Unit 2

KMBN MK02
Price Policy
Price Positioning
The price policy involves determining where a product or service should be
positioned in the market in relation to competitors.
Analyzing customer segments, market research, and competitive pricing is
essential for making informed decisions.

Pricing Strategies
There are various pricing strategies, such as cost-plus pricing, value-based
pricing, penetration pricing, skimming pricing, etc.

Marketing analytics helps in evaluating which strategy aligns best with your
business goals and market conditions.
Dynamic Pricing: In certain industries, dynamic pricing is used to adjust
prices in real-time based on demand, competitor pricing, and other
factors.
Marketing analytics can provide insights into the data sources and
algorithms necessary for implementing dynamic pricing models.

Price Discrimination: Analyzing customer data and behavior can

support price discrimination strategies where different prices are
offered to different customer segments based on their willingness to
pay.
Promotions and Discounts:
• Marketing analytics can help in assessing the impact of various
promotional campaigns and discounts on pricing objectives.
• It can aid in identifying which promotions are most effective in driving
sales and customer satisfaction.
Types of Pricing
Market-oriented Methods Cost-oriented Method
• Perceived value pricing • Cost plus pricing: Cost plus pricing
• Going-rate pricing involves adding a certain
percentage to cost in order to fix
• Competitors ‘parity method the price
• Premium pricing • Mark-up pricing
• Discount pricing
• Break-even pricing
• Target return pricing: In this case,
the firm sets prices in order to
achieve a particular level of return
on investment (ROI).
Break-even pricing

• In this case, the firm determines the level of sales needed to cover all the
relevant fixed and variable costs. The break-even price is the price at which the
sales revenue is equal to the cost of goods sold. In other words, there is neither
profit nor loss.

• For instance, if the fixed cost is Rs. 2, 00,000, the variable cost per unit is Rs. 10,
and the selling price is Rs. 15, then the firm needs to sell 40,000 units to break
even. Therefore, the firm will plan to sell more than 40,000 units to make a profit.
If the firm is not in a position to sell 40,000 limits, then it has to increase the
selling price.
Price Objectives

Revenue Maximization: One common pricing objective is to maximize

revenue. Marketing analytics can help determine the optimal price
point that will yield the highest revenue, considering demand elasticity
and cost structures.

Profit Margin Optimization: Price objectives can also revolve around

profit margin. Analytics can assist in finding the right balance between
pricing and cost management to maximize profits.

Market Share Growth: For some businesses, gaining market share is a

primary objective. Marketing analytics can help assess the trade-offs
between pricing and market share growth strategies
Customer Acquisition and Retention: Pricing can be used to acquire
new customers and retain existing ones.
Analytics can help track the lifetime value of customers acquired
through different price points and strategies.

Competitive Positioning: Setting prices to position a product as

premium, value, or mid-range compared to competitors is an important
objective.
Marketing analytics can provide insights into the effectiveness of this
strategy and help make adjustments as needed.
Price Elasticity Management
Understanding price elasticity—how sensitive demand is to price changes—is crucial.
Marketing analytics can help in estimating price elasticity and using it to inform
pricing decisions.
Estimating Demand: Price Elasticity
• Price Elasticity of Demand (PED): Price elasticity of demand is a key
concept. It is expressed as the percentage change in the quantity
demanded for a product or service resulting from a 1% change in its price.
The formula for calculating PED is as follows:

• PED = (% Change in Quantity Demanded) / (% Change in Price)

• If PED > 1, demand is considered elastic, meaning that small price changes
lead to proportionally larger changes in quantity demanded.
• If PED < 1, demand is considered inelastic, meaning that price changes have
a relatively smaller impact on quantity demanded.
• If PED = 1, demand is unitary elastic, indicating that price changes result in
proportionate changes in quantity demanded.
Using Elasticity for Demand Estimation
• Price Reduction and Elastic Demand: If a business reduces the price of a product with
elastic demand, the percentage increase in quantity demanded will be greater than the
percentage decrease in price. This can result in increased total revenue.

