Basic five objectives of pricing-survival,max current profit,max market share,max market skimming, or product quality leadership
Price covers -variable costs and some fixed costs.
Survival pricing is short term plan where as in long term firm must add value or parish.
Over capacity,intense competition,changing customer wants leads to variable cost.
2-maximization of current profits
current price is based on demand and cost function( cash flow and RIO)
For current max- profits ,firm may sacrifice long run performance(value .add.)competitor's move,legal constrains
3-maximization of market share
Higher sales volume will lead to lower unit costs& higher long run profits.they set lowest price to capture price sensitive customer.
Market penetration price-large production capacity-lowest possible price/large market -share/cuts its price further,which discourages competition
4.Maximisation of market skimming
Market leader MNCs practice extracting premium price for innovation-SONY,DELL,TOYOTA,LG,SAMSUNG-are examples who reduce the introductory high price after skimming-ex-Sony HDTV introductory price$43,000-(1990) dropped down to $1,200 in 2004-no.of buyers with high demand, high price-high quality, cost of production for small.Qty.not high-less competitor
Many brand create image of “affordable luxuries” as perceived by customer as a symbol of status-price just high enough-within reach –BMW &Rolls Royce cars,champaign,nikon/canon range of cameras, Amway products, Raymond ,Park Avenue toiletories,Gillette shaving systems
.Target Return Pricing
Firm determines at what price targeted ROI will be achieved.
BE VOLUME=F.C/(PRICE-V.C)=500000/(20-10)=50,000 WHICH IS BASED ON AN ASSUMPTION THAT MARKET WII BUY 50,000 UNITS@ Rs20=10,00,000 ON ITS INVESTMENT OF Rs1 mio but,depend on Price Elasticity & competitor’s price.manufacturer must consider different prices & estimates their probable Impact on sales-volume& profit.must try to lower total cost so that the BEV is lower as well& net cost
pricing in real word- the application Pricing policies followed by firms in actual practice. Analysis of various factors in pricing decisions. Relationship between the pricing objectives & the goals of firm. BICP( Bureau of Industrial Costs & Prices)
THOUGH A FIRM MAY HAVE BEEN CLASSIFIED AS FMCG-HLL/P&G-THEY HAVE VARIOUS MODEL,SIZE ,SHAPE,OF THE SAME PRODUCT.THEY ARE INTER RELATED OR MANUFACTURED UNDER THE SAME ROOF,BUT MEANT FOR DIFFERENT MARKET SEGMENT & TARGET CUSTOMER-SO PRICED AS PER THE PAYING CAPACITY & COMPETITION & THEIR PRICING,OFFERS,AD,SP,OTHER FACTORS.-SURF WILL BE PRICED SIMILARLY LIKE AERIAL-
SITUATIONS WHEN PRICING DECISIONS REQUIRED.
New product introduction or setting the price for the first time.
Modification of an existing product
In response to a competitor’s price or product change.
Changes in costs.
Change in the demand pattern of a product.
Changes in Govt. policy concerning taxes & duties
Illustration of the relationship of price to supply ( S ) and demand ( D ).
Determinants of Pricing
Pricing decisions are usually determined by-cost, customer’sdemand,& competition.(3c)
Demand-”law of demand" states that-higher the price, lower the demand, other things remain the same. gold price falls-demand increases-vegetables-income rise-demand may rise despite of price.
Monopolistic competition-many sellers, product of each seller is differentiated, so that buyer will not change product despite of low price- hero Honda-brand leader-due to recommendation by user friends,ad,own experience,-brand recall by :HERO-HONDA CUP/SA RE GA MA- can command price
3-Role of cost in pricing
Cost determines price-but price is a result of many factors-demand determines price-why do firms report loss?-cost is affected by volume, which is affected by price. New product-price is a gamble-
In long run cost must be recovered by a firm-or the said product or firm will be closed down-multi factors decide about a product to be promoted or not depending its final ROI.
New product pricing
New product success/ROI depends on soundness of initial pricing of the new product
The new product or a line extension, the modification, its relation with the present product-if it is a similar product there is possibility of cannibalism-better to replace a dead product with an new one.
If a competitor introduces a product which competes with another product as per customer psychology-their pricing is to be taken into account. thus pricining is full of complexities, it may appear MR=MC,
GIVEN RATE OF RETURN-5% ON SALES,10% ON TOTAL ASSETS OR 15% ON NET WORTH( SHARE CAPITAL+ RESERVES)=TARGET RETURN PRICING.
WHEN THE BUSINESS IS RISKY LIKE –COMPUTERS 25% RETURN IS NORMAL,ENGINEERING FIRMS -18%,-VOLVO,HITACH-TATA-EARTHMOVERS
NATURE OF INDUSTRY-LEVEL OF COMPETITION, RATE OF TECHNOLOGICAL OBSOLANCE ,IMP. TO DECIDE ROI
NATURE OF PRODUCT-UNIQUE CHARACTERISTICS,R&D COST,INDUSTRIAL/DAILY USE/FMCG
Perceived value pricing
Customer must get the value promised as per their proposition & perception
Advertisement & sales force enhance perceived value in buyer’s mind.
