Pricing decisions 19-11-13


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Pricing decisions 19-11-13

  2. 2. Session Coverage-Pricing Decisions Importance of Pricing External and Internal Factors Affecting pricing decisions Pricing Objectives Pricing Approaches Cost Based Pricing Buyer Based Pricing p g Competition Based Pricing
  3. 3. Session Coverage-Pricing Decisions New Product Pricing Strategies Product-mix Pricing Strategies Price Adjustment St t i P i Adj t t Strategies Price Changes
  4. 4. PRICE Price is amount of money and/or other items with utility needed t acquire a it ith tilit d d to i product.
  5. 5. The Importance of Price to Marketers • Pricing only element that produces Revenue ; Other elements produce costs • Prices are the easiest marketing – mix element to adjust • Price communicates to the market the company's intended value positioning of its product or brand
  6. 6. Purpose of Pricing The purpose of price is not to recover costs, costs but to capture the perceived value of the product in the minds of the customer. customer ( (Nimer) ) Is this all?
  7. 7. Current Pricing Trends in Indian Markets You are getting less for your money You are getting less for your money Weight (Grams) Product Price(Rs) Then ( ) Now 1 Lays Chips 20 68 61 2 Good Day Biscuits 10 100 84.5 3 Dairy Milk Chocolate 20 50 38 4 Britannia Bread 12 400 375 5 Maggi 10 100 80 6 Haldiram Snacks 10 52 48 7L S Lux Soap 10 75 65 Less 7 15.5 12 25 20 4 10 Times of India-November 20, 2011
  8. 8. CUSTOMER’S MIND • Some customers interested in low prices, while other segment interested in service, quality, value and brand image. • R Research id tifi d 4 segment of h identified t f shoppers Brand loyal: relatively uninterested in price System beaters: prefer certain brands but y p buy them at reduced price. Deal shoppers: Driven by low prices
  9. 9. CUSTOMER’S MIND •Uninvolved: Not motivated by either a Uninvolved: brand or low price. Study had differentiation in demographics. So, psychographic factors responsible for different degree of price sensitivity. Value is also very important
  10. 10. Importance of Pricing-McKinsey Research Pricing is extremely important, small changes in price can translate into huge p p y improvements in profitability. A study of 1000 companies: McKinsey found that a 1% increase in price would improve profits by 7% assuming no change in sales volume.
  11. 11. Factors Affecting Pricing Decisions • Two Types of Factors: 1. Internal Factors 2. External Factors
  12. 12. INTERNAL FACTORS Aim is to recover cost of manufacturing and marketing through price. 1. 2. 2 3. 4. 4 5. Corporate & Marketing objective of firm Image sought by firm through Pricing Characteristics of Product Price l ti it f demand P i elasticity of d d Stage of product in its life cycle
  13. 13. INTERNAL FACTORS 6. 6 7. 8. 8 9. Cost of manufacturing and marketing Extent of differentiation practiced Composition of product li of products C iti f d t line f d t Other elements of market mix of firm and their interaction with pricing.
  14. 14. EXTERNAL FACTORS 1. 1 Market Characteristic (Demand (Demand, Customer and Competition) 2. 2 Buyer behavior with respect to product 3. Bargaining power of major customers 4. Bargaining power of major suppliers 5. Competitors p p pricing p y g policy 6. Government control/regulation on pricing 7. 7 Other relevant legal aspects
  15. 15. EXTERNAL FACTORS 8. 8 Societal (Social) Considerations 9. Understanding reached if any with price cartels. cartels
  16. 16. Where does the money go? Why do textbooks cost so much??? Authors + Publishers = 75% Retailers R t il = 25% Suppose price of book is Rs 50 (37.50 &12.5) Author gets 10-15% of wholesale price g p Author s Author’s Share = Rs 3.75-6.63 3 75 6 63 Publisher’s Share= Rs 31.87-33.75
  17. 17. Where does the money go? Author: Takes 3 long years to develop book. Revised Editions- takes 1-1.5 years Publishers share looks more (Rs 32-33) they 32-33), cover cost of MR, Art, Design, Production, Distribution, Salaries of sales force, distribution , , of promotional material AND OVERHEAD Costs-Office, Computers etc Spend 15-20 lakh upfront.
