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  1. 1. Marketing Management MBA CP 205
  2. 2. Developing Pricing Strategy
  3. 3. Developing Pricing Strategy <ul><li>Learning Objectives: </li></ul><ul><li>Know how consumers process and evaluate prices. </li></ul><ul><li>Know how a company should set prices initially for products or </li></ul><ul><li>services. </li></ul><ul><li>Know how a company should adapt prices to meet varying </li></ul><ul><li>circumstances and opportunities. </li></ul><ul><li>Know when a company should initiate a price change. </li></ul><ul><li>Know how a company should respond to a competitor’s price </li></ul><ul><li>change. </li></ul>
  4. 4. <ul><li>Significance of pricing </li></ul><ul><li>Price is the only element in the marketing mix that generates </li></ul><ul><li>revenue, rest generate only cost. </li></ul><ul><li>Price is an important determinant of sales and profitability. </li></ul><ul><li>Competition contributes the maximum to the importance of </li></ul><ul><li>pricing and makes it a highly dynamic function. </li></ul><ul><li>Pricing is a highly risky decision area and mistakes in pricing </li></ul><ul><li>seriously affect the firm, its profits, growth and future. </li></ul>Developing Pricing Strategy
  5. 5. Developing Pricing Strategy <ul><li>Rent </li></ul><ul><li>Fee </li></ul><ul><li>Fare </li></ul><ul><li>Rate </li></ul><ul><li>Toll </li></ul><ul><li>Premium </li></ul><ul><li>Honorarium </li></ul><ul><li>Dues </li></ul><ul><li>Salary </li></ul><ul><li>Commission </li></ul><ul><li>Wage </li></ul><ul><li>Tax </li></ul>Synonyms for Price
  6. 6. Developing Pricing Strategy Common Pricing Mistakes <ul><li>Determine costs and take traditional industry margins. </li></ul><ul><li>Failure to revise price to capitalize on market changes. </li></ul><ul><li>Setting price independently of the rest of the marketing mix elements. </li></ul><ul><li>Failure to vary price by product item, market segment, distribution channels, and purchase occasion. </li></ul>
  7. 7. Developing Pricing Strategy Consumer Psychology and Pricing Price-quality inferences Price cues Reference Prices
  8. 8. <ul><li>When examining products, consumers employ reference prices . </li></ul><ul><li>Observed price may be compared to an internal reference price </li></ul><ul><li>or an external frame of reference. </li></ul><ul><li>Sellers often attempt to manipulate reference prices. They may </li></ul><ul><li>place product among expensive products to imply that it belongs </li></ul><ul><li>to the class. </li></ul><ul><li>The firm may also state a high manufacturer’s suggested price or </li></ul><ul><li>by pointing to a competitor’s high price. </li></ul>Developing Pricing Strategy
  9. 9. Developing Pricing Strategy <ul><li>“ Fair Price” (what the product should cost). </li></ul><ul><li>Typical Price. </li></ul><ul><li>Last Price paid. </li></ul><ul><li>Upper-bound price (the most consumers would pay). </li></ul><ul><li>Lower-bound Price (the least the consumers would pay). </li></ul><ul><li>Competitors’ prices. </li></ul><ul><li>Expected Future Price. </li></ul><ul><li>Usual Discounted Price. </li></ul>Possible Consumer Reference Prices
  10. 10. <ul><li>Many consumers use price as indicator of quality. </li></ul><ul><li>Some brands adopt scarcity a means to signify quality and justify </li></ul><ul><li>premium pricing. </li></ul><ul><li>Many Sellers believe that prices should end in an odd number. A </li></ul><ul><li>price of Rs. 3,999 instead of Rs. 4,000 is seen in the Rs. 3000 </li></ul><ul><li>range rather than Rs. 4000 range. </li></ul><ul><li>Prices ending with ‘0’ and ‘5’ are common in the market place as </li></ul><ul><li>these are thought to be easier for consumers to process. ‘Sale’ </li></ul><ul><li>sign next to the price tends to spur demand. </li></ul>Developing Pricing Strategy
  11. 11. <ul><li>Factors influencing pricing </li></ul><ul><li>Internal factors: </li></ul><ul><li>Corporate and Marketing objectives of the firm. </li></ul><ul><li>The characteristics of the product. </li></ul><ul><li>Price elasticity of demand. </li></ul><ul><li>The stage of the product in its lifecycle. </li></ul><ul><li>Costs of manufacturing and marketing. </li></ul>Developing Pricing Strategy
  12. 12. <ul><li>Extent of distinctiveness of the product and extent of </li></ul><ul><li>differentiation practiced. </li></ul><ul><li>Other elements of the marketing mix and their interaction with </li></ul><ul><li>pricing. </li></ul><ul><li>Composition of the product line of the firm. </li></ul><ul><li>External factors: </li></ul><ul><li>Market characteristics (demand, customer and competition). </li></ul><ul><li>Buyer behavior towards the product. </li></ul><ul><li>Bargaining power of major customers. </li></ul>Developing Pricing Strategy
