Pricing strategy Assignment

Submitted by
Rohan Bajaj 2013238
Sumant Kharbanda 2013294

Chapter 1
Q 1) Define Strategic Pricing and differentiate it from more tactical approaches such as
cost-driven, market driven or competitor-driven pricing.
Ans) Strategic pricing sets a product's price based on the product's value to the customer, or on
competitive strategy, rather than on the cost of production. This approach recognizes that
people often make purchasing decisions based more on psychology than on logic, and that
what's most valuable to the customer may not be what's most expensive to produce.
What customers are willing to pay for a product may be vastly more, or less, than a company
would charge if it simply priced based on cost. Discovering what consumers value about the
product and how much they value it can let a company increase its price or might suggest that
a new product has no chance of turning a profit. For every 1 percent of price increase customers
are willing to pay, companies receive 7 to 8 percent higher profits. In this model the product's
price is usually set by a marketer or salesperson rather than by the operations and development
team.
Traditional pricing is set either based on the cost of production or on the price that competitors
are charging. Sometimes this is a reasonable approach; for example, government contractors
are often required to bid for projects based on cost plus markup. But when multiple competitors
produce the same product at the same price, the only way to compete is to offer a discount.
Pricing a company's product strategically is therefore key to avoiding price wars.

Q2) Introduce the identifying characteristics of strategic pricing.

Ans) Characteristics of strategic pricing :

Proactive Strategic pricing follows an approach to a business situation that involves

anticipating market and competition changes in advance of their actual occurrence and
making appropriate organizational shifts in response. Many high technology business
operators need to take a more proactive strategy to deal with the rapidly changing
marketplace for their company's products.

Value Based - Value-based pricing is about coming up with a price that your customers
are willing to pay. Value-based pricing (VBP) is the most highly recommended pricing

technique by consultants and academics. The basic concept is setting a price to capture
the majority of what your customers are willing to pay.
Strategic pricing takes into account how much value the customer is going to get out
of that particular product and then keeping that in mind he sets the final price of the
product.

Profit Driven - A profit-oriented pricing strategy involves setting prices for your
products that will guarantee you'll make money on each sale. You determine your cost
for manufacturing each product, then add a percentage for profit. There are some
strategies and issues you should review before setting prices in this manner. While
profits are the goal of any business, setting prices based on profit goals can present
some problems for your business. If competitors price similar products for less, you
may have to weather some lost sales. Though you can price each product to guarantee
a profit, if you find yourself at the high end of the price range, be prepared to lose
customers who are bargain hunters. Having the highest-priced product may not be
entirely negative; many companies such as Apple and Cadillac routinely charge more
than competitors but attract a quality-oriented customer. If you can compete on quality,
you may be able to maintain your profit-oriented pricing strategy.

Q3) Define the five elements of a pricing strategy and illustrate how they work in concert
to maximise profitability.
Ans) The five elements of a pricing strategy

Value Creation - Value creation is the primary aim of any business entity. Creating
value for customers helps sell products and services, while creating value for
shareholders, in the form of increases in stock price, insures the future availability of
investment capital to fund operations. From a financial perspective, value is said to be
created when a business earns revenue (or a return on capital) that exceeds expenses (or
the cost of capital). But some analysts insist on a broader definition of "value creation"
that can be considered separate from traditional financial measures. "Traditional
methods of assessing organizational performance are no longer adequate in today's
economy," according to ValueBasedManagement.net. "Stock price is less and less
determined by earnings or asset base. Value creation in today's companies is
increasingly represented in the intangible drivers like innovation, people, ideas, and
brand."

Price structure - Details of different prices and discounts offered on different order
sizes. The marketer is responsible for developing a pricing structure which is Proactive,
Consistent and Transparent. Only the will your customer trust your pricing policy
and pricing approach in the market.

Price and Value Communication - Price and Value communication involves

communicating credibly, in monetary terms, the differentiating benefits of your
product. The goal, particularly for a higher-priced product, is to establish for the
customer the value identified during the value creation stage. Without that, you run
the risk that the purchasing department does not know the value of your differentiating
benefits to their company, or that they will not acknowledge the value, even if they do
know what it is. Once you have established the economic value, or at least have opened
a discussion about what it is, you no longer need to justify your price premium relative
to the competition. Instead, you can sell or promote your discount relative to the added
value that you deliver. Or, to describe value communication in the negative, you can
show that your lower-priced competitors are none-the-less overpriced because the
savings from buying their products is insufficient to compensate for the value lost by
not buying your product!
In order to implement and execute a successful value-based strategy, it is critical that
you address value managementnot just price managementsystemically. Failure to
include an understanding of value in offer development and customer communication
activities will result in a disconnect between what product teams are building, what
marketing is communicating, and what sales is selling, leading to fewer profitable sales
and poorer financial performance.

