Pricing (Marketing)

PRICING
MARKETING
MANAGEMENT
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1) Definition
2)
3)
4)
5)
6)
SUBMITTED TO :-
DR. SMRITI SOOD
UNIVERSITY BUSINESS
SCHOOL,
PANJAB UNIVERSITY
SUBMITTED BY :-
ABHISHEK GUPTA (01)
AMIT KUMAR (02)
ANKUSH JAIN (03)
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Contents

PRICE-DEFINED
The value of money (or its equivalent) placed on a good or service.
Usually expressed in monetary terms (an example of non-monetary is
“bartering.”)
The key to pricing is understanding the value that buyers place on a
product.
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The Past
 1970s: Toys ‘R’ Us
emerges as a toy retailing
category killer, offering
greater product selection
and lower prices than its
small store competition.
 Explosive growth occurs.
 Late 1990s: Wal-Mart
uses toys as a loss
leader, pricing lower than
Toys ‘R’ Us and becomes
the largest toy retailer.
The Present
 Toys ‘R’ Us tries price
matching and fails
miserably, losing sales,
profit, and market share.
 New ownership closes
stores, cut costs, and steps
away from the price war.
 Efforts focus on top-selling,
higher margin or exclusive
items, store atmosphere,
shopper experiences, and
customer service.
Toys ‘R’ Us – Pricing for Success
Case Study

THE PURPOSE OF PRICING
 It has to satisfy the consumers by carrying the right
value to them. It has to capture back to the company’s
kitty the value that is due to the company.
 Price, fundamentally, is a measure of value i.e. It has to
be true reflector of value for the company as well as for
the customers.
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IMPORTANCE OF PRICING
 Price is the only element in the marketing mix of a firm that generates
revenue. Everything else generates only cost.
 Price and sales volume together decide the revenue of any business.
Price, thus, is the most crucial to the revenue of the business.
 Price is the most important determinant of the profitability of the
business.
 Companies that take the non price route may concentrate on elements
other than price- product, distribution and promotion but the very
purpose behind the non price route is to gain a comfortable pricing
position. It is by adjusting the price that firm finds the funds for the other
three elements of the marketing mix.
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Objectives of Pricing
 Pricing objectives flow from marketing objectives. A business firm will have a
number of objectives or a mix in the matter of pricing. Some may be short term,
or long term, some are primary and some are secondary objectives.
 Mostly firms expect their pricing to serve not one but a combination of many
objectives such as:-
 Profit maximization in the short term.
 Profit optimization in the short term.
 A minimum return on investment.
 A minimum return on sales income.
 Achieving a particular sales volume.
 Achieving a particular market share.
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Factors affecting price
A combination of economic, psychological, quantitative and
qualitative factors influence pricing which maybe classified as
internal or external.
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Internal factors
Corporate and marketing objectives of the firm.
The image sought by the firm through pricing.
The characteristics of the product. Stage of product in its life cycle.
Use pattern and turnaround rate of product.
Cost of manufacturing and marketing.
Extent of differentiation of the product.
Interaction with other 3 P’s
Whether buyers buy some other products in combination
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External factors
Market characteristics(demand, customer and competition)
Price elasticity of demand of product.
Competitors pricing strategies.
Government controls/regulation on pricing.
Buying behavior of the customers of the product.
Bargaining power of major customers.
Bargaining power of major suppliers.
Societal views.
Understanding reached, if any, with competitors
Other relevant legal aspects
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 Customer perceptions of value
 Other internal and external considerations
 Marketing strategy, objectives, mix
 Nature of the market and demand
 Competitors’ strategies and prices
 Product costs
Major Considerations in Setting Price

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 Customer-oriented pricing:
 Involves understanding how much value consumers
place on the benefits they receive from the product
and setting a price that captures that value.
 Value-based pricing:
 Uses buyers’ perceptions of value, not the seller’s
cost, as the key to pricing.
 Good value pricing
 Value-added pricing
Customer Value Perceptions

Pricing Mistakes
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 Undertaking “strategies” such as determine costs and
take Industry’s traditional margins to calculate price.
 Not revising price often enough to capitalize on market
changes;
 Setting price independently of the rest of the marketing
program rather than as an intrinsic element of market-
positioning strategy;
 Not varying price enough for different product items,
market segments, distribution channels, and purchase
occasions.

