PRICING DECISIONS

Session Coverage-Pricing Decisions

Importance of Pricing External and Internal Factors Affecting pricing decisions Pricing Objectives Pricing Approaches
Cost Based Pricing Buyer Based Pricing p Based Pricing g Competition

Session Coverage-Pricing Decisions

New Product Pricing Strategies Product-mix Pricing Strategies Price P i Adj Adjustment t t St Strategies t i Price Changes

PRICE
Price is amount of money and/or other it items with ith utility tilit needed d dt to acquire i a product.

The Importance of Price to Marketers

Pricing only element that produces Revenue ; Other elements produce costs Prices are the easiest marketing mix element to adjust Price communicates to the market the company's intended value positioning of its product or brand

Purpose of Pricing
The purpose of price is not to recover costs but to capture the perceived value costs, of the product in the minds of the customer. customer ( (Nimer) )

Is this all?

Current Pricing Trends in Indian Markets

Youaregettinglessforyourmoney
Weight(Grams) Product Price(Rs) ( ) Then Now 1 LaysChips 20 68 61 2 GoodDayBiscuits 10 100 84.5 3 DairyMilkChocolate 20 50 38 4 BritanniaBread 12 400 375 5 Maggi 10 100 80 6 HaldiramSnacks 10 52 48 7 Lux L Soap S 10 75 65 Less 7 15.5 12 25 20 4 10

Times of India-November 20, 2011

CUSTOMERS MIND
Some customers interested in low prices, while other segment interested in service, quality, value and brand image. Research R h id identified tifi d 4 segment t of f shoppers Brand loyal: relatively uninterested in price System y beaters: p prefer certain brands but buy them at reduced price. Deal shoppers: Driven by low prices

CUSTOMERS MIND
Uninvolved: Not motivated by either a brand or low price. Study had differentiation in demographics. So, psychographic factors responsible for different degree of price sensitivity. Value is also very important

Importance of Pricing-McKinsey Research

Pricing is extremely important, small changes in price can translate into huge p in p profitability. y improvements

A study of 1000 companies: McKinsey found that a 1% increase in price would improve profits by 7% assuming no change in sales volume.

Factors Affecting Pricing Decisions Two Types of Factors: 1. Internal Factors 2. External Factors

INTERNAL FACTORS
Aim is to recover cost of manufacturing and marketing through price. 1. 2 2. 3. 4 4. 5. Corporate & Marketing objective of firm Image sought by firm through Pricing Characteristics of Product P i elasticity Price l ti it of fd demand d Stage of product in its life cycle

INTERNAL FACTORS
6. 6 7. 8 8. 9. Cost of manufacturing and marketing Extent of differentiation practiced C Composition iti of f product d t li line of f products d t Other elements of market mix of firm and their interaction with pricing.

EXTERNAL FACTORS
1 Market Characteristic (Demand 1. (Demand, Customer and Competition) 2 Buyer behavior with respect to product 2. 3. Bargaining power of major customers 4. Bargaining power of major suppliers 5. Competitors p p pricing gp policy y 6. Government control/regulation on pricing 7 Other relevant legal aspects 7.

EXTERNAL FACTORS
8. Societal (Social) Considerations 8 9. Understanding reached if any with price cartels. cartels

Where does the money go?

Why do textbooks cost so much??? Authors + Publishers = 75% R t il Retailers = 25% Suppose price of book is Rs 50 (37.50 &12.5) Author g gets 10-15% of wholesale p price Author s Share = Rs 3.75-6.63 Authors 3 75 6 63 Publishers Share= Rs 31.87-33.75

Where does the money go?

Author: Takes 3 long years to develop book. Revised Editions- takes 1-1.5 years Publishers share looks more (Rs 32-33) 32-33), they cover cost of MR, Art, Design, Production, Distribution, , Salaries of sales force, , distribution of promotional material AND OVERHEAD Costs-Office, Computers etc Spend 15-20 lakh upfront.

Where does the money go?