Pricing Policy - The policy by which a company determines the wholesale and retail
prices for its products or services. The company needs to decide how much to charge
to what type of a customer.
Whether the company wants to have a different pricing policy fr loyal cutomers or they
want to have a single and consistent pricing policy for all its customers.

If the company plans to give discounts then on what basis they will calculate the
discount. Is it going to be on the basis of quantity purchased or dynamic pricing i.e
different price on different timings.

Price Setting This is the final and the most important level in the pricig pyramid or
the most important element of pricing strategy. At this level, the company actually
determines the price of the product or service it is offering.
The process of coming up with a cost to consumers of a good or service produced by a
business. Marketing managers often influence the price setting process for goods and
services that they help promote, although the price level of a product is typically set
based on its production and distribution costs, as well as the value of the product
perceived by targeted consumers.

If all the above elements of pricing strategy are carried out, keeping in mind the relevance
and importance of the other elements, the company is bound to have an effective and
efficient pricing strategy.

Chapter 2
Q1) Define value and its role in pricing strategy.
Ans) The term value commonly refers to the overall satisfaction that a customer receives from
using a product or service offering.
The value at the heart of pricing strategy is not on use value but is what economists call
economic value or exchange value. Economic value depends on the alternatives customers have
available with them to satisfy the same need. Some people consider cheap products to be the
product of choice because of low price whereas some consider them as the only products they
do not want to buy as they are not sure about the quality of that cheap product. Hence, the
economic value may differ from person to person.
The economic value accounts for the fact that the value one can capture for commodity
attributes of an offer is limited to whatever competitors charge for them. Only the part of
economic value associated with differentiation, which we call differentiation value, can
potentially be captured in the price.
Differential value comes in two forms, monetary value and psychological value.
Monetary value represents the total cost savings or income enhancements that a customer
accrues as a result of purchasing a product. monetary value is the most important element for
most business to business purchases. When a manufacturer buys high speed switching
equipment for its production line from ABB, a global electrical electrical equipment
manufacturer, it gets products with superior reliability that minimises power supply. For ABBs
customers this efficiency is the monetary value as because of this efficiency they are saving on
money, which means they are earning more in a way.
Psychological value refers to the many ways that a product creates innate satisfaction for the
customer. A rolex watch may not create any tangible satisfaction fot the customer but a certain
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segment if watches wearers derives deep psychological benefits from the prestige and beauty
associated with the ownership of that watch.

Q2) Describe the approaches to estimate value for different types of benefits.
Ans) Marketers have historically invested considerable efforts to develop effective value
propositions to represent their company and products. And a few would argue that an effective
value proposition, a concise statement of customer benefits, is an essential input to brand
building and sales conversions. But a general statement of value is insufficient input to pricing
decisions because it lacks the detail and quantification needed to shape strategy.

The various approaches to estimate value are:-

Competitive reference prices Reference pricing refers to how much consumers expect to
pay for a good in relation to other competitors and the previously advertised price.
1. Reference pricing could refer to a situation when a firm sells price just below the
main price of its competitor. (BD)
2. Reference pricing also refers to a situation where a firm sales a good at a large
discount to a previously advertised reference price (OFT)
When buying goods consumers give importance to comparing the price of the good
with a reference price The price that they would usually expect to pay or the price
they think the good is worth using all previous data.
What Determines the Reference Price for a Product?

Memories of past prices. What consumers have paid in the past for similar products
Prices set by market leader with most brand loyalty. For example, in the cola market,
people would instinctively think of what coca-cola would cost. If Tesco sell 20%
cheaper, then they are paying a lower price.
Price of related products and services. For example, if coach travel to London is 15,
that will play some role in creating a reference price for train tickets.
Nature of industry. For example, people have come to expect large discounts in clothes
shops. When they see clothes on sale at full price, they may remember that these prices
are likely to be cut at a later stage.
Other products in the line. For example, if you introduce a more high expensive, high
end product, it may look lower end sales lines look more attractive. For example,
premium organic bread at 3.00 a loaf, makes an ordinary loaf at 1.25 look relatively
more attractive.

