Marketing Management-Pricing

1. Pricing

2. Price
• The money charged for a product or a service
• Cost is incurred to the supplier/producer in
supplying/producing the product
• Price is paid by the buyer to acquire the
product

3. Pricing Products
• The most common mistakes in setting prices are;
– pricing that is too cost oriented
– prices that are not revised often enough to reflect
market changes
– pricing that does not take rest of marketing-mix
into account
– prices that are not varied enough for different
products, market segments & purchase occasions

4. Factors influencing pricing decisions
• Costs of production
• Competitive prices
• Customer’s perception
of value
• Customer demand
• Target market
• Other marketing mix
elements
• Stage in the product
lifecycle
• State of the economy
• Expectations of
distributors
• State of competition in
the market

5. New Product Pricing Strategies
• Market skimming pricing:
- High price to gain max. revenues
- Fewer but more profitable sales
- e.g. Sony HDTV
• Market penetration pricing:
- Low price to attract a large no. of buyes
& a large market share
- e.g. Dell & Wall mart, Tata Nano, Tata Indica

6. Blackberry Z10
• From being a leader in the smartphone market at one time, BlackBerry's India market share has been reduced
to a dismal 0.2% as of December 2013 compared to 4.3% in December 2012, according to data from research
firm IDC.
• Analysts feel that the company could have priced its devices much lower in India, a highly price-sensitive and
competitive market, or could have come out with a larger portfolio of devices across different price points,
after launching its flagship Z10 smartphone in February 2013. However, given the recent statements of the
senior management on staying away from low-cost devices, any rebound in India looks a far cry.
• "The pricing strategy has gone horribly wrong," Mansi Yadav, an analyst at research firm IDC said, adding
that theRs43,990-price tag for the Z10 was far higher than customer expectations. BlackBerry was forced to
slash Z10's price to Rs29,990 in September 2013 under a special offer and then again on February 25 this year,
Rs17,990, under a limited period offer.
• BlackBerry then had to replenish stocks as customers lapped up the Z10 at the attractive price. And it's
not just Z10, last week, the company lowered the price of Z30 by 10% to Rs34,990 after launching it in
October 2013 for Rs39,990. In January, BlackBerry cut Q10's price to Rs38,990 and Q5's to Rs19,990,
under limited period offers, in an attempt to reach out to Qwerty keypad enthusiasts.
• BlackBerry refuted analysts' views, saying that the pricing of a product depended on multiple factors like its
operating system, hardware quality, manufacturing costs, and currency exchange rates, and price reduction of
a product is common for smartphones. It said that while the strengthening of the rupee against the US
dollar had allowed the company to lower the costs of Z10 to Rs17,990, it admitted that higher levels of
inventory of the model had also played a hand.

7. Product Mix Pricing Strategies
• Product line pricing:
- Setting price steps between
various products in a product line
- Is based on the cost differences
between the
products, customer evaluations
of different features &
competitor’s prices
- e.g. Rexona, Lifebuoy, Dove

8. Product Mix Pricing Strategies
• Optional product pricing:
- Pricing of optional or accessory
products along with the main product
• Captive product pricing:
- Setting price for products that must be used
with the main product.
- e.g. HP printer and cartridges

9. Product Mix Pricing Strategies
• By product pricing:
- Setting a price for by products in order to
make the main products price competitive
-
• Product bundle pricing:
- Combining several products & offering the
bundle at a reduced price
- e.g. Combo deals

10. Price Adjustment Strategies
• Discounts:
- A straight reduction in price on purchases
during a stated period of time.
- e.g. discounts of bulk purchasing
• Allowances:
- Promotional money paid by
manufacturers to retailers in return for
an agreement to feature the
manufacturer’s products in some way.

11. Types of Discount
• A quantity discount is a price reduction to buyers who buy large volumes. A typical
example might be “ $ 10 per unit for less than 100 units, $ 9 per unit for volume for 100 or
more units.”
• A functional discount (also called a trade discount) is offered by the sellers to trade-
channel members who perform certain functions, such as selling, storing, record keeping.
• A seasonal discount is a price reduction to buyers who buy merchandise or services out of
season. For example, lawn and garden equipment manufacturers offer seasonal discounts
to retailers during the fall and winter months to encourage early ordering in anticipation of
the heavy spring and summer selling seasons.

12. Price Adjustment Strategies
• Segmented pricing:
- Selling a product or service at two or more
different prices where the difference is not
based on the difference in cost.
 Customer segment pricing: e.g. Airfare for children
(uptil 12 years) and adults
 Product form pricing: e.g. Nokia 1100 & N 72, N 73
 Location pricing: e.g. multiplex and local movie halls

13. Price Adjustment Strategies
• Psychological pricing:
- Sellers consider the psychology of pricing & not
simply the economics
-The price is used to say something about the
product (quality)
Reference pricing: Price carried in buyer’s mind &
referred to when the buyer looks at that product.
Example: Bata shoes

14. Price Adjustment Strategies
• High-Low Pricing.
Boomerang tracked the prices of many Amazon items for months. For example,
Amazon listed a 32-inch smart TV for just under $400 in May of last year. The price
consistently increased and decreased for six months, and on Black Friday, the huge
shopping day right after Thanksgiving, the price plunged to $250.
Items that are popular on Amazon and that get good reviews from customers tend to
be cheaper than on competitor sites, while other less-popular items might be
more expensive. Boomerang found that a popular router, for instance, was listed
for $144 at Walmart and $120 at Amazon. However, the price of a different router
that had received poor reviews from buyers turned out to be more expensive, at
$56 on Amazon and $40 via Walmart.

