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   Pricing: Fourth P’ of Marketing mix       2

         Introduction to pricing             3

    ...
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           Pricing: Fourth P’ oF Marketing Mix
      The marketing mix is probably the most famous m...
www.mynotebook.in




                        introduction to Pricing

      Pricing your product or service is one of the...
www.mynotebook.in




   •  Price is the selling price per unit customers pay for your product or
      service.
         ...
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                                 case study

       Washers and dryers traditionally were
seen as ut...
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                 Questions involved in Pricing

    Pricing involves asking questions like:
•   How ...
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  •   Are there legal restrictions on retail price maintenance, price
      collusion, or price discri...
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    - 8 -
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                          Functions oF a Price

      A well chosen price should do three things:
  ...
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                         setting the Price

       A firm must set a price for the first time when i...
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Groups of buyers: those who insist on quality, those who insist on price
and those who balance the t...
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     The firm has to consider many factors in setting its pricing policy. Let
us describe a six- ste...
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      Many companies try to set a price that will maximize their current
profits. They estimate the de...
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                    steP 2: deterMining deMand

      Each price will lead to a different level of d...
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      Estimating Demand curves
      It involves statistically analyzing past prices, quantity sold ...
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and variable costs for any given level of production. Average cost is the
cost per unit at that level ...
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              steP 5: selecting a Pricing Method

       Given the three C’s, the customers demand s...
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Perceived Value Pricing
     An increasing number of companies now base their price on the
customers’...
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      In going rate pricing, the firm bases its price largely on competitors’
prices. The firm might c...
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2.98). The theory is this drives demand greater than would be expected if
consumers were perfectly rat...
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Company Pricing Policy
     The price must be consistent with company pricing policies. The aim
to en...
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                      how coMPanies Price?




Price points A, B, and C, along a demand curve
Price ...
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Increase. This decrease in quantity demanded more than offsets the
additional revenue from the incre...
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While there is no single recipe to determine pricing, the following is a
general sequence of steps t...
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Because of inherent tradeoffs between marketing mixes elements, pricing
will depend on other product, ...
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that may not be in the best interest of either side. Setting the price too high
may attract a large nu...
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effect of price on the bottom line. They customize prices and offerings
based on segment value and cos...
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In geographical pricing the company decides how to price its products to
different customers in differ...
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   This strategy involves setting and artificially high price then offering
the product at substantial...
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days and that the buyer can deduct 2 % by paying the bill within 10
days.
2. Quantity Discount
   Quan...
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•   Demand is expected to be relatively inelastic; that is, the customers
    are not highly price sen...
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buyer at the lower price can arbitrage by selling to the consumer buying
at the higher price but with ...
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referred to as a rate fence. Price discrimination is thus very common in
services, where resale is not...
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     6. Product bundling pricing


     initiating and resPonding to Price changes
       Companies of...
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Initiating price increases
      A successful price increase can raise profits considerably. A major...
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change. If it has a profit- maximization objective, it may react by increasing
the advertising budge...
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Health of seller: The significance of the health of the seller cannot be
underestimated. Where the sel...
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Number of interested buyers: The number of prospective buyers in the
marketplace will greatly affect t...
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Sale of a subsidiary or division: Where the target is a subsidiary or division
of a much larger compan...
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                    Pricing oF Fresh Flowers

The price of the flower depends upon the demand, quali...
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4.    BIJLI                          PER KG      Rs. 18    Rs. 20      10%

5.    ASTER               ...
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                     BANGLORE


18.   CHINESE ROSE                PER       Rs. 4    Rs. 5     20%
   ...
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              Pricing oF consuMer durables

The pricing of consumer durables mainly depends upon the...
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Profit Goal (10%)                       ____________

