Buyers: Instant price comparison : Pricescan.com Name price & have it met : Priceline.

e.com Get product fire : Open Source (Linux) Sellers: Monitor customers behaviour & tailor offers : GE Special prices for certain customers Both: Can negotiate prices online : Ebay

Purchase decisions are based on how consumers perceive prices and what they consider the current actual price to be not the marketers stated price. Customers may have a lower price threshold below which prices signal inferior or unacceptable quality, as well as an upper price threshold above which prices are prohibitive and seen as not worth the money. Eg. A black T-shirt.

Reference Prices Price-quality inferences Price endings

Price cues

 Left to right pricing ($299 vs. $300) Odd number discount perceptions Even number value perceptions Ending prices with 0 or 5 Sale written next to price

 Customers purchase item infrequently Customers are new

Product designs vary over time

Prices vary seasonally Quality or sizes vary across stores

PRICING Adopting the right pricing helps in achieving objectives. Ineffective pricing the reverse
Price Competition Co.s adopt different strategies : In Price Competition, Co. tries to offer services / products at price similar to competition

Non Price Competition Focus on features other than price : quality, service, features, packaging etc. (TESCO Vs. MS)

Select the price objective Determine demand

Estimate costs
Analyze competitor price mix Select pricing method Select final price

SETTING PRICING OBJECTIVES

Survival : Short term, competition, cannot last. Profit Maximization : Choosing one of several alternatives in pricing. ROI : Usually data used to arrive at ROI is not available when prices are set, so Co.s use trial & error. Maximum Market Share : Penetration pricing; Growth rate of a firms market share can be independent of industry performance. Maximum Market Skimming : Price high with new technology / R&D product & then drop price. Product quality : Set prices to reflect product Quality; Taj Hotels, Barista

Price Sensitivity Estimating Demand Curves Price Elasticity of Demand

Price sensitivity
Price Demand Price Demand
But there are exceptions

The product is more distinctive Buyers are less aware of substitutes Buyers cannot easily compare the quality of substitutes The expenditure is a smaller part of buyers total income The expenditure is small compared to the total cost of the end product Part of the cost is paid by another party The product is used with previously purchased assets The product is assumed to have high quality and prestige Buyers cannot store the product

Demand Curve
Can be estimated in many ways: Statistically analyze past prices, volumes sold and devise a relationship based statistical model. Price Experiments : Demand curve can also be measured by changing the price of a product in a market segment & observing demand fluctuations. Surveys

Price elasticity of demand = % change in quantity Demanded % change in price

Types of Costs
Accumulated Production Activity-Based Cost Accounting Target Costing

 Fixed costs Variable costs Total costs

Average cost
Cost at different levels of

production

Activity based Cost Accounting

ABC accounting tries to indentify the real costs associated with serving each customer. It allocates indirect costs like clerical costs, office expenses, supplies, and so on, to the activities that use them, rather than in some proportion to direct costs. Both variable and overhead costs are tagged back to each customer.

Target Costing

ANALYSING COMPETITORS PRICING Demand for a product is influenced by competitors strategies. Careful planning required; otherness pricing wars will ensue / cause exits Inefficient pricing may allow new competitors to come in eg. Detergents Reaction to price changes : a) Status quo; b) equal prices; c) attack prices Co.s have to depend on competitor history, public statements, publicly available data etc. to analyze competitors prices.

SELECTION OF PRICING METHOD

Mark- up Pricing : Firms fix selling price which is cost price + mark up (85 + 15 = 100) Common among retailing; Mark up usually expressed as % of : C.P. (15 / 85 = 17.6% or S.P. 15/100= 15%

SELECTION OF PRICING METHOD Target Return Pricing :

Is set by marketers to achieve a specified ROR on investments or ROI. Usually used by market leaders, GE, Dupont , GM. Target return pricing = Unit cost +
(Desired Cost Invested Capital ---------------------------------------Unit Sales

Eg. Cost of unit : Rs. 200 Investment : Rs. 100000 ROR : 15% Expects to sell : 500 Units Price = 200 + (0.15 100000) / 500 = Rs. 230.

SELECTION OF PRICING METHOD

SELECTION OF PRICING METHOD

Perceived Value Pricing :
Price is based on perceived value by customer. PV = Weighted Average of products attribute (buyers image, warranty, customer support, Suppliers reputation, esteem) Scores usually based on MR. Firms attempt to enhance value by advertising & promotional activities. Risk is in under or over estimating value.

SELECTION OF PRICING METHOD

Going Rate Pricing :
Co. follows prevailing price pattern in the market; Adopts pricing strategy of major player with slight adjustment of prices.

SELECTION OF PRICING METHOD

English auctions Dutch auctions Sealed-bid auctions : : : Ascending Bids Descending Bids Industrial products quote prices in sealed covers; usually for products where price is not fixed or where it is difficult to fix price because of accompanying features.

SELECTION OF PRICING METHOD Differentiated Pricing :

Different prices for the same product at different location or for different customers .

