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PRICING

METHODS
18-1
A. COST-BASED PRICING

Under cost based pricing the marketer primarily looks


at production costs as the key factor in determining the
initial price.

This method offers the advantage of being easy to


implement as long as costs are known. But one major
disadvantage is that it does not take into consideration
the target market’s demand for the product.

This could present major problems if the product is


operating in a highly competitive market where
competitors frequently alter their prices.

18-2
(I) MARKUP ON COST

Using this method price is determined by simply


multiplying the cost of each item by a predetermined
percentage then adding the result to the cost.

A major general retailer, may apply a set percentage


for each product category (e.g., women’s clothing,
automotive, garden supplies, etc.) making the pricing
consistent for all like-products. Alternatively, the
predetermined percentage may be a number that is
identified with the marketing objectives (e.g., required
20% ROI). The calculation for markup on cost is:

Item Cost + (Item Cost x Markup Percentage) = Price


50 + (50 x .30) = Rs 65
18-3
(II) COST-PLUS PRICING

Cost-plus pricing also adds to the cost by using a fixed


monetary amount rather than percentage.

For instance, a contractor hired to renovate a office


owner’s office will estimate the cost of doing the job by
adding their total labor cost to the cost of the materials
used in the renovation. The homeowner’s selection of
carpet to be used in is likely to have little effect on the
labor needed to install it whether it is a low-end, low
priced tile or a high-end, premium priced carpet.
Assuming most material in the office project are
standard sizes and configuration, any change in the
total price for the renovation is a result of changes in
material costs while labor costs are constant.
18-4
(III) BREAKEVEN PRICING

Breakeven pricing is associated with breakeven analysis,


which is a forecasting tool used by marketers to determine
how many products must be sold before the company starts
realizing a profit.

The formula for determining breakeven takes into


consideration both variable and fixed costs as well as price,
and is calculated as follows:

Fixed Cost = Number of Units to Breakeven


Price – Variable Cost
Per Unit

18-5
18-6
 For example, assume a company operates a
single-product manufacturing plant that has a
total fixed cost per year of Rs. 3,000,000 and
the variable cost (e.g., raw materials, labor,
electricity, etc.) is Rs. 45.00 per unit. If the
company sells the product directly to customers
for Rs.120, it will require the company to sell
40,000 units to breakeven.

 3,000,000 = 40,000 units


120 - 45

18-7
B. TARGET RETURN PRICING

 In this method marketer sets price to achieve a


target return-on-investment (ROI). For
example, let's assume that marketer have
invested Rs.10,000 in the company. Expected
sales volume is 1,000 units in the first year.
Marketer want to earn all his investment in the
first year, so he need to make Rs.10,000 profit
on 1,000 units, or Rs. 10 profit per unit, giving
a price of Rs. 60 per unit.

18-8
C. VALUE-BASED PRICING

 Companies price their product based on the value it creates for the
customer. This is usually the most profitable form of pricing, if one
can achieve it.

 In this method it is the buyers perception of value and not the sellers
cost which is the key to the product pricing.

 Let's say that a tube light manufactured by Mahamaya Electric


Devices saves the typical customer Rs.1,000 a year in, say, energy
costs. In that case, price tag of Rs.60 seems too cheap. If the product
reliably produced that kind of cost savings, company could easily
charge Rs.150, Rs.200 or more for it, and customers would gladly pay
it, since they would get their money back in a matter of months.

18-9
Value Example:
ITL Tractor is Rs 100,000 vs.
Market Rs. 90,000
Rs. 90,000 if equal
7,000 extra durable
6,000 reliability
5,000 service
2,000 warranty
Rs. 110,000 in benefits - Rs.
10,000 discount!

18-10
18-11
D. PSYCHOLOGICAL PRICING

This method takes into consideration the consumer's


perception of price.
 Odd-Even Pricing: a product priced at Rs. 299.95 may
be perceived as offering more value than a product
priced at Rs. 300.00.
 Prestige Pricing: The higher the price the more likely
customers are to perceive it has being higher quality
compared to a lower priced product. marketers,
looking to present an image of high quality, may choose
to price products at even levels (e.g., Rs. 100 rather
than Rs.99.99).

18-12
E. MARKET PRICING

 Under the market pricing


method cost is not the main
factor driving price decisions;
rather initial price is based on
analysis of market research in
which customer expectations
are measured.

 The main goal is to learn what


customers in an organization’s
target market are likely to
perceive as an acceptable price.

18-13
F. COMPETITION BASED PRICING

When setting price it makes sense to look at the price of competitive


offerings. For some, competitor’s price serves as an important reference
point from which they set their price.

 Below Competition Pricing: A marketer attempting to reach objectives


that require high sales levels (e.g., market share objective) may monitor
the market to insure their price remains below competitors.

 Above Competition Pricing: Marketers using this approach are likely to


be perceived as market leaders in terms of product features, brand image
or other characteristics that support a price that is higher than what
competitors offer.

 Parity Pricing: A simple method for setting the initial price is to price the
product at the same level competitors price their product.

18-14
A successful pricing strategy must be
driven by the "Three C's" of pricing
strategy:
Customers, Competitors, and Costs.

18-15
Product
ProductLine LinePricing
Pricing
Setting
SettingPrice
PriceSteps
StepsBetween
BetweenProduct
ProductLine
LineItems
Items
i.e.
i.e.Rs.
Rs.299,
299,Rs.
Rs.399
399
Optional-Product
Optional-ProductPricing
Pricing
Pricing
PricingOptional
Optionalor orAccessory
AccessoryProducts
Products
Sold With The Main Product
Sold With The Main Product
i.e. CarAccessory
i.e.Car Accessory
Product
Product Captive-Product
Captive-ProductPricing
Pricing
Pricing
PricingProducts
ProductsThat ThatMust
MustBeBeUsed
Used
Mix
Mix With
WithTheTheMain
MainProduct
Product
i.e.
i.e.Razor
RazorBlades,
Blades,Film,
Film,Software,
Software,telephone
Pricing
Pricing telephone
By-Product
By-ProductPricing
Pricing
Strategies
Strategies Pricing
PricingLow-Value
Low-ValueBy-Products
By-ProductsTo ToGet
GetRid
Rid
of
ofThem
Them
i.e.
i.e. Lumber
LumberMills,
Mills,Zoos
Zoos
Product-Bundle
Product-BundlePricing
Pricing
Pricing
PricingBundles
BundlesOf OfProducts
ProductsSold
SoldTogether
Together
i.e.
i.e.Season
SeasonTickets,
Tickets,Computer
ComputerMakers
Makers

18-16
18-17
Price
PriceAdjustment
Adjustment Strategies
Strategies

Discount
Discount&&Allowance
Allowance
Reducing Segmented
Segmented
Reducing Pricesto
Prices toReward
Reward Adjusting
Customer
CustomerResponses
Responsessuch
suchasas AdjustingPrices
Pricesto
toAllow
Allow
Paying Early or Promoting for Differences in Customers,
for Differences in Customers,
Paying Early or Promoting Products,
the
theProduct.
Product. Products,ororLocations.
Locations.

Cash
CashDiscount
Discount Customer
Customer

Quantity
QuantityDiscount
Discount Product
ProductForm
Form

Functional
FunctionalDiscount
Discount Location
Location

Seasonal
SeasonalDiscount
Discount Time
Time

18-18
• Adjusting Prices for Psychological
Psychological Pricing Effect.
•Price Used as a Quality Indicator.

• Temporarily Reducing Prices to


Promotional Pricing Increase Short-Run Sales.
• i.e. Loss Leaders, Special-Events

• Adjusting Prices to Account for the


Geographic Location of Customers.
Geographical Pricing • i.e. FOB-Origin, Uniform-Delivered,
Zone Pricing, Basing-Point, &
Freight-Absorption.

• Adjusting Prices for International


International Pricing Markets.
• Price Depends on Costs, Consumers,
Economic Conditions & Other Factors.

18-19
18-20
18-21
Microsoft – has 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.

Deliberate price cutting or offer of ‘free


gifts/products’ to force rivals (normally
smaller and weaker) out of business or
prevent new entrants- Destroyer/Predatory
Pricing

18-22
INITIATING AND RESPONDING TO PRICE
CHANGES

Competitor
Reactions
to Initiating
Price Price Cuts
Changes

Price
Changes
Buyer
Reactions Initiating
to Price
Price Increases
Changes

18-23
Has No
HasCompetitor
CompetitorCut
Cut
Price? Hold
HoldCurrent
CurrentPrice;
Price;
Price?
Continue
ContinuetotoMonitor
Monitor
Competitor’s
Competitor’sPrice.
Price.

Will
WillLower
LowerPrice
Price No
Negatively
NegativelyAffect
AffectOur
Our
Market
MarketShare
Share&&Profits?
Profits?
Reduce
ReducePrice
Price

No Raise
RaisePerceived
Perceived
Quality
Quality
Can/
Can/Should
ShouldEffective
Effective
Action
Actionbe
beTaken? Yes Improve
Taken? ImproveQuality
Quality
&&Increase
IncreasePrice
Price
Launch
LaunchLow-Price
Low-Price
“Fighting
“FightingBrand”
Brand”
18-24
HOW TO SET PRICE?

 RESEARCH
 Monadic Design
In monadic design, each respondent is exposed to one, and
only one, price point for any given product.

 Comparative design
Comparative testing asks people to evaluate brand X first at
one price and then again at a second price. It is a more
sensitive testing.

 Declarative design
What do you, as a consumer, believe that this product is really
worth to you? In declarative design, each respondent is asked
to volunteer his or her own maximum and/or reasonable,
acceptable prices.
18-25
A. PRICE SENSITIVITY METER

18-26
18-27
 The point at which an equal number of respondents believe the test product is
expensive as believe it is too cheap is referred to as the point of marginal
cheapness (PMC). The point at which an equal number of respondents believe
the test product is too expensive as believe it is cheap is referred to as the point
of marginal expensiveness (PME). The point at which an equal number of
respondents believe the test product is expensive as believe it is cheap is
referred to as the indifference price point (IPP). The point at which an equal
number of respondents believe the test product is too expensive as believe it is
too cheap is referred to as the optimal price point (OPP).

 In this method, the optimal price point for a product is the point at which the
same number of respondents indicate that the price is too expensive as those
who indicate that the price is too cheap.

18-28
B. CONCEPT TEST/CONCEPT EVALUATION

After introducing the product concept the respondents are asked:

How likely, would you be to purchase this product in the next 12


months if it is priced Rs. 200? (Kindly Tick )

Definitely would purchase


Probably would purchase
Might or might not purchase
Probably would not purchase
Definitely would not purchase

18-29
C. CONJOINT ANALYSIS

Which refrigerator would you prefer?

Ice within 15 minutes Ice within one-hour

Rs. 8000 Rs. 7000

Strongly Prefer
Strongly Prefer
Product on Left Product
on Right
1 2 3 4 5 6 7 8 9

18-30
D. DISCRETE CHOICE

BRAND X BRAND Y BRAND Z NONE

75 Channels 250 Channels 150 Channels If these were


alternatives
Extremely clear Clear Somewhat fuzzy only
picture quality picture quality picture quality I would not
purchase
Rs. 10, 000 Rs. 9,000 Rs. 8,000 anything

18-31
THANKS
YOU
18-32