PRICING
Price is all around us.
Prof. Ravi Chhabra
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PRICING
You pay rent for your apartment, tuition for your
education, and a fee to your dentist or physician.
The airline, railways, taxi and bus companies
charge you a fare; the local utilities call their
price a rate; and the local bank charges you
interest for the money you borrow.
The guest lecturer is paid an honorarium and the
government official takes a bribe to pass a file
which was his job anyway.
PRICE BRINGS IN THE REVENUES
This is the only element in the marketing mix
that brings in the revenues. All the rest are costs
Price communicates the value positioning of the
product.
PRICING
A firm must set a price for the first time when
It develops a new product
It introduces its regular product into a new
distribution channel or geographical area
It enters bids on new contract work ( as in
Industrial Sale )
PRICING
A company must set its price in relation to the
value delivered and perceived by the customer
PRICING
Higher price
PRICING
Lower price
PRICE = COST + PROFIT
PRICING POLICY (FACTORS )
Selecting the pricing objective
Determining demand
Estimating costs
Analyzing competitors costs, prices, offers
Selecting a pricing method
Selecting the final price
THE PRICING OBJECTIVE
The company first decides where it wants to
position its market offering. The objective could
be : Survival
Maximize current profit
Maximize market share
Maximize market skimming
Product - quality leadership
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DETERMINING DEMAND
Each price will lead to a different level of demand
and have a different impact on a companys
marketing objectives.
Demand and price are inversely related i.e.
Higher the price, lower the demand
Company needs to consider : Price sensitivity
Price elasticity of demand
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WHAT INFLUENCES PRICE
SENSITIVITY?
Shared cost ( part of cost is
borne by other party )
Sunk investment (product
used is required as a
complement to earlier
purchase )
Inventory effect ( buyers can
not store the product )
Items bought more
frequently ( more sensitive ) /
infrequently ( less sensitive )
Unique value effect ( quality , prestige or
exclusiveness )
Substitute awareness by buyers
Difficult comparison by buyers
End benefit ( expenditure small part of total
income )
Total expenditure ( purchase cost is insignificant
compared to the cost of end product )
Low cost items (less sensitive ) / high cost
items ( more sensitive )
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WHAT IS PRICE ELASTICITY?
This determines the changes in demand with
unit change in price
If there is little or no change in demand, it is said
to be price inelastic.
If there is significant change in demand, then it
is said to be price elastic.
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DEMAND IS LIKELY TO BE LESS
ELASTIC WHEN
There are few or no substitutes
Buyers readily do not notice the higher price
Buyers are slow to change their buying habits
Buyers think that the higher prices are justified
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ESTIMATING COSTS
Fixed costs
Variable costs
Learning curve
Activity based costing
Target costing
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PRICING METHODS
Markup pricing
Target return pricing
Perceived value pricing
Value pricing
Going rate pricing
Sealed bid pricing
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NEW-PRODUCT PRICING
STRATEGIES
Pricing Strategies
Market
skimming pricing
Market penetration pricing
NEW-PRODUCT PRICING
STRATEGIES
Pricing Strategies
Market skimming pricing is a strategy with
high initial prices to skim revenue layers from
the market.
Product
quality and image must support the price.
Buyers must want the product at the price.
Costs of producing the product in small volume
should not cancel the advantage of higher prices.
Competitors should not be able to enter the market
easily.
New-Product Pricing Strategies
Pricing Strategies
Market penetration pricing sets a low initial
price in order to penetrate the market quickly
and deeply to attract a large number of buyers
quickly to gain market share.
Price
sensitive market
Inverse relationship of production and distribution
cost to sales growth
Low prices must keep competition out of the market.
PRODUCT-MIX PRICING
STRATEGIES
Pricing Strategies
Product
line pricing
Optional product pricing
Captive product pricing
By-product pricing
Product bundle pricing
PRODUCT-MIX PRICING
STRATEGIES
Pricing Strategies
Product
line pricing takes into account
the cost difference between products in the
line, customer evaluation of their features,
and competitors prices.
Normal Hair
$3.90
Anti-dandruff
$4.90
Hair Fall Defense
$4.90
Oily Hair
$3.90
PRODUCT-MIX PRICING
STRATEGIES
Pricing Strategies
Optional
product pricing takes into
account optional or accessory products
along with the main product.
New car with sports rims
$60,000
New car with ordinary rims
$59,000
PRODUCT-MIX PRICING
STRATEGIES
Pricing Strategies
Captive
product pricing involves
products that must be used along with the
main product.
