Setting the right price

Case situation
Navin an entrepreneur hailing from a small town of Jaipur developed a new detergent and invested a capital of Rs 10,00,000 to start the manufacturing of this detergent under the brand name Clean. He decided to price it much lower than other detergents. Despite heavy competition in this market he could establish himself in the local market and in a period of two years gained a profit of Rs 1,00,000. Using his newly acquired market position. Navin decided to manufacture a premium quality bathing soap called Natural, using herbs and fruit composition which is yet an unexplored market or up market product in the region he operates . He is aware of the competition he will be facing with the presence of global brands. It is also true that initial manufacturing cost of this soap is very high as the raw material had to procured from neighboring states. But undeterred and determined to move ahead he starts the production. Though he has immense amount of gut feel yet he wants to calculate every move of his this time. There are certain issues which need more analysis and one most important is the right price.

Case Analysis Navins dilemma This case is about the dilemma of setting a price for a new product. The product is innovative in nature having a high cost of production, wanting to enter the premium market with a low price. To judge the feasibility of the proposition?

 What are the influences on pricing ? What should be the pricing objective set? What is the break even point ? What could be the other price strategy should he use skim or penetrate the market ? What should be the pricing method ?

Business Situation If Naveen charge Rs 1.99 for an one bottle of liquid detergent clean . How many detergent bottles will he have to make to breakeven if the fixed cost is 1,40, 000 and unit variable cost is 97 paise. If the production capacity is only 1,00,000 units what is maxima and minima price ?

 If the total expected unit sales forecast is next one year is 150,000 units. What is the reaction on price. What is the profit/ loss if the production increases to 1,50,000.
If you reduce the variable cost to .89 paise and spread fixed cost what could be the breakeven . If in metropolitan cities a higher price could be charged to Rs 2.79. what would be the breakeven point

SWOT Analysis
Strengths Good financial strength Good product with a high demand A well established image Opportunities Demand for herbal cosmetic products very high Usage rate is high Low involvement product thus a price sensitive market Loyalties not very high

Weaknesses New established set Threats up Many big players in the market Cost of production Players with a high learning very high curve may come out with a still Learning curve is small cheaper and a better product

Consumer Psychology and Pricing

Reference Prices Price-quality inferences Price cues - 2,999 -3,000 -2950

Steps in Setting Price

Select the price objective Determine demand Estimate costs Analyze competitor price mix

Select pricing method

Select final price
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Step 1- What would be my price objective

Survival Maximum Current Profit- cash flow or ROI Maximum Market Share- market penetration Maximum Skimming Quality or cost positioning

What should be the pricing Strategy

Step 2: Determining Demand

Price Sensitivity Estimating Demand Curves:

surveys, price experiments, statistical analysis

Price Elasticity of Demand

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Types of Cost
Fixed Cost Cost that do not change with production Variable Cost vary directly with the level of production Total Cost FC+VC Average Cost the cost per unit at a given level of production

Step 4 Analyzing Competitors Costs, Prices and Offers

Costs Prices Offers

What influences the price???

Price too high. No demand Ceiling

Customers assessment of value

Competitors prices
Costs

FLOOR

Price too low. No profits

Step 5: Selecting a Pricing Method

- Markup pricing:10%, 20% -Target-return pricing: ROI -Perceived-value pricing - Value pricing:EDLP - Going-rate pricing - Auction-type pricing: due to
internet
- Group Pricing

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What would be my Break-Even point

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Step 6: Selecting the final price

Psychological Pricing Gain and Risk sharing Pricing - guaranteeing The influence of other Marketing mix elements Company Pricing Policies Impact of Price on other Parties

Price-Adaptation Strategies
Geographical Pricing-cash,countertrade Discounts/Allowances Promotional Pricing: loss leader pricing, specialevent pricing, cash rebates, low interest financing, longer payment terms, warranties & service contract, psychological discounting

Differentiated Pricing:price discrimination,

(customer segment pricing, product form pricing, image pricing, channel pricing, location pricing, time pricing)
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Brand Leader Responses to Competitive Price Cuts

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

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