TOTAL                                   ______...
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  1. 1. www.mynotebook.in Pricing: Fourth P’ of Marketing mix 2 Introduction to pricing 3 Case study 5 Questions involved in pricing 6 What a price should do? 8 Setting the price 9 How Companies Price? 21 Adapting Prices 26 Initiating and responding to price changes 32 Responding to competitors price change 34 Internal Factors Affecting Price 34 External Factors Affecting Price 35 Pricing of fresh flowers 37 Pricing of consumer durables 39 - 1 -
  2. 2. www.mynotebook.in Pricing: Fourth P’ oF Marketing Mix The marketing mix is probably the most famous marketing term. Its elements are the basic, tactical components of a marketing plan. Also known as the Four P's, the marketing mix elements are price, place, product, and promotion. Pricing is one of the four P's of the marketing mix. The other three aspects are product, promotion, and place. It is also a key variable in microeconomic price allocation theory. Price is the only revenue generating element amongst the 4ps, the rest being cost centers. Pricing is the manual or automatic process of applying prices to purchase and sales orders, based on factors such as: a fixed amount, quantity break, promotion or sales campaign, specific vendor quote, price prevailing on entry, shipment or invoice date, combination of multiple orders or lines, and many others. Automated systems require more setup and maintenance but may prevent pricing errors. Pricing is an important strategic issue because it is related to product positioning. Furthermore, pricing affects other marketing mix elements such as product features, channel decisions, and promotion. Pricing are perhaps the easiest element of the marketing program to adjust, product features, channels and even promotion take more time. - 2 -
  3. 3. www.mynotebook.in introduction to Pricing Pricing your product or service is one of the most important business decisions you will make. You must offer your products for a price your target market is willing to pay - and one that produces a profit for your company - or you won't be in business for long. Price is not just a number on a tag or an item. We pay rent for apartment, tuitions and also fees to our physicians or dentist. The airline company, railway, taxi driver and bus charge us a fare; these local authorities call their price a rate. Bank charges us interest for the money we borrow. The “price” for an executive is salary, the price of the salesperson may be a commission and the price of the worker is wage. Throughout most of history, prices were set by negotiation between buyers and sellers. “Bargaining” is still a sport in some areas. Setting one price for all buyers is a relatively modern idea that arose with the development of large-scale retailing at the end of nineteenth century. Traditionally, price has operated as the major determinant of buyer choice. This is still the case in poorer nations, among poorer groups and with commodity-type products. Although nonprice factors have become more important in recent decades, price still remains one of the most important elements determining market share and profitability. Consumers and purchasing agents have more access to price information and price discounters. Consumers put pressure on retailers to lower their prices. Retailers put pressure on manufacturers to lower their prices. The result is a marketplace characterized by heavy discounting and sales promotion. Definitions: • Cost is the total of the fixed and variable expenses (costs to you) to manufacturer or offers your product or service. - 3 -
  4. 4. www.mynotebook.in • Price is the selling price per unit customers pay for your product or service. So, the price you set is the cost to the customer. Ideally, it should be higher than the costs you incurred in producing the product. Think of your cost as the surface of the ocean. You must set your price above the surface to cover costs or you will quickly drown. Of course, there will be times when you decide to set prices at or below cost for a temporary, specific purpose, such as gaining market entrance or clearing inventory. How the customer perceives the value of the product determines the maximum price customers will pay. This is sometimes described as "the price the market will bear." Perceived value is created by an established reputation, marketing messages, packaging, and sales environments. An obvious and important component of perceived value is the comparison customers and prospects make between you and your competition. Somewhere between the your cost and "the price the market will bear" is the right price for your product or service - a price that enables you to make a fair profit and seems fair to your customers. Consequently, once you understand your costs and your maximum price, you can make an informed decision about how to price your product or service. However, while costs are important in setting your prices, don't limit your thinking only to cost-based pricing. Value-based pricing makes you think about your business from the customer's perspective. If the customer doesn't perceive value worth paying for at a price that offers you a fair profit, you need to re-think your game-plan. - 4 -
  5. 5. www.mynotebook.in case study Washers and dryers traditionally were seen as utilitarian products that could never justify a high price. In 2001, Whirlpool introduced the Duet, a front-loading washer- dryer that retailed at $ 2300- nearly four times the price of comparative models. The question aroused was “How did Whirlpool do it?” The Duet was a truly unique offering that promised “performance and efficiency without compromise.” Its huge capacities could wash and dry bi loads, yet it used much less water and electricity than competitors. It also washed all types of clothing- from silks and lace to sleeping bags and comforters. Duet also could claim an emotional benefit for users- bigger loads meant fewer loads and therefore more time and freedom to do other things. The Duet pricing plan as the result of a broader shift in Whirlpool’s pricing strategy to reduce the frequency of costly and potentially confusing discounts. It wanted to find the optimal prices for its products. Many marketers, however, neglect their pricing strategies- one survey found that managers spent less than 10% of their time in pricing. Pricing decisions are clearly complex and difficult. Holistic marketers must take into account many factors in making pricing decisions- the company, the customers, the competition, and the marketing environment. Pricing decisions must be consistent with the firm’s marketing strategy and its target markets and brand positioning. - 5 -
  6. 6. www.mynotebook.in Questions involved in Pricing Pricing involves asking questions like: • How much to charge for a product or service? This question is a typical starting point for discussions about pricing, however, a better question for a vendor to ask is - How much do customers value the products, services, and other intangibles that the vendor provides. • What are the pricing objectives? • Do we use profit maximization pricing? • How to set the price?: (cost-plus pricing, demand based or value- based pricing, rate of return pricing, or competitor indexing) • Should there be a single price or multiple pricing? • Should prices change in various geographical areas, referred to as zone pricing? • Should there be quantity discounts? • What prices are competitors charging? • Do you use a price skimming strategy or a penetration pricing strategy? • What image do you want the price to convey? • Do you use psychological pricing? • How important are customer price sensitivity (e.g. "sticker shock") and elasticity issues? • Can real-time pricing be used? • Is price discrimination or yield management appropriate? - 6 -
