Pricing Management

S. Suresh

What is a Price?
Narrowly, price is the amount of money
charged for a product or service.

Broadly, price is the sum of all the values

that consumers exchange for the benefits of having or using the product or service.

Synonyms for Price

Rent Tuition Fee Fare Rate Toll Premium Honorarium Special assessment Bribe Dues Salary Commission Wage Tax

Factors to Consider in Setting Price

Common Pricing Mistakes

Determine costs and take traditional industry
margins Failure to revise price to capitalize on market changes marketing mix Failure to vary price by product item, market segment, distribution channels, and purchase occasion

Setting price independently of the rest of the

Factors to Consider When Setting Prices

Value based Pricing

Value based pricing Setting price
based on buyers perceptions of value rather than on the sellers cost.
Good value pricing Offering just the right combination of quality and good service at a fair price. Value added pricing Attaching value added features and services to differentiate a companys offers and charging higher prices.

...Value based Pricing

- Everyday low pricing (EDLP) involves
charging a constant everyday low price with few or no temporary price discounts

- High-low pricing involves charging higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected items

Cost based pricing Setting prices based on

Cost based pricing

the costs for producing, distributing, and selling the product plus a fair rate of return for effort and risk. Cost-plus pricing adding a standard mark-up to the cost of the product. Break even pricing (target profit pricing) Setting price to break even on the costs of making and marketing a product, or setting price to make a target profit.

Target costing Pricing that starts with

ideal selling price, then targets costs that will ensure that the price is met.

Factors to Consider When Setting Prices

Price elasticity of demand illustrates the response of demand to a change in price
Inelastic demand occurs when demand hardly changes when there is a small change in price Elastic demand occurs when demand changes greatly for a small change in price

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

9-10

PRICING STRATEGIES

9-11

New-Product Pricing Strategies

Market-Skimming

When to use:
Products quality and image must support its higher price. Costs of smaller volume cannot be so high they cancel the advantage of charging more. Competitors should not be able to enter market easily and undercut the high price. Ex: Sony HDTV in Japan

Set a high price for a

new product to skim revenues layer by layer from the market.

Company makes fewer,

but more profitable sales.

New-Product Pricing Strategies

Market Penetration

When to use:
Market must be highly price sensitive so a low price produces more market growth. Production and distribution costs must fall as sales volume increases. Must keep out competition and maintain low price or effects are only temporary. Ex: Dell selling PCs through low cost direct channels

Set a low initial price in

order to penetrate the market quickly and deeply.

Can attract a large

number of buyers quickly and win a large market share.

Product Mix Pricing Strategies

Product line pricing

Optionalproduct pricing

Captiveproduct pricing

By-product pricing

Product bundle pricing

9-14

Product Line Pricing Setting the price steps between

various products in a product line based on cost differences between the products, customer evaluations of different features, and competitors prices.
Samsonite childs backpack @ $ 50 to Black Label Vintage@ $1250 Bata in India

Optional-Product Pricing The pricing of optional or

accessory products along a main product.
Car buyers

Captive-Product Pricing Setting a price for products that

must be used along with a main product.
blades for razor and cartridges for a printer.

9-15

 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.
By-products of MeadWestvacos wood-processing used by Asphalt Innovations for producing chemicals

Product bundle pricing combines several products and offering the bundle at a reduced price
Fast Food Restaurants - burger, fries and soft drinks Resorts - airfare, accommodation, meals and entertainment.

9-16

Steps in Setting Price

Select the price objective Determine demand Estimate costs Analyze competitor price mix Select pricing method Select final price

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 Part of the cost is paid by another party The product is assumed to have high quality and Buyers cannot store the product
prestige the end product

Factors Leading to Less Price Sensitivity

Price-Adaptation Strategies
Discounts/ Allowances
Discounts A straight reduction in price on purchases during a stated period of time. Cash discount price reduction to buyers who pay their bills promptly. Quantity discount price reduction for those who buy in large quantities. Functional discount (trade discount) Offered by sellers to trade channel members who perform certain functions like selling, storing and record keeping.

Seasonal discount Price reduction to buyers who

buy merchandise or services out of season.

Price-Adaptation Strategies
Discounts/ Allowances Allowance Promotional money paid by
manufacturer to retailers in return for an agreement to feature the manufacturers product in some way.
Trade in Allowances are price reductions given in turning old item when buying a new one. Promotional allowance are payments or price reductions to reward dealers for participating in advertising and sales support programs.

Segmented pricing Selling a product or service at

two or more prices, where the difference in prices is not based on differences in costs.
Customer Segment pricing Different customers pay different prices for the same product or service. Ex. Museum Entry Product-form pricing Different versions of the product are priced differently but not according to differences in their cost. Ex. Mineral water Location pricing a company charges different prices for different locations, even though the cost of offering each location is the same. Ex. Theatres Time pricing Firm varies its price by the season, the month, the day and even the hour. Ex. Weekend discounts at Resorts.

Price-Adaptation Strategies

Price-Adaptation Strategies
Psychological Pricing
A pricing approach that considers the psychology of prices and not simply the economics; the price is used to say something about the product. Ex: Smirnoff, Relska, Popov & Wolfschnidt Reference prices Prices that buyers carry in their mind and refer to when they look at a given product. Ex. Sale, Reduced, Price after rebate, Price
matching guarantee

Price-Adaptation Strategies
Promotional pricing Temporarily
pricing products below the list price, and sometimes even below cost, to increase short-run sales.
Loss leader prices pricing below the cost. Special event pricing (Dec. 31st, welcoming new year) Shopping festivals by Big Bazaar Low interest financing, longer warranties, free maintenance

Price-Adaptation Strategies
Geographical Pricing Setting prices for customers located in
different parts of the country or world. (FOB)Free on Board Goods are placed free on board a carrier; the customer pays the freight from the factory to the destination. Uniform-delivered pricing Company charges the same price plus freight to all customers, regardless of their location. Zone Pricing Company sets up 2 or more zones. All customers within a zone pay the same total price; the more distant the zone, the higher the price. Basing-point pricing Seller designates some city as a basing point and charges all customers the freight cost from that city to the customer. Freight absorption pricing Seller absorbs all or part of the freight charges in order to get the desired business.

Price-Adaptation Strategies
Dynamic Pricing - Adjusting prices
continually to meet the characteristics and needs of individual customers and situations.
Airlines offers specially designed for you.

International Pricing Prices charged in

different countries
Depends upon economic conditions, competitive situations, laws & regulations, development of wholesaling and retailing systems.

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

Pricing for rural markets

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 low-unit 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

Assessing and Responding to Competitor Price Changes

THANK YOU

10