SESSION – 1 & 2

Introduction to the Course

& Basic Pricing Methods

By Agenda
Dr. Nripendra Singh •Introduction to the Course
• Assessment Process
Jaypee Business School,
Noida • Relevance of Pricing Strategy
•Basic Pricing Methods
 Pricing Strategy : 12MEMM23
(Marketing Elective-Advance Marketing)

MBA PROGRAM – Batch 2012-14

Term-IV
July to September - 2013

Learning Facilitator: Dr. Nripendra Singh

Faculty Office: Arya Bhatt Bhawan II, Fourth Floor
Walk-in Hours: Between 4:00 PM to 5:00 PM
Phone: 0120 – 2400974 Extn - 481
Email ID: nripendra.singh@jiit.ac.in
 LEARNING OBJECTIVES
• To provide students with an understanding of the
important role price structuring has in organization’s
profitability.
• To provide an exposure to key concepts, theories and
research findings in pricing and to illustrate their
applicability in tackling the challenges in business
• To highlight the major types of pricing decisions and to
suggest analytical frameworks and approaches that will
aid decision making
• By the end of the course the student is expected to
learn how to develop pricing strategy, estimate
economic value, price sensitivity and price, and should
be able to design price structure for a company.
 Assessment Process
(refer COURSE OUTLINE)

The major components of evaluation process will include:

Project 15%
Assignment 15%
Mid-Term Exam 30%
End-Term Exam 40%
 List of Books
Text Book:
Thomas T. Nagle and John E. Hogan (2009) The Strategy and Tactics
of Pricing – A guide to growing more profitably, 4th Ed. Pearson
Education

Supplementary Books:
• Andrew Gregson (2009) Pricing Strategies. Jaico Publishing
• Dolan, Robert, J and Herbert Simon. (1996) Power Pricing. New York:
Free Press
• Marlene Jensen. (2004) The Tao of Pricing. Amazon.com
• Marlene Jensen. (2004) Pricing Psychology Report. Amazon.com
• Marlene Jensen. (2005) 46 Ways to Raise Prices -- Without Losing Sales.
• Marn, Roegner and Zawada. (2004) The Price Advantage. Amazon.com
• Philip Kotler and Kevin L. Keller (2005) Marketing Management. PHI
 Project Work & Assignment
Students will work in groups on specific sector on one of the pricing
issues of their choice. Each group would give a short presentation
of its project/case. Grades would be based on how well students
demonstrated knowledge of the issues, as well as the clarity and
general strength of the presentation.
Each group will have 10 members, divided into 2 sub-groups of 5
each. Both the subgroup under each group will select separate
companies from the same Industry. Each student in the sub-group
will work on one of the following issues:
a. Price Structure
b.Economic Value Estimation (EVE).
c. Identifying and developing price metrics and fences.
d.Price Levels or Price Sensitivity – Segment-wise.
e. Pricing in Distribution Channel
 Project Work & Assignment
Level-I submission: (Individual-Assignment) – after the completion of 4 sessions
Write down the outline of your project work – based on the topics of study that you choose.
Outline should have (i) proposed title of your project/assignment (should be same for sub-
group members), (ii) description of the issue, in detail. It should be hand written and should
not be less than 2 and more than 3 pages.
Level-II submission: (Individual-Assignment) – after the completion of 7 sessions
Your understanding of the company’s pricing policy, along with one of the competitor. It should
have a focus on the issue selected by you. All this should be hand written, in two to three
pages.
Level-III submission: (Project-Sub-Group) – after the completion of 10 sessions
The Final report should be submitted in sub-groups. It should be written as a small case on the
company you have selected, focusing on the complete pricing strategy of that company. The
report should contain company profile, its customer segment, markets served, and general
description of all the 5 issues related to pricing strategy. At last your own views covering the
pricing strategy as compared to its competitors. It should be typed and not more than 8-10
pages.
Level-IV Presentation: (Project-Group) – after the completion of 15 sessions
The presentation should be made group-wise. The purpose is to analyze and compare the
pricing strategies of the two companies studied under each group. The focus of the
presentation should be on bringing out the differences and unique points if any. It should
not be more than 6-7 slides.
 What do you perceive from this?
• Do you see any substantial price difference
between the different brands of 1.5 ton
window ACs in the market today?
– LG,
– Whirlpool,
– Samsung,
– Voltas,
– Hitachi...