Estimating Monetary Value - Sellers must understand the monetary value of their offering to
the customer. They must be able to estimate the advantage that their product provides to their
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business customers. A company professes to understand the benefits that its product will be
able to provide to the customer. But one product is capable of providing different levels of
benefits and hence different amount of value to different customers.
The same generic benefit can be of different value to different customers depending upon their
specific requirements, conditions of existence and their competitive criteria. A machine capable
of giving high precision will be of immense value to a company, competing on the exacting
requirements of its customers and will be able to fetch a high price, but will be of limited value
to a company competing primarily on price.
Both, the buyers and sellers intuitively understand the usefulness of a product to the buyer. But
they do not know the value of the product to the buyer in monetary terms. Therefore neither
the buyer nor the seller knows the amount of money the buyer will be able to save or earn if
the buyer buys a particular machine from the seller.
This has serious disadvantages. The seller is not able to build definitive argument in favour of
his product and he does not know the price that he should charge. The seller ends up competing
on generic value of the product and rhetoric and charging lower price to beat the competition.
The buyer does not know the true value of the product he is buying and is always suspicious
of the price that the seller is charging. It is the responsibility of the seller to find out the
monetary value of their product to the customer. This can be an onerous task. The employees
of the seller company will have to delve deep into the functioning of the buyer company to find
out how their product is adding value to the operations of the buyer company.
This is likely to turn into a detailed and deep study of the operations of the buyer company and
cannot be done unless the employees of the buyer company co-operate whole-heartedly in the
endeavour. But the process will help the buyer company to understand its operation better.
It will understand the monetary value of different levels of performance in various areas of
operation. For example, if the product of the seller provides finer tolerance by a certain amount
than the competitors product, the seller company has to put a monetary value to this particular
advantage of its product.
The process of finding the monetary value of finer tolerances can be very long-winding and
will involve many functional departments of the buyer company. The rejection rates of the
machines with lower and higher tolerances will have to be found and monetary value has to be
assigned to them.
The time wasted in producing defective pieces will have to be found and a monetary value will
have to be assigned to it as well. Because of finer tolerance, the product of the buyer will be
more acceptable in the market and it may be able to sell the manufactured product at a higher
price to a higher number of customers.
Monetary value has to be put to this advantage. There may be many more advantages of finer
tolerances which will have to be documented and monetary value put to it. The product of the
seller may have many more advantages other than the fine tolerance it is able to give.

Monetary value will have to be given to all these advantages. The process may look very
cumbersome at the outset but both companies will have to endure it as the final results will be
illuminating for both of them.
If most of the buyers of the sellers product have similar operations, then a study of the
operations of a few representative companies can be done and it can be safely assumed that all
the buyers are receiving similar value from the sellers product. Once the monetary value of a
sellers product is determined, its salespersons can quote the figure to win orders.
Industrial buyers have long been believed to be rational buyers. And sellers have been focusing
on issues like productivity, quality, output rates etc., in their discussions and negotiations with
industrial buyers. But it is time to trade up from rhetoric to substance and calculate the
monetary value of the advantages of its offerings to the buyer.
Estimating Psychological Value - Psychological value has to do with the strength of the desire
for an object or aversion against it, and since it is psychological value that we are studying, our
analysis must not be limited to physical objects. Our analysis must cover also the value of
psychological objects which are not always limited physical entities that may be perceived and
possessed.
The object which has psychological value may be a physical object. Its value is measured by
the strength of the desire to possess it. This is not the same as the rational evaluation of its
utility, because the free air has, by any rational criterion, infinite utility, always being
immediately necessary for life. But this object is so common that rarely do we experience any
strong desire for it and consequently it does not normally have much psychological value. A
basic principle for the evaluation of an object is that a desire for it must be experienced before
it can be said to have psychological value. If situations arise in which air to breathe is at a
premium, then certainly air takes on psychological value. The concept of value,
psychologically considered, is then independent of the rational estimate of the utility of the
object, and it is
Psychological value refers to the many ways that a product creates innate satisfaction for the
customer. A rolex watch may not create any tangible satisfaction fot the customer but a certain
segment if watches wearers derives deep psychological benefits from the prestige and beauty
associated with the ownership of that watch.
Q3) Show how value based segmentation can enable a company to more profitably align
what it offers with differences in what consumers are willing to pay.
Ans) Segmentation is not a new technique, as it is time and again used as a product-centric way
of dividing a companys population by focusing on demographics related to the business at
hand that align products to market segments. What is new is the process of dividing a firm's
population that shifts to a customer-centric segmentation, where the polestar is on customer
attributes of needs and value. The attributes appertain to the relationship between a customer
and the firm, and the customers lifetime value. A successful customer-value based
segmentation (CVS) is one that provides an understanding of when and how a customer is
likely to derive value, and how the firm can effectively implement marketing programs to
provide that customer value and achieve its marketing goals. The purpose of this article is to
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illustrate with a financial services organization case study the CVS process: 1) Perform CVS,
2) Perform targeted (response) modeling per segment from the CVS, 3) Develop segmentbased positioning statements, and marketing strategies that will achieve favorable customer
response, and 4) Implement segment-based marketing strategies through marketing
communication and sales force activities
Segmentation is one of the key functions of marketing. Companys profitability depends on
customer segmentation. Value based segmentation techniques talks about defining
segmentation based on value placed by customers on the product. A value based segmentation
1. Determine basic segmentation criteria that create natural fences between customer
groups
2. Identify discriminating value drivers
3. Determine your operational constraints and advantages with regard to those value
drivers
4. Create primary segments based on overlap of customer needs and your internal
constraints, and secondary segments based on most important needs
5. Create detailed segment descriptions for easier identification in the field
6. Develop metrics and fences to operationally separate conceptual segments
Good value based segmentation has following characteristics:

Based on the segments profit potential i.e., the value the segment receives relative
to your operational ability to service the segment
Needs between segments are different enough that you can design different offerings at
different price points
Able to facilitate the creation of product/service offerings
Based on identifiable criteria that easily separate one segment from another
Helps managers to make better marketing and pricing decisions (statistical significance
is a nice-to-have, not a necessity)

Actionable in the field, i.e. easily enabling customers to make trade-offs between offerings and
willingness to pay.

Chapter 3
Q1) Discuss the challenges of segmented price structure.
Ans) A segmented price structure is one that causes revenues to vary with differences in the
two key elements that drive potential profitability: the economic value that customers receive
and the incremental cost to serve them.
The most obvious disadvantage in price segmentation is that when you lower a price for a
particular segment (say Senior Citizens, students) then you are getting a lower sales revenue,
hence lower profit, while your cost of goods sold remains the same. Another disadvantage must
be the additional cost of market research, and advertising targeting that price market segment.
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The additional costs involved in making plans and keeping track of performance against those
plans. The additional costs of keeping records for each of these price market segments. It may
well be that having price segments increases to need for training the sales force to operate in
the new price segment.

Wholesalers will often have price segmentation for their products. This is usually done
depending upon quantities ordered. They have the normal wholesale price per article, and then
offer discounts of say 2.5% on quantity below 10, 5% for orders of 10-100, 7.5% for orders of
101 - 200, and 10% for orders over 200.

Q2) Examine the mechanisms to maintain segmented structures including, Price offer
configuration, price metrics and price fences.
Ans) A segmented price structure is one that causes revenues to vary with differences in the
two key elements that drive potential profitability: the economic value that customers receive
and the incremental cost to serve them. There are three mechanisms that one can use to maintain
such a segmented structure: price offer configuration, price metrics and price fence. Each is
appropriate for addressing different reasons for the existence of value based segmentation.

Price offer configuration when differences in the value of an offer across segments is
caused by differences in the value associated with features, services, or both, a seller
can segment the market by configuring different offers for different segments. Using
offer design to implement segmented pricing requires minimal enforcement of the
segments because customers self select the offer that determines their prices. The
segment pricing of airline seats is based partially on offer design, with passengers freely
choosing whether they want the price that includes the ability to cancel or change flights
freely or want to forgo that feature in return for a much more discounted price.
Optimising offer Bundle
Designing segment specific Bundles
Unbundling strategically

Price metrics - Price metrics are simply the unit by which price is applied to the product
or service. Barbers serving primarily male clientele typically charge by the haircut a
metric that seems fair to customers and is profitable for the barber because each haircut
takes approximately the same amount of time. But pricing by the haircut is less
profitable in hair salons serving both men and women because womens hair is often
longer and takes more time to cut. Pricing by the haircut would mean that haircuts with
longer hair would be less profitable than those for shorter hair. To address this issue,
salons frequently augment the per haircut metric with an additional per length
metric in which customers with longer hair pay a higher price.
An interesting aspect of this example is that the metric was changed to align price with
cost-to-serve and not value. Strategic pricing requires using the price structure to drive
profitability by capturing value created across segments as well getting paid for cost
differences between segments. This last point is frequently overlooked by marketers
with a strong customer orientation because they fail to appreciate how price can be used
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as an incentive to change customer behaviors in a way that reduces costs. Although it

is unlikely that customers would adopt shorter hair styles simply to reduce the cost of
a haircut, in many instances price can be used to shape customer behaviors. In business
markets, for example, customers that have a pressing need for rush orders will gladly
pay more for a guarantee of quick delivery. We frequently counsel companies to
augment their per unit pricing metric with a delivery time metric that forces
customers that value quick delivery to pay for it. Although this price structure ensures
the company gets paid for value delivered, it also creates an incentive for customers
that would prefer quick delivery but are not willing to pay for it to reduce their usage
of a high cost service.