The Six
Steps for
Determining
Price
1. DETERMINE
PRICING
OBJECTIVES
2. DETERMINING
DEMAND
3. ESTIMATE COST
4. ANALYZE
COMPETITION
5. SELECTING THE
PRICING METHOD
6. SELECTING THE
FINAL PRICE
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1. Determine Pricing Objectives
 The company first decides where it wants to position
its market offering. The clearer a firm’s objectives, the
easier it is to set price.
 The main pricing objectives are:-
 Survival
 Maximum current profit
 Maximum market share
 Maximum market skimming
 Product-quality leadership
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 The Normally inverse relationship between price and demand
is captured in a demand curve.
 The demand curve shows the market’s probable purchase
quantity at alternative prices and gives the Price sensitivity
 Most companies attempt to
measure their demand curves
using several different methods.
 Surveys
 Price experiments
 Statistical analysis
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2. Determine demand

 Price elasticity of demand
If demand hardly changes with a small change in price, we say
the demand is inelastic. If demand changes considerably,
demand is elastic.
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3. Estimating costs
 Demand sets a ceiling on the price the company can charge for its product. Costs set the
floor.
 A company’s costs take two forms, fixed and variable.
 Fixed costs, also known as overhead, are costs that do not vary with production
level or sales revenue. A company must pay bills each month for rent, heat,salaries,
regardless of output.
 Variable costs vary directly with the level of production. For example, each calculator
produced bya company incurs the cost of plastic, microprocessor chips, and
packaging. These costs tend to be constant per unit produced, but they’re called
variable because their total varies with the number of units produced.
 Total costs consist of the sum of the fixed and variable costs for any given level of
production.
 Average cost is the cost per unit at that level of production; it equals total costs
divided by production.
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 ACCUMULATED PRODUCTION Decline in the average cost with
accumulated production experience is called the experience curve or
learning curve.
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TARGET COSTING
 Costs change with production scale and
experience. They can also change as a result of a
concentrated effort by designers, engineers, and
purchasing agents to reduce them through target
costing.
 The firm must examine each cost element—design,
engineering, manufacturing, sales—and bring down
costs so the final cost projections are in the target
range.
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4. Analyzing competitors
 Within the range of possible prices determined by market
demand and company costs, the firm must take competitors’
costs, prices, and possible price reactions into account.
 If the firm’s offer contains features not offered by the nearest
competitor, it should evaluate their worth to the customer and
add that value to the competitor’s price.
 If the competitor’s offer contains some features not offered by
the firm, the firm should subtract their value from its own price.
Now the firm can decide whether it can charge more, the
same, or less than the competitor.
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5. Selecting a Pricing Method
 Given the customers’ demand schedule, the cost
function, and competitors’ prices, the company selects
a price.
 The three major considerations in price setting:
 Costs set a floor to the price.
 Competitors’ prices and the price of substitutes provide an
orienting point.
 Customers’ assessment of unique features establishes the price
ceiling.
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 Six price-setting methods:
 Markup pricing
 Target-return pricing
 Perceived-value pricing
 Value pricing
 Going-rate pricing
 Auction-type pricing
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 MARKUP PRICING The most elementary pricing method is to add a
standard markup to the product’s cost.
Unit cost = variable cost +fixed cost
unit sales
Markup price = unit cost .
(1 - desired return on sales)
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 TARGET-RETURN PRICING the firm determines the price that yields
its target rate of return on investment.
Target-return price = unit cost + desired return * invested capital
unit sales
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 PERCEIVED-VALUE PRICING Perceived value
is made up of a host of inputs, such as the
buyer’s image of the product performance, the
channel deliverables, the warranty quality,
customer support, and softer attributes such as
the supplier’s reputation, trustworthiness, and
esteem. Companies must deliver the value
promised by their value proposition, and the
customer must perceive this value.
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 VALUE PRICING Firms win loyal customers by
charging a fairly low price for a high-quality
offering. Value pricing is thus not a matter of
simply setting lower prices; it is a matter of
reengineering the company’s operations to
become a low-cost producer without sacrificing
quality, to attract a large number of value
conscious customers.
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 A type of value pricing is everyday low pricing (EDLP). A retailer that
holds to an EDLP pricing policy charges a constant low price with little
or no price promotions and special sales. Constant prices eliminate
week-to-week price uncertainty and the “high-low” pricing of
promotion-oriented competitors. In high-low pricing, the retailer
charges higher prices on an everyday basis but runs frequent
promotions with prices temporarily lower than the EDLP level.These
two strategies have been shown to affect consumer price judgments—
deep discounts (EDLP) can lead customers to perceive lower prices
over time than frequent, shallow discounts (high-low), even if the
actual averages are the same.
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 GOING-RATE PRICING the firm bases its price
largely on competitors’ prices. Smaller firms
“follow the leader,” changing their prices when
the market leader’s prices change rather than
when their own demand or costs change.
Some may charge a small premium or
discount, but they preserve the difference.
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AUCTION-TYPE PRICING
 English auctions (ascending bids) have one seller and many buyers. The
seller puts up an item and bidders raise the offer price until the top price is
reached.
 Dutch auctions (descending bids) feature one seller and many buyers, or
one buyer and many sellers. In the first kind, an auctioneer announces a high
price for a product and then slowly decreases the price until a bidder accepts.
In the other, the buyer announces something he or she wants to buy, and
potential sellers compete to offer the lowest price.
 Sealed-bid auctions let would-be suppliers submit only one bid; they cannot
know the other bids. A supplier will not bid below its cost but cannot bid too
high for fear of losing the job. The net effect of these two pulls is the bid’s
expected profit.
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6. Selecting the Final Price
 Pricing methods narrow the range from
which the company must select its final
price.
 In selecting that price, the company must
consider additional factors, including the
impact of other marketing activities,
company pricing policies, gain-and-risk-
sharing pricing, and the impact of price on
other parties.
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ADAPTING THE PRICE/PRICING
STRATEGIES
 Companies usually do not set a single price but rather
develop a pricing structure that reflects variations in
geographical demand and costs, market-segment
requirements, purchase timing, order levels, delivery
frequency, guarantees, service contracts, and other
factors.
 As a result of discounts, allowances, and promotional
support, a company rarely realizes the same profit
from each unit of a product that it sells.
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Price versus Non-price
Competition
 In developing a marketing program, companies need to decide whether to
compete primarily on the basis of price or the non-price elements of marketing
mix.
 A company will engage in price competition when it markets its product on lowest
possible prices. In this strategy, product accompanied few services or no services.
 With price competition, there is little customers loyalty and consumers buy a brand