  7. 7. www.mynotebook.in • Are there legal restrictions on retail price maintenance, price collusion, or price discrimination? • Do price points already exist for the product category? • How flexible can we be in pricing? : The more competitive the industry, the less flexibility we have. o The price floor is determined by production factors like costs (often only variable costs are taken into account), economies of scale, marginal cost, and degree of operating leverage o The price ceiling is determined by demand factors like price elasticity and price points • Are there transfer pricing considerations? • What is the chance of getting involved in a price war? • How visible should the price be? - Should the price be neutral? (i.e.: not an important differentiating factor), should it be highly visible? (To help promote a low priced economy product, or to reinforce the prestige image of a quality product), or should it be hidden? (So as to allow marketers to generate interest in the product unhindered by price considerations). • Are there joint product pricing considerations? • What are the non-price costs of purchasing the product? (eg.: travel time to the store, wait time in the store, disagreeable elements associated with the product purchase - dentist -> pain, fish market -> smells) • What sort of payments should be accepted? (cash, check, credit card, barter) Pricing Process of determining what a company will receive in exchange for its products. - 7 -
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  9. 9. www.mynotebook.in Functions oF a Price A well chosen price should do three things: • Achieve the financial goals of the firm (eg.: profitability) • Fit the realities of the marketplace (will customers buy at that price?) • Support a product's positioning and be consistent with the other variables in the marketing mix • Price is influenced by the type of distribution channel used, the type of promotions used, and the quality of the product • Price will usually need to be relatively high if manufacturing is expensive, distribution is exclusive, and the product is supported by extensive advertising and promotional campaigns • A low price can be a viable substitute for product quality, effective promotions, or an energetic selling effort by distributors From the marketer’s point of view, an efficient price is a price that is very close to the maximum that customers are prepared to pay. In economic terms, it is a price that shifts most of the consumer surplus to the producer. A good pricing strategy would be the one which could balance between the Price floor (the price below which the organization ends up in losses) and the Price ceiling (the price beyond which the organization experiences a no demand situation). - 9 -
  10. 10. www.mynotebook.in setting the Price A firm must set a price for the first time when it develops a new product, when it introduces its regular product into a new distribution channel or geographical area and when it enters bids on new contract work. The firm must decide where to position its product on quality and price. nine Price Quality strategies There can be competition between price quality segments. The above figure shows nine price quality strategies. The diagonal strategies 1,5 and 9 can all coexist in the same market; that is, one firm offers a high quality product at a high price, another offers an average quality product at an average price and still another offers a low quality product at a low price. All three competitors can coexist as long as the market consists of three - 10 -
  11. 11. www.mynotebook.in Groups of buyers: those who insist on quality, those who insist on price and those who balance the two. Strategies 2, 3 and 6 are ways to attack the diagonal positions. Strategy 2 says, “Our product has the same quality as product 1 but we charge less.” Strategy 3 says the same thing and offers an even greater saving. If quality sensitive customers believe these competitors, they will sensibly buy from them and save money unless firm’s 1 product has acquired snob appeal. Positioning strategies 4, 7 and 8 amount to overpricing the product in relation to its quality. The customers will feel “taken” and will probably complain or spread bad word of mouth about the company. The firm has to consider many factors in relation to value delivered and perceived by the customer. If the price is higher than the value received, the company will miss potential profits; if the price is lower than the value received, the company will fail to harvest potential profits. - 11 -
  12. 12. www.mynotebook.in The firm has to consider many factors in setting its pricing policy. Let us describe a six- step procedure: 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 steP 1: selecting the Pricing objective. After the positioning of the product is done, the firm would try and attempt to decide its pricing objective. The clearer a firm’s objective, the easier it is to set price. The company can pursue any of five major objectives through pricing: survival, maximum current profit, maximum current share, maximum market skimming, or product quality leadership. • Survival Companies pursue survival as their major objective if they are plagued with overcapacity, intense competition, or changing consumer wants. As long as prices cover variable costs and some fixed costs, the company stays in business. • Maximum current profit - 12 -
  13. 13. www.mynotebook.in Many companies try to set a price that will maximize their current profits. They estimate the demand and cost associated with alternative Prices that can produce maximum current profit, cash flow, or rate of return on investment. • Maximum current share Some companies want to maximize their market share. They believe that higher sales volume will lead to lower unit costs and higher long-run profit. They set the low price assuming the market price is sensitive. • Maximum market skimming Companies unveiling a new technology favor setting high prices to maximize market skimming. • Product quality leadership A company might aim to be a product quality leader in the market. Many brands strive to be “affordable luxuries”- products or services characterized by high level of perceived quality, taste, and status with a price just high enough not to be out of consumers’ reach. Example: SONY, when introduced the world’s first high definition television sets into the Japanese market in 1990, the high tech sets cost $ 43000. These television sets were purchased by customers who could afford to pay high price for new technology. Sony rapidly reduced the price in next three years to attract new buyers, and by 1993 a 28” HDTV cost was around $6000. In 2001, cost was further reduced to $2000. In this way Sony skimmed the maximum amount of revenue from the various segments of the market. - 13 -