Retailers: Personal and Operation Cost=50 % Marketing Cost =13-15% Taxes = 10-15% Income: Author =7 7.5 5% Publisher = 7.5% Retailer = 5% %

PRICING SURVEY RESEARCH

9 % Companies GUESS about Price 37% C Companies i match t h what h t COMPETITORS Charge for similar offerings 52% Companies p choose p price that cover costs and provide fair profit.

Setting Pricing Policy

1 PRICING OBJECTIVES 1.
1. Profit maximization in short term 1 2. Profit optimization (to make something as good d as it can b be) )i in l long t term. g a particular market share 3. Achieving 4. Deeper penetration in the market 5 Entering new markets 5. 6. Keeping parity with competition

PRICING OBJECTIVES
7.Providing 7 Providing commodities at prices affordable by weaker sections. 8 Providing commodities at a price that 8.Providing stimulate economic development. These 2 objectives are relevant only to providers of essential commodities and public utility services. services Firms seek to meet basket of returns through pricing policies policies. NO FIRM IS SATISFIED WITH SINGLE OBJECTIVE

Firms use pricing for Variety of Obj i Objectives-AP, AP BA and d LG

Asian Paints (Uses Price to Protect MS)
M.Leader, 33% Share, but industry highly competitive. Has reduced prices of all items to protect MS.

British Airways (Enhance Profitability)

Started focusing of Business/Executive & Economy Class Have reduced no of seats in Economy Class. Economy.

LG (MS to Profitability)-Came in 2001-Objective was

volume/MS.Profits came down to 2% of sales in 2005. Now objective is Profitability. Have increased the prices and working on differentiation

Setting the Price

2. Determining ee g Demand e a d Price sensitivity Total Cost of Ownership Estimating Demand Curves Price Elasticity of Demand
Inelastic Elastic

Setting the Price 3. Estimating g Cost

Types of Cost and Levels of Production Fixed costs Variable cost Total cost Average cost
Fixed cost:
Does not change with production
Examples: Rent, Overhead, Salaries

Variable Cost Changes with production Can be eliminated in the short run Examples: Cost of materials that go directly into the product, wages

Average Cost (= Total cost / No of units in Production)

Setting the Price

Selecting a Pricing

Method

PRICING METHODS/STRATEGIES 1. Cost based pricing 2 Demand 2. D dB Based dP Pricing i i 3. Competition Based pricing 4. Value Pricing 5 Product line oriented pricing 5. 6. Tender Pricing 7 Differentiated 7. Diff ti t d Pricing Pi i

COST BASED PRICING-2

Following methods are commonly used: 1. Mark-up Pricing/Cost plus pricing 2 Absorption 2. Ab ti cost t pricing/full i i /f ll cost t pricing i i 3. Target rate of return pricing

COST BASED PRICING-3

Mark-up Pricing/Cost plus pricing: Selling price of product is fixed by adding margin to its cost price. price Slower the turnaround, larger mark-up Used by y companies, p , who do not have manufacturing of their own.

Mark-up or Cost Plus Pricing-4

TO SET PRICE: 1) Estimate Total Cost Per Unit Formula 2) Apply the Formula
e.g., TOTAL COST + 30-50% or anything%

Problem
IGNORES demand

Advantage
SIMPLE

COST BASED PRICING-5

2. Absorption cost pricing (Full Cost Pricing)

COST BASED PRICING-6

1. Target rate of return pricing Estimated Unit Cost = Rs12.50 Rs12 50 b. Estimated Sales Volume = 80,000 units c. TOTAL COST = R Rs 10 10,00,0,00 00 0 00 d. Target ROI = 20% .20 x Rs10,000,00 =Rs 2,000,00 Needed Profit

COST BASED PRICING PRICING-7 7

Needed (Target) Revenue = Total Cost + Profit = Rs10,000,00 R 10 000 00 + R Rs 2 2,000,00 000 00 = Rs12,000,00 Unit Price = REVENUE / VOLUME = Rs12,000,00 / 80,000 =Rs15 00 / Unit Price =Rs15.00

Break-Even Break Even Chart

Break Even Break-Even

Cost Cost, Volume Volume, Price and Profits interrelated A particular volume level and its associated cost level generates a particular profit level level. When we consider different price level, we h have diff different t profit fit l levels. l Firm can accordingly project profits at different price levels and chose the one that suits them the most.