Why?
 CASE: Whirlpool - Duet
Introduced in 2001 at $2,300, when the avg. Price of comparative
models was $500-600.
It was a front loading washer dryer combo that was priced 4
times high.
It charged this premium because of the superior performance and
efficiency without compromise.
Its distinctive competencies were:
- Huge capacity.
- Less consumption of water and electricity..
- Wide range of clothes that can be cleaned.
- Benefit realized for customer were more freedom and time to
do other things.
 Product Quality Leadership

Four Seasons starts

with very high-quality
service—”we await
you with the perfect
sanctuary.”
It then charges a price
to match.
 Importance of pricing
• McKinsey conducted a research on 2,400 cos. in 1992-
- 1% improvement in price contributes to 11.1% profit.
- 1% improvement in VC contributes to 7.8% profit.
- 1% improvement in Volume contributes to 3.3% profit.
- 1% improvement in FC contributes to 2.3% profit.

This breaks the myth or conventional thinking that saving on

costs or increasing volume contributes to Profitability.

• GE lighting gets 55,000 pricing requests a year and in order to

tackle that company has evaluate 300 factors that go into price
quote. This has led to reduction of processing time from 30
days to 6 hours.
 Broad Pricing Strategies
• Cost based Pricing
• Demand based pricing
• Competition oriented pricing
Pricing Strategies
 Broad Pricing Strategies
• Cost based Pricing
– Mark-up Pricing (Cost plus Pricing): Traders/ Non-
manufacturers use it. Mark up may vary
depending on place and movement, etc.
– Absorption cost Pricing (Full cost Pricing): Manuf.
use it. Mark-up is fixed.
– Target rate of return Pricing: It is rational approach
to fulfil ROI expectation of the firm.
– Marginal Cost Pricing: Flexibility of not to recover
fixed cost, depending on market situation.
 Broad Pricing Ste (contd.)
• Demand based pricing
– What the traffic can bear pricing: when the
demand of a product is inelastic to price (
monopoly and oligopoly)
– Skimming Pricing
– Penetration Pricing
 Broad Pricing Ste (contd.)
• Competition oriented pricing
– Premium Pricing: Above competitor
– Discount Pricing: Below Competitor
– Parity Pricing/Going Rate Pricing
– Matching Competitor
Penetration Pricing
 New-Product Pricing Strategies

• When to use:
Market Penetration
 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.
– 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.
 Penetration Pricing
• Price set to ‘penetrate the market’
• ‘Low’ price to secure high volumes
• Typical in mass market products – chocolate bars, food
stuffs, household goods, etc.
• Suitable for products with long anticipated life cycles
• May be useful if launching into a new market
Market Skimming
 New-Product Pricing Strategies

Market-Skimming • When to use:

 Set a high price for a new
product to “skim”
revenues layer by layer
from the market.
 Company makes fewer,
but more profitable sales.
– Product’s 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.
 Market Skimming
• High price, Low volumes
• Skim the profit from the market
• Suitable for products that have
short life cycles or which will face
competition at some point in the
future (e.g. after a patent runs
out)
• Examples include: Playstation,
jewellery, digital technology, new
DVDs, etc.

Plasma screens: Currently at

high prices but for how long?
Title: Thin-shaped television. Copyright: Getty Images,
available from Education Image Gallery
Value Pricing
 Value-Based Pricing

• Uses buyers’ perceptions of value, not the

seller’s cost, as the key to pricing.
 Perceived Value

A less expensive
piano might play
well, but would it
take you places you
have never been
before?
 Value Pricing
• Price set in accordance with
customer perceptions about
the value of the
product/service
• For Perceived Value Pricing,
examples include status
products/exclusive products

Companies may be able to set prices

according to perceived value.

