Method adopted by a firm to set its selling price

Depends on the firm's average costs, and on the customer's perceived value of the product in comparison

UNDERSTANDING PRICING
Price is not just a number on a tag

In the past, prices were set by negotiation between

buyers and sellers

Bargaining is still prevalent in many parts of Asia

 Many firms are avoiding the low-price trend and have

been successful in trading consumers up to more expensive products and services by combining unique product formulations with engaging marketing campaigns.

Today the Internet is partially reversing the fixed

pricing trend.

Buyers can Get instant price comparisons shopping-websites.htm Name their price & have it met -Priceline.com Get products for free -Open Source
Sellers can Monitor customer behavior & tailor offers to them Give some customers special prices-CDNOW

Both buyers & sellers can Negotiate prices in online auctions & exchanges

Giving away products free via sampling has been a successful marketing tactic for years; today with the advent of the Internet software, product and service companies are following the suit

 Purchase decisions are based on how consumers perceive

prices

What they consider is the current actual price but not the

marketers stated price

Consumers may have a lower price threshold below which

prices may signal inferior or unacceptable quality

Upper price threshold above which prices are prohibitive

and seen as not worth the money

REFRENCE PRICING
When examining products, consumers often employ

reference prices
In considering an observed price, consumers often

compare it to an internal reference price (pricing from memory)

An external frame of reference (posted regular retail

price)

PRICE-Quality Inferences
Many consumers use price as an indicator of quality

Some companies adopt exclusivity and scarcity to justify

premium prices

Price Endings
Many sellers believe that prices should end in an odd

number

Research has shown that consumers tend to process prices

in a left -to- right manner rather than by rounding

Pricing cues like sale signs and prices that end in a 9 are

less effective the more they are employed

Setting

the
Price

Pricing
Company misses potential profits

Lower Higher Price price

Higher Lower Perceived perceived Value value

11

Pricing

Higher Lower price Price

Lower perceived value

Company fails to harvest potential profits

12

Factors of Setting Price

Selecting Price Objective
Determining Demand Estimating Costs Analyzing Competition

Selecting Pricing Method

Selecting Final Price

Selecting Price Objectives

Survival
Maximum Current Profit Maximum Market Share Maximum Market Skimming

Product Quality Leadership

Others

 Survival:

Over Capacity Intense Competition Changing Consumer Wants. Is a short term objective

Maximum Current Profit

Based on demand and cost function

 Maximum Market Share

Higher Sales Volume Lower Unit Cost Higher Long-Run Profit

Market Penetration Pricing

1) 2) 3)

Market is price sensitive Production and Distribution costs decrease with increase in volume. Low price discourages actual and potential competition

 Maximum Market Skimming

Prices start high and are slowly lowered over time. Companies unveiling a new technology favor setting high prices. Example

Technique backfires if competitor prices lower.

 Favourable conditions

Large number of buyers having high current demand. High initial price deters competitors. High Price positions product as a superior product.

 Product Quality Leadership

When companies strive to be Affordable Luxuries Premium Pricing with Loyal Customer Base Example: - Mercedes, CCD, Taj Hotels

Other Objectives

Non Profit Organizations have other pricing objectives. Pricing affects the public image of certain organizations

Determining Demand
Price Sensitivity

Estimating Demand Curves

Price Elasticity of Demand

 Pricing Sensitivity

The first step in estimating demand is to understand what affects price sensitivity.

Customers are less price sensitive to 1) Low cost items or items bought infrequently 2) Few substitutes available 3) Slow to change buying habits 4) Higher prices are justified 5) Price is a small percentage of Total Cost of Ownership 6) Part of the cost is borne by another party 7) Buyers cannot store the product 8) Information is freely available

 Estimating Demand Curves

Surveys Price Experiments Should be performed carefully Statistical Analysis: Using data analysis tools marketers can optimize pricing.

 Price Elasticity of Demand

Marketers need to know how responsive or elastic, demand would be to

a change in price. I.) If demand hardly changes with a small change in price, we say the demand is inelastic. II.) If demand changes considerably, demand is elastic. Price Elasticity depends on magnitude and direction of price change.

Estimating Costs
Types of costs
Activity-Based cost accounting Accumulated Production Target Costing

Cost Terms and Production

Fixed costs

Variable costs
Total costs Average cost

Cost at different levels of production

Cost per Unit as a Function of Accumulated Production

Target Costing
Costs change with production scale and experience.
Target cost can be achieved by bringing down

the cost of each element Design Engineering Manufacturing

Analyzing Competitors Costs, Prices and Offers

Market Share Objectives :

Match the price differences or changes of the competitor Profit-Maximization Objectives: Company React by increasing advertising budget and improving the product quality Interpretation is the key: Research the competitors financial situation, recent sales, consumer loyalty

Homogeno us product

Selecting a pricing method

Presented By- Vivek Nimje

Markup Pricing
Target-return Pricing Perceived value Pricing Value Pricing

Going-rate pricing
Auction-type pricing

Markup Pricing
Most elementary pricing method Standard Mark-up is added for profit
Variable cost per unit $10 Fixed Cost $300,000 Expected unit sales 50,000

Manufacturers unit cost: Unit cost = variable cost + fixed cost/Unit sales = $10 + $300000/50,000 = $16

Mark-up price unit cost =

(1 desired profit on sales)

= $16 (1-0.2) $20

Does the standard mark-up make

logical sense?
Generally, No.

