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Pricing

Prof Ramendra Singh

Friday, June 30, MM-I_Pricing_Session 5 1


2017
Setting the Price
Pricing Procedure • Survival
• Maximize current profits
• Select pricing objective • Maximize market share
• Determine demand – Penetration strategy
• Estimate costs • Market skimming
• Analyze competition – Skimming strategy
• Select pricing method • Product quality leaders
• Select final price • Partial cost recovery

Friday, June 30, MM-I_Pricing_Session 5 2


2017
Setting the Price
Pricing Procedure • Understand factors
that affect price
• Select pricing objective sensitivity
• Determine demand • Estimate demand
• Estimate costs curves
• Analyze competition • Understand price
• Select pricing method elasticity of demand
• Select final price – Elasticity
– Inelasticty

Friday, June 30, MM-I_Pricing_Session 5 3


2017
Setting the Price
Pricing Procedure • Types of costs and levels of
production must be
• Select pricing objective considered
• Determine demand • Accumulated production
leads to cost reduction via
• Estimate costs
the experience curve
• Analyze competition
• Differentiated marketing
• Select pricing method offers create different cost
• Select final price levels

Friday, June 30, MM-I_Pricing_Session 5 4


2017
Setting the Price
• Key Pricing Terms:
– Fixed costs: do not vary directly with changes
in level of production
– Variable costs: vary with production
– Total costs: sum of fixed and variable costs a
given level of production
– Average cost: cost per unit at a given level of
production

Friday, June 30, MM-I_Pricing_Session 5 5


2017
Setting the Price
Pricing Procedure • Firms must analyze the
competition with respect to:
• Select pricing objective – Costs
• Determine demand – Prices
– Possible price reactions
• Estimate costs
• Pricing decisions are also
• Analyze competition
influenced by quality of
• Select pricing method offering relative to
• Select final price competition

Friday, June 30, MM-I_Pricing_Session 5 6


2017
Setting the Price
Pricing Procedure • Price-setting begins with
the three “C’s”
• Select pricing objective • Select method:
• Determine demand – Markup pricing
• Estimate costs – Target-return pricing
– Perceived-value pricing
• Analyze competition
– Value pricing
• Select pricing method
– Going-rate pricing
• Select final price – Auction-type pricing
– Group pricing

Friday, June 30, MM-I_Pricing_Session 5 7


2017
Setting the Price
Pricing Procedure • Requires consideration of
additional factors:
• Select pricing objective – Psychological pricing
• Determine demand – Gain-and-risk-sharing
pricing
• Estimate costs – Influence of other
• Analyze competition marketing mix variables
• Select pricing method – Company pricing policies
• Select final price – Impact of price on other
parties

Friday, June 30, MM-I_Pricing_Session 5 8


2017
Adapting the Price
Price Discounts and Allowances:
• Cash • Seasonal discounts
discounts • Promotion
• Quantity allowances
discounts
• Trade-in
allowances

Friday, June 30, MM-I_Pricing_Session 5 9


2017
Adapting the Price
Promotional Pricing Tactics:
• Loss-leader • Longer payment terms
pricing • Warranties and
• Special-event service contracts
pricing
• Psychological
• Cash rebates
discounting
• Low-interest
financing

Friday, June 30, MM-I_Pricing_Session 5 10


2017
Adapting the Price
Discriminatory Pricing Tactics:
• Customer segment • Channel pricing
pricing • Location pricing
• Product-form • Time pricing
pricing
• Image pricing

Friday, June 30, MM-I_Pricing_Session 5 11


2017
Adapting the Price
• Price discrimination works when:
– Market segments show different intensities of
demand
– Consumers in lower-price segments can not
resell to higher-price segments
– Competitors can not undersell the firm in
higher-price segments
– Cost of segmenting and policing the market
does not exceed extra revenue

Friday, June 30, MM-I_Pricing_Session 5 12


2017
Adapting the Price
Product-Mix Pricing Tactics:
• Product-line pricing • Two-part pricing
• Optional-feature • By-product
pricing pricing
• Captive-product • Product-bundle
pricing pricing

Friday, June 30, MM-I_Pricing_Session 5 13


2017
Coke Vending Machine:
Case Study
 It had been reported that Coke was testing “smart” vending machines
that are capable of pricing the product differentially based on
current demand. The news was met with mixed reviews.
 The move faced criticism from competitors who claimed that Coke
was exploiting customers, and was parodied on National media.
 However, price differentiation also received support from some
quarters on the basis that differential pricing would lead to increased
market efficiency.
 The Coca-Cola Company rubbished media reports claiming that it
would implement differential pricing.
 What is the impact of implementing a differential price strategy
on the company’s performance, both qualitatively and
quantitatively?

Friday, June 30, MM-I_Pricing_Session 5 14


2017
Response of media and
competitors
• Media’s response- There was a mixed response from media to the
differential pricing
 Negative-It is unfair and ethically wrong to charge more to a
thirsty person in hot weather.
 Positive-Same principle is being implemented in other industries
like airlines and so Coke is not wrong in implementing the same.

Competitor’s response
 Raising prices in hot weather is customer exploitation.
 Focus should be on making drink easier to buy and not harder.

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2017
Estimation of increased revenue potential
Description Value
Current price per can 75 cents
No. of crates sold 1.2 billion
28.8 billion (assuming 24
No. of cans sold cans/crate)
Total value realised through vending machines $ 21.6 billion
Price per can on hot days (during high traffic 90 cents
periods)
Price per can on cold days (during low traffic 60 cents
periods)
Percentage of hot (high traffic) days in a year 60%
Percentage of cold (low traffic) days in a year 40%
Value realised through differential pricing $ 22.46 billion
Incremental sales $ 0.864 billion (~4%)

Friday, June 30, MM-I_Pricing_Session 5 16


2017
Pros & Cons of
Differential Pricing
Will this strategy will hurt the brand,
as people will stop trusting it ?
During hot days, consumers will buy
from the competitors?
Will It lead to bad publicity?

Friday, June 30, MM-I_Pricing_Session 5 17


2017