Price Setting PPT . Will help you in interpreting how to set a price of your products seeing the behaviour of customer

1. Price Setting

4. Price Setting Process
• Price setting is challenging, requiring the collection and analysis of information about the company's business goals
and cost structure, the customer's preferences and needs, and the competition's pricing and strategic intent.
• The goal of the price-setting process is to set profit-maximizing prices by capturing the appropriate amount
of differential value in each of the served segments.
• A good pricing decision can improve profits dramatically, a poor one can invoke a competitive response that quickly
devolves into a price war that destroys profits for all.
Steps of Pricing Setting Process
I. DEFINING THE PRICE WINDOW
II. ESTABLISHING AN INITIAL PRICE POINT
III. COMMUNICATE PRICES TO THE MARKET

5. Price Setting Process
I. Defining the Price Window
• The price window is set for each segment and is defined by the ceiling, the highest allowable
price point, and the floor, the lowest allowable price point. The price points for the price ceiling
and floor will differ depending on whether the product is positively or negatively differentiated as
shown below.

6. Price Setting Process
II. Establishing an Initial Price Point
There are three considerations when determining where in the price window to set the initial price.
a) Alignment with Overall Business Strategy
b) Price-Volume Trade-offs
c) Customer Response
a) Alignment with Overall Business Strategy Few decisions that marketers make influence customer behaviors as
much as pricing so it is important that price levels reinforce the overall business strategy.
OPTION 1: SKIM THE MARKET
OPTION 2: PENETRATE THE MARKET
OPTION 3: NEUTRAL MARKET PRICING
OPTION 4: VALUE BASED PRICING
OPTION 5 : COST PLUS PRICING

7. VALUE BASED PRICING
Value-based pricing is a strategy of setting prices primarily based on a consumer's perceived value of a product
or service. Value pricing is customer-focused pricing, meaning companies base their pricing on how much the
customer believes a product is worth. Our Course focus is all about creating value and capturing that value through
prices.
COST PLUS PRICING
A cost-plus pricing strategy, or markup pricing strategy, is a simple pricing method where a fixed percentage is added
on top of the production cost for one unit of product (unit cost).
• Easy to calculate
• Predictable profit that always covers production costs
• Customers understand the justification for your price – if you do clean-sheeting pricing
• But it lacks connection with the value your product provides to customers
• Often ignores the competition

8. Price Setting Process
Skim the Market
• Skim pricing (or skimming) is designed to capture high margins at the expense of large sales volume.
• This strategy optimizes immediate profitability only when the profit from selling to relatively price-insensitive customers
exceeds that from selling to a larger market at a lower price.
• In some instances, products might reap more profit in the long run by setting initial prices high and reducing them over
time — the “sequential skimming”.
• The competitive environment must be right for skimming. A firm must have some source of competitive protection to
ensure long-term profitability by precluding competitors from providing lower-priced alternatives. Patents or copyrights
are one source of protection against competitive threats.
• A skim price isn't necessarily a poor strategy even when a firm lacks the ability to prevent competition in the future. HOW?
Pricing low in the face of competition makes sense only when it serves to deter competitors or to establish a competitive
advantage. If a low price cannot do either, the best rule for pricing is to earn what you can while you can. If and when
competitors enter by duplicating the product's differentiating attributes and, thus, undermine its competitive advantage,
the firm can then reevaluate its strategy.

9. Price Setting Process
Penetrate the Market
• Penetration pricing involves setting a price low enough to attract and hold a large base of customers. Penetration prices
are not necessarily cheap, but they are low relative to perceived value in the target segment.
• Penetration pricing will work only if a large share of the market is willing to change brands or suppliers in response to
lower prices.
• In some cases, penetration pricing can actually undermine a brand's long-term appeal.
• When Lacoste allowed its “alligator” shirts to be discounted by lower priced mass merchants, high-image retailers refused to carry
the product any longer and traditional Lacoste customers migrated to more exclusive brands.
Competitive Price / Neutral market price
• Neutral pricing involves a strategic decision not to use price to gain market share, while not allowing price alone to restrict
it. Setting a price based on what the competition charges if product is not much different from the competitor.

10. Price Setting Process
b) Price Volume Trade-off
• It is very important to understand relationship between changes in price and volume.
• Managers focus on these questions to guide their pricing choice:
• How much volume could I afford to lose before a particular price increase would be unprofitable?
• How much volume would I have to gain in order for a particular price decrease to improve my profitability?
c) Customer Response
• Once the price-volume trade-offs are understood, the next consideration is to estimate how consumers are likely to respond to a
potential price change in order to balance the potential profit impact against the risks.

11. Price Setting Process
III. Communicate prices to the market
• Clarity of prices
• Competitive prices review/ Substitute prices review
• Individual price communication while pricing a bundle
• Exchange rate (Fluctuating cost elements)
• Transparent price communication
• Price increase should be clearly communicated to the whole market
• Price increase justification should be clearly communicated
• Price communication through right medium
• Value communication through prices
• Price communication as per target market
• Price signaling should be adequate and effective
• Proper price referencing

12. Price Setting Process
III. Communicate prices to the market
• Know your comparisons – Know your positioning so communicate accordingly
• Different ways to state the price – Use the Price matrix as per your customers. Use multiple matrix as per market
segments.
• Keep it simple – Don’t make it complex for buyers to understand but at the same time don’t disclose all costs
• Be confident – Own what you communicate. Don’t be shy to discuss prices.
• Communicate the price increase effectively - Don’t tell your customers that prices is increasing because you need to
increase your profitability! Rather tell them it is to sustain the cost increase shock and remain profitable to
consistently supply the same level of services/products. Tell them it is essential for business sustainability.
• Be clear with communication of discounts and promotions to avoid wrong reference setting to your prices.