SESSION 1 & 2 Introduction to the Course & Basic Pricing Methods

By Agenda
Introduction to the Course
Assessment Process Relevance of Pricing Strategy

Dr. Nripendra Singh

Jaypee Business School, Noida

Basic Pricing Methods

Pricing Strategy : 12MEMM23

(Marketing Elective-Advance Marketing) MBA PROGRAM Batch 2012-14 Term-IV July to September - 2013 Learning Facilitator: Faculty Office: Walk-in Hours: Phone: Email ID: Dr. Nripendra Singh Arya Bhatt Bhawan II, Fourth Floor Between 4:00 PM to 5:00 PM 0120 2400974 Extn - 481 nripendra.singh@jiit.ac.in

LEARNING OBJECTIVES
To provide students with an understanding of the important role price structuring has in organizations 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 Assignment Mid-Term Exam End-Term Exam

15% 15% 30% 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 subgroup 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 companys 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 servicewe 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/ Nonmanufacturers 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 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.

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.

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
Set a high price for a new product to skim revenues layer by layer from the market. Company makes fewer, but more profitable sales.

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.

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 sellers 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 products 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 Chinas 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