• Price Increase and Elastic Demand: Conversely, if the price is increased for a product
with elastic demand, the percentage decrease in quantity demanded will be greater than
the percentage increase in price, potentially leading to reduced total revenue.

• Price Reduction and Inelastic Demand: In the case of inelastic demand, a price reduction
will lead to a smaller percentage increase in quantity demanded compared to the
percentage decrease in price. Total revenue may increase.

• Price Increase and Inelastic Demand: When the price is increased for a product with
inelastic demand, the percentage decrease in quantity demanded will be smaller than
the percentage increase in price, potentially leading to increased total revenue.
• Determining Price Points: Businesses can use price elasticity to find the optimal
price point where the increase or decrease in price will maximize revenue. For
elastic demand, a price reduction can be considered, while for inelastic demand,
there may be opportunities to increase prices without significant impacts on
quantity demanded.

• Product Line Strategy: Understanding the price elasticity of different products

within a product line can help businesses make decisions about which products
to promote, bundle, or adjust prices for to optimize overall revenue.

• Competitive Pricing: When evaluating the price elasticity of their products,

businesses can assess how price changes may affect their competitive position in
the market. Understanding the relative price elasticity of their offerings
compared to competitors' products can inform pricing decisions.

• Sensitivity Analysis: Price elasticity analysis can be used in sensitivity analysis to

evaluate the potential impact of various pricing strategies on demand and total
revenue. Businesses can test different scenarios to make data-driven pricing
decisions.
Demand Curve

• The demand curve is a graphical representation of the relationship

between the price of a good or service and the quantity demanded
for a given period of time.

• In a typical representation, the price appears on the left vertical axis

while the quantity demanded is on the horizontal axis.
Key Takeaways

• A demand curve is a graph that shows the relationship between the price
of a good or service and the quantity demanded within a specified time
frame.
• Demand curves can be used to understand the price-quantity relationship
for consumers in a particular market, such as corn or soybeans.
• The demand curve generally slopes down from left to right, due to the law
of demand while the quantity demanded drops as the price rises for the
majority of goods.
• Changes in factors besides price and quantity can shift a demand curve to
the right or left.
• There are some exceptions to the relationship between price and demand,
including Giffen goods and Veblen goods.
Does the Demand Curve Slope Downward or
Upward?
• The demand curve generally slopes downward from left to right,
illustrating that as the price of a good rises, the demand for it falls.

• However, there are exceptions to the rule—for Giffen goods and

Veblen goods, for example. In both cases, rising prices tend to
accompany a rise in demand, leading to a demand curve that rises
from left to right.
Linear Demand Curve
• Straight Line relationship between price and demand is represented
through Linear demand curve.

Power Demand Curve

• Arc that shows the relationship between price and demand, when
product’s price elasticity is not affected by product’s price.
Price Optimization
• Price optimization is the process of finding the optimal price point for a
product or service.

• It maximizes profitability by using market and consumer data to find a

balance between value and profit.

• This typically involves analyzing customer data to understand what price

points are most likely to result in a sale, then setting prices accordingly.

• By taking into account various factors such as customer demand,

competition, and costs, businesses can use price optimization to maximize
their profits.
How to Optimize Pricing

• Analyze data to identify price patterns and trends

• Develop pricing models to optimize price points

• Test different price points to determine the optimal price

• Monitor price changes and adjust prices accordingly

• Implement price changes in real-time

Benefits of Price Optimization
• The most obvious benefit is that it can help companies increase their
profits. By setting prices that reflect customer demand and considering the
competition, companies can ensure that they are maximizing revenue.

• In addition to increasing profits, price optimization can also help businesses

attract new customers and retain existing ones.

• By setting competitive prices yet still offering value, businesses can draw in
new customers who may not have considered their products or services.

• At the same time, companies can also keep existing customers happy by
ensuring they get a good deal.

