Pricing Strategies and Determination

Manish Kumar

What is Price?
Price

is the sacrifice that one party pays another to receive something in exchange For our case, price is a monetary value charged by an organization for the sales of its products

Determining the Base Price

Cost-Plus Pricing

Easiest, Often misleading A simple allocation of fixed and variable costs Standard mark-up - a standard profit margin Target return pricing - a standard amount of profit per item Ignores demand (price sensitivity) and fails to account for competition

Determining the Base Price

Demand Pricing

Based on the elasticity of demand Higher prices are favored with inelastic
Price increases offset volume losses

Lower prices are favored with elastic

Volume increases offset price reductions

Consumers are indifferent with unitary demand Breakeven analysis Demand schedules

Determining the Base Price

Demand Pricing

Profit-Maximization
Calculate the profit at each price point on a demand curve and choose the highest In other words, which price produces the highest total contribution Verified by observing marginal revenue and cost figures

Determining the Base Price

Demand Pricing

Where does demand information come from? Analytic modeling Experiments Customer surveys Managerial judgement

Determining the Base Price

Strategic Pricing Concerns
Ethical Concerns Legal Concerns

Low cost focus

price

Differentiation focus
unique

Competitive Strategy Positioning Continuum

Determining the Base Price

Strategic Pricing Concerns
Ethical Concerns Legal Concerns

Low cost focus

price

Differentiation focus
unique

Competitive Strategy Positioning Continuum

Determining the Base Price

Strategic Pricing Concerns
Ethical Concerns Legal Concerns

Low cost focus

price

Differentiation focus
unique

Competitive Strategy Positioning Continuum

Determining the Base Price

Strategic Pricing Concerns
Ethical Concerns Legal Concerns

Objectives

Goal-setting/Objective-setting Pricing to achieve a target ROI Pricing to stabilize price and margin Pricing to reach a target market share Pricing to meet or prevent competition Pricing for profit maximization Pricing for survival

Determining the Base Price

Strategic Pricing Concerns
Ethical Concerns Legal Concerns

Skimming Pricing Strategy

Penetration Pricing Strategy

Maturity Decline

Growth Introduction

New

product pricing

Skimming Vs. Penetration

Determining the Base Price

Legal Concerns Ethical Concerns

Skimming Pricing Strategy

Growth Introduction

Penetration Pricing Strategy

Maturity

Strategic Pricing Concerns

Decline

High initial price for quick ROI Inelastic demand Price insensitivity by the market

Determining the Base Price

Legal Concerns Ethical Concerns

Penetration Pricing Strategy

Growth Introduction

Skimming Pricing Strategy

Maturity

Strategic Pricing Concerns

Decline

Low initial price with elastic demand Volume for lower production costs Imminent competition

Determining the Base Price

Strategic Pricing Concerns
Ethical Concerns Legal Concerns

Price-Quality

judgements

Customers uncertain about brand quality prior to purchase look to price Customers look to price in high risk purchases

Adjustments to Base Prices

Reasons base prices change over time:

Variation in objectives over product life cycle Introductory low prices, higher decline prices Competitive price moves Competitive forces dictate modification of pricing

Price Flexing Discounts/Allowances

Reasons

base prices change over time:

Price Flexing - Discounts/Allowances To Trade

Functional Or Trade Seasonal Quantity Cash Sales Promotion

To Consumer
Trade-in Allowances Cash Discounts Rebates

Price Flexing Discounts/Allowances

To Consumer Trade-in Allowances Cash Discounts Rebates
Used

to encourage consumers to upgrade to newer or more expensive products

Price Flexing Discounts/Allowances

To Consumer Trade-in Allowances Cash Discounts Rebates
Seasonal

or agebased discounts used to encourage purchases

Price Flexing Discounts/Allowances

To Consumer Trade-in Allowances Cash Discounts Rebates
After

the purchase payment made to the consumer by the producer

Price Flexing Discounts/Allowances

To Trade Functional Or Trade Seasonal

Compensate the trade for functions performed:

Quantity
Cash

Sales Promotion

Buying & Selling Transportation Storage Financing Risk-taking Providing Information Standardizing & Grading