Different weightage-3 types-price buyers, value buyers, loyal buyers
Deliver more value than competitor & demonstrate it to the prospective buyer clearly, Dupont-polyethylene resins
5- SELECTING A PRICING METHOD
MARKUP PRICE-To a standard markup for profit=unit cost/1-desired return on sales=Rs20/1-.5=Rs.40/ie 50% mark up for manufacturer,delers may add 20% mark up,net MRP=Rs48/,subject to demand & competition.
FAIRLY LOW PRICE FOR A HIGH QUALITY OFFERING/SERVICE-WAL-MART,BIG BAZAAR,PETER ENGLAND.P&G REDUCED ITS SHAMPOO & DETERGENT PRICES ,SO THAT HLL WAS COMPELLED TO LOWER PRICES-REENGINEERING OPERATIONS WITHOUT SACRIFICING QUALITY & LOWERING PRICES SIGNIFICANTLY TO ATTRACT LARGE NO.OF VALUE CONSCIOUS CUSTOMER .EVERY DAY LOW PRICING(EDLP)/HIGH LOW PRICING-DAILY HIGH PRICE BUT PRICES SLASHED ON BUSY HOURS.SUPER MARKETS USE A COMBI OF EDLP+HLP+PROMO- TO ATTRACT VALUE SENSITIVE CUSTOMERS TO RETAIL.
GOING RATE PRICING
COSTS ARE DIFFICULT TO MEASURE & COMPETITOR RESPONSE IS UNCERTAIN, A FIRM CHARGES A PRICE AS PER COMPTITOR-SAME/LESS/MORE THAN MAJOR COMPETITIOR-”FOLLOW THE LEADER” CEMENT/STEEL/PAPER/PETROLIUM PRODUCTS.GOLD/DIMONDS.
AUCTION TYPE PRICING
ENGLISH AUCTIONS-ASCENDING BIDS-ONE SELLER MANY BUYERS-ANTIQUES=SOTHBY’S/REAL ESTATE/USED CARS/CATTLE.
DUTCH AUCTION-DESCENDING BIDS-ONE BUYER MANY SELLEERS-
SEALED BID AUCTIONS-WOULD BE SUPPLIERS CAN SUBMIT ONLY BID WITHOUT KNOWING OTHER BID PRICE-MOST GOVT.WORKS,LARGE CORPS,INSTITUTIONS PROCURE SUPPLIES & SUPPORT SERVICES.
TWO STAGE BIDDING-PRE QUALIFIERS ARE ALOOWED TO SUBMIT COMMERCIAL BIDS
CONSUMER & BUSINESS BUYERS JOIN TOGATHER TO FORM GROUPS TO AVAIL MAJOR DISCOUNTS IN BUYING CRITICAL COMPONENETS-HOUSING CO-OPERATIVES FORMCONSORTIUM TO BUY SERVICES OR CRITICAL COMPONENETS,SSI’S-AVAIL BULK DISCOUNTS-SEZ,SWP
STEP-6.SELECTING THE FINAL PRICE
Selecting the final price includes impact on other mkt.activities/firm’s pricing policy/impact on other parties.
Impact on other mktg.activity-As per Reibstein examined the relative price/relative quality/relative adv.
Brand with avg. rel.qlty-but high rel.adv=charge premium price.
Brand with high rel.qlty.& high rel.adv.=highest price.
Positive relationship between high price & high adv. Held most strongly in the later stage of the product life cycle for mkt.leaders,so price is not as important as quality.
Company pricing policies
Consistent with company’s pricing policy.
Air lines charge up to 50% cancellation fee for tickets bought on apex fares.
Banks charge penalty if minimum balance is not maintained in SB account.
Dell/Compaq/HP sales persons quote prices that are reasonable to customer & profitable to company
GAIN & RISK SHARING PRICING
Buyer may not buy a product from seller due to high perceived level of risk, in that case the seller offers to absorb part or all the risk if it fail to deliver the full promised value-LIC pays survival bonus/ many FMCG products today are available on money back guarantee basis
IMPACT OF PRICE ON OTHER PARTY
SHOULD THE DISTRIBUTORS & WHOLE SELLERS WELCOME THE PRICE?
ARE THEY LEFT WITH ENOUGH MARGINS?
HOW THE SALES FORCE IS GIONG TO HANDLE?
WHAT WOULD BE THE COMPETITOR’S REACTION?
WILL THE GOVT.INTERVENE ?
MANY ITEAMS ARE REGULATED BY GOVT. LIKE PETORLIUM/LPG& LISTED PHARMA PRODUCTS.