• Finally, price optimization can help businesses save time and money.
Complementing Products
• Complementing products are items that are typically used together or
enhance each other's value. In the context of pricing analytics,
understanding complementing products is crucial for developing effective
strategies that maximize revenue and customer satisfaction. Here are some
examples and considerations for complementing products:
• Understanding Complementary Products:
Identify products that are commonly used together or enhance each other's
functionality. For example, if you sell cameras, camera lenses and accessories could be
complementary products.

Examples of Complementary Products:

1. Smartphone and protective case
2. Printer and ink cartridges
3. Shampoo and conditioner
4. Gaming console and video games
5. Computer and software applications
Cross-Selling Opportunities:
1. Use pricing analytics to identify opportunities for cross-selling complementary products. For
instance, if a customer buys a camera, you can offer a discount on camera bags or additional
lenses.
2. Bundling Strategies:
3. Create bundled packages that include complementary products at a discounted price. This
encourages customers to purchase both items together.
Dynamic Pricing:
1. Implement dynamic pricing where the price of one product is influenced by the pricing of its
complementary product. For example, if a printer is discounted, you may adjust the price of
ink cartridges accordingly.
Market Basket Analysis:
1. Conduct market basket analysis to understand which products are frequently purchased
together. This analysis can unveil patterns and help optimize pricing for complementary
products.

Seasonal Adjustments:
• Adjust pricing for complementary products based on seasonal demand. For
example, if you sell cameras, you might offer discounts on camera accessories
during the holiday season.
Pricing using subjective demand curve
• In situations when you don’t know the price elasticity for a
product or don’t think you can rely on a linear or power demand
curve, a good way to determine a product’s demand curve is to
identify the lowest price and highest price that seem
reasonable.
Understanding Subjective Demand Curve
• A subjective demand curve refers to a graphical representation or
conceptual model that illustrates how the quantity demanded for a
product or service is influenced by qualitative and subjective factors,
rather than solely by changes in price.

• Unlike traditional demand curves that are based on quantitative data

and price elasticity, a subjective demand curve takes into account
non-numerical factors such as customer perceptions, brand image,
emotional appeal, and other qualitative considerations.
[Link] Factors:
The curve is shaped by subjective, qualitative factors that influence consumers' willingness to
purchase a product at different price points.
[Link] Value:
It reflects how customers subjectively perceive the value of a product. This perception may be
influenced by brand image, product features, quality, and other non-price-related considerations.
[Link] Perception:
Brand reputation and perception play a significant role in shaping the subjective demand curve.
Consumers may be willing to pay a premium for products associated with a strong, positive brand.
[Link] Preferences:
Individual and collective customer preferences, including lifestyle choices and values, contribute to
the shape of the subjective demand curve.
[Link] Appeal:
Emotional factors, such as how a product makes customers feel or the emotional connection they
have with a brand, can impact the demand curve.
[Link] Selling Proposition (USP):
The unique features or selling points of a product contribute to its perceived value, and thus,
influence the subjective demand curve.
[Link] Elasticity:
Unlike traditional demand curves that rely on price elasticity of demand, a subjective demand curve
may exhibit elasticity or inelasticity based on subjective factors rather than purely economic
considerations.
Multi Product Pricing
• Multiple product pricing involves setting prices for a range of products
offered by a business. This could include different variations of a single
product, complementary products, or an entire product line.

• Developing a comprehensive multiple product pricing strategy is essential

for maximizing revenue, meeting customer needs, and staying competitive.

• For example, the various models of refrigerators, TV sets, radios, and car
models produced by the same company may be treated as different
products for at least pricing purpose.
• The major problem in pricing multiple products is that each product
has a separate demand curve. But, since all of them are produced
under one organization by interchangeable production facilities,
they have only one inseparable marginal, cost curve.

• That is, while revenue curves, AR and MR, are separate for each
product, cost curves, AC and MC, are inseparable.