Price Flexing Discounts/Allowances

To Trade Functional Or Trade Seasonal
Permits

Quantity
Cash

Sales Promotion

seasonal marketers to maintain steady production and to sustain operations in outof-season lulls

Price Flexing Discounts/Allowances

To Trade Functional Or Trade Seasonal
Price Spring

Quantity
Cash

Summer

Fall

Winter

Sales Promotion

Price Flexing Discounts/Allowances

To Trade Functional Or Trade Seasonal

Quantity
Cash

Sales Promotion

Induce largerquantity purchases and to reward customers for making fewer purchases but purchasing in larger quantities

Price Flexing Discounts/Allowances

To Trade Functional Or Trade Seasonal

Quantity
Cash

Sales Promotion

Encourage prompt payment from customers. Invoice includes payment terms and period of time that the cash discount is available

Price Flexing Discounts/Allowances

To Trade Functional Or Trade Seasonal

Quantity
Cash

Sales Promotion

Two percent off the total invoice price if paid within 10 days of the invoice date. Otherwise the total invoice price is due in 30 days

2/10, Net 30

Price Flexing Discounts/Allowances

To Trade Functional Or Trade Seasonal
Used

Quantity
Cash

Sales Promotion

by producers to encourage greater purchases or used to induce retailers to provide shelf or display space

Price Flexing Discounts/Allowances

To Trade Functional Or Trade Seasonal
Off-Invoice Allowances Bill-Back Allowances

Quantity
Cash

Sales Promotion

Stocking Allowances

Other Forms of Price Flexing

Price shading

Salesperson reduces base price because of the need to secure a large/important client
New technology allows for transaction-bytransaction customization

Price customizing

Other Forms of Price Flexing

Price promotion

Sales, incentive pricing Retailers began forwardbuying or diverting product Every Day Low Pricing (EDLP) is reducing the use of price promotion Free-standing inserts (in newspapers) Point of purchase

Couponing

Other Forms of Price Flexing

Pricing

for different segments

Geographic segments
Different prices in different zones

Usage segments
Different prices for high volume users

Demographic segments
Different prices for students, children, etc.

Time segments
On- and off-season rates

Geographic Pricing Policies

FOB
Pricing
Uniform Delivered Pricing

Zone
Pricing

Basing-Point
Pricing

Geographic Pricing Policies

FOB Pricing Zone Pricing Basing-Point Pricing
Uniform Delivered Pricing

Using freight absorption pricing (FOB - Free On Board) the seller pays or absorbs the transportation charges

Geographic Pricing Policies

FOB Pricing Zone Pricing Basing-Point Pricing
Uniform Delivered Pricing

Using zone pricing all consumers in the same zone pay the same transportation charge

Geographic Pricing Policies

FOB Pricing Zone Pricing Basing-Point Pricing
Uniform Delivered Pricing

Using basing-point pricing, all freight costs are priced as if they originated from the same basing point

Geographic Pricing Policies

FOB Pricing Zone Pricing Basing-Point Pricing
Uniform Delivered Pricing

Using uniform delivered pricing all consumers pay the same transportation charges (average shipping expense to all customers)

Pricing Policies
Prestige Pricing Loss-Leader Pricing Odd-Even Pricing

Product Line Pricing

Pricing Policies
Prestige Pricing Loss-Leader Pricing Odd-Even Pricing

Product Line Pricing

Pricing at relatively high levels so as to convey an image of high quality or exclusivity

Pricing Policies
Prestige Pricing Loss-Leader Pricing Odd-Even Pricing

Product Line Pricing

Pricing policy which offers products at prices below or near cost to attract consumers from competitors stores

Pricing Policies
Prestige Pricing
Loss-Leader Pricing Product Line Pricing

Odd-Even Pricing

Price lining is producing or marketing multiple products at different price points Bundling is marketing two or more products in a single package for a special price

Pricing Policies
Prestige Pricing Loss-Leader Pricing Odd-Even Pricing

Product Line Pricing

Odd pricing refers to a price ending with an odd number just under a round number Even pricing is used to convey high quality