products/services ‘Out of Season’. .. Ensuressteadier production during the year.
  43. 43. Allowances : Promotional money paid by Manufacturer to Retailersin return for an agreement to feature the manufacturers products in someway.These are other types of reductions from the list price@ Trade in Allowances - Price reduction granted for turning in an old item whenbuying a new one.@ Promotional Allowances- Payments/price reductions to reward dealers forparticipating in advertising and sales support systems.
  44. 44. [ c ] Promotional PricingCompanies temporarily ‘price their products belowthe list price’ and sometimes even below cost.Types of Promotional Pricing:(1) Loss Leader Pricing - Supermarkets and Departmental stores dropprices on well known brands to stimulate customerinterest.But manufacturers disapprove this as their brandsare being used as ‘loss leaders’ and can cause‘dilution of brand image’.
  45. 45. (2) Special Event Pricing – Sellers establish special prices in certain seasonsto draw in more customers(3) Cash Rebates – Offered to encourage more purchases within aspecified time period. …. Helps clear inventorieswithout cutting list prices.(4) Low Interest Financing – Company can offer customers low interest financeinstead of lowering the price.
  46. 46. (5) Warranties and Service Contracts – Company can promote sales by adding a free warranty offer OR servicecontract free of charge OR at a reduced price.(6) Psychological Discounting – Involves putting an artificially high price on a product and then offering it at asubstantial savings.Ex: “ Was Rs.400, Now Rs.250 ” ….. But it’s a highly illegitimate discount tactic !!!… Discounts from normal prices are a legitimate form of promotional pricing.,
  47. 47. [ d ] Discriminatory Pricing# Companies modify their basic price to accommodate differences in customers,products, locations.This form of pricing occurs when a company sells a product at ‘two or more prices’that do not reflect a ‘proportional difference in costs’.Types of Discriminatory Pricing:(1) Customer Segment Pricing : Different customer groups charged different prices for the same product.Ex: Museums charge lower fee for students/children
  48. 48. (2) Product Form Pricing - Different versions of the product are priced differently but not proportionatelyto their respective costs.Ex: Standard Iron : Rs.400 ; Iron with indicator lamp : Rs.450(3) Image Pricing- Pricing products at two different levels based on image differences.Ex: Perfumes in different bottle shapes priced differently.(4) Location Pricing- Different locations priced differently even though cost of offering to each locationis the same.
  49. 49. Ex: Theatre varies its seat prices according to audience preference for differentlocations.(5) Time Pricing - Prices are varied by season, day or hours.Ex: Public Utilities [ Phone Bills, Dial up Internet charges ] [e] Product Mix Pricing@ Firm searches for a set of prices that ‘maximize profits’ on the total productmix.@ Pricing difficult as various products have ‘different demand and cost’interrelationships and are subject to ‘different degrees of competition’.
  50. 50. Different forms of Product Mix Pricing:(1) Product Line Pricing - Panasonic offers five different cameras ranging from a simple one to complexone that includes lot many features.… Each successive camera offers additional features permitting ‘PremiumPricing’.# Management to establish ‘Price points’ between various camera modelsconsidering the following aspects: * Cost differences between cameras * Customers evaluation of various features * Competitors prices
  51. 51. # Customers associate ‘Low’, ‘Average’ and ‘High’ quality with such products.# Even if all the three prices are raised, people will normally buy the products attheir preferred price points/levels.(2) Optional Feature Pricing - @ Companies offer optional products or features along with their main product. @ Pricing such options is always a problem as they have to decide ‘which itemsto include in the price’ and ‘which to offer as options’.Ex: Restaurants price liquor ‘high’ and their food ‘Low’. Food revenue covers foodand other restaurant costs while liquor generates the necessary profit for them.
  52. 52. (3) Captive Product Pricing –@ Some products require the use of ‘Ancillary’ OR ‘Captive’ products for effectiveusage.Ex: Razor Blades, Camera Films @ Manufacturers of main products [ Razors, Camera ] price them low and ‘sethigh mark ups’ on ancillary product/supplies [ Blades, Film Rolls ]… Those camera makers who do not sell films have to price their camera’s higherin order to ‘make the same overall profit’.
  53. 53. Risks associated –@ Danger in pricing captive products too high due to the following reasons : * It could give rise to ‘Pirates’, counterfeit these parts and sell them to outletswithout passing the cost savings to the customers. * Company to control above problem by advising users to ‘use products onlyfrom authorized dealers’ for guaranteed performance.(4) Two Part Pricing - Used by Service Firms who charge a ‘fixed fee’ plus a ‘variable usage fee’.
  54. 54. Ex: Telephone user pays a minimum monthly fee plus charges for calls beyond theminimum specified.Problem of …* How much to charge for basic service?* How much for the variable usage? … Fixed fee to be low enough to induce purchase of the service while profit canbe made on the usage fees.(5) By-Product Pricing - @ Pricing of main product is affected if by-products have little value and arecostly to dispose off.
  55. 55. @ Manufacturer to accept any price that covers more than the cost of disposal ofby-product.@ If by-products have value to some customer groups, then they should be pricedon their value.@ Any income earned on the by-products will make it easier for the company tocharge a lower price on its main product if forced by competition.
  56. 56. (6) Product Bundling Prices -# Sellers ‘bundle their products’ at a set price.# Savings on the bundle must be substantial to induce customers to buy thebundle.Ex: Auto manufacturer offers an option package at less than the cost of buyingall the options separately.
  57. 57. PRICING Strategies Value and Competition BasedCost Based Pricing Product Mix PricingPricing Value Based: 1.Product Line Pricing1.Cost plus 1.Every day Low Pricing 2.Optional Product Pricing2.Break even 2.High Low Pricing 3.Captive Product Pricing Competition Based: 4.By-Product Pricing 1.Destroyer Pricing 5.Product Bundle Pricing 2.Price Matching or Going Rate Pricing 3.Price Bidding or Close Bid Pricing
  58. 58. Cost Based Pricing COST PLUS Adding and make up the total cost of the product Advantages: sellers are more certain about the cost than the demand If all companies use this method Price become Standard It is fairer to both buyers and sellers Disadvantages: It ignores demand and competition
  59. 59. BREAK EVEN:The firm determines the price at which it will make a target profit Value & Competition Based Pricing Value Based Pricing: setting the price of a product on the basis of consumers’ value rather than manufacturers cost Every Day Low Pricing: Competition Based Pricing: based on Constant low prices and no competitors products Discounts EX: Destroyer: to eliminate competition ex: VK Price Matching: price equal to competitors High Low Pricing: Charging Price Bidding: Normally it is used in higher prices everyday but running construction and Manufacturing services. frequent promotions to lower the This is done through quotations prices on temporary bases
  60. 60.  Product line Pricing: setting the price for entire product line ex: Nokia Mobiles Optional Product Pricing: giving accessory product with main product ex: PC +4GB PEN drive etc Captive Product Pricing: setting the price for a product that must be used along with the main product ex: Gillette razors By Product: determining the price of main product in order to make the main products more attractive Product Bundle Pricing: several product together at the reduced price ex: Anchor toothpaste + Brush etc

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