• Therefore, the marginal rule of pricing cannot be applied straight

away to fix the price of each product separately. The problem,
however, has been provided with a solution by E.W. Clements.
Nonlinear pricing
• Nonlinear pricing is a strategy that takes into account a variety of
factors beyond the cost of a product or service.

• These can include the customer’s willingness to pay, the value they
place on the product, and the competition.

• The goal of non-linear pricing is to find the optimal price that

maximizes revenue and profits while also considering the customer’s
perception of value.
Different profit maximization strategies
using non-linear pricing
• Dynamic pricing: This strategy adjusts prices based on supply and demand.
For instance, an e-commerce company might increase the price of a
product during high demand periods and lower it during low demand
periods. This helps the company to balance supply and demand while also
maximizing revenue.

• Value-based pricing, where companies set prices based on the perceived

value of a product to the customer. For example, luxury goods and
premium services often use value-based pricing because the perceived
value to the customer is high. The price is set based on the value that the
customer places on the product, not on the cost of production.
• Tiered Pricing: Offer different tiers or levels of service with varying features and
prices

• Time-based pricing: Businesses can use nonlinear pricing to offer different prices
for a product or service based on the time of day, week, or year, such as charging
higher prices during peak hours or seasons.

• Location-based pricing: Businesses can use nonlinear pricing to offer different

prices for a product or service based on the location of the consumer, such as
charging higher prices in tourist areas or urban areas.

• Personalized pricing: Businesses can use nonlinear pricing to offer personalized

prices for a product or service based on the consumer’s purchasing history,
demographics, or other factors.

• Bundled Pricing: Package multiple products or services together and offer them
at a bundled price that is lower than the sum of individual prices.
Price Bundling
• Price bundling is a marketing strategy where multiple products or
services are combined and sold together as a single package at a
discounted price compared to purchasing each item separately.

• This strategy aims to increase sales, enhance customer satisfaction,

and create a perceived value for the bundled offerings.

• Price bundling is widely used across various industries.

Types
Pure Bundling
1. In pure bundling, products or services are available only as a package, and
customers cannot purchase the items individually. The bundled package is
priced at a rate lower than the sum of the individual prices.
Mixed Bundling
1. Mixed bundling allows customers to purchase the bundled package or
individual items separately. The price for the bundle is typically lower than
the combined prices of the individual items. This strategy provides flexibility
to customers who may not want all the items in the bundle.
Determine Bundling Pricing
Determining the optimal bundling pricing involves a strategic approach that
considers various factors such as costs, customer preferences, and market
conditions. Here are steps to help determine the optimal bundling pricing:

• Understand Customer Preferences

• Segment Your Market
• Identify Complementary Products
• Determine Price Sensitivity
• Calculate Costs
• Set Objectives
Continued…
• Consider Price Discrimination
• Test Different Bundling Options
• Calculate Perceived Value
• Determine the Bundle Price
• Evaluate Profit Margins
• Consider Competitive Pricing
• Monitor Customer Feedback
Markdown Pricing
• Markdown pricing is a common pricing strategy in the ecommerce
and retail industries. It involves reducing the price of a product to
clear out stock, make room for new inventory, or to boost sales.

• Markdown pricing is a valuable tool for businesses to manage

inventory, boost sales, and increase profits.
Markdown pricing Strategies
• Clearance sales: Businesses can hold clearance sales to reduce the prices of overstocked
or slow-moving items in order to clear inventory.

• Seasonal markdowns: Businesses can markdown prices on seasonal items at the end of
the season to make room for new products.

• Loss leaders: Businesses can markdown prices on certain products as a way to attract
customers to the store and increase sales of other products.

• Promotions and discounts: Businesses can use it as a part of promotional campaigns,

such as buy one, get one free or discounting items that are nearing expiration.

• End-of-Life products: Businesses can markdown prices on products that are being
phased out to clear inventory before discontinuing them.