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Pricing

Price Should Align with Value

Value =
Benefit
s
-Costs

Pricing Strategies
Nine Price-Quality Strategies

Setting the Price


Step 1: Selecting the pricing objective
Survival overcapacity, intense competition, to
cover variable costs & some fixed costs
Maximize current profits get maximum out of
each transaction (Eg. Skimming pricing electronic
goods)
Maximize their market share higher sales volume
leads to low unit costs & higher long run profits

Market-penetration pricing (low price)


Best when:
Market is highly price-sensitive, and a low price stimulates
market growth,
Production and distribution costs fall within accumulated
production experience, and
Low price discourages actual and potential competition

Setting the Price


Step 2: Determining Demand
Estimating Demand Curves
Analyse past prices, quantities sold
Conduct price experiments
Systematically vary the price & see the response
Have different prices in similar territories
Ask consumers to state how many units they would
buy at different proposed prices

Price

Demand
Curve
Quantity
Demande

Setting the Price


Step 3: Estimating Cost
Types of Cost and Levels of Production
Fixed costs doesnt vary with level of production
(overhead)-rent, interest, salaries etc.
Variable cost vary with level of production
Average cost

Accumulated Production
Average costs fall with experience because labor
productivity improves

Target Costing
Decide the price at which the product will sell,
deduct the profit margin this to get target cost.
Then find the ways to reduce the cost

Setting the Price


Step 4: Analyzing Competitors Cost,
Prices, and Offers
Decide to charge more, the same or the
less
Realise that competitor can also change
their prices in reaction to your price

Setting the Price


Step 5: Selecting a Pricing Method
Markup Pricing
Unit Cost = variable cost + (fixed cost/unit expected sales)
Markup price= unit cost/ (1 desired return on sales)
Variable cost per unit = Rs. 10
Fixed cost = 3,00,000
Expected unit sales = 50,000
Unit cost = 10+3,00,000/50,000 = Rs. 16
IF YOU WANT 20% MARK UP
Mark up Price = 16/(1 - 0.2) = Rs. 20

Target-Return Pricing
Target-return price =
unit cost + (desired return X investment capital)/unit expected
sales

16+(0.2 x 10,000,00)/ 50,000 = Rs. 20

Setting the Price


Break-even volume
Break-even volume = fixed cost / (price variable
cost)
= 3,00,000 / (20 10) = 30,000

Setting the Price


Step 6: Selecting the Final Price
Influence of the Other Marketing Elements
Brands with average relative quality but high
relative advertising budgets charged premium
prices
Brands with high relative quality and high relative
advertising budgets obtained the highest prices

Psychological pricing
Luxurious brands & ego sensitive products like
perfumes, watches, etc.,
High priced cars are perceived to have high quality

Adapting the Price


Promotional Pricing
Loss-leader pricing
Store traffic & loss on the leader items can be
compensated by the additional sales

Special-event pricing Diwali sale, DSF, DSS etc.,


Cash rebates
within specified time period to clear inventories

Low-interest financing Small EMIs & longer


payment terms
Psychological discounting Initially artificial high price
then reduce - Was AED 359, now AED 299

Warranties and service contracts


Most of the time promotional pricing is a zero sum
game

Adapting the Price


Discriminatory Pricing
Customer segment
different prices with reduced attributes for
different segments
Sachets Vs Bottles for shampoo

Location pricing
Coke in first class restaurant, bakery, vending
machine

Time pricing
If you buy before certain period you will get
special discount etc.

Product
Product Mix
Mix Pricing
Pricing Strategies
Strategies
Product
Product Line
Line Pricing
Pricing

Setting
SettingPrice
PriceSteps
StepsBetween
BetweenProduct
ProductLine
LineItems
Items
i.e.
i.e.$299,
$299,$399
$399

OptionalOptional- Feature
Feature Pricing
Pricing

Product
Product
Mix
Mix
Pricing
Pricing
Strategies
Strategies

Pricing
PricingOptional
Optionalor
orAccessory
AccessoryProducts
Products
Sold
SoldWith
WithThe
TheMain
MainProduct
Product
i.e.
i.e.Car
CarOptions
Options

Captive-Product
Captive-Product Pricing
Pricing

Pricing
PricingProducts
ProductsThat
ThatMust
MustBe
BeUsed
Used
With
WithThe
TheMain
MainProduct
Product
i.e.
i.e.Razor
RazorBlades,
Blades,Film,
Film,Software
Software

By-Product
By-Product Pricing
Pricing

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-Bundle Pricing
Pricing

Pricing
PricingBundles
BundlesOf
OfProducts
ProductsSold
SoldTogether
Together
i.e.
i.e.Season
SeasonTickets
Tickets

Two
Two part
part Pricing
Pricing

Telephones
Telephones --fixed
fixedfee
feeplus
plusvariable
variablefee
fee

Price-Reaction Program for


Meeting a Competitors Price Cut
Has competitor
cut his price?
Yes
Is the price
likely to
significantly
hurt our sales?

By less than 2%
Include a
cents-off coupon
for the next
purchase

Hold our price


at present level;
continue to watch
competitors
price

No
No

Yes

No
Is it likely to be
a permanent
price cut?

By 2-4%
Drop price by
half of the
competitors
price cut

Yes

How much has


his price been
cut?

By more than 4%
Drop price to
competitors
price