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How to price a product effectively


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How to price a product effectively

  1. 1. PRICING Maxwell Ranasinghe B.Sc. ( Business Administration) Hons. MAAT, Attorney at Law, CPM ( New Haven- USA)
  2. 2. PRICING <ul><li>IMPORTANCE OF PRICING </li></ul><ul><li>PRICING OBJECTIVES </li></ul><ul><li>FACTORS TO CONSIDER IN PRICING </li></ul><ul><li>CONCEPTS OF COSTING FOR PRICING </li></ul><ul><li>PRICING STRATEGIES </li></ul><ul><li>SETTING THE FINAL PRICE </li></ul>
  3. 3. Pricing the revenue maker <ul><li>The Price is the amount of money, goods or services that must be offered to get a product ( sum of all the values that consumers exchange for the benefit of having or using the product or service) </li></ul><ul><li>Price is expressed in different terms such as Rent, Tuition fees, fare, interest, premium, salary, taxes and commissions </li></ul>
  4. 4. Role and importance of pricing <ul><li>- it generates income </li></ul><ul><li>- it influences buyer </li></ul><ul><li>- it is the most flexible </li></ul><ul><li>- it could lead to gain or loose market </li></ul><ul><li>- Customers often equate price with quality </li></ul><ul><li>- Price connects customers and sellers at the point of exchange </li></ul><ul><li>- Customers often use price to compare competing products </li></ul><ul><li>- for certain products price could be main criteria in selection </li></ul>
  5. 5. Pricing Objectives <ul><li>Financial Objectives </li></ul><ul><ul><ul><li>Profit - Return of investment </li></ul></ul></ul><ul><ul><ul><ul><ul><li>- Profit maximisation </li></ul></ul></ul></ul></ul><ul><ul><ul><li>Cash Flow </li></ul></ul></ul><ul><li>Sales and Marketing Objectives </li></ul><ul><ul><li>Market Share and Positioning </li></ul></ul><ul><ul><li>Volume of sales </li></ul></ul><ul><ul><li>Status Quo </li></ul></ul><ul><li>Survival ( cover expenses in short run) </li></ul>
  6. 6. Factors to be considered in pricing <ul><li>Cost of the product </li></ul><ul><li>Customers </li></ul><ul><li>Channel requirements </li></ul><ul><li>Competitors </li></ul><ul><li>Compatible with objective of the company & other Ps of M Mix </li></ul><ul><li>Legal aspects </li></ul><ul><li>Principals of Taxation </li></ul>
  7. 7. Pricing should be in line with other elements of the marketing mix <ul><li>The positioning of the product </li></ul><ul><li>Quality of the product </li></ul><ul><li>Distribution </li></ul><ul><li>Promotion </li></ul><ul><li>Persons involved in the product </li></ul><ul><li>Processes adopted </li></ul><ul><li>Physical evidence </li></ul>
  8. 8. Concepts of Setting Prices <ul><li>Price Sensitivity- The general trend is that people are sensitive to prices on items that are purchased regularly and the items that cost a lot. They are less sensitive to prices that they do not buy regularly and to the items that cost less. </li></ul><ul><li>Estimating Demand Curves- This will allow the marketer to find out demand at different levels of pricing, charge different prices at different markets, offer discounts at selected outlets to find out the demand . </li></ul><ul><li>Price Elasticity of Demand- The percentage of demand that changes with the percentage of change in the price is elasticity of the demand. If price changes 10% and the demand changes at a higher rate ( e.g.. 20%) then the demand is elastic. If the price changes 10% and the demand changes at a lower rate ( e.g. 5%) then the demand is inelastic </li></ul>
  9. 9. Concepts of costing for pricing <ul><li>Cost and Levels of production- There are three types of cost that is Fixed Cost( FC) ,Variable Cost (VC) and Total Cost (TC) </li></ul><ul><li>Fixed Cost (FC) does not change with the increased production egg. Rent, Rates and Loan Interest. </li></ul><ul><li>E.g. Monthly rent Rs. 100,000 will have to pay even if there is no production or even if there is a production of 10,000 units </li></ul><ul><li>Variable Cost (VC) </li></ul><ul><li>The cost that changes with the increased production. E.g.. Raw materials </li></ul><ul><li>Total Cost ( TC) </li></ul><ul><li>The sum of the FC and the VC </li></ul>