  14. 14. www.mynotebook.in steP 2: deterMining deMand Each price will lead to a different level of demand and therefore have a different impact on a company’s marketing objectives. The relation between alternative prices and the resulting current demand is captured in demand curve. In the normal case, demand and price are inversely related: the higher the price, the lower the demand and vice-versa. Price Sensitivity: Elastic Demand Inelastic Demand The first step in estimating demand is to understand what affects price sensitivity. Customers are most prices sensitive to products that cost a lot or are brought frequently. They are less price sensitive to low cost items or items they buy infrequently. They are also less price sensitive when price is only a small part of the total cost of operating, obtaining and servicing the product over its lifetime. A seller can change a higher price than competitors and still get the business, if the company can convince the customer that it offers the lowest total cost of ownership. - 14 -
  15. 15. www.mynotebook.in Estimating Demand curves It involves statistically analyzing past prices, quantity sold and other factors to estimate their relationships. The data can be of overtime or of different locations at the same time. An alternative approach is to change prices in similar territories to see how sales are affected. Price elasticity of Demand Marketers need to know how responsive or elastic demand would be to a change in price. It is a mistake not to consider price elasticity of consumers and their needs in developing marketing programs. Price elasticity depends upon the magnitude and direction of the contemplated price change. It may be negligible with long price change and substantial with short price change. steP 3: estiMating costs Demand sets a ceiling on the price the company can charge for its product. Costs set the floor. The company wants to charge a price that covers its cost of producing, distributing and selling the product, including a fair return for its effort and risk. Yet, when companies price products to cover full costs, the net result is always profitability. Types of costs and Levels of production Many types of costs are taken into consideration before pricing a product. Two main costs taken into consideration are fixed costs which do not vary with production or sales revenue, and variable costs that vary directly with the level of production. Total costs consist of the sum of fixed - 15 -
  16. 16. www.mynotebook.in and variable costs for any given level of production. Average cost is the cost per unit at that level of production. It is equal to total cost divide by production. Activity Based cost accounting Today’s company tries to adapt their offers and terms to different buyers. A manufacturer, for example, will negotiate different terms with different retail chain. The manufacturer’s costs will differ with each chain and so will his profit. Target Costing Cost change with production scale and experience. They can also change with concentrated efforts by designers, engineers and purchasing agents to reduce them through target costing. steP 4: analyzing coMPetitors’ costs, Prices and oFFers Within the range of possible prices determined by market demand and company costs, the firm must take competitors’ costs, prices and possible price reactions into account. The firm should first consider the nearest competitor’s price. If the firm’s offer contains features not offered by the nearest competitor, their worth to customer should be evaluated and added to the competitor’s price. If the competitor’s offer contains some features not offered by the firm, their worth to the customer should be evaluated and subtracted from the firm’s price. Now the firm can decide whether it can change more, or less than the competitor. But competitors can change their prices in reaction to the price set by the firm. - 16 -
  17. 17. www.mynotebook.in steP 5: selecting a Pricing Method Given the three C’s, the customers demand schedule, the cost function and the competitors’ prices, the company is now ready to select a price. Cost set a floor to the price. Competitors’ prices and the price of substitutes provide an orienting point. Customers’ assessments of unique feature establish the pricing ceiling. Companies select a pricing method that includes one or more of these three considerations. Markup Pricing The most elementary pricing method is to add a standard markup to the product’s cost. Construction companies submit job bids by estimating the total project cost and adding a standard markup for profit. The manufacturers’ unit cost is given by: Unit cost = variable cost + fixed cost Unit sales Target Return Pricing The firm determines the price that would yield its target rate of return on investment. Target pricing is used by general motors which price its automobiles to achieve a15%-20% ROI. This method is also used by public utilities, which need not to make a fair return on investment. The target return price is given by following formula: Target return price = unit cost + desired return * invested capital Unit Sales - 17 -
  18. 18. www.mynotebook.in Perceived Value Pricing An increasing number of companies now base their price on the customers’ perceived value. They must deliver the value promised by their Proposition and the customer must perceive this value. They use the other marketing mix element like advertising and sales force, to communicate and enhance perceived value in buyers’ mind. Value Price In recent years, several companies have adopted value pricing, in which they win loyal customers by changing a fairly low price for a high quality offering. For example: Procter & Gamble Few years ago they created quite a stir by reducing prices on Pampers and Luvs diapers, liquid Tide detergent and Folger’s coffee to value price them. In the past, a brand loyal family had to pay what amounted to Rs. 32625 premium for a years worth of P & G products versus private label or low priced brands. To offer value prices, P & G underwent a major overhaul. It redesigned the way it develops, manufactures, distributes, prices markets and sells products to deliver better value a every point in the supply chain. Value pricing is not a matter of simply setting lower prices; it is a matter of re-engineering the company’s operations to become a low cost producer without sacrificing quality and lowering prices significantly to attract a large number of value conscious customers. Going Rate Pricing - 18 -
  19. 19. www.mynotebook.in In going rate pricing, the firm bases its price largely on competitors’ prices. The firm might charge the same, more, or less than major competitors’. Auction Type pricing It is growing more popular, especially with the growth of the internet. Here consumer go through different prices in different sites and then chooses the same desired product with the lowest prices. For example Now day’s books are displayed on different sites for readers to find the current price which are going on in the market and same applies for electronics, etc. steP 6: selecting the Final Price Pricing methods narrow the range from which the company must select its final price. In selecting that price, the company must consider additional factors, including the impact of other marketing activities, company pricing policy, gain and risk sharing pricing and the impact of price on other parties. Psychological Pricing. Psychological pricing or price ending is a marketing practice based on the theory that certain prices have a psychological impact. The retail prices are often expressed as "odd prices": a little less than a round number, e.g. $19.99 or £6.95 (but not necessarily mathematically odd, it could also be - 19 -