Any pricing method that ignores current demand, perceived value and competition is not likely to lead to the optimal price

Mark-up pricing Advantage

Sellers can determine costs much more easily than they

can estimate demand

By tying price to cost, sellers simplify the pricing task Where all firms in the industry use this pricing method,

prices tend to be similar

Many people feel that cost-plus pricing is fairer to

both buyers and sellers

Target-Return Pricing

Target-Return Pricing
In target-return pricing, the firm determines the price that would

yield its target return on investments(ROI)

Target-return price

= unit cost +(desired return*invested capital)/unit sales =$16+(.20*$1000000)/50000=$20

Break-even volume= fixed cost/(price variable cost)

= $300000($20-$10)=30,000

Disadvantages of TargetReturn Pricing

Target-return pricing only considers ROI

Perceived Value Pricing

Pricing on customers perceived value.

It doesnt consider price elasticity and competitors prices

Companies must deliver the value promised by their value proposition.

Companies use advertising and sales force to enhance perceived value in buyers minds.

Characteristics of perceived value

Buyers image of product performance Channel deliverables The warranty quality Customer support Suppliers reputation Trustworthiness Esteem The key to perceived-value pricing is to deliver more value than the competitor and to demonstrate this to prospective buyers.

Perceived Value Pricing

Value Pricing
Winning customers by charging low price for high-quality offering

Re-engineering the companys operations to become a low-cost producer without sacrificing quality A retailer holding every day low pricing (EDLP)charges a constant low price at retail level with no price promotions In high-low pricing, the retailer gradually lowers prices on everyday basis. The prices are eventually lowered below EDLP level

Going-Rate Pricing
In going-rate pricing, the firm bases its price largely on competitors prices. The firm might charge the same, more or less than major competitors.

English auctions (ascending bids)

Dutch auctions (descending bids)

Sealed-Bid auction

Auction-type Pricing

Auction-type Pricing
English auctions (ascending bids)
Dutch auctions (descending bids)

Selecting

Impact of other marketing activities

Company pricing policies

Gain-and-risk sharing pricing Impact of price on other parties

Geographic Pricing

Price Adaptation Strategies

Price Discounts and Allowances

Differentiated Pricing

Promotional Pricing

How to get Paid? Barter

Compensation Deal
Buyback Arrangement Offset

Price Discounts and Allowances

Discount
Quantity Discount Functional Discount Seasonal Discount Allowance

Promotional Pricing
Loss-Leader Pricing Low Interest Financing Warranties and Service Contracts
Longer Payment Terms

Special Event Pricing

Promotional Pricing Tactics

Cash Rebates
Psychological Discounting

Psychological Discounting

Differentiated Pricing
Customer-segmented pricing
Product-form pricing Image pricing Channel pricing Location pricing Time pricing

Initiating Price Cuts

Why? Reasons Excess plant capacity Declining market share Drive to dominate market thru low costs Responding to economic recession

Caution: Low price traps

Low quality trap consumers assume low quality
Fragile market-share trap lower price

buys market share but not market loyalty; may encourage brand switching behavior Shallow-pockets trap competitors may have deeper pockets in price war

Marlboro Friday : the day when Marlboro man fell off his horse.

Marlboro Friday : the day when Marlboro man fell off his horse.
Loss of $10 billion off its market cap in

a single day It took 2 years to fully recover from Marlboro Friday's loss

Warning : Smoking Kills !

Initiating Price increases

Why? Reasons
Cost inflation Anticipatory pricing Over-demand

How? Methods
Delayed quotation pricing- Do not set final price until product is
finished or delivered (e.g. industrial construction )

Escalator clauses-Todays price + inflated price (e.g. aircraft Indus.)

Unbundling- Separately price 1 or more element (e.g. Car companies) Reduction of discounts- remove/reduction of discount

Reaction to price changes

Customers reactions: Question motivation behind changes Negative: new model coming; financial trouble; price will decline further; quality reduced Positive: item is hot; good value Response depends on price sensitivity of customers
Competitors reactions: when competitors are likely to react: - few firms - homogenous products - buyers are highly informed

Responding to competitors Price Changes

Possible responses: Maintain price Maintain price and add value Reduce price Increase price and improve quality launch a low-price fighter fighting brand

Responding to Low-Price competitors