Price fences - Fences are another way to create a price structure to align price with value
and cost-to-serve. This type of pricing structure sets the upper limit and the lower limit
of the price, i.e, it sets the range beyond which the price cannot exceed.
Every airline traveler is familiar with the price fences and their effect on the price paid.
Why do airlines put policy restrictions on discount tickets such as requiring a Saturday
night stay and 14 day advance purchase requirements? The airlines recognize they are
serving two segments that value an airline seat very differently. Business travelers
require flexibility in their travel plans and may have to travel with very short notice to
serve a customer or to address a pressing company issue. Leisure travelers that plan
vacations months in advance do not value flexibility as highly and are willing to commit
to their travel far in advance in exchange for better prices. By using the policy fences,
the airlines have created a price structure that captures the value of travel flexibility
from only those customers for whom it is important.

Chapter 4
Q1) Explain how to develop value-based messages to reflect key product characteristics.
Ans) The first step in developing a value message is determining which customer perceptions
to influence. We start with an understanding of the value drivers that are deemed most
important to a customer segment. The goal is to help the customer recognise the linkages
between a products most important differentiated features and the salient value drivers. Two
product characteristics determine how you should try to influence buyer perceptions of key
value drivers: the target customers relative cost of search for information about the
differentiating attribute of your offering and the type of benefits sought monetary or
psychological.
Relative cost of search is the financial and nonfinancial cost, relative to the expenditure in the
category, that a customer must incur to determine differences in features and benefits across
alternatives. The size of the expenditure is important because investing even five minutes
comparing product alternatives may be too mch to make a more informed choice about a $5
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purchase, but spending an hour researching alternatives before spending $5000 would seem
merely prudent. Several other factors affect the relative cost of search including search
characteristics of the products and customers expertise in that category.
Types of benefits sought also influences communication strategy. Measurable monetary
benefits such as profits, cost savings, or productivity motivate many purchases and translate
directly into quantified value differences among the competing brands. But, for other
purchases, especially consumer products, psychological benefits such as comfort, appearance,
pleasure, status, etc play a critical role in customer choice for goods in which value drivers are
most important to the customer, value quantification should be a central part of the message
because the data calls attention to any gaps between the customers perceptions of value and
the actual monetary value of the product.
Q2) Examine how to adapt value-based messages for important purchase characteristics.
Ans) Value based communication must not only be adjusted for product characteristics such as
cost of search and benefit type, but also for the customers purchase context. Consider the
challenge facing Lenovo, a leading maker of netbook computers. Netbooks are small
computers with limited computing power designed to provide inexpensive access to the internet
and basic home office functions such as word processing. The value drivers for Lenovos
netbooks are well understood. Their light weight and small size make them highly portable for
travellers or students. They are exceedingly reliable because of their simple design and the fact
that they run only mature operating systems such as Microsofts Windows XP.
Given the relatively clear linkage between product attributes and customer value drivers,
crafting a value message would seem to be a straightforward exercise. But consider how the
message would have to be adjusted depending on the specifics of the purchase context. Suppose
the target customer was a long time laptop buyer who was thinking about replacing his 5 yr old
Dell computer. Since this customer has not been in the market for a new computer since before
netbooks were introduced, he might not even know what a netbook is, much less that Lenovo
is a leading manufacturer.
It is not until the customer has progressed from awareness and through consideration of the
product that he is ready to receive and process detailed product related value messages. So once
again the Lenovo marketing managers must be ready to adapt market communications to detail
the superior performance of their computer versus other notebooks as well as versus full sized
laptops. This might be accomplished by product comparison tools on the Lenovo website or by
working with the channel partners to promote differentiated features of the product. Finally
after progressing through a number of steps in the buying process, the customer may be ready
to think about price value trade-offs and to make a purchase.
Q3) Show how to communicate price to positively influence customers willingness to pay.
Ans) Although it is easy to understand how value can be influence, particularly the perceived
value of psychological benefits, prices would seem to be hard data that are relatively easy to
compare and communicate. But research over the years has repeatedly shown that people do
not necessarily evaluate price logically. Customers can perceive the same price paid in return
for the same value differently depending on how it is communicated.

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Four aspects of price perception and their implications for price communication

Proportional price evaluation

Reference prices
Perceived fairness
Gain or loss framing

Proportional price evaluation Buyers tend to evaluate price differences proportionally