  20. 20. www.mynotebook.in 2.98). The theory is this drives demand greater than would be expected if consumers were perfectly rational. Psychological pricing is one cause of price points. This approach is used when the marketer wants the consumer to respond on an emotional, rather than rational basis. For Example: Bata BATA has priced their products like Rs. 299, Rs. 399, Rs. 999, this is because they have analyzed the psychological mindset of the customer. It is not only Bata but many other shops have come up with prices like these. Gain and Risk sharing pricing Buyers may resist accepting a seller’s proposal because of high perceived level of risk. The seller has the option of offering to absorb part or all of the risk if he does not deliver the full promised value. If he’s unable to deliver the promised value he will be ready to be held responsible for the failure of the desired value or any kind of fault. The influence of other Marketing Mix Elements The final price must take into account the brand’s quality and advertising relative to competition. Like brands with average relative quality but high relative advertising budgets are able to change premium Prices. Brands with high relative quality and high relative advertising obtained the highest prices. - 20 -
  21. 21. www.mynotebook.in Company Pricing Policy The price must be consistent with company pricing policies. The aim to ensure that the sales people quote prices that are reasonable to customers and profitable to the company. For example: Dell Dell has developed innovative pricing techniques. Dell uses a high tech “cost forecasting” system that enables it to scale its selling prices based on consumer demand and the company’s own costs. The company instituted this flexible pricing model in 2001 to maximize its margins during economic slowdown. Dell managers get cost information from suppliers, which they then combine with knowledge about profit targets, delivery dates and competition to set prices for business segments. On any given day, the same computer might sell at different prices depending upon whether the purchaser is a government, small business or home PC buyer. The cost forecasting system may help to explain why dell was the only US PC maker among the top six to report a profit for the first quarter of 2001. Impact of price on other companies Management must also consider the reactions of other parties to the contemplated price. - 21 -
  22. 22. www.mynotebook.in how coMPanies Price? Price points A, B, and C, along a demand curve Price points are prices at which demand is relatively high. In introductory microeconomics, a demand curve is downward sloping to the right and either linear or gently convex to the origin. The first is usually true, but the second is only piecewise true, as price surveys indicate that demand for a product is not a linear function of its price and not even a smooth function. Demand curves look more like a series of waves than a straight line. Points A, B, and C in the diagram are price points. By increasing the price beyond a price point (say to a price slightly above price point B), sales volume decreases by an amount more than proportional to the price - 22 -
  23. 23. www.mynotebook.in Increase. This decrease in quantity demanded more than offsets the additional revenue from the increased unit price. As a result, total revenue Decreases when a firm raises its price beyond a price point. Technically, the price elasticity of demand is low (inelastic) at a price lower than the price Point (steep section of the demand curve), and high (elastic) at a price higher than a price point (gently sloping part of the demand curve). It is a common marketing strategy for a firm to set prices at existing price points. There are 3 main reasons for the existence of price points: • Substitution price points Price points occur at the price of a close substitute When an item's price rises above the cost of a close substitute, the quantity demanded drops sharply • Customary price points People are used to paying a certain amount for a type of product Increasing the price beyond this amount will cause sales to drop dramatically • Perceptual price points Also referred to as psychological pricing or odd-number pricing Raising a price above Rs.99 will cause demand to fall disproportionally because Rs.100 is perceived to be a significantly higher price - 23 -
  24. 24. www.mynotebook.in While there is no single recipe to determine pricing, the following is a general sequence of steps that might be followed for developing the pricing of a new product: 1. Develop marketing strategy - perform marketing analysis, segmentation, targeting, and positioning. 2. Make marketing mix decisions - define the product, distribution, and promotional tactics. 3. Estimate the demand curve - understand how quantity demanded varies with price. 4. Calculate cost - include fixed and variable costs associated with the product. 5. Understand environmental factors - evaluate likely competitor actions, understand legal constraints, etc. 6. Set pricing objectives - for example, profit maximization, revenue maximization, or price stabilization (status quo). 7. Determine pricing - using information collected in the above steps, select a pricing method, develop the pricing structure, and define discounts. These steps are interrelated and are not necessarily performed in the above order. Nonetheless, the above list serves to present a starting framework. Marketing Strategy and the Marketing Mix Before the product is developed, the marketing strategy is formulated, including target market selection and product positioning. There usually is a tradeoff between product quality and price, so price is an important variable in positioning. - 24 -
  25. 25. www.mynotebook.in Because of inherent tradeoffs between marketing mixes elements, pricing will depend on other product, distribution, and promotion decisions. Estimate the Demand Curve Because there is a relationship between price and quantity demanded, it is important to understand the impact of pricing on sales by estimating the demand curve for the product. For existing products, experiments can be performed at prices above and below the current price in order to determine the price elasticity of demand. Inelastic demand indicates that price increases might be feasible. Calculate Costs If the firm has decided to launch the product, there likely is at least a basic understanding of the costs involved; otherwise, there might be no profit to be made. The unit cost of the product sets the lower limit of what the firm might charge, and determines the profit margin at higher prices. The total unit cost of a producing a product is composed of the variable cost of producing each additional unit and fixed costs that are incurred regardless of the quantity produced. The pricing policy should consider both types of costs. Environmental Factors Pricing must take into account the competitive and legal environment in which the company operates. From a competitive standpoint, the firm must consider the implications of its pricing on the pricing decisions of competitors. For example, setting the price too low may risk a price war - 25 -