TELECOM/INSURANCE ARE REGEULATED BY THEIR RESPECTIVE REGULATORY AUTHORITES
ADOPTING THE PRICE
Corporations generally don't set asingle price,but rather a pricing structure that encompasses- variations in geographical demand & costs ,market segment requirements, purchase timing, order level,gurantee,service contract,
Thus the final realization of profits for individual products will be dependant on factors mentioned above
PRICE ADOPTION STRATEGY-Geographical Pricing
A company charges price based on customer & location /country/freight charges/exchange rates/purchase thru not hard currency, but barter system or counter trade:
Bareter:Eminence.S.A.french clothingmaker-5 yr deal to barter $25 mio of US produced underwear sports wear to east European transport &Ad.space in their magazine
Compensation deal: Some% in cash & rest in kind-Brazilian co-purchased planes from UK firm, payment 70% cash+30%-coffee.
Buy- back arrangement: A U.S. firm built a chemical plant in India & received payments partly in cash & partly finished goods.
Offset: seller receives almost all amount in cash but agrees to spend substantial amount of that in that country in a time frame-PepsiCo sells its cola in Russia& buys Vodka at discount to be sold in U.S.
Loss-leader- pricing: when top selling brands are given at a discounted price-BigBazer/Shopper’sStop to attract customer in to the store to maintain volumes to the dissatisfaction of other retailers
Special event pricing: clothing & appeals discount in July/august to clear old stock to get fresh stock for Puma
Cash-rebates; Auto mobile-2 & 4 wheeler rebates to clear stock, laptop /desktop discounts & free bundle offer
Low–interest financing:0% interest financing of all automobiles
Longer payment terms;EMI for all electronics & consumer goods
Warranties & service contract: all automobile/computer companies cover with service & replacement warranties
Psychological discounting: Discount upto50% in textile/shoes though inflated Mrs. only psychologically attractive
Price discrimination: on intensity of demand/volume/class: as mentioned below:
Product form pricing: different price for laptop/desktop ( same configuration),Bata-seconds-HeroHonda-range
Image pricing: cosmetics and garments charge 2 prices at 2 levels of the same product
Channel pricing: coca-cola- different price for fast food/star hotel and vending machine
Location pricing: Cinema hall price difference for various class for same movie
Time pricing: Hotels /restaurant charge less on weekends/odd hours
Price discount & allowances
CASH DISCOUNT: when cash is collected the business is complete, so discount given to cash party & those who want to before the due date.
QUANTITY DISCOUNT: to generate volume ,whole sellers offer 20 bottles free in a case or 10+2 in pharma marketing
FUNCTIONAL DISCOUNT: trade discounts are given to distributors if they place order in case-lots & keep 30 days stock in any given time for costly items.
SEASONAL DISCOUNT: in hotel and tourism business as well as in pharma industry cold/cough items discount is given to sell in winter
ALLOWANCES: Garment & cloth gives 2+1 free or for retail display by GSK-BW or P&G ,NESTLE for display of baby food contest
NET PRICE ANALYSIS:LIST PRICE OF A PRODUCT Rs-3000-AVG.DISCOUNTS-300+450( promotional price,15%of list price)+co-op.adv. moneyRs-150=net price Rs2100 not Rs3000/
USE MANY PRICING TECHNIQUES TO STIMULATE EARLY PURCHASE:
SPECIAL EVENT PRICING:
LONGER PAYMENT TERMS
WARRANTIES & SERVICE CONTRACTS
FIRMS SOME TIMES INITIATE PRICE CUTS TO DOMINATE THE MARKET THRU LOWER COSTS;
LOW-QUALITY TRAP-CONSUMERS WILL ASSUME THAT QLTY.IS LOW
FRAGILE-MARKET SHARE TRAP-LOW PRICE MAY BUY MS.-BUT NOT LOYALITY
SHALOW POCKETS TRAP-HIGH PRICE COMPETITORS MAY REDUCE THEIR PRICE AS COUNTER STRATEGY
Initiating price increases
A successful price increase can raise profits-if profit margin for SURF is3% of sales,1% price rise=profits to 33%,price rise is due to COST INFLATION-ever rising costs, sales drop 7drop in productive gives rise to rise prices to balance cost.
In anticipation of further escalation of cost or inflation/GOVT. price control=anticipatory pricing
Different methods of price rise
DELAYED QUOTATION PRICING: no pricing until the product is finished/delivered like in-flats or heavy equipment
ESCALATOR-FACTOR: customer pays majority of price as per today’s prevailing pricing ,rest he pays as per inflation –steel plants/oil rigs/bridge/railways/aircraft construction
UNBUNDLING: the company maintains its price as per present norms but charges some accessories separately-automobile-internal fittings,anti lock break, central locking,anti theft control, sun control or delivery and services
REDUCTION OF DISCOUNTS: stops offering its normal discounts or free goods on bulk purchase.
CUSTOMERS PREFER A SLOW AND SMALL PRICE RISE THAN A SHARP PRICE JUMP-MARUTI HAD TO CUT PRICE IN RESPONSE TO SANTRO IN JUNE 05-& ALL CARS OFFER UP TO 50,000/NOW