rather than in absolute terms. For example, according to one research study if customers would
leave a store and go to one nearby to save $5 on a purchase. Of respomdants who were told
that the price in the first store was $15, some 68% said they would go to the other store to by
the product for $10. Of respondents who were told that the price was $125 at store 1, only 29%
would switch stores to buy the product for $120. When the $5 difference was proportionally
more then the customers valued it, but when it was not substantial enough they dint value it.
This phenomenon is also called as the Weber-Fechner effect. The significance of this effect is
that price change perceptions depend on the percentage, not the absolute difference, and that
there are thresholds above and below a products price at which price are noticed or ignored.
Reference prices - The cost that consumers anticipate paying or consider reasonable to pay for
a particular good or service. The marketing department of a business will often attempt to assess
the reference price for each of the products or services they are promoting in order to set pricing
levels appropriately to achieve their marketing goals.
A reference price is a strategy where a particular good or service being sold is made to look
more attractive in terms of price by placing it next to a more expensive alternative. Here, the
price of the expensive alternative serves as a reference price for the good to be sold.
Perceived fairness - A fair price is the price point for a good or service that is fair to both
parties involved in the transaction. Perception of price fairness, a concept derived from equity
research, may be a variable moderating perceived sacrifice and perceived product value, and
therefore willingness to buy. Pricing research has traditionally viewed consumer judgments of
price fairness in terms of consumers' relationships with sellers. Price acceptability is affected
by perceptions of the equity, or fairness, of market prices.
Gain-Loss Framing - Gain or loss framing refers to phrasing a statement that describes a
choice or outcome in terms of its positive (gain) or negative (loss) features. A message's
framing does not alter its meaning. For example, the gain-framed message One fourth of
people will survive the attack is semantically equivalent to the loss framed message Three
fourths of people will perish in the attack. Framing does not refer to whether a communicator
portrays a choice or outcome as good or bad. Instead, it refers to whether an option or
possibility is communicated in terms of its positive or negative consequences. In one type of
gainloss framing, different consequences framing, one states a statistic of the likelihood or
quantity of either the positive or the negative outcome.

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Chapter 5
Q1) Role of pricing policies in developing a strategic approach to pricing
Ans) This approach to pricing enables companies to either fit costs to prices or scrap products
or services that cannot be generated cost-effectively. Through systematic pricing policies and
strategies, companies can reap greater profits and increase or defend their market shares.
Setting prices is one of the principal tasks of marketing and finance managers in that the price
of a product or service often plays a significant role in that product's or service's success, not
to mention in a company's profitability. Generally, pricing policy refers how a company sets
the prices of its products and services based on costs, value, demand, and competition. Pricing
strategy, on the other hand, refers to how a company uses pricing to achieve its strategic goals,
such as offering lower prices to increase sales volume or higher prices to decrease backlog.
managers can begin developing pricing strategies by determining company pricing goals, such
as increasing short-term and long-term profits, stabilizing prices, increasing cash flow, and
warding off competition. Managers also must take into account current market conditions when
developing pricing strategies to ensure that the prices they choose fit market conditions. In
addition, effective pricing strategy involves considering customers, costs, competition, and
different market segments.
Pricing strategy entails more than reacting to market conditions, such as reducing pricing
because competitors have reduced their prices. Instead, it encompasses more thorough planning
and consideration of customers, competitors, and company goals. Furthermore, pricing
strategies tend to vary depending on whether a company is a new entrant into a market or an
established firm. New entrants sometimes offer products at low cost to attract market share,
while incumbents' reactions vary. Incumbents that fear the new entrant will challenge the
incumbents' customer base may match prices or go even lower than the new entrant to protect
its market share. If incumbents do not view the new entrant as a serious threat, incumbents may
simply resort to increased advertising aimed at enhancing customer loyalty, but have no change
in price in efforts to keep the new entrant from stealing away customers.
The following ways explain various companies develop pricing policy and strategy. First, costbased pricing is considered. This is followed by the second topic of value-based pricing. Third,
demand-based pricing is addressed followed by competition-based pricing.

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Q2) Link between a firms pricing actions and customer expectations future purchase
behaviours.