  26. 26. www.mynotebook.in that may not be in the best interest of either side. Setting the price too high may attract a large number of competitors who want to share in the profits. From a legal standpoint, a firm is not free to price its products at any level it chooses. For example, there may be price controls that prohibit pricing a product too high. Pricing it too low may be considered predatory pricing or "dumping" in the case of international trade. Offering a different price for different consumers may violate laws against price discrimination. Finally, collusion with competitors to fix prices at an agreed level is illegal in many countries. Pricing in companies can also be done in various other types. In small companies, prices are often set by the boss. In large companies, pricing is handled by division and product line managers. Even here, top management sets general pricing objectives and policies and often approves the prices proposed by lower levels of management. In industries where pricing is the key factor (aerospace, railroads, oil companies), companies will often establish a pricing department to assist others in determining appropriate prices. Executives complain that pricing is a big headache and one that it is becoming worse by the day. Many companies do not handle pricing well, and throw up their hands at “strategies” like this “we determine our costs and take our industry’s traditional margins.” Other common mistakes are: price is not revised often enough to capitalize on market changes: price is set independently of the rest of the marketing mix rather than as am element of market positioning strategy; and price is not varied enough for different product items, market segments distribution channels and purchase occasions. Others have different attitude: they use price as a key strategic tool. These “power pricers” have discovered the highly leveraged - 26 -
  27. 27. www.mynotebook.in effect of price on the bottom line. They customize prices and offerings based on segment value and costs. Consumer Psychology and Pricing Many economists assume that consumers are price takers and accept prices at “face value” or as given. Marketers recognize that consumers often actively process price information, interpreting prices in terms of their knowledge from prior purchasing experience, formal communication, and point of purchase or online resources. Purchase decisions are based on how consumer perceive prices and what they consider to be the current actual price and not the marketer’s stated price. They may have a lower price threshold below which prices may signal inferior or unacceptable quality, as well as an upper price threshold above which prices is prohibitive and seen as not worth the money. Understanding how consumers arrive at their perceptions of prices is an important marketing priority. adaPting Prices Companies usually do not set a single price, but rather a pricing structure that reflects variations in geographical demand and costs, market segment requirements, purchase timing, order levels, delivery frequencies, guarantees, service contracts and other factors. As a result of discounts, allowances and promotional support, a company rarely realizes the same profit from each unit of a product that it sells. Geographical Pricing - 27 -
  28. 28. www.mynotebook.in In geographical pricing the company decides how to price its products to different customers in different locations and countries. For example: PROCTAR AND GAMBLE China is P&G’s sixth largest market, yet two-third of China’s population earns less than $25 per month. So in 2003, P&G developed a tiered pricing initiative to help compete against cheaper local brands while still protecting the value of its global brands. P&G introduced a 320 gram of Tide Clean White for 23 cents, compared with 33 cents for 350 grams of Tide Triple Action. The Clean White version doesn’t offer such benefits as stain removal and fragrance, but it costs less to make and, according to P&G, outperforms every other brand at that price level. WIBS BREAD Wibs Bread which prices their product at Rs. 9 in Maharashtra and Rs. 11 outside Maharashtra. Promotional Pricing Companies can use several pricing techniques to stimulate early purchase: 1. Longer payment terms. Sellers, especially mortgage banks and auto companies, stretch loans over longer periods and thus lower the monthly payments. Customers often worry less about the cost (that is, the interest rate) of a loan and more about whether they can afford the monthly payment. 2. Warranties and Service Contracts. Companies can promote sales by adding free or low cost warranty or service contract. 3. Psychological Discounting - 28 -
  29. 29. www.mynotebook.in This strategy involves setting and artificially high price then offering the product at substantial savings; for e.g. “Was $359, now $299”. 4. Special Event Pricing Sellers will establish special prices in certain seasons to draw in more customers. Every August, there are back-to-school sales. 5. Loss Leader Pricing Super market and department stores often drop the price on well- known brands to stimulate additional store traffic. This pays if the revenue on the additional sales compensates for the lower margins on the loss leader items. 6. Cash Rebates Auto companies and other consumer-goods companies offer cash rebates to encourage purchase of the manufacturer’s products within a specified time period. Rebate can help clear inventories without cutting the stated list price. 7. Low Interest Financing Instead of cutting its price, the company can offer customer’s low interest financing. Auto makers have even announced no interest financing to attract customers. PRICE DISCOUNTS AND ALLOWANCES 1. Cash Discount A price reduction to buyers who pay bills promptly. A typical example is “2/10, net 30,” which means that payment is due within 30 - 29 -
  30. 30. www.mynotebook.in days and that the buyer can deduct 2 % by paying the bill within 10 days. 2. Quantity Discount Quantity discounts must be offered equally to all customers and must not exceed the cost savings to the sellers. They can be offered on each offered placed or on the number of units ordered over a given period. 3. Functional Discount Discount (also called Trade Discount) offered by manufacturer to trade-channel members if they will perform certain functions, such as sellers, storing and record keeping. 4. Seasonal Discount A price discount to those who buy merchandise or services out of season. Hotels, motels, and airlines offer seasonal discounts in slow selling periods. 5. Allowance An extra payment designed to gain reseller participation in special programs. Trade-in allowances are granted for turning in an old item when buying a new one. Promotional allowances reward dealers for participating in advertising and sales support programs. Skimming Strategy Skim pricing attempts to "skim the cream" off the top of the market by setting a high price and selling to those customers who are less price sensitive. Skimming is a strategy used to pursue the objective of profit margin maximization. Skimming is most appropriate when: - 30 -
