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Pricing strategy

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  1. 1. PRICING
  2. 2. Pricing objectives <ul><li>Profit </li></ul><ul><ul><li>Target returns </li></ul></ul><ul><ul><li>Maximising profits </li></ul></ul><ul><li>Sales </li></ul><ul><ul><li>Volume </li></ul></ul><ul><ul><li>Share </li></ul></ul><ul><li>Competitive reaction </li></ul>
  3. 3. Estimating demand <ul><li>Past statistics </li></ul><ul><li>Surveys </li></ul><ul><li>Price experimentation </li></ul>
  4. 4. Elasticity of demand <ul><li>Search – compare before buy </li></ul><ul><li>Experience – compare after buy </li></ul><ul><li>Credence – difficult to compare </li></ul>
  5. 5. Costs <ul><li>Fixed and variable costs </li></ul><ul><li>B-E analysis (volumes & capacity utilisation) </li></ul><ul><li>Marginal analysis </li></ul>
  6. 6. Market skimming <ul><li>Usually for high tech and low availability goods </li></ul><ul><li>New product has distinctive features strongly desired by consumers </li></ul><ul><li>Demand is inelastic </li></ul><ul><li>Protection to product in form of patents etc </li></ul>
  7. 7. Market penetration <ul><li>A large market exists for the product </li></ul><ul><li>Demand is elastic </li></ul><ul><li>Economies of scale possible </li></ul><ul><li>Fierce competitive scenario </li></ul>
  8. 8. Discounts <ul><li>Quantity </li></ul><ul><li>Trade discounts </li></ul><ul><li>Cash </li></ul><ul><li>Functional </li></ul><ul><li>Seasonal </li></ul><ul><li>Allowance </li></ul>
  9. 9. Pricing strategies <ul><li>Price lining </li></ul><ul><li>Odd pricing </li></ul><ul><li>Leader pricing </li></ul><ul><li>High-low </li></ul><ul><li>Everyday low pricing </li></ul>
  10. 10. Product line pricing <ul><li>Determine low price </li></ul><ul><li>Determine high price </li></ul><ul><li>Set price differentials for intermediate products </li></ul>
  11. 11. PLP principles <ul><li>Noticeable differences should correspond to perceived value differences </li></ul><ul><li>Highest and lowest should be priced to mould consumer perception </li></ul><ul><li>Price differences should get wider as price increases. </li></ul>
  12. 12. Price Bundling <ul><li>Package rates, etc </li></ul><ul><li>In mixed bundling, products can be bought individually or as a package </li></ul><ul><li>Products must be in growth stage </li></ul><ul><li>Captures different WTP to maximise revenues </li></ul><ul><li>Demand elastic </li></ul><ul><li>Objectives? </li></ul>
  13. 13. Differential pricing <ul><li>Geographical </li></ul><ul><li>Segment pricing </li></ul><ul><li>Product form </li></ul><ul><li>Image / channel </li></ul><ul><li>Seasonal </li></ul>
  14. 14. <ul><li>Eg </li></ul><ul><li>WTP customer 1 = Rs.5 </li></ul><ul><li>WTP customer 2 = Rs.3 </li></ul><ul><li>Cost of making 2 units = Rs.7 </li></ul>
  15. 15. Advance Selling <ul><li>Improves profits by selling in advance when the customer has uncertainty </li></ul><ul><li>Advance selling is generally more profitable than spot selling as long as customers are uncertain about their future consumption states </li></ul><ul><li>Customer uncertainty is high in most service markets </li></ul>
  16. 16. Enabling technology <ul><li>Internet </li></ul><ul><li>Electronic tickets </li></ul><ul><ul><li>Physical </li></ul></ul><ul><ul><li>Paperless </li></ul></ul><ul><li>Smartcards </li></ul>
  17. 17. Benefits of technology <ul><li>Less arbitrage </li></ul><ul><li>Hides value and validity </li></ul><ul><li>Records identity </li></ul><ul><li>Lower transaction cost </li></ul><ul><li>Managing customer information </li></ul><ul><li>Cost of reaching customer </li></ul>
  18. 18. Benefits of technology <ul><li>More complex product packages </li></ul><ul><li>More information about buyers </li></ul><ul><li>Information on demand </li></ul>
  19. 19. Yield Management <ul><li>Yield management is a method to help the firm sell the right inventory unit to the right customer at the right time </li></ul><ul><li>It guides the allocation of undifferentiated units of limited capacity </li></ul>
  20. 20. Conditions for yield management <ul><li>Binding capacity constraints </li></ul><ul><li>Low marginal cost of serving additional customers </li></ul><ul><li>Inverse relationship between customer price sensitivity and customer booking time </li></ul>
  21. 21. Restrictions <ul><li>Book a certain length ahead of time </li></ul><ul><li>Stay for a minimum time </li></ul><ul><li>Use service in a particular period </li></ul><ul><li>Have a higher change or cancellation penalty </li></ul><ul><li>Non-refundable reservation </li></ul>
  22. 22. <ul><li>The firm should try to balance the restriction and the benefit </li></ul><ul><li>Customers accept yield management in some industries like airlines because they are used to it, not because they think it fair </li></ul>
  23. 23. Acceptable practices <ul><li>Information of different pricing options to be made available </li></ul><ul><li>A substantial discount to be given for cancellation restrictions </li></ul><ul><li>Reasonable restrictions imposed in exchange for discounted rate </li></ul><ul><li>Different prices for products perceived to be different </li></ul>
  24. 24. Unacceptable practices <ul><li>Offering insufficient benefits in exchange for restrictions </li></ul><ul><li>Offering severe restrictions on discounts </li></ul><ul><li>Not informing customers of change in reference prices, etc </li></ul>
  25. 25. Some examples <ul><li>486SX was the 486DX with the coprocessor disabled </li></ul><ul><li>FedEx offers morning and afternoon delivery. Afternoon packages are not sent out in the morning even if they have arrived in time </li></ul><ul><li>IBM laser printer E series prints 5 ppm. Chips were introduced in the high cost printer to slow it down from 10 to 5 ppm. </li></ul>
  26. 26. How to increase prices <ul><li>Increase reference price </li></ul><ul><li>Attach additional services </li></ul><ul><li>Package deals </li></ul><ul><li>Attach restrictions to lower prices </li></ul>
  27. 27. Perceived Fairness <ul><li>Customers feel that raising prices to maintain profits is fair </li></ul><ul><li>Customers feel that raising prices to increase profits is unfair </li></ul><ul><li>If costs decrease, customers believe that it is fair for the company to maintain prices </li></ul><ul><li>Not so, if a macro-economic factor has lead to cost decrease </li></ul>