15. Price Adjustment Strategies
• Promotional pricing:
- Temporarily pricing the product
below the list price & sometimes even
below cost to increase sales in the short
run.
 Special event pricing
 Cash rebates – free services,
longer warranties

16. Geographical pricing
Uniform-delivered pricing: A geographical pricing strategy in which the company charges
same price plus freight to all customers, regardless of their locations.
Zone Pricing: A geographical pricing strategy in which the company sets up two or more
zones. All customers within a zone pay the same total price; the more distance the
zone, the higher the price.
Basing-point pricing: A geographical pricing strategy in which the seller designates some
city as basing point and charges all customers the freight cost from that city to
customer.
Freight- absorption pricing: A geographical pricing strategy in which the seller absorbs all
or part of the freight charges in order to get the desired business.

17. Setting Price and Value-in-use
Pricing

18. Mark-up pricing
Manufacturer’s unit cost
= variable cost + (fixed cost/unit sales)
•Mark up on Cost=
Item Cost + (Item Cost x Mark-up Percentage) =
Price
•Mark-up price on Sales
= Unit cost ÷ (1-desired return on sales)

19. • A computer software retailer used a markup
rate of 40%. Find the selling price of a computer
game that cost the retailer $25.
• A golf shop pays its wholesaler $40 for a certain
club, and then sells it to a golfer for$75. What is
the markup rate?
• A shoe store uses a 40% markup on cost. Find
the cost of a pair of shoes that sells for$63.

20. • An item originally priced at $55 is
marked 25% off. What is the sale price?
• An item that regularly sells for $425 is
marked down to $318.75. What is the
discount rate?
• An item is marked down 15%; the sale price
is $127.46. What was the original price?

21. lculate answers for the following scenarios if retailer markups are based on their selling price:
a. A retailer sells a set of measuring cups for $2.50 after adding $0.50 to the original cost. What
is the markup percentage?
b. The cost of a food blender for the retailer is $40 and the retailer applies a markup of $60.
What is the retail markup percentage?
c. A retailer marks up all products by 20 percent. If a set of glasses costs the retailer $10, what
will be the final selling price?
d. A retailer marks up all products by 75 percent. If the selling price of a set of plastic bowls is
$4, what was the cost to the retailer?

22. Target –return pricing
Target return price
=
unit cost + {(desired return× invested capital)
÷unit sales}

23. unit cost + {(desired return× invested
capital) ÷unit sales}
• Calculate the price of the product when:
Unit cost of production= 10,000
Initial capital investment= Rs 40,00,000
Expected unit sales= 1000 units
Desired ROI is 20%

24. unit cost + {(desired return× invested
capital) ÷unit sales}
• Calculate the price of the product when:
Variable cost of per unit production= 5,000
Fixed cost = 30,0000
Initial capital investment= Rs 40,00,000
Expected unit sales= 1000 units
Desired ROI is 30%

25. Break-even volume
Break-even volume
=
fixed cost÷ (price-variable cost)

26. • Regency, Inc. makes disposable cap and gown
sets for graduations. Each cap and gown set
sells for $15. The average variable cost for
manufacturing ten cap and gown sets is $100.
Total fixed costs for the year equal $65,000.
Calculate the break-even point in units.

27. CeylonExpresssellsbottledpasteurizedteatoretailers.Ithasthefollowingrevenuesandcosts:
Salespriceperbottle: $0.50
Averagevariablecostsperbottle: $0.30
Totalfixedcosts(annual): $50,000.00
Taxrate: 20percent
Whatistheannualbreak-evenpointinunitsforthecompany?

28. • . If total fixed costs of Tesla Motors are
$23,400,000 and the average variable cost is
$50,500, how many Roadsters must Tesla sell
to break even? The price of the car is $75000.

29. What is a break-even point? The Catera Company makes and sells cotton candy machines. What is the break-
even volume for Catera machines in units?
Catera Machines Financial Information
Salesperson salary $ 40,000
Advertising 100,000
Research and development 20,000
Production equipment 20,000
Overhead allocation 20,000
Catera’s selling price $600
Average variable cost $350

30. Perceived Value Pricing
• Competitors price = x
• Price premium for durability =y
• Price premium for reliability = z
• Price premium for warranty =m
• Price premium for after sales service= n
• Price premium for brand equity= r
• Price premium for any other factor= s
• Perceived value of the product= x+y+z+m+n+s+r

31. Perceived value pricing
• Competitors price = Rs 2000
• Price premium for durability =Rs. 20
• Price premium for reliability = Rs. 55
• Price premium for warranty = Rs. 70
• Price premium for after sales service= Rs. 300
• Price premium for brand equity= Rs. 600
• Price premium for any other factor= Rs. 200
• Perceived value of the product= ?