  31. 31. www.mynotebook.in • Demand is expected to be relatively inelastic; that is, the customers are not highly price sensitive. • Large cost savings are not expected at high volumes, or it is difficult to predict the cost savings that would be achieved at high volume. • The company does not have the resources to finance the large capital expenditures necessary for high volume production with initially low profit margins. Penetration pricing It pursues the objective of quantity maximization by means of a low price. It is most appropriate when: • Demand is expected to be highly elastic; that is, customers are price sensitive and the quantity demanded will increase significantly as price declines. • Large decreases in cost are expected as cumulative volume increases. • • The product is of the nature of something that can gain mass appeal fairly quickly. • There is a threat of impending competition. Differentiated Pricing Price discrimination exists when sales of identical goods or services are transacted at different prices from the same provider. In a theoretical market with perfect information, no transaction costs or prohibition on secondary exchange (or re-selling) to prevent arbitrage, price discrimination can be a feature only of monopoly markets. Otherwise, the moment the seller tries to sell the same good at different prices, the - 31 -
  32. 32. www.mynotebook.in buyer at the lower price can arbitrage by selling to the consumer buying at the higher price but with a tiny discount. However, market frictions in oligopolies such as the airlines, and even in fully competitive retail or industrial markets allow for a limited degree of differential pricing to different consumers. Price discrimination also occurs when it costs more to supply one customer than it does another, and yet the supplier charges both the same price. Although the term "discrimination" has negative (e.g. racist, sexist) connotations, the literal meaning of the word "discrimination" (from discriminatio, "a distinction") is neutral. "Price discrimination" is a technical term meaning only differentiation in price by customer, and is not intended as an accusation of criminal or unfairly biased behavior. The effects of price discrimination on social efficiency are unclear; typically such behavior leads to lower prices for some consumers and higher prices for others. Output can be expanded when price discrimination is very efficient, but output can also decline when discrimination is more effective at extracting surplus from high-valued users than expanding sales to low valued users. Even if output remains constant, price discrimination can reduce efficiency by misallocating output among consumers. Price discrimination requires market segmentation and some means to discourage discount customers from becoming resellers and, by extension, competitors. This usually entails using one or more means of preventing any resale, keeping the different price groups separate, making price comparisons difficult, or restricting pricing information. The boundary set up by the marketer to keep segments separate are - 32 -
  33. 33. www.mynotebook.in referred to as a rate fence. Price discrimination is thus very common in services, where resale is not possible; an example is student discounts at museums. Price discrimination can also be seen where the requirement that goods be identical is relaxed. For example, so-called "premium products" (including relatively simple products, such as capuccino compared to regular coffee) have a price differential that is not explained by the cost of production. Some economists have argued that this is a form of price discrimination exercised by providing a means for consumers to reveal their willingness to pay. Godrej Refrigerators while supplying it to the showrooms prices differently from what it prices to the wholesalers and dealers. Due to this customers are charged differently at dealers and showrooms Airlines charge different fares to passengers on the same flight, depending on the seating class, the time of day (morning or night coach), the day of the week (workday or weekend); the seasons. Airlines are using yield pricing to capture as much revenue as possible. Product Mix Pricing We can distinguish six situations involving product-mix pricing. 1. Product line pricing 2. Optional feature pricing 3. Captive product pricing 4. Two part pricing 5. By-product pricing - 33 -
  34. 34. www.mynotebook.in 6. Product bundling pricing initiating and resPonding to Price changes Companies often face situation where they may need to cut or raise prices. Initiating price cuts Several circumstances might lead a firm to cut prices. The firm needs additional business and cannot generate it through increased sales effort, product improvement or other measures. Companies sometimes initiate price cuts in a drive to dominate the market through lower costs. Either the company starts with lower costs than its competitors or it initiates price cuts in the hope of gaining market share and lower cost. Price cutting strategy involves possible traps: • Low quality trap • Fragile market share trap • Shallow pockets trap - 34 -
  35. 35. www.mynotebook.in Initiating price increases A successful price increase can raise profits considerably. A major circumstance provoking price increases is cost inflation. Rising costs unmatched by productivity gains squeeze profit margin and lead companies to regular rounds of price increases Another factor leading to price increases is over demand when a company cannot supply all of its customers it can raise its prices, ration supplies to customers or both. A company needs to decide whether to raise its price sharply on a time basis or to raise it by small amounts several times. In passing price increases on to customers, the company must avoid looking like a price gouger. reaction to Price change Any price change can provoke a response from customers, competitors, distributors, suppliers and even government. Customer reactions Customers often question the motivation behind price changes. A price increase, which would normally deter sales, may carry positive meanings to customers: The item is “hot” and represents an unusually good value. Competitors Reaction: Competitors are most likely to react when the number of firms are few, the product is homogeneous, and the buyers are highly informed. If the competitor has a market share objective, it is likely to match the price - 35 -
  36. 36. www.mynotebook.in change. If it has a profit- maximization objective, it may react by increasing the advertising budget or improving product quality. resPonding to coMPetitors Price change Market leaders frequently face aggressive price cutting by smaller firms trying to build market share. Using price, Fuji attacks Koddak, Bic attacks Gillette, and Compaq attacks IBM. Brand leaders also face lower- priced private- store brands. The best response varies with the situation. The company has to consider the product stage in the lifecycle, its importance in the company’s portfolio, the competitor’s intentions and resources, the market price and quality sensitivity, the behavior of costs with volume and the company’s alternative opportunities. internal Factors aFFecting Price Because every business accusation is unique it is difficult to discuss meaningfully how a particular pricing model should apply in the abstract. However, regardless of what pricing technique is to be employed, there are various issues to consider in all transactions. Many of these are internal so particular seller or the business enterprise itself, while many forces will be external and applicable to the market place. Internal forces may motivate the seller to dispose of the business enterprise. In a closely held business this may include a variety of personal issues. The following are typical drivers in many deals: Age of seller: Whether a single or multiple seller is involved, the age of the seller may well impact the motivation to sell the business. - 36 -