Q3) Common pricing policies and their impact on profitability

Ans) The following explain various ways companies develop pricing policy and strategy. First,
cost-based pricing is considered. This is followed by the second value-based pricing. Third,
demand-based pricing is addressed followed by competition-based pricing.
a) Cost Based Pricing- The traditional pricing policy can be summarized by the formula:
Cost + Fixed profit percentage = Selling price.Cost-based pricing involves the
determination of all fixed and variable costs associated with a product or service. After
the total costs attributable to the product or service have been determined, managers
add a desired profit margin to each unit such as a 5 or 10 percent markup. The goal of
the cost-oriented approach is to cover all costs incurred in producing or delivering
products or services and to achieve a targeted level of profit.By itself, this method is
simple and straightforward, requiring only that managers study financial and
accounting records to determine prices. This pricing approach does not involve
examining the market or considering the competition and other factors that might have
an impact on pricing. Cost-oriented pricing also is popular because it is an age-old
practice that uses internal information that managers can obtain easily. In addition, a
company can defend its prices based on costs, and demonstrate that its prices cover
costs plus a markup for profit.
b) Value Based Pricing- Value pricers adhere to the thinking that the optimal selling price
is a reflection of a product or service's perceived value by customers, not just the
company's costs to produce or provide a product or service. The value of a product or
service is derived from customer needs, preferences, expectations, and financial
resources as well as from competitors' offerings. Consequently, this approach calls for
managers to query customers and research the market to determine how much they
value a product or service. In addition, managers must compare their products or
services with those of their competitors to identify their value advantages and
disadvantages.Yet, value-based pricing is not just creating customer satisfaction or
making sales because customer satisfaction may be achieved through discounting
alone, a pricing strategy that could also lead to greater sales. However, discounting may
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not necessarily lead to profitability. Value pricing involves setting prices to increase
profitability by tapping into more of a product or service's value attributes.
c) Demand Based Pricing- demand-based pricing policies are, like value pricers, not
fully concerned with costs. Instead, they concentrate on the behavior and characteristics
of customers and the quality and characteristics of their products or services. Demandoriented pricing focuses on the level of demand for a product or service, not on the cost
of materials, labor, and so forth.According to this pricing policy, managers try to
determine the amount of products or services they can sell at different prices. Managers
need demand schedules in order to determine prices based on demand. Using demand
schedules, managers can figure out which production and sales levels would be the most
profitable. To determine the most profitable production and sales levels, managers
examine production and marketing costs estimates at different sales levels. The prices
are determined by considering the cost estimates at different sales levels and expected
revenues from sales volumes associated with projected prices.The success of this
strategy depends on the reliability of demand estimates.
d) Competetion Based Pricing- company sets its prices by determining what other
companies competing in the market charge. A company begins developing
competition-based prices by identifying its present competitors. Next, a company
assesses its own product or service. After this step, a company sets it prices higher than,
lower than, or on par with the competitors based on the advantages and disadvantages
of a company's product or service as well as on the expected response by competitors
to the set price. This last consideration-the response of competitors-is an important part
of competition-based pricing, especially in markets with only a few competitors. In
such a market, if one competitor lowers its price, the others will most likely lower theirs
as well.This pricing policy allows companies to set prices quickly with relatively little
effort, since it does not require as accurate market data as the demand pricing.
Competitive pricing also makes distributors more receptive to a company's products
because they are priced within the range the distributor already handles. Furthermore,
this pricing policy enables companies to select from a variety of different pricing
strategies to achieve their strategic goals. In other words, companies can choose to mark
their prices above, below, or on par with their competitors' prices and thereby influence
customer perceptions of their products.

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Chapter 6
Q1) Price setting process and understand tradeoffs between strategic factors such as
costs, customer response, and competition to arrive at the most profitable price.
1. Define the price window
Set initial price range based on differential value and relevant questions
Posers
Appropriate Price ceiling for this product
Incorporating reference prices into the price window
Role of costs in setting the initial price range

2. Set initial Price

Determine the amount of differential value to be captured by the price
Posers
Overall Business objectives
Non value related determinants of price sensitivity
Price volume tradeoffs and their impact on profitability
3. Communicate Prices to market
Develop communication plan to ensure prices are perceived to be fair
Posers
Best approach to communicate price changes
Considerations for implementing significantly higher prices

Q2) Communicate new pricing internally and externally

Ans) Simplify lead capture from tradeshows and conferences If your business participates in
such events, you know theyre a great tool for generating interestand lots of business cards.
Use Web-to-lead functionality People who visit your website are already interested in your
product or service. Know your target audience Before creating your Web-to-lead form, think
about what information you want to collect in standard and custom fields during the initial
contact.
Step #1: Align sales and marketing. You spend lots of resources developing leads. Now make
the most of those efforts by making sure marketing and sales work together so no lead is
overlooked or dropped. Many companies use a three-step process for processing leads:
Marketing nurtures leads, inside sales qualifies the leads and converts them to opportunities,
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and sales works the opportunity. Others use just two steps: Marketing converts the leads to
sales opportunities when they meet agreed-upon criteria, such as a high lead score. Sales then
works the opportunity.
Step #2: Capture more leads More leads mean more potential business.
Step #3: Work leads efficiently Once you have lots of leads, how do you make the most of
them? Because leads differ in quality, you should prioritize them to make sure reps focus on
your hottest leads first. Prioritize leads with lead scoring Use a point system to assign values
to characteristics that align with successful sales. Categorize scored leads Once scored, you
can categorize leads into levels of priority, such as A, B, and C. Meet regularly to fine-tune the
criteria for these categories. If your threshold for an A lead is usually 50, Use assignment rules
to route leads Its a good idea to assign unqualified leads, such as category C leads, to a
marketing queue to be nurtured until theyre ready to buy.
Step #4: Track your lead-generation efforts To improve lead generation, you need to know
which marketing tools work best for you. Is it email campaigns? Google AdWords campaigns?
Webinars? Trade shows? Heres how to find out: Identify and track lead sources Find out
where you get most of your leads. Enter the lead source for each opportunity coming into the
funnel so you can track ROI as it moves through the funnel. Use the lead history report to
analyze revenue and pipeline The lead history report can tie lead criteria such as lead source,
industry, or annual revenue to opportunity amounts, giving you the power to slice and dice
revenue and pipeline for different leads. Use campaigns for deeper metrics.Use reports and
dashboards .