32. • Competitors price = Rs 1000
• Price premium for durability =Rs. 50
• Price premium for reliability = Rs. 40
• Price premium for warranty = Rs. 60
• Price premium for after sales service= Rs. 100
• Price premium for brand equity= ???
• Price premium for any other factor= Rs. 150
• Perceived value of the product= 1600

33. Value Pricing
• Everyday low pricing
• High –low pricing
• Special value pricing
• Bundling
• Value in use pricing

34. Value in use pricing
By detecting a market place opportunity in the
basic facewash market Himalaya is one of the
leading player in the mid-range market. A price of a
single pack of Himalaya facewash is say $ 65 per
100 ml.
They have developed a new moisturizer facewash
TULI to meet the need of this segment. To boost up
performance of THE TULI two times than its standard
Application, they have created a lotion called as
TULI LT. TULI LT unit price will have 20% margin.
The question is what should be the appropriate
pricing method for TULI+TULI LT??

35. Data sheet
• Labour cost per unit =$30
• Electricity cost per unit = $10
• Cost of patent = $ 2, 00,000
• Cost of materials per unit = $10
• Cost of developing TULI LT = $ 1,00,000
• Expected company sales volume= 10,0000 units
• Assumed attachment rate : 40%
• Assumed value sharing by the company = 40%

36. Data sheet
With the previous data sheet assume efficiency increases to 3 times.
•Labour cost per unit =$30
•Electricity cost per unit = $10
•Cost of patent = $ 2, 00,000
•Cost of materials per unit = $10
•Cost of developing TULI LT = $ 1,00,000
•Expected company sales volume= 10,0000 units
•Assumed attachment rate : 40%
•Assumed value sharing by the company = 40%

37. Data Sheet
With the previous data sheet assume efficiency increases to 4 times.
•Labour cost per unit =$30
•Electricity cost per unit = $10
•Cost of patent = $ 2, 00,000
•Cost of materials per unit = $10
•Cost of developing TULI LT = $ 1,00,000
•Expected company sales volume= 10,0000 units
•Assumed attachment rate : 40%
•Assumed value sharing by the company = 40%

38. Data sheet
• Labour cost per unit =$30
• Electricity cost per unit = $10
• Cost of patent = $ 1, 00,000
• Cost of materials per unit = $10
• Cost of developing TULI LT = $ 2,00,000
• Expected company sales volume= 10,000 units
• Assumed attachment rate : 50%
• Assumed value sharing by the company = 50%

39. AB toothpaste
The original price of AB tooth-paste is Rs. 40. It added micro
granules in it which has increased its efficiency by two times.
Given the following data sheet what should be the value in
use price for AB-improved?
Cost of production: Rs. 10 per unit
Overhead cost: Rs. 5 per unit
Cost of sales : Rs. 5 per unit.
Cost of developing microgranules= Rs. 1,00,000
Expected margin on micro granules per unit 20%
Expected sales of AB improved is 20,000 unit
Assumed value sharing by the company is 40%.

40. • THE EFFICIENCY HAS INCREASED DOUBLY. THIS MEANS THE
CUSTOMER NOW CAN SAVE WORTH OF 1 UNIT OF AB
TOOTHPASTE.
SO TOTAL SAVINGS = (COST OF PRODUCTION + OVERHEAD
COST + COST OF SALES)
= RS. (10+5+5) = RS. 20
OUT OF THIS SAVINGS, THE COMPANY WILL SHARE 40%.
HENCE, THEY WILL CHARGE 60 % OF THE ADDITIONAL VALUE
ALONG WITH THE ORIGINAL PRICE.
HENCE, VALUE IN USE PRICE = RS [40 + (20*0.60)= RS. 52.

41. Suman detergent
• Suman detergent is now sold with a foil of glowy liquid with enhances the glow of
the washed cloth even when you use 33.33% less detergent for each wash. The
name of the new detergent is Suman Glow ( one SKU of Suman detergent with one
foil of glowy) Given the data sheet calculate the value-in-use price.
Initial price of Suman Detergent= Rs. 50 per SKU
Cost of production: Rs. 10 per SKU
Overhead cost: Rs. 5 per SKU
Cost of sales : Rs. 5 per SKU
Total cost of developing glowy liquid= Rs. 1,00,000
Expected margin on glowy per unit 30%
Attachment rate is 50%
Expected sales of Suman detergent for the year 2013-14 is 20,000 unit
Assumed value sharing by the company is 50%.

42. CONCLUSION
value in use pricing strategy can be utilized in
both consumer and industrial market but is more
beneficial at industrial segment.
Value in use pricing is used across many of the
industries. In software industry ,value in use
pricing strategy is ubiquitous.
 value in use pricing leads to higher profit
margins in software than in other industry.
Thus it can be said that value in use pricing is true
in business to business environment where ROI
calculations are frequently included in sales.

43. Other Pricing Strategies
• Going-rate pricing
• Auction-type pricing strategy