  37. 37. www.mynotebook.in Health of seller: The significance of the health of the seller cannot be underestimated. Where the seller’s health is deteriorating or in question, the perception of the ability to continue to keep the business enterprise will serve to motivate the seller and often cause the seller to accept a lower purchase price. Number of sellers: Where there are multiple sellers, disputes can cause the group to become dysfunctional or otherwise fractions. This tension may lead to some being more motivated to dispose of the business enterprise. Restrictive agreements: Where the sellers are parties to restrictive agreements or another contractual obligations, the ability to adequately market the business enterprise may be affected. Uncertain management: Where the seller’s management team is uncertain, either because of age, health, mobility, non-ownership, or lack of commitment to the enterprise, the ability to deliver a functioning, turn-key operation will be in question. Expiration issues: Where some of the significant assets of the seller are likely to expire or otherwise cease to have the market advantage that the business presently enjoys, the buyer will be less likely to pay top dollar. Financial condition: Many businesses enjoy favorable financial relations through leases or other business settings, including the use fully depreciated equipment. These potential expenditures may have a significant impact on the value to the outsiders, and may strongly motivate the seller. External Factors Affecting Price In addition to various internal forces, the market place will itself dictate new pricing issues including the following: - 37 -
  38. 38. www.mynotebook.in Number of interested buyers: The number of prospective buyers in the marketplace will greatly affect the purchase price. Where the business attracts the number of suitors, the seller is in an enviable position and can often play them off against one another to obtain the most favorable price. Cost of money: The purchase price will be necessarily influenced by the cost of the money that the buyer will have to pay to consummate the transaction. Where third-party funds are being sought, the interest rate and the terms of borrowings will become the part of the economics of the transaction. Form of payment: The form of payment the buyer desires and the seller is willing to accept will influence the price negotiations. Where the seller is ready to consider the alternatives to an all cash purchase price, there will be greater flexibility in the price negotiations. Similar opportunity: If other similar opportunities exist in the market place the opportunities offered by the same will be necessarily be affected. As with virtually any good as supply of business in the market place increase, the price is generally depressed with virtually any good as supply of business in the market place increase, the price is generally depressed. Synergies: Many prospective buyers will see synergies that can be developed between the target business and other businesses already operated by the prospective buyer. Where the business can be a supplier or a customer of other relative business enterprises the value to the particular buyer will be enhanced. Complimentary companies: A buyer and a seller must be cognizant of not only competitive businesses but also the effect the transaction will have on the complementary business relied upon by the target such as suppliers, vendors and customers. - 38 -
  39. 39. www.mynotebook.in Sale of a subsidiary or division: Where the target is a subsidiary or division of a much larger company, often the seller will have many priorities unrelated to price. - 39 -
  40. 40. www.mynotebook.in Pricing oF Fresh Flowers The price of the flower depends upon the demand, quality of the flowers, and type of flower, occasion and the geographical location. Demand: If the flower is purchased in bulk then the price will be low and vice-versa. Quality: If the quality is sub-standard the price is tantamount to that. Type: If a flower is of exotic nature, then it will be priced higher than the local variety as it is not easily available as the local flowers. Occasion: On special occasion like Diwali, Dasera, Valentine day etc. the demand for the flowers is high and that is why on this days the prices are higher. Location: In posh areas the prices will be relatively higher as compared to not so posh areas. Transportation Cost: It is an important element in determining the price of flowers. If the flowers are imported from other countries the cost is relatively higher. Here are the price analysis of some flowers: SR NAME OF THE IMPORTS QUANTITY COST SELLING COM NO. FLOWER PRICE PRICE MISSI ON 1. MOGRA BANGLORE PER KG Rs. 40 Rs. 120 Rs. 80 VIA PLANE 2. LILY WITH ELECO PER KG Rs. 182 Rs. 200 10% 3. GONDA PER KG Rs. 18 Rs. 20 10% - 40 -
  41. 41. www.mynotebook.in 4. BIJLI PER KG Rs. 18 Rs. 20 10% 5. ASTER PER KG Rs.18 Rs. 20 10% 6. BASKET FLOWER PER SET Rs. 137 Rs. 150 10% (HOLY) 7. RISHI GANDHA PUNE PER KG Rs. 36- Rs. 40-50 10% 54 AND Rs. 60 8. TULSI VIRAR PER SET Rs. 8 Rs.10 2% 9. TRIDA VIRAR PER KG Rs. 20 Rs. 25 5% 10. BEL PATTA BHUSAVAL PER SET Rs. 5 Rs. 6 1% 11. AAM (MANGO) BHUSAVAL PER Rs. 2 Rs. 3 1% PATTA BUNDLE 12. BANANA PATTA PER Rs. 30 Rs. 40 10% BUNDLE 13. SUNFLOWER NASHIK PER Rs. 5-6 Rs. 6-7 1% (JERMERA) FLOWER 14. CARNITION NASHIK PER KG Rs. Rs. 120- 10% AND OOTY 140 15. ROSE SANGLI, PER Rs. Rs. 1.50 10% KOLHAPUR, FLOWER TAZGAON 16. ORCHID THAILAND PER STICK Rs. 5 Rs. 7-8 40% AND SINGAPORE 17. CHRYSANTHEMUM NASHIK, PER KG Rs. 63 Rs. 70-80 10% HIMACHAL, - 41 -
  42. 42. www.mynotebook.in BANGLORE 18. CHINESE ROSE PER Rs. 4 Rs. 5 20% FLOWER 19. TULIP HOLLAND, PER SET Rs. 80 Rs. 100 25% - 42 -
  43. 43. www.mynotebook.in Pricing oF consuMer durables The pricing of consumer durables mainly depends upon the materials used for manufacturing and its quality, labour, transportation cost, commission of middle man and most important profit ratio of the firm. Here is the Performa of how the price for consumer durables are done: Particulars Your Estimates Labour: My Salary ____________ Staff Salary ____________ Total Labor ____________ Other Expenses: Commission ____________ Rent & electricity ____________ Transportation ____________ Raw Materials (can be manufactured or ____________ out sourced) Utilities ____________ Marketing ____________ Office Supplies ____________ Repairs ____________ Miscellaneous ____________ After Sale Service Total Expenses ____________ Total Operating Expenses ____________ - 43 -
  44. 44. www.mynotebook.in Profit Goal (10%) ____________ TOTAL ____________ - 44 -
  45. 45. www.mynotebook.in - 45 -

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