which has lowest price.
 In non-price competition companies maintain stable prices and emphasize more
on other aspects of marketing program. Although while deciding price of the
product, competitors prices are taken into consideration.
 In this strategy, companies attempt to compete by the means of product
differentiation, promotional activities, product quality, variety, more features or on
some other element of marketing mix.
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Geographical Pricing
 The company decides how to price its products to different customers
in different locations and countries.
 Another issue is how to get paid. This issue is critical when buyers lack
sufficient hard currency to pay for their purchases. Many buyers want to
offer other items in payment, a practice known as countertrade.
 Countertrade takes several forms:
 Barter
 Compensation deal.
 Buyback arrangement.
 Offset.
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Following are different pricing mechanism a company can follow under
geographical pricing strategy :
 Point of production pricing : In this strategy, company quotes the selling
price at the factory gate (point of production) and the buyer selects the mode
of transportation and pays all freight costs.
 Uniform delivered pricing : Under this, the same price is quoted to all
buyers regardless of their geographical location.
 Zone-delivered pricing : Here, company divides a market into a limited
number of broad geographical zones and then sets a uniform delivery price
for each zone.
 Freight-Absorption pricing : Company quotes a price equal to its factory
price plus the shipping costs that would be charged by a competitive seller
located near the customers.
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Price Discounts and
Allowances
 Most companies will adjust their list price and
give discounts and allowances for early
payment, volume purchases, and off-season
buying.
 Discount
 Quantity Discount
 Functional Discount
 Seasonal Discount
 Allowance
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Promotional Pricinga
Companies cn use several pricing techniques to stimulate early purchase:
 Loss-leader pricing. Supermarkets and department stores often drop the price on
well known brands to stimulate additional store traffic.
 Special event pricing. Sellers will establish special prices in certain seasons to
draw in more customers. Every August, there are back-to-school sales.
 Special customer pricing. Sellers will offer special prices exclusively to certain
customers.
 Cash rebates. Auto companies and other consumer-goods companies offer cash
rebates to encourage purchase of the manufacturers’ products within a specified time
period. Rebates can help clear inventories without cutting the stated list price.
 Low-interest financing. Instead of cutting its price, the company can offer
customers low interest financing. Automakers have used no-interest financing to try
to attract more customers.
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 Longer payment terms. Sellers, especially mortgage banks and auto
companies, stretch loans over longer periods and thus lower the monthly
payments. Consumers often worry less about the cost (the interest rate) of a
loan, and more about whether they can afford the monthly payment.
 Warranties and service contracts. Companies can promote sales by adding a
free or low-cost warranty or service contract.
 Psychological discounting. This strategy sets an artificially high price and
then offers the product at substantial savings; for example, “Was $359, now
$299.” Discounts from normal prices are a legitimate form of promotional pricing
Promotional-pricing strategies are often a zero-sum game. If they work,
competitors copy them and they lose their effectiveness. If they don’t work, they
waste money that could have been put into other marketing tools, such as
building up product quality and service or strengthening product image through
advertising.
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Psychological Pricing
 Odd/even pricing: use odd pricing (i.e. $19.99 to suggest bargains). The
psychological principle is based on odd numbers conveying a bargain image,
while even numbers ($10, $50, $100) conveying a quality image.
 Prestige pricing: set higher than average prices to suggest exclusiveness,
status, and prestige. Many consumers assume that higher prices mean higher
quality and are willing to pay more for certain goods and services.
 Multi-unit pricing: Suggest a bargain and helps to increase sales. Some
businesses have found that pricing items in multiples, such as 3 for $.99 is
better than selling the same items at $.33 each.
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Psychology Pricing continued…
 Bundle pricing: Including several products in a package that is sold at a single price.
 All inclusive travel vacations (airfare, hotel, meals)
 Software that is included when you purchase a new computer
 Promotional pricing: Used in conjunction with sales promotions when prices are lower than
average. Examples: Back to school sales, Presidents’ Day sales, clearance sales, etc.
 Other promotional techniques may involve rebates, coupons, and special discounts.
 Discount pricing: involves the seller’s offering reductions from the usual price based on the
buyer’s performance of certain functions.
 Paying cash (Encourage consumers to pay their bills quickly or to not encourage use of credit
cards)
 Buying in large quantities.
 Sellers benefit from large orders through the lower selling costs involved in one transaction
as opposed to several small transactions.
 Quantity discounts also offer buyers an incentive to purchase more merchandise than they
originally intended to purchase.
 Seasonal discounts (willing to buy at a time outside the customary buying season)
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Differentiated Pricing
 Companies often adjust their basic price to accommodate differences in customers,
products, locations, and so on. Price discrimination occurs when a company sells a
product or service at two or more prices that do not reflect a proportional difference in
costs.
 In first-degree price discrimination, the seller charges a separate price to each
customer depending on the intensity of his or her demand.
 In second-degree price discrimination, the seller charges less to buyers of larger
volumes.
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 In third-degree price discrimination, the seller charges
different amounts to different classes of buyers, as in the
following cases:
 Customer-segment pricing.
 Product-form pricing.
 Image pricing.
 Channel pricing.
 Location pricing
 Time pricing.
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Product Mix Pricing
 In this case, the firm searches for a set of
prices that maximizes the profits on the total
product mix.
 Pricing is difficult because the various
products have demand and cost
interrelationship and are subject to different
degrees of competition.
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There are six situations involving product-mix pricing
 Product line pricing
 Optional feature pricing
 Captive-Product Pricing
 Two-part pricing
 By Product Pricing
 Product-bundling pricing
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PRICING OF A NEW PRODUCT
 The firm’s requirement in going for new products can be:
 To be real innovator and to earn the rewards associated with
innoation
 To exploit a market need that is coming to the fore
 To expand the product mix to ensure steady growth over the long
term.
 The extent of newness and the nature of the new product
influence pricing strategies.
 Two broad alternatives available in new product pricing are:-
 Skimming pricing
 Penetration pricing
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 When to Use:
 Product’s quality and image must
support its higher price.
 Costs of low volume cannot be so
high they cancel the advantage of
charging more.
 Competitors should not be able to
enter market easily and undercut
the price.
 When to Use:
 Market is highly price sensitive so
a low price produces more growth.
 Costs must fall as sales volume
increases.
 Need to keep competition out or
effects are only temporary.
 Market Skimming:
 Set a high price for a new product
to “skim” revenues layer by layer
from the market.
 Company makes fewer, but more
profitable sales.
 Market Penetration:
 Set a low initial price in order to
“penetrate” the market quickly and
deeply.
 Can attract a large number of
buyers quickly and win a large
market share.
New-Product Pricing Strategies