  13. 13. <ul><li>Bargaining power of major suppliers. </li></ul><ul><li>Competitor’s pricing policy. </li></ul><ul><li>Government controls/regulation. </li></ul><ul><li>Understanding reached with price cartels. </li></ul><ul><li>Keeping competition out. </li></ul><ul><li>Keeping parity with competition. </li></ul><ul><li>Fast turnaround and early recovery. </li></ul><ul><li>Stabilizing prices and margins in the market. </li></ul>Developing Pricing Strategy
  14. 14. Select the price objective Determine Demand Estimate costs Analyze competitors’ Prices Select pricing method Select final price Steps in Setting Price: Developing Pricing Strategy
  15. 15. <ul><li>1. Selecting Price objective </li></ul><ul><li>A company can pursue any of the following objectives: </li></ul><ul><li>Survival: Pursued if the firm is having over capacity, intense </li></ul><ul><li>competition or faces changing consumer wants. </li></ul><ul><li>Maximum current profit: The strategy assumes that firm has </li></ul><ul><li>knowledge of its demand and cost functions. </li></ul><ul><li>Maximum market share: Firm practices market penetration </li></ul><ul><li>strategy. Three conditions that favor low price: </li></ul><ul><li>Market highly price sensitive. </li></ul><ul><li>Manufacturing and distribution cost fall due to leaning curve </li></ul><ul><li>effect. </li></ul><ul><li>Low price discourages competition. </li></ul>Developing Pricing Strategy
  16. 16. <ul><li>Maximum market skimming: Favored by cos. dealing in high </li></ul><ul><li>technology products. </li></ul><ul><li>Product quality leadership: Relevant for products having high </li></ul><ul><li>levels of perceived quality, taste or status. </li></ul><ul><li>Profit maximization in the short term and profit optimization in </li></ul><ul><li>the long term. </li></ul><ul><li>A minimum return on investment. </li></ul><ul><li>A minimum return on sales turnover. </li></ul><ul><li>Achieving a target sales value. </li></ul><ul><li>Entering new markets. </li></ul><ul><li>Target profit on entire product line irrespective of profit level in </li></ul><ul><li>individual products. </li></ul>Developing Pricing Strategy
  17. 17. <ul><li>2. Determining demand </li></ul><ul><li>Estimating demand involves understanding as to what affects </li></ul><ul><li>price sensitivity. </li></ul><ul><li>Consumers are price sensitive to those products that are priced </li></ul><ul><li>higher or are bought frequently. </li></ul><ul><li>Consumers are less price sensitive when total cost of ownership </li></ul><ul><li>(TCO) is low. </li></ul><ul><li>Marketers need to know price elasticity of demand of their </li></ul><ul><li>products. </li></ul>Developing Pricing Strategy
  18. 18. Developing Pricing Strategy $ Rs $ $ $ $ Rs Rs Rs Rs10
  19. 19. Developing Pricing Strategy <ul><li>The product is more distinctive. </li></ul><ul><li>Buyers are less aware of substitutes. </li></ul><ul><li>Buyers cannot easily compare the quality of substitutes. </li></ul><ul><li>The expenditure is a small part of the buyer’s total income. </li></ul><ul><li>The expenditure is small compared to cost of end product. </li></ul><ul><li>Part of the cost is borne by another party. </li></ul><ul><li>The product is used in assets previously bought. </li></ul><ul><li>The product is assumed to have more quality or exclusiveness. </li></ul><ul><li>Buyers cannot store the product. </li></ul>Factors leading to less Price sensitivity
  20. 20. <ul><li>Prices are likely to be less elastic also when: </li></ul><ul><li>There are few or no substitutes or competitors. </li></ul><ul><li>Buyers do not readily notice higher price. </li></ul><ul><li>Buyers are slow to change their buying habits. </li></ul><ul><li>Buyers think that the higher prices are justified. </li></ul><ul><li>There may be a price indifference band within which price </li></ul><ul><li>changes have little or no effect. </li></ul><ul><li>Long run price elasticity may differ from short run elasticity. </li></ul>Developing Pricing Strategy
  21. 21. 3. Estimating costs Developing Pricing Strategy <ul><li>Fixed costs </li></ul><ul><li>Variable costs </li></ul><ul><li>Total costs </li></ul><ul><li>Average cost </li></ul><ul><li>Cost at different levels of production </li></ul>Cost per unit at Different levels of Production per period