Two-part pricing is where the price is
broken into
Fixed
fee
Variable usage fee
PRICE ADJUSTMENT STRATEGIES
Pricing Strategies
By-product
pricing refers to products
with little or no value produced as a result
of the main product.
Producers will seek little or no profit other
than the cost to cover storage and delivery.
PRICE ADJUSTMENT STRATEGIES
Pricing Strategies
Product
bundle pricing combines
several products at a reduced price.
1 bottle: $2.70
Bundled 2 bottles: $4.90
PRICE ADJUSTMENT STRATEGIES
Pricing Strategies
Discount
and allowance pricing
Segmented pricing
Psychological pricing
Promotional pricing
Geographical pricing
Dynamic pricing
International pricing
Price Adjustment Strategies
Pricing Strategies
Discount
and allowance pricing
reduces prices to reward customer
responses such as paying early or
promoting the product.
Discounts
Allowances
Price Adjustment Strategies
Pricing Strategies
Discounts
Cash
discount for paying promptly
Quantity discount for buying in large
volume
Functional (trade) discount for selling,
storing, distribution, and record keeping
Price Adjustment Strategies
Pricing Strategies
Allowances
Trade-in allowance for turning in an old
item when buying a new one
Promotional allowance to reward dealers
for participating in advertising or sales
support programs
Price Adjustment Strategies
Pricing Strategies
Segmented
pricing is used when a
company sells a product at two or more
prices even though the difference is not
based on cost.
Customer
segment pricing
Product form segment pricing
Location pricing
Price Adjustment Strategies
Pricing Strategies
To
be effective:
Market
must be segmentable
Segments must show different degrees of
demand
Watching the market cannot exceed the
extra revenue obtained from the price
difference
Must be legal
Price Adjustment Strategies
Pricing Strategies
Customer segment pricing is when different
customer pay for different prices for the same
product or service.
Product form segment pricing is when
different versions of the product are priced
differently but not according to differences in
cost.
Location pricing is when the product is sold in
different geographic areas and priced differently
in those areas even though the cost is the same.
PRICE ADJUSTMENT STRATEGIES
Pricing Strategies
Revenue
management charges the right
customer at the right price at the right
time.
Yield management balances price and
demand.
PRICE ADJUSTMENT STRATEGIES
Pricing Strategies
Psychological pricing occurs when sellers
consider the psychology of prices and not simply
the economics.
Reference prices are prices that buyers carry
in their minds and refer to when looking at a
given product.
Noting
current prices
Remembering past prices
Assessing the buying situations
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PRICE ADJUSTMENT STRATEGIES
Pricing Strategies
Promotional pricing is when prices are
temporarily priced below list price or cost to
increase demand.
Loss
leaders
Special event pricing
Cash rebates
Low interest financing
Longer warrantees
Free maintenance
PRICE ADJUSTMENT STRATEGIES
Pricing Strategies
Loss leaders are products sold below cost to
attract customers in the hope they will buy other
items at normal markups.
Special event pricing is used to attract
customers during certain seasons or periods.
Cash rebates are given to consumers who buy
products within a specified time.
Low interest financing, longer warrantees,
and free maintenance lower the consumers
total price.
PRICE ADJUSTMENT STRATEGIES
Pricing Strategies
Risks of promotional pricing
Used
too frequently
Copies by competitors can create deal-prone
customers who will wait for promotions and avoid
buying at regular price.
Creates price wars.
PRICE ADJUSTMENT STRATEGIES
Pricing Strategies
Geographical pricing is used for customers in
different parts of the country or the world.
FOB
pricing
Uniformed delivery pricing
Zone pricing
Basing point pricing
Freight absorption pricing
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PRICE ADJUSTMENT STRATEGIES
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PRICE ADJUSTMENT STRATEGIES
PRICE ADJUSTMENT STRATEGIES
Pricing Strategies
FOB (free on board) pricing means that the
goods are delivered to the carrier and the title
and responsibility passes to the customer.
Uniformed delivery pricing means the
company charges the same price plus freight to
all customers, regardless of location.
PRICE ADJUSTMENT STRATEGIES
Pricing Strategies
Zone pricing means that the company sets up
two or more zones where customers within a
given zone pay a single total price.
Basing point pricing means that a seller
selects a given city as basing point and charges
all customers the freight cost associated from
that city to the customer location regardless of
the city from which the goods are actually
shipped.