Cost Data in respect to new
Products
 It is essential to understand the costing of the
new product to establish if the new product
pricing is done on cost plus basis or not.
 Judgements, more than techniques are
important in allocating overheads which
makes costing a tricky and complex
procedure especially in an ongoing multi
product company.
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Organizational Infrastructure.
 The organizational Infrastructure is essential to manage pricing.
Infrastructure refers to a specialized pricing set up within the organization –
to drive pricing performance.
 It articulates clear targets and goals for various pricing initiatives and helps
manage the risks involved.
 It helps fast identify pricing opportunities and forsee impending losses,
exploit price bands and value maps; locate where revenues are eroded.
 It helps focus on critical pricing processes like costing and demand supply
analysis; and also fixes who owns and drives the organization's pricing
center.
 This kind of focus will support the realisation of overall business strategy.
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Initiating and Responding to
Price Changes
 Pricing is not a one-time decision; rather it is a continuous one.
 A Company faces many situations under which it is required to
change and adjust the price of its product.
 In some situations, companies initiate price cuts or price
increase and in another situation they need to react towards
price changes by competitors.
 While initiating or reacting towards price changes, companies
should also gauge the competitors’ and Customers’ responses
to price change.
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Initiating Price Cuts
 Several circumstances might lead a firm to cut prices.
 One is excess plant capacity: The firm needs additional business and cannot generate it
through increased sales effort, product improvement, or other measures. Companies
sometimes initiate price cuts in a drive to dominate the market through lower costs. A
price-cutting strategy can lead to other possible traps:
 Low-quality trap. Consumers assume quality is low.
 Fragile-market-share trap. A low price buys market share but not market loyalty. The same
customers will shift to any lower-priced firm that comes along.
 Shallow-pockets trap. Higher-priced competitors match the lower prices but have longer staying
power because of deeper cash reserves.
 Price-war trap. Competitors respond by lowering their prices even more, triggering a price war.
 Customers often question the motivation behind price changes. They may assume the
item is about to be replaced by a new model; the item is faulty and is not selling well; the
firm is in financial trouble; the price will come down even further; or the quality has been
reduced. The firm must monitor these attributions carefully.
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Initiating Price Increases
 A successful price increase can raise profits considerably. A
major circumstance provoking price increases is cost inflation.
Rising costs unmatched by productivity gains squeeze profit
margins and lead companies to regular rounds of price
increases. Companies often raise their prices by more than the
cost increase, in anticipation of further inflation or government
price controls, in a practice called anticipatory pricing. Another
factor leading to price increases is overdemand. When a
company cannot supply all its customers, it can raise its prices,
ration supplies, or both.
51