  10. 10. <ul><li>Contribution </li></ul><ul><li>Contribution is the amount that contributed by sales to recover the Fixed Cost when Variable Cost is deducted from the Sales Price. </li></ul><ul><li>Selling Price (Rs. 40) – Variable Cost ( Rs. 15)= Contribution (Rs. 25) </li></ul><ul><li>So the contribution will help a firm to find out many important aspects such as Break Even Point, how many should be manufactured to earn a given amount of profits etc,. </li></ul>
  11. 11. Costing Formulas <ul><li>Fixed Cost (FC) </li></ul><ul><li>Selling Price (SP) </li></ul><ul><li>Contribution per unit (CPU)= SP-VC </li></ul><ul><li>Break Even Point= Income=Total Expenses( No profit or loss) </li></ul><ul><li>Units to BEP= FC/CPU </li></ul><ul><li>Units to Expected profit= FC+Profit/CPU </li></ul>
  12. 12. Cost and Prices <ul><li>A garment industry is sewing socks and the cost elements are as follows </li></ul><ul><li>Fixed Cost Rs. 100,000 </li></ul><ul><li>Variable Cost Rs. 15 per unit </li></ul><ul><li>Selling Price is Rs. 40.00 </li></ul><ul><li>What is the BEP ? </li></ul><ul><li>If the company wants to earn a profit of Rs. 200,000 how many units it should manufacture ? </li></ul>
  13. 13. Variable cost Production - Units Cloths meter p/u Price Per meter Variable Cost 0 1.5 10 0 1000 1.5 10 15000 2500 1.5 10 37500 5000 1.5 10 75000 6250 1.5 10 93750
  14. 14. Fixed Cost Units produced Fixed cost- e.g. rent Total Fixed cost 0 100000 100000 1000 100000 100000 2500 100000 100000 5000 100000 100000 6250 100000 100000
  15. 15. Total Cost & Income Units produced Variable Cost- VC @ 15 per unit Fixed cost –FC Total Cost VC+FC Total Income Selling Price Rs. 40.00 0 0 100000 100000 0 1000 15000 100000 115000 40000 2500 37500 100000 137500 100000 5000 75000 100000 175000 200000 6250 93750 100000 193750 250000
  16. 16. BEP 4000 units Rev. 1600 00
  17. 17. <ul><li>Break Even Point </li></ul><ul><li>Sale Price Rs. 40.00 </li></ul><ul><li>Variable Cost Rs. 15.00 </li></ul><ul><li>Contribution ( 40- 15) Rs. 25.00 </li></ul><ul><li>BEP = Fixed Cost </li></ul><ul><li>Contribution </li></ul><ul><li>BEP = 100000 = 4000 </li></ul><ul><li>25 </li></ul><ul><li>Once the BEP is reached all the FC is recovered. Then the contribution becomes a profit. The you can manipulate the pricing in many ways. </li></ul>
  18. 18. <ul><li>How many items should be manufactured to earn a profit of Rs. 200,000 </li></ul><ul><li>FC + Profit </li></ul><ul><li>CPU </li></ul><ul><li>100000 + 200000 = 12000 </li></ul><ul><li>25 </li></ul><ul><li>40 x 12000 = 480,000 </li></ul><ul><li>VC 15 x 12000 = 180,000 </li></ul><ul><li>FC = 100,000 </li></ul><ul><li>Profit = 200,000 </li></ul>
  19. 19. Pricing Strategies <ul><li>Cost Based (Internal Oriented) Pricing </li></ul><ul><li>Demand (Market/ Customer) Based Pricing </li></ul><ul><li>Competitor Based Pricing </li></ul>
  20. 20. Cost or Company Oriented Pricing <ul><li>Cost plus pricing ( determine the sellers total cost and then add a specified amount of percentage.) </li></ul><ul><li>Cost 16 add 20% = Cost x 1+.20 = 19.20 </li></ul><ul><li>Mark-up pricing ( A company may have an idea of what profit it should earn. Therefore after taking all internal cost factors into consideration, this predetermined profit margin from the cost will be added to the cost. It is called the mark up ) </li></ul><ul><li>. E.g. What would be the price of a product costing Rs. 16.00, if Markup on cost is 20% </li></ul><ul><li>Mark up on cost : Cost x 1+.20 16 x 3.20 = 19.20 </li></ul><ul><li>( results of both are same) </li></ul>
  21. 21. <ul><li>Margin on sales price pricing </li></ul><ul><li>The difference in this calculation is that profit margin is based on sales price but the cost of the product is given for calculation </li></ul><ul><li>Cost Rs. 16.00 calculate the price with a mark up/ margin of 20% on sales </li></ul>
  22. 22. Margin on sales <ul><li>formula = cost </li></ul><ul><ul><ul><ul><ul><li>1 – markup </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>16 </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>1 – (20/100) </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Rs. 20.00 </li></ul></ul></ul></ul></ul>