PRICE ADJUSTMENT STRATEGIES
Pricing Strategies
Freight absorption pricing
means that the seller absorbs
all or part of the actual freight
charge as an incentive to
attract business in competitive
markets.
PRICE ADJUSTMENT STRATEGIES
Pricing Strategies
Dynamic pricing
International pricing
PRICE ADJUSTMENT STRATEGIES
Pricing Strategies
Dynamic pricing is when prices are
adjusted continually to meet the
characteristics and needs of the
individual customer and situations.
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PRICE ADJUSTMENT STRATEGIES
Pricing Strategies
International pricing is when prices are
4set in a specific country based on countryspecific factors.
Economic
conditions
Competitive conditions
Laws and regulations
Infrastructure
Company marketing objectives
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PRICE CHANGES
Initiating Pricing Changes
Price cuts
Price increases
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PRICE CHANGES
Initiating Pricing Changes
Price cuts is a reduction in selling
price.
Excess
capacity
Increase market share
Price
increases is an increase in
selling price
Cost
inflation
Increased demand and lack of supply
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PRICE CHANGES
Buyer Reactions to Pricing Changes
Price cuts
New
models will be available
Models are not selling well
Quality issues
Price
increases
Product
is hot
Company greed
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PRICE CHANGES
Responding to Price Changes
Questions
Why
did the competitor change the
price?
Is the price cut permanent or
temporary?
What is the effect on market share and
profits?
Will competitors respond?
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PRICE CHANGES
Responding to Price Changes
Solutions
Reduce
price to match competition
Maintain price but raise the perceived
value through communications
Improve quality and increase price
Launch a lower-price fighting brand
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PUBLIC POLICY AND PRICING
Pricing Within Channel Levels
Price fixing: Sellers must set prices
without talking to competitors.
Predatory pricing: Selling below cost
with the intention of punishing a
competitor or gaining higher long-term
profits by putting competitors out of
business.
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PUBLIC POLICY AND PRICING
Pricing Across Channel Levels
Retail (resale) price maintenance
is when a manufacturer requires a
dealer to charge a specific retail price
for its products.
Deceptive pricing occurs when a
seller states prices or price savings that
mislead consumers or are not actually
available to consumers.
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PUBLIC POLICY AND PRICING
Pricing Across Channel Levels
Deceptive pricing
Scanner
fraud: Failure of the seller to
enter current or sale prices into the
computer system.
Price confusion results when firms
employ pricing methods that make it
difficult for consumers to understand
what price they are really paying.
PSYCHOLOGICAL PRICING
It is used to lessen the impact of the actual
pricing in the consumers mind
It is used as a surrogate to indicate the product
quality or esteem
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NEW METHODS OF PRICING
Group Pricing
Gain and Risk sharing pricing
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GEOGRAPHICAL PRICING
Different pricing at different locations
Could be in terms of barter, countertrade and
foreign currency
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DISCOUNTS AND ALLOWANCES
Early payment
Off season
Bulk purchase
Retail discount
Cash discount
Trade in allowance
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PROMOTIONAL PRICING
Loss leader pricing
Special event pricing
Cash rebate
Low interest financing
Longer payment terms
Warranties and service contracts
Psychological discounting
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DISCRIMINATORY PRICING
Customer segment
Product form
Image pricing
Location pricing
Time pricing
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PRECONDITIONS
Market
must be segment able
The lower price segment should not be
able to resell the product to the higher
price segment
The competitors must not be able to
undersell the firm in the higher price
segment
Should not breed customer resentment
and ill will
Price discrimination should not be illegal
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PRODUCT MIX PRICING
Product line pricing
Optional feature pricing
Captive product pricing
Two part pricing
Byproduct pricing
Product bundling pricing
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INITIATING PRICE CUTS
Excess plant capacity
Competition
Aggressive pricing
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INITIATING PRICE INCREASES
When demand exceeds supply
When costs go up
Govt. policies
Reduce/remove discounts and rebates
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INDIRECT PRICE INCREASES
Shrinking pack size for same price
Substituting less expensive raw materials
Reducing product features
Removing product services
Using less expensive packaging material
Reducing the no. of packs and sizes offered
Creating new economy brands
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REACTION TO PRICE CHANGES
Customer reaction
Competitor reaction
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RESPONDING TO COMPETITOR
PRICE CHANGES
Maintain price
Maintain price and add value
Reduce price
Increase price and quality
Launch a low price fighter
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Thank You
[email protected]
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