PRICING STRATEGY

PRICE

Quantity of money received by the seller

Price = ------------------------------------------------
Quantity of goods & services received by
the buyer
Pricing strategy
• Success of any business
depends on long run profit,
growth,& survival objectives
• Contributing to +ve cash
flow, price helps to finance
growth objectives
• A diversed firm with multiple
product lines can hold
several pricing strategy in
operation at one time
New product
introduction

• Substantial investment stage

• How fast a firm should recover
its investment depends on
- nature of product & its life span
- Strength of potential competition
- Type of demand
- Financial strength of the company
Stra teg ies for p ricin g a ne w
prod uct
• Market skimming
• Market penetration
Market skimming
strategy
• Charge an artificially high price &
gradually reducing over time
• If development & marketing cost
recovered before competitors
enter, surplus earnings used for
product improvement & expansion
into large volume markets thus
reducing average cost of producing
• Skimming is more effective when
the product has strong patent
protection or other barriers to
market entry exist(complex tech.
Or high capital requirements)
• Drawback: High margins attract
competition
Market penetration strategy
• Penetration pricing is based on the
assumption that demand for product
is highly elastic
• By setting low price ,firm stimulates
market growth , capture large share
& thereby increases its scale &
efficiency of operation,realizing lower
production cost than competitors
Dr awb acks:
• Larger volume must be sold before
startup cost are recovered.Thus,
short run profits are sacrificed to
gain mkt. Share & long run profