PRICING DECISIONS

II ELEMENT OF MARKETING MIX

PRICE

Price is the amount of money charged for a product or service.

Of all marketing mix elements price is the only one which generates revenue for the company.

Price is said to be the most flexible element of the marketing mix as it can be changed quickly.

Price to a large extent depends on the number of competitors

and level of competition.

FACTORS INFLUENCING PRICE

DETERMINATION

EXTERNAL FACTORS Market Characteristics - Major Firm resort to low pricing in the time recession Eg. HUL decreased the price of Pepsodent

, Coca Cola also dropped the prices of all its 330 ml cans from
Rs. 25 to Rs. 20.

Buyer Behavior in respect of the product Diamond Government controls / regulation on Pricing Sugar Prices, Oil Prices etc.

Competitors Pricing Strategy.

FACTORS INFLUENCING PRICE

DETERMINATION

1.

2. 3.

4.

Two types of factors Internal & External Internal Factors : Price as per the objectives of the firm For example- Wal Marts objective is to Provide the customers what they want, when they want it, all at a value, and therefore they follow EDLP. Stage of Product life Cycle. Manufacturing Costs Price difference in China v/s other countries Nature of the Product. Eg Necessity, Luxury

PRICING OBJECTIVES
Profit Maximization in Short Term/ Long Term A minimum return on Investments. Achieving Particular Market Share. Deeper Penetration of the market Entering New Markets. Counter the Competition. Keeping at Pace with Competition. Providing the commodities at prices that will stimulate Economic Development. Providing the commodities at prices affordable by weaker section.

PRICING METHODS / APPROACHES

COST- BASED PRICING COMPETITOR BASED

DEMAND BASED PRICING / VALUE BASED

COST BASED PRICING

Cost based pricing considers cost to be an important element of the price. Under this method Price is decided on the basis of Cost of the product. Following Policies are used under this strategy: Cost Plus Pricing / Mark Up Pricing Mark up Pricing involves fixing a price for a product by adding mark ups/ margins to the cost price. Mark ups are decided by trial and error and there is no fixed criteria of reaching the mark up. Eg. Honda . Recent Case of KFAR : And a decision for Cost Based Pricing.

COST BASED PRICING CONTD

Target Return Pricing / Break Even Pricing : The Firm Decides that price which would yield its target rate of ROI. GM used to price its automobile to achieve a 15 % - 20% ROI. Formula ,

Target Return Price = Unit Cost +

Desired return * Invested Capital Unit Sales

Eg Investment = Rs 10,00,000, ROI = 20% , Unit Sales(Projected) = 50,000, Unit Cost 20 T. R. P = 20 + .20 * 10,00,000 50,000 T.R.P = Rs. 24

DEMAND BASED PRICING / VALUE BASED PRICING

Under this method Price of a Product is determined keeping the demand concept into the mind : Following Policies are popular under this strategy : What the Market can Bear Pricing : The highest price that the consumers are willing to pay for the product under a specific situation, that price is fixed. Skimming Pricing (For New Products) : Keeping high initial Prices to skim the high end customers and then settle to low prices later on. Eg. A good Strategy for Luxury and Speciality Products. LG Electronics in India. Peneteration Pricing (For New Products) : Seeks penetration in the Market with Low Prices. Appropriate for large sales of no frill products. Eg. Reliance Communications.

COMPETITION ORIENTED PRICING

Under this Pricing approach Firm fixes it price Keeping the price of the Competitor in the mind : Following Policies are majorly used : Premium Pricing : Charging a Price above the Price of the competitor. Eg. Bentley, Rolex. Discount Pricing : Charging the Price below the Prices charged by the Competitor. Eg. Big Bazar , Easy Day. A very popular strategy in recent past in Indian Aviation sector. Kodak & Fuji Films in USA markets in Late 1990s. Going Rate Pricing : Charging the same price as the competitor. Majorly famous for Industrial Products like Steel, Paper etc.

EXAMPLE OF COMPETITION BASED PRICING

Pay- Per- Second Pricing in Telecom Sector of India.

Tata- Docomo entered the market in June 2009 by Pay-per use plan. On Oct 30 Aircel Announced its Pay Per Second Plan. Airtel also announced per-second pricing later.

ADAG, Reliance Com followed the suit on 3rd Nov 2009 for both

GSM and CDMA

4TH Nov Vodafone also launched same scheme. 6th November BSNL also adopted the policy.

PRICING TO VALUE
Is based on assumption that the objective is not cover cost but to realize the value of the product perceived by the customer. Following Policies are popular : Perceived Value Pricing : Few companies Price their products on Customers Perceived value, Perceived Value is made up of several elements like (Quality, Warranty, Customer service, Brand name etc). Companies Charge Premium Price for a Positive Perceived value for their products. Eg. Apple, Caterpillar, Louis Vuitton. Value Pricing : The companies win Loyalty of customers by charging Fairly low prices for good Quality offerings ( Claim to Provide Value for Money) eg. Wal Mart, Big Bazar, Bata, Jet Lite.

MARKET ENTRY PRICING STRATEGIES

Market-Skimming

Pricing: Setting a high initial price for

14 - 13

a new product. Works if product is new, distinctive and desired Early in Product Life Cycle, when demand inelastic Protected by entry barriers, e.g. patents Market-Penetration Pricing: Setting a low initial price for a new product. Works if large market, elastic demand Economies of scale are possible Fierce competition

PRODUCT MIX PRICING STRATEGIES

1. Product Line Pricing : Pricing the entire Product line Optimally, in order to ensure there is minimal chance of self cannibalization.

Usually marketers differentiates their items in Product line by

different price levels : HUL : Wheel, Rin & Surf Excel.

The customer thus associates it with low, medium and high quality.

In such a case Perceived Quality difference should be established to justify prices.

NOKIA LUMINA : Launched in India on 14th Nov 2011. Available widely by Mid dec 2011.
NOKIA LUMINA - 710 Rs 19,000 512MB RAM

PRODUCT LINE PRICING : A CASE OF VARIANTS & HOW YOU JUSTIFY

NOKIA LUMNIA -800 Rs 29,000 512MB RAM 3.7-inch screen (480 x 800 pixels) 8MP rear camera with dual-LED flash 16GB storage. Very Elegant and High End Look

LED flash and 3.7-inch TFT screen (480 x 800 pixels) 5 megapixels 8GB storage Average Looking

LUMINA WHICH IS WHICH ?

PRODUCT MIX PRICING STRATEGIES

Optional Product Pricing : Relates to the pricing of the accessories or the optional products.

The question Which to price separately? Idea is to make Usual things optional

Prominent in Automobile sector ( Economy Model to High end

Model ) point of competition .

Also very much Popular in Aviation ( Extra Prices for the blanket, Water, food etc. ) : Ryan Air, Indigo . American Airlines in 2008 started the concept of charging for checking bags.

OPTIONAL PRODUCT PRICING

visit : http://www.youtube.com/watch?v=tvu0j06rENQ&feature=player _embedded. To see the optional product pricing in aviation sector.

PRODUCT MIX PRICING STRATEGIES

Captive Product Pricing : Related to the pricing of the products which are used along the main product.

Captive products are items designed specifically for use with another product

Camera- Rolls, Printer- Cartridges, Razor- Blade. HP selling low- priced printers but making money on cartridges. Gillette with same strategy for blades, and low priced razors.

PRODUCT MIX PRICING STRATEGIES

Product Bundle Pricing : Combining the several products and

offering the bundle at reduced price.

Mostly used by retailers like Big Bazar, Shoppers Stop.

Also popular in Tourism and Leisure Business : the total

package price less than the individual product prices.

TENDER PRICING

Few firms, Basically in Industrial markets fix the prices on the basis of tenders.

The Institutional Customers are called for competitive bidding through sealed tenders or quotations.

the buyer looks for the lowest price. The focus here is to fix a price that takes care of all costs and profits and is low enough to get the business.

Eg. For Printing of Workbooks for an Institution , quotations are

invited. Lowest Quotation becomes the price of the Workbook. And the contract is given to the bidder.

AFFORDABILITY BASED PRICING

This strategy is also called Social Welfare Pricing.

This strategy is popular in case of those products which are

basic needs of all the segments of consumers.

The pricing is done in such a way that all segments of the total market can afford to buy and consume the product as per their need.

Here price is Independent of Cost.

This Pricing Strategy is commonly used by the Government.

Eg. Item sold through PDS.

DIFFERENTIATED PRICING

Charging different prices for same product by the same company in different market segments or zones.

This is mostly related to place of production ( Bread, Rusk), Customers Ability to pay etc.

NOKIAs Apps Store OVI is using differentiated Pricing

Strategy Nokia having different Prices on OVI stores as per the purchasing power of the customers pf different countries. Eg. For same applications Pricces are different in Pakistan, UK and USA.

Price Discrimination.

PSYCHOLOGICAL PRICING

Consumer Buying Decisions are influenced by Psychological Factors ( As per few Research findings)

The research reveals that customer responds better to certain types of prices and will more likely to buy items with these

prices eg. Rs. 999 , 49, 449 etc.

This focus on a belief that people feel that they are getting savings on what they have bought.

Bata has been a Pioneer in this strategy and now other firms are also using this strategy.

INTERESTING PRICING STRATEGIES