Review Break Even

Break Even Point (in Units) = FC (SP-VC) 5000000 (15.00-6.25)

5,71,428 , , units

Review Break Even

Break Even Point (in Rupees) FC = 1-(VC/SP) 5 000 000 5,000,000 1-(6.25/15) Rs 85 85,71,429 71 429

2. DEMAND BASED PRICING-1

1. What 1 What the traffic can bear? bear? 2. Skimming Pricing 3 Penetration 3. P t ti Pricing Pi i

DEMAND BASED PRICING-2

1 What 1. What the traffic can bear? bear? Maximum M i price i th that t a customer t can pay. Safe when demand is inelastic. Buyer opposition or new firms will create y difficulty.

DEMAND BASED PRICING-3

2. Skimming Pricing 2 High Price+High profits at early stages, later settles down at low prices prices. For example: I-Pod, Mobile Phones

2.DEMAND BASED PRICING-4

3.Penetration 3 Penetration Pricing: Penetration through low prices when new product is not a luxury product product.

3. COMPETITION ORIENTED PRICING 1 PRICING-1

Three policy options available: Premium-Up Discount-Down Di tD Parity or going rate pricing-Matching prices of competitors

Perceived Value Pricing (Offer more value than competitor and demonstrate it)
Perceived Value Price = F ( buyers image of product, channel deliverables, warranty quality, customer support, firm reputation, trustworthiness)

Value Pricing
Low price for high quality offering e.g. WalMart. It is as much a philosophy as a method One pricing strategy based on Value Pricing is EDLP

Going Rate Pricing

Go by competitors competitor s prices Charge same as, less than or more than competitors prices F ll the Follow h leader l d pricing i i is i another h example l as in i Commodity C di oligopolies li li such h as steel, paper, fertilizers

Value Pricing-Essence
Value>Price>Costs (Loss to Seller) Price>Value>Costs (Loss of Market Share) Pi Price>Cost>Value C t V l (Bi (Big L Looser) ) Price=Value>Cost (Good)

PRICE ADJUSTMENT
Geographical Pricing Promotional Pricing Di i i t Discriminatory P Pricing i i Discounts and Allowances Product Mix Pricing
Product Line Pricing

Setting the Price

Selecting g the Final Price

Psychological Pricing Reference price p Brands with average relative quality but high relative advertising budgets charge premium prices Brands with high relative quality and high relative advertising budgets obtained the highest prices The positive relationship between high advertising budgets and high prices held most strongly in the later stages of the product life cycle for market leaders Company Pricing Policies Impact of Price on Other Parties Geographical Pricing Discriminatory Pricing

Adapting the Price

Promotional Pricing Loss-leader pricing Special-event Special event pricing Cash rebates Low-interest L i t t financing fi i Longer payment terms Warranties W ti and d service i contracts t t Psychological discounting

Price Adaptations

-- Promotional pricing - loss leader pricing, special event pricing ( Going to school program of Bata), Cash rebates (as in jeweler shops) low interest financing (0% for 12 months), longer payment terms, warranties / service contracts, psychological discounting (price high and then discount) -- Geographical Pricing -- Price Discounts and Allowances - Cash discount discount, quantity discount discount, functional discount (given to intermediaries if they perform certain functions), seasonal discount (off-peak buying), allowances (trade allowance to resellers for participating in trade-ins, promotion allowance given to resellers for participating in advertisement and promotion programs of the firm) -- Price discrimination -- Product Mix Pricing pricing optional feature pricing (power windows for car), car) captive product pricing (razor - Product line pricing, is low price and blade is high price), two part pricing (Mobile Phones)