  23. 23. Customer Oriented Pricing Strategy <ul><li>Market Skimming ( innovative, inelastic demand, high value, high demand low supply – e.g.. celltel) </li></ul><ul><li>Market Penetrating ( “mee too” products, quick entry into market, greater volume to achieve to get economies of scale, greater market to catch) </li></ul><ul><li>Psychological ( emotional factor, image, quality e.g.. Bata 99.90 rather than Rs. 100 , Rolex very high price and image) </li></ul>
  24. 24. <ul><li>Value based ( customer perceived value, find out how much customers are willing to pay for the product through market research) </li></ul><ul><li>Promotional Pricing Strategy ( Cash rebates- Special event pricing- Loss leader ( setting low prices on certain items and attracting customers and assuming they will by other products at normal prices )- Low Interest Deals – Group Pricing </li></ul>
  25. 25. Competitor Oriented Pricing <ul><li>Competitive bid pricing ( matching or improving over the competitors price. Especially used in Tenders. You need to know the market well and the requirements of the customer well to quote price in this format) </li></ul><ul><li>Competitive advantage pricing ( Price may be the same but you offer additional services E.g. Petrol shed offers free window cleaning for customer who pump petrol in their station ) </li></ul>
  26. 26. Setting the final pricing <ul><li>Cost </li></ul><ul><li>Other overheads </li></ul><ul><li>Discounts- Cash/Trade in /Quantity </li></ul><ul><li>Allowances </li></ul><ul><li>Margins for Channel members </li></ul><ul><li>Defects replacement cost/ guarantees </li></ul>
  27. 27. <ul><li>Mark up pricing – </li></ul><ul><li>This is the most common and elementary pricing system used by many. </li></ul><ul><li>This could be done in two ways : one by adding a markup on sales price and other by adding a mark up to cost. </li></ul><ul><li>E.g. What would be the price of a product costing Rs. 16.00, if mark up on sales 20% or Markup on cost is 20% </li></ul><ul><li>Mark up on sales: Cost 16.00 = 20.00 </li></ul><ul><li>1- markup 1-.20 Profit = 4.00 </li></ul><ul><li>Mark up on cost : Cost x 1+.20 16 x 1.20 = 19.20 </li></ul><ul><li>Profit = 3.90 </li></ul>
  28. 28. <ul><li>Target Return Pricing </li></ul><ul><li>If a company wants to earn a specific amount of profit what would be the price that the products should be sold? </li></ul><ul><li>A company invest Rs. 1,000,000 and it wants to earn a profit of 20% on the investment ( Return On Investment= ROI). The Total Cost of the product is Rs. 16 and the amount to be sold is 50,000 units. What would be the price ? </li></ul><ul><li>The profit expected is 1,000,000 x20% = 200,000 </li></ul><ul><li>You are going to sell only 50,000 units </li></ul><ul><li>So one unit should earn a profit of Rs.= 200,000 = Rs. 4.00 </li></ul><ul><ul><ul><ul><ul><li>50,000 </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Selling price = Cost + Profit </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Therefore the selling price = 16.00 + 4.00 = 20.00 </li></ul></ul></ul></ul></ul>
  29. 29. <ul><li>Perceived value Pricing </li></ul><ul><li>Perceived value is the customers price. What is the estimate of the value of the product. BMW car may fetch higher value than a Toyota in the customers mind </li></ul><ul><li>Lux may fetch a higher price than the other local soaps </li></ul><ul><li>Therefore pricing can be made based on this value </li></ul><ul><li>Value Pricing </li></ul><ul><li>Value pricing is fixing a lower price for good quality products. It is called value for money pricing . E.g.. House of Fashion </li></ul>
  30. 30. <ul><li>Group Pricing </li></ul><ul><li>Companies offer special prices when a group of buyers intend buying products. Singer and Abans are using this type of pricing by visiting work places of their customers. They usually collaborate with Welfare Societies of employees and arrange these kind of sales and offer better prices and terms. They call it Group Sales for these type of selling. </li></ul>
  31. 31. <ul><li>Going Rate Pricing </li></ul><ul><li>Pricing product at the same level as the competitors prices </li></ul><ul><li>Lot of vegetables, fish, Gold, Iron, Land in the market are priced on this method </li></ul><ul><li>Auction Type Pricing </li></ul><ul><li>In order to sell extra stocks and obsolete items this pricing method is used. People tend to think that this price is bargain price. </li></ul>