Title: BMW At The Frankfurt Auto Show. Copyright:

Getty Images, available from Education Image Gallery
Loss Leader
 Loss Leader
• Goods/services deliberately sold below cost to encourage
sales elsewhere

• Typical in supermarkets, e.g. at Christmas, selling bottles

of gin at £3 in the hope that people will be attracted to
the store and buy other things

• Purchases of other items more than covers ‘loss’ on item

sold. Example, ‘Free’ mobile phone when taking on
contract package
Psychological Pricing
 Psychological Pricing
• Used to play on consumer perceptions
• Classic example - £9.99 instead of £10.99!
• Links with value pricing – high value goods
priced according to what consumers THINK
should be the price
Psychological Pricing

• Considers the psychology of

prices and not simply the
economics.
• Consumers usually perceive
higher-priced products as
having higher quality.
• Consumers use price less when
they can judge quality of a
product.
Going Rate (Price Leadership)
 Competition-Based Pricing
• Going-Rate Pricing:
– Firm bases its price largely on competitors’ prices,
with less attention paid to its own costs or to
demand.
• Sealed-Bid Pricing:
– Firm bases its price on how it thinks competitors
will price rather than on its own costs or on
demand.
Tender Pricing
 Tender Pricing
• Many contracts awarded on
a tender basis
• Firm (or firms) submit their
price for carrying out the
work
• Purchaser then chooses
which represents best value
• Mostly done in secret

A European consortium led by Airbus

recently won a contract to supply
refuelling services to the RAF – priced
at £13 billion!
Title: Air refuelling. Copyright: Getty Images, available
from Education Image Gallery
Price Discrimination
 Price Discrimination
• Charging a different price for
the same good/service in
different markets
• Requires each market to be
impenetrable
• Requires different price
elasticity of demand in each
market

Prices for rail travel differ for the same

journey at different times of the day

Title: Inter-City 125. Copyright: Getty Images, available

from Education Image Gallery
 Segment Pricing

• Selling a product or service at two or more

prices, where the difference in prices is not
based on differences in costs.
• Types:
1. Customer-segment (Retired, Differently abled,
School Kids)
2. Product-form (Refrigerated Vs Non-refr. Drinks)
3. Location pricing (Daman Vs Delhi)
4. Time pricing (Full, Half, Night Charge)
Destroyer Pricing/Predatory Pricing
 Destroyer/Predatory Pricing
• Deliberate price cutting or
offer of ‘free gifts/products’ to
force rivals (normally smaller
and weaker) out of business or
prevent new entrants
• Anti-competitive and illegal if
it can be proved

Microsoft – have been accused of predatory

pricing strategies in offering ‘free’ software as
part of their operating system – Internet
Explorer and Windows Media Player - forcing
competitors like Netscape and Real Player out
of the market.
Title: Bill Gates speaks at UNIX convention. Copyright:
Getty Images, available from Education Image Gallery
Discussion Question
• What would you think if Mercedes
suddenly lowered its prices on its cars?
• What would you think if Mercedes
suddenly raised its prices on its cars?
• Why?
 More Pricing Strategies

By-Product Pricing:
Setting a price for by-products in order to make the main
product’s price more competitive (e.g., Printer & cartridges)

Product Bundle Pricing:

Combining several products and offering the bundle
at a reduced price (e.g., computer with software and
Internet access).
 Optional- and Captive-Product Pricing
• Optional-Product
– Pricing optional or accessory products sold with
the main product (e.g., ice maker with the
refrigerator).
• Captive-Product
– Pricing products that must be used with the main
product (e.g., replacement cartridges for Gillette
razors).
 Product Bundle Pricing
CityPASS bundles tickets to many attractions at a low combined price.
 Promotional Pricing
Companies offer promotional prices to create buying excitement and urgency.
 Geographical Pricing

• FOB-origin pricing
• Uniform-delivered
pricing
• Zone pricing
• Basing-point pricing
• Freight-absorption
pricing
 International Pricing
• Price depends on many
factors, including:
– Economic conditions
– Competitive situations
– Laws and regulations
– Development of the
wholesaling and retailing
system
– Costs
 International Pricing

Companies must decide what prices to charge in different countries.