Airlines, Hotels, Privilege Customers, Soft Drinks.

SELECTION OF PRICING METHOD

Value Pricing :
Marketers offer low prices for high quality products / services Not in response to competition but by R & D and improved process methods & reduced costs (TOI. Computer Companies.)

SELECTION OF PRICING METHOD Market Skimming :

When firms develop unique / innovative products / break through technology, they prefer to set high prices & recover sunk costs as quickly as possible. This is more so, if PLC. is short. (Chips, Electronic Items, Microwave)

 Psychological Pricing
Impact of other marketing activities Transfer Pricing Gain-and-risk sharing pricing Impact of price on other parties

Psychological Pricing :
Consumers judge a products quality by price; e.g. perfumes, high end automobiles are status products.

Prices ending in number 9 or 5 increases customer sensitivity; e.g. Price Demand But in the US, Demand 1/3 rd when womens dress prices increased from $ 34 $ 39.

Influence of other Marketing Mix variables :

Usually price set on production cost or cash flow needs; but other costs like distribution, advertising, promotion, are being incorporated. Consumer behavior why, where, when & how a consumer buys becomes easier to understand while buying a product (Hll stocks premium products at C3, less expensive brands at Kirana stores)

Transfer Pricing :
When one division sells goods to another division, price charged is transfer pricing. Could be inter division, inter country.

Pricing impact on others :

Pricing policy affects suppliers, distributors, producers of complementary products, govt. etc.

The Motorola Case

Gain & Risk Sharing Prices:

Buyers dose not accept proposal because of high perceived risk. Seller can offer to absorb part of risk if promised value is not delivered.

Price Adjustments : Adapting the price

Once a pricing pattern has been fixed marketers may need to adjust price while fixing price. Geographical Pricing Discounts/Allowances Promotional Pricing Differentiated Pricing Experience curve Pricing Product Mix Pricing.

Price Adjustments : Adapting the price

Geographical Pricing
If customers are scattered, different pricing for different regions is adopted covering delivery expenses. Different types. Uniform delivery pricing : co. fixes a uniform price for the whole market. FOB : Customer bears transportation cost of goods; ownership is transferred at point of origin (factory/ warehouse) Zone pricing : Markets divided into zones depending on population density, transportation, shipping costs, infrastructure. Basis point pricing : certain locations are basis points; goods dispatched from same basis point are priced same.

Price Adjustments : Adapting the price

Countertrade Barter Compensation deal Buyback arrangement Offset

Price Adjustments : Adapting the price

Discounts/ Allowances Cash discount Quantity discount Functional discount Seasonal discount Allowance

Price Adjustments : Adapting the price

Promotional Pricing :
General idea that promotional prices encourage trial; Off season price discounts result in profits; but promotional prices cant counter new product introduction by competitors; Also customers become very price conscious about products that have frequent promotions.

 Loss-leader pricing Special-event pricing Cash rebates Low-interest financing Longer payment terms Warranties and service contracts Psychological discounting

Price Adjustments : Adapting the price

Discriminatory Pricing :
Companies charge different customers differently for same product on the basis of paying capacity and value of customers; Generally market divided into geographic segments to prevent sale of cheaper editions for profit; e.g. Books; magazines (subscriber vs. stall) e.g. Transportation costs cause discrimination in prices of petrol.

 Customer-segment pricing Product-form pricing Image pricing Channel pricing Location pricing Time pricing Yield pricing

Price Adjustments : Adapting the price

Experience curve Pricing :
New products introduced at low price but price sensitive customers buy; Manufacturing people gain experience & work efficiently; cost of production decreases; Though co. loses revenue initially over time it recovers costs. Industrial products industrial greases / lubricants.

Price Adjustments : Adapting the price

Product Mix Pricing : a) Product Line pricing If more than one product item offered in a line then price set by line rather than individual products : Intel Celeron $ 150, Intel $ 300-600, Itanumin $ 4200 b) Optional feature pricing : for accessories that come with a product : e.g. car, pc. (10000$ vis a vis 13000$)

Price Adjustments : Adapting the price

Product Mix Pricing :
c) Captive Product Pricing : Price the basic product low, spares are expensive; e.g. HP, Gillette, Caterpillar, encourages piracy d) Two part pricing : Company charges fixed price for initial service, and subsequent charges for extra service, e.g. Telephones, cells. e) By Product pricing : Setting prices for by-products obtained from the original products. The pricing of diesel, kerosene and other petroleum byproducts like crude oil is done in a way to sustain the competitive pressure on the original products.

 A large proportion have a low and seasonal income Several approaches adopted by retailers and

companies to address this Rural retailers often extend credit Retailers also break the bulk and sell in loose form, in small quantities Companies use a similar strategy by introducing lowunit packing or LUP Companies also develop low-priced products with a target price for rural markets Companies might offer refill packs or recyclable and reusable packs

Delayed quotation pricing

Escalator clauses Unbundling Reduction of discounts

 Maintain price
Maintain price and add value Reduce price Increase price and improve quality Launch a low-price fighter line