 It can increase price in the following ways, each of which has a
different impact on buyers.
 Delayed quotation pricing.
 Escalator clauses
 Unbundling.
 Reduction of discounts.
 The more similar the products or offerings from a company, the more
likely consumers are to interpret any pricing differences as unfair.
Product customization and differentiation and communications that
clarify differences are thus critical.
52

Responding to Competitors’
Price Changes
 The company must consider the product’s stage in the
life cycle, its importance in the company’s portfolio,
the competitor’s intentions and resources, the
market’s price and quality sensitivity, the behavior of
costs with volume, and the company’s alternative
opportunities.
 The right strategy depends on the ability of the firm to
generate more demand or cut costs.
53

Pricing Strategies
Cost-based pricing
Set prices based on costs
 $6.50 cost of trash cans.
 If desire 10% profit then
mark-up 10% from cost
 If desire 23% profit then
mark-up 23% from cost
Demand-based
pricing
Marketers attempt to
determine what consumers
are willing to pay for given
goods and services.
Importance of a consumer’s
“perceived value of an item”
Effective when there are few
substitutes and consumer is
willing to pay higher prices
because they believe an item
is different from that offered
by competition. Companies
try to achieve this status by
developing brand loyalty.
Competition-
based pricing
Set prices based on what
the competitors charge.
Elect to take one of three
actions using this pricing
method:
 Price above the
competition
 Price below the
competition
 Price in-line with the
competition
54

Pricing Strategies continued….
 You could also use a combination of these strategies
 Many marketers use all three pricing strategies to determine prices.
 Cost-based pricing helps marketers determine the price floor for a product – the
lowest price for which it can be offered to still make a profit.
 Demand-based pricing determines a price range that is defined by the price floor
and price ceiling (the highest amount consumers would pay).
 Competition-based pricing may be used to assure the final price is in line with the
competition.
 Combining pricing considerations offers a good range within which a company
can establish its selling price. And if a company decides to go with the
competition-based strategy, they still know how much they can lower their
prices if necessary based on the cost-based pricing figures.
55

Pricing Policies
 One-price policy – all customers are charged the same price for the
same type or amount of merchandise.
 Flexible-price policy – customers pay different prices for the same
type or amount of merchandise.
 Four stages to the Product Life Cycle:
 Introduction > Growth > Maturity > Decline
 Pricing plays an important role in this sequence of events.
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