  18. 18. Where does the money go? Retailers: Personal and Operation Cost=50 % Marketing Cost =13-15% Taxes = 10-15% Income: Author =75% 7.5 Publisher = 7.5% Retailer = 5% %
  19. 19. PRICING SURVEY RESEARCH 9 % Companies GUESS about Price 37% C Companies match what i t h h t COMPETITORS Charge for similar offerings 52% Companies choose p p price that cover costs and provide fair profit.
  20. 20. Setting Pricing Policy
  21. 21. 1. 1 PRICING OBJECTIVES 1. 1 Profit maximization in short term 2. Profit optimization (to make something as good as it can b ) i l d be) in long t term. g 3. Achieving a particular market share 4. Deeper penetration in the market 5. 5 Entering new markets 6. Keeping parity with competition
  22. 22. PRICING OBJECTIVES 7.Providing 7 Providing commodities at prices affordable by weaker sections. 8.Providing 8 Providing commodities at a price that stimulate economic development. These 2 objectives are relevant only to providers of essential commodities and public utility services services. Firms seek to meet basket of returns through pricing policies NO FIRM IS SATISFIED WITH policies. SINGLE OBJECTIVE
  23. 23. Firms use pricing for Variety of Objectives-AP, BA and LG Obj i AP d • Asian Paints (Uses Price to Protect MS) • M.Leader, 33% Share, but industry highly competitive. Has reduced prices of all items to protect MS. • British Airways (Enhance Profitability) • Started focusing of Business/Executive & Economy Class. Class Have reduced no of seats in Economy Economy. • LG (MS to Profitability)-Came in 2001-Objective was volume/MS.Profits came down to 2% of sales in 2005. Now objective is Profitability. • Have increased the prices and working on differentiation
  24. 24. Setting the Price 2. Determining Demand ee g e a d – Price sensitivity – Total Cost of Ownership – Estimating Demand Curves – Price Elasticity of Demand • Inelastic • Elastic
  25. 25. Setting the Price 3. Estimating Cost g – Types of Cost and Levels of Production • Fixed costs • Variable cost • Total cost • Average cost • Fixed cost: – Does not change with production • Examples: Rent, Overhead, Salaries – Variable Cost Changes with production Can be eliminated in the short run Examples: Cost of materials that go directly into the product, wages Average Cost (= Total cost / No of units in Production)
  26. 26. Setting the Price Selecting a Pricing Method PRICING METHODS/STRATEGIES 1. Cost based pricing 2. Demand B 2 D d Based P i i d Pricing 3. Competition Based pricing 4. Value Pricing 5. 5 Product line oriented pricing 6. Tender Pricing 7. Differentiated Pricing 7 Diff ti t d P i i
  27. 27. COST BASED PRICING-2 Following methods are commonly used: 1. Mark-up Pricing/Cost plus pricing 2. Absorption cost pricing/full cost pricing 2 Ab ti t i i /f ll t i i 3. Target rate of return pricing
  28. 28. COST BASED PRICING-3 Mark-up Pricing/Cost plus pricing: Selling price of product is fixed by adding margin to its cost price. price •Slower the turnaround, larger mark-up •Used by companies, who do not have y p , manufacturing of their own.
  29. 29. Mark-up or Cost Plus Pricing-4 • TO SET PRICE: • 1) Estimate Total Cost Per Unit Formula • 2) Apply the “Formula” – e.g., TOTAL COST + 30-50% or anything% • Problem – IGNORES demand • Advantage – SIMPLE
  30. 30. COST BASED PRICING-5 2. Absorption cost pricing (Full Cost Pricing)
  31. 31. COST BASED PRICING-6 1. Target rate of return pricing Estimated Unit Cost = Rs12 50 Rs12.50 b. Estimated Sales Volume = 80,000 units c. TOTAL COST = R 10 00 0 00 Rs 10,00,0,00 d. Target ROI = 20% .20 x Rs10,000,00 =Rs 2,000,00 Needed Profit
  32. 32. COST BASED PRICING 7 PRICING-7 Needed (Target) Revenue = Total Cost + Profit = R 10 000 00 + R 2 000 00 = Rs10,000,00 Rs 2,000,00 Rs12,000,00 Unit Price = REVENUE / VOLUME = Rs12,000,00 / 80,000 =Rs15.00 =Rs15 00 / Unit Price
  33. 33. Break Even Break-Even Chart
  34. 34. Break Even Break-Even • Cost Volume Price and Profits Cost, Volume, interrelated • A particular volume level and its associated cost level generates a particular profit level level. • When we consider different price level, we have diff h different profit l t fit levels. l • Firm can accordingly project profits at different price levels and chose the one that suits them the most.