  22. 22. <ul><li>4. Analyzing competitors’ costs, prices and offers </li></ul><ul><li>With in the range of prices determined by market demand and </li></ul><ul><li>company costs, the firm must take into account competitors’ </li></ul><ul><li>prices, costs and offers. </li></ul><ul><li>Firm’s product features should be compared with rival offerings. </li></ul><ul><li>5. Selecting a Pricing method </li></ul><ul><li>Broad categories of pricing methods are: </li></ul><ul><li>Cost based pricing. </li></ul><ul><li>Demand based pricing. </li></ul>Developing Pricing Strategy
  23. 23. <ul><li>Competition oriented pricing. </li></ul><ul><li>Value pricing. </li></ul><ul><li>Product line oriented pricing. </li></ul><ul><li>Tender pricing. </li></ul><ul><li>Affordability based pricing. </li></ul><ul><li>Differentiated pricing. </li></ul><ul><li>Under cost based pricing following methods are commonly used: </li></ul><ul><li>Mark up pricing. </li></ul><ul><li>Absorption cost pricing. </li></ul><ul><li>Target rate of return pricing. </li></ul><ul><li>Marginal cost pricing. </li></ul>Developing Pricing Strategy
  24. 24. <ul><li>Mark up pricing involves keeping the selling price fixed by </li></ul><ul><li>adding a margin to its cost price. It is based on the assumption </li></ul><ul><li>that demand can not be known accurately but costs are known. </li></ul><ul><li>Absorption cost pricing rests on the estimated unit cost of the </li></ul><ul><li>product at the normal level of production & sales and includes </li></ul><ul><li>variable & fixed costs involved in manufacturing, selling and </li></ul><ul><li>administering the product. </li></ul><ul><li>In Target rate of return pricing the rate of return is used as a </li></ul><ul><li>mark up. In case of absorption pricing, the mark up is decided on </li></ul><ul><li>an arbitrary basis where as, here it is the based on ROI. </li></ul>Developing Pricing Strategy
  25. 25. <ul><li>Marginal cost pricing aims at maximizing the contribution </li></ul><ul><li>towards fixed costs. Marginal costs include all the direct variable </li></ul><ul><li>costs of the product. These are fully realized in marginal costing </li></ul><ul><li>and in addition, some portion of the fixed costs is also realized. </li></ul><ul><li>Demand based pricing includes following methods: </li></ul><ul><li>‘ What the traffic can bear’ pricing. </li></ul><ul><li>Skimming pricing. </li></ul><ul><li>Penetration pricing. </li></ul><ul><li>What the traffic can bear pricing is one where the seller </li></ul><ul><li>takes the maximum price that the customer is willing to pay for </li></ul><ul><li>the product under the circumstances. </li></ul>Developing Pricing Strategy
  26. 26. <ul><li>As the name suggests, Skimming pricing method skims the </li></ul><ul><li>market in the first instance through high price and subsequently </li></ul><ul><li>settles down for a lower price. </li></ul><ul><li>It aims at high price and high profits in the early stage of </li></ul><ul><li>marketing the product to buyers that are not price sensitive. </li></ul><ul><li>It is very useful in the pricing of new products especially those </li></ul><ul><li>that have luxury or speciality element. </li></ul><ul><li>Penetration pricing that is opposite of skimming pricing seeks </li></ul><ul><li>to achieve greater market penetration through relatively low </li></ul><ul><li>prices. </li></ul>Developing Pricing Strategy
  27. 27. <ul><li>It brings large sales volumes in a market where consumers are </li></ul><ul><li>price sensitive and where there is stiff competition. </li></ul><ul><li>In all demand based pricing methods Price Elasticity of </li></ul><ul><li>demand is taken into account. </li></ul><ul><li>It refers to relative sensitivity of demand of a product to changes </li></ul><ul><li>in its price. </li></ul><ul><li>Three policy Options are available in case of competition based </li></ul><ul><li>pricing: </li></ul><ul><li>Premium pricing. </li></ul><ul><li>Discount pricing. </li></ul>Developing Pricing Strategy
  28. 28. <ul><li>Parity pricing/Going rate pricing. </li></ul><ul><li>For all these, a competitor’s price serves as a reference point. </li></ul><ul><li>Premium pricing means pricing above the competitor’s price </li></ul><ul><li>while discount pricing is below that of the competitor. </li></ul><ul><li>Parity pricing involves matching the prices to competition. It is </li></ul><ul><li>appropriate where supply is more than demand and where </li></ul><ul><li>channels and consumers are well aware of their choices. </li></ul><ul><li>Product line pricing involves fixing prices of various products in </li></ul><ul><li>a manner that the product line as a whole is priced optimally. </li></ul>Developing Pricing Strategy