CHAPTER 9
Q1) Barriers that prevent good pricing strategies from being adopted across the
organization
Ans) The financial and political environment can impact on healthcare professionals desire,
motivation and ability to make changes. At an organisational level, financial systems may not
facilitate payments for new interventions and resources may be constrained. Incentive
mechanisms and regulatory processes may not be aligned with whats needed to implement the
changes. Evidence shows that regulation and national target setting bring about improvements
in the quality of healthcare. Mandatory reporting has been shown to bring about improvements
in patient care. There is also evidence to show that continued professional development is
linked to improved quality of care and better patient outcomes.
Q2) Structural approach of formal pricing organization
Ans) Formal structure is primarily concerned with the relationship between authority and
subordinate. A typical organization chart illustrates the formal structure at work in a company
or part of a company. The hierarchical organization begins at the top with the most senior leader
and then cascades down to the subordinate managers and then subordinate employees below
those managers. There are job titles, financial obligations and clear lines of authority for each
box on the organization chart.

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Q3) Decision rights matrix and process mapping

Ans Decision Rights Matrix- Also called: Pugh matrix, decision grid, selection matrix or grid,
problem matrix, problem selection matrix, opportunity analysis, solution matrix, criteria rating
form, criteria-based matrix.
A decision matrix evaluates and prioritizes a list of options. The team first establishes a list of
weighted criteria and then evaluates each option against those criteria. This is a variation of the
L-shaped matrix.
When to Use a Decision Matrix
When a list of options must be narrowed to one choice.
When the decision must be made on the basis of several criteria.
After the list of options has been reduced to a manageable number by list reduction.
Typical situations are:
When one improvement opportunity or problem must be selected to work on.
When only one solution or problem-solving approach can be implemented.
When only one new product can be developed.
used, such as 2, 1, 0, 1, 2 for a five-point scale or 3, 2, 1, 0, 1, 2, 3 for a sevenpoint scale. Again, be sure that positive numbers reflect desirable ratings.
Multiply each options rating by the weight. Add the points for each option. The option
with the highest score will not necessarily be the one to choose, but the relative scores
can generate meaningful discussion and lead the team toward consensus
Process Mapping- process mapping refers to activities involved in defining what a business
entity does, who is responsible, to what standard a business process should be completed,
and how the success of a business process can be determined.The main purpose behind
business process mapping is to assist organizations in becoming more efficient. A clear and
detailed business process map or diagram allows outside firms to come in and look at
whether or not improvements can be made to the current process.Business process mapping
takes a specific objective and helps to measure and compare that objective alongside the
entire organization's objectives to make sure that all processes are aligned with the
company's values and capabilities.
Q4) Incentives structure to encourage more profitable behaviours
Ans) Building an effective incentive plan requires a company to align interdependent elements
within the business in a way that communicates a clear behaviour standard to its employees.
The plan must have a purpose; it must project the potential that can be realized if the purpose
is fulfilled and identify the people that are in a position to impact those outcomes. It must also
have a way to standardize the benefit or reward it is going to provide employees and determine
how much of increased shareholder value it is going to allocate to employees and how its value
will be measured. This interdependent alignment is held together by forming the right measures
and metrics in your reward strategies - especially the company's incentive plans. Those
indicators should be measurable although they may or may not be directly reflected in the
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financial statements. The measures chosen should help the organization track progress towards
strategic objectives and reflect improvement in productivity.
Profit-Based Allocation
Under this approach to building metrics, a company decides that it will allocate a percentage
of annual profits to employees. The award amount is divided among employees based on a
pre-determined formula. Typically, payouts occur at year end, but some companies prefer to
make those payments quarterly.
Targeted KPIs
Some plans select drivers for their incentive plans that are more within the reach or control of
employees. These are referred to as KPIs (key performance indicators.) The theory behind the
key performance indicator approach is that improvements in the focus and execution of
employees on the issues they are best positioned to impact will lead, ultimately, to
improvements in profits.
Tiered Awards
Incentive targets may be tiered to eliminate an "all or nothing" consequence. Commonly, three
to five tiers are recommended. The payout results at each tier should be significantly greater
than the preceding tier. Often, the plan grid (see below) can help produce this "tiering" effect.

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