  35. 35. Review Break Even Break Even Point (in Units) = 5,71,428 units , , FC (SP-VC) 5000000 (15.00-6.25)
  36. 36. Review Break Even Break Even Point (in Rupees) FC = 1-(VC/SP) 5,000,000 5 000 000 1-(6.25/15) Rs 85 71 429 85,71,429
  37. 37. 2. DEMAND BASED PRICING-1 1. What 1 “What the traffic can bear?” bear? 2. Skimming Pricing 3. Penetration Pricing 3 P t ti P i i
  38. 38. DEMAND BASED PRICING-2 1. What 1 “What the traffic can bear?” bear? • • • Maximum price th t a customer can pay. M i i that t Safe when demand is inelastic. Buyer opposition or new firms will create y difficulty.
  39. 39. DEMAND BASED PRICING-3 2. 2 Skimming Pricing High Price+High profits at early stages, later settles down at low prices prices. For example: I-Pod, Mobile Phones
  40. 40. 2.DEMAND BASED PRICING-4 3.Penetration 3 Penetration Pricing: Penetration through low prices when new product is not a luxury product product.
  41. 41. 3. COMPETITION ORIENTED PRICING-1 PRICING 1 Three policy options available: • Premium-Up • Di Discount-Down tD • Parity or going rate pricing-Matching prices of competitors
  42. 42. Perceived Value Pricing (Offer more value than competitor and demonstrate it) Perceived Value Price = F ( buyer’s image of product, channel deliverables, warranty quality, customer support, firm reputation, trustworthiness) Value Pricing Low price for high quality offering e.g. WalMart. It is as much a philosophy as a method One pricing strategy based on Value Pricing is EDLP Going Rate Pricing Go by competitor’s prices competitor s Charge same as, less than or more than competitor’s prices Follow h l d F ll the leader pricing is another example as in Commodity oligopolies such as i i i h l i C di li li h steel, paper, fertilizers
  43. 43. Value Pricing-Essence Value>Price>Costs (Loss to Seller) Price>Value>Costs (Loss of Market Share) Price>Cost>Value (Bi L Pi C t V l (Big Looser) ) Price=Value>Cost (Good)
  44. 44. PRICE ADJUSTMENT • • • • • Geographical Pricing Promotional Pricing Discriminatory P i i Di i i t Pricing Discounts and Allowances Product Mix Pricing – Product Line Pricing
  45. 45. Setting the Price Selecting the Final Price g – Psychological Pricing • Reference price p • Brands with average relative quality but high relative advertising budgets charge premium prices • Brands with high relative quality and high relative advertising budgets obtained the highest prices • The positive relationship between high advertising budgets and high prices held most strongly in the later stages of the product life cycle for market leaders – Company Pricing Policies – Impact of Price on Other Parties – Geographical Pricing – Discriminatory Pricing
  46. 46. Adapting the Price • Promotional Pricing – Loss-leader pricing – Special event pricing Special-event – Cash rebates –L Low-interest financing i t t fi i – Longer payment terms –W Warranties and service contracts ti d i t t – Psychological discounting
  47. 47. Price Adaptations -- Promotional pricing - loss leader pricing, special event pricing ( Going to school program of Bata), Cash rebates (as in jeweler shops) low interest financing (0% for 12 months), longer payment terms, warranties / service contracts, psychological discounting (price high and then discount) -- Geographical Pricing -- Price Discounts and Allowances - Cash discount quantity discount functional discount (given to intermediaries if they perform discount, discount, certain functions), seasonal discount (off-peak buying), allowances (trade allowance to resellers for participating in trade-ins, promotion allowance given to resellers for participating in advertisement and promotion programs of the firm) -- Price discrimination -- Product Mix Pricing pricing car) - Product line pricing, optional feature pricing (power windows for car), captive product pricing (razor is low price and blade is high price), two part pricing (Mobile Phones)