  29. 29. <ul><li>Tender pricing is applicable in the case of business firms and is </li></ul><ul><li>applicable to industrial products. </li></ul><ul><li>Affordability based pricing is relevant in case of essential </li></ul><ul><li>commodities. The idea is to set price in a manner so that all </li></ul><ul><li>sections of population is able to buy the products as required. </li></ul><ul><li>The price set may be independent of costs in which case it may </li></ul><ul><li>involve an element of state subsidy. </li></ul><ul><li>In differentiated pricing , some firms charge different prices </li></ul><ul><li>for the same product in different areas/zones or to customer </li></ul><ul><li>class. It may be on the basis of volume of purchase. </li></ul>Developing Pricing Strategy
  30. 30. <ul><li>6. Selecting the Final Price </li></ul><ul><li>Final price is selected after considering various pricing methods. </li></ul><ul><li>The firm should consider other factors such as: </li></ul><ul><li>Impact of other marketing activities like quality and advertising </li></ul><ul><li>relative to competition. </li></ul><ul><li>Company pricing policies. </li></ul><ul><li>Gain and risk sharing pricing. </li></ul><ul><li>Impact of pricing on other stakeholders. </li></ul>Developing Pricing Strategy
  31. 31. <ul><li>Steps involved in Pricing Procedure </li></ul><ul><li>Identify the target customer and draw up their profiles. </li></ul><ul><li>Decide the market position and price image that the firm desires </li></ul><ul><li>for the brand. </li></ul><ul><li>Determine the extent of price elasticity of demand of the </li></ul><ul><li>product and the price sensitivity of the target customer groups. </li></ul><ul><li>Take into account the life cycle stage of the product. </li></ul><ul><li>Analyze competitor’s prices. </li></ul><ul><li>Analyze other environmental factors. </li></ul><ul><li>Chose the appropriate pricing method considering above factors. </li></ul><ul><li>Conduct periodic review of the pricing method selected. </li></ul>Developing Pricing Strategy
  32. 32. <ul><li>Some firms have proactive approach to pricing and desire to tap </li></ul><ul><li>market opportunities, increase market share and aim at retaining </li></ul><ul><li>customers under different market conditions. </li></ul><ul><li>Some firms adopt reactive pricing policies and are satisfied with </li></ul><ul><li>certain simple criteria like recovering costs and matching the </li></ul><ul><li>competition etc. </li></ul><ul><li>Terms of sale: </li></ul><ul><li>Price and terms of sale go as a package. Terms of sale include Ex </li></ul><ul><li>works/FOB/CIF/FOR/Destination/Cash sale/Credit sale prices etc. </li></ul>Developing Pricing Strategy
  33. 33. <ul><li>Terms of payment, delivery schedule, taxes & duties applicable </li></ul><ul><li>and installation & commissioning charges are also indicated. </li></ul><ul><li>Other related dimensions: </li></ul><ul><li>Price plays a communicative role: Many firms use price as an </li></ul><ul><li>index of quality, luxury, status or technical excellence of their </li></ul><ul><li>products. Such products are sold on the exclusiveness idea. </li></ul><ul><li>Marketers try to get around consumer’s psychological barrier in </li></ul><ul><li>respect of price through Psychological pricing . Examples include </li></ul><ul><li>Bata pricing. </li></ul>Developing Pricing Strategy
  34. 34. Developing Pricing Strategy Price-reaction Program for meeting competitor’s price cut
  35. 35. Developing Pricing Strategy <ul><li>Brand leader's response to competitive price-cuts </li></ul><ul><li>Maintain price. </li></ul><ul><li>Maintain price and add value. </li></ul><ul><li>Reduce price. </li></ul><ul><li>Increase price and improve quality. </li></ul><ul><li>Launch a low-price fighter line. </li></ul>
  36. 36. Developing Pricing Strategy <ul><li>Recap: </li></ul><ul><li>How consumers process and evaluate prices. </li></ul><ul><li>How a company should set prices initially for products or </li></ul><ul><li>services. </li></ul><ul><li>How a company should adapt prices to meet varying </li></ul><ul><li>circumstances and opportunities. </li></ul><ul><li>When a company should initiate a price change. </li></ul><ul><li>How a company should respond to a competitor’s price </li></ul><ul><li>change. </li></ul>