 Setting the price
• Most markets have three to five points or tiers. E.g. :
Marriot Hotels develop different brands for different
price points.
– Vacation Villas (Highest price)
– Marriot Marques (High Price)
– Marriot (High –medium price)
– Renaissance (Medium – high price)
– Courtyard (medium price)
– Towne Place Suites (medium low price)
– Fairfield Inn (Low price)
 Setting the Price
There are 6 steps:
STEP 1: Selecting the price objective: 5 major objectives are-
• Survival
• Maximum Current Profit: Assumption that firm has knowledge of its
demand and cost function. .
• Maximum Market Share: Assumption that market is price sensitive,
therefore, penetration pricing. E.g. Reliance Mobile.
• Maximum Market Skimming: Example Sony HDTV initially launched at
43,000 dollars in 1990. in 1993 it cost 6,000 dollars and 1,200 dollars in
2004.
• Product Quality Leadership: Many brands strives for affordable luxuries
like Starbucks coffee, BMW cars etc.
 Setting the price

STEP 2: Determining Demand: Each price will lead to different

level of demand. So it is imp to know reasons of Price
Sensitivity.
- Normal Case: Demand is inversely related to price.
- Prestige Goods: Demand is directly related to price.
- Internet increases price sensitivity bcoz customer can
compare the prices online. But, Mckinsey study suggests that
89% of a sample of internet customers visited only one book
site, 84% visited only one toy site, 81% visited only one music
site.
 Setting the price
STEP 3: Estimating Costs: Demand sets the ceiling on the price and costs set
the floor.
Types of Costs and Levels of Production
• Fixed Costs: Overheads; Rent, Interest, salaries.
• Variable Costs: It is with level of production. Raw material, packaging, etc.
• Total Cost: Fixed cost and Variable Cost.
Three myths about Pricing strategy
• Pricing our products to cover full costs will make us profitable
• Pricing our products to grow market share will make us profitable
• Pricing our products to meet customer demands will make us profitable
 Setting the price
STEP 4: Analyzing Competitors Costs, Prices and Offers
Range of possible prices determined market demand and
company costs; The firm must take company cost, prices and
reaction into account.
STEP 5: Selecting the pricing Method:
• Mark-up pricing
• Target return pricing
• Perceived Value pricing
• Value Pricing
• Going Rate pricing
• Auction type pricing
 Setting the price
STEP 6: Selecting the final price: Impact of other Marketing
Activities –
Relationship among relative prices, relative quality and relative
advertising.
Consumers pay high price for known products as compared to
unknown
Consumers pay highest to branded and maximum advertised
products and vice-versa.
Price is not as important as quality and other benefits in the
offer.
Positive relationship between high price and high advertising in
later stage of PLC for market leader.
 Case: DELL
• Case- DELL: Example of flexibility pricing.
• On any day, the same computer might sell at different price
depending on whether the purchaser is a government, small
business, or home PC buyer.
• “Cost- forecasting”
 Adapting the price
Companies do not set a single price but a pricing
structure that reflects variation in -Geographical
demand and costs, Market segment requirements, Purchase
timing, Order levels, Delivery frequency, Guarantee, Service
Contracts
• Case- DELL: Example of flexibility pricing. On any day, the
same computer might sell at different price depending on
whether the purchaser is a government, small business, or
home PC buyer.
• Case- Procter and Gamble: 2/3 of China’s population earns
less than $ 25 per month. It started tiered pricing- 320 gm of
Tide (clean white) for 23 cents and 350 gm for 33 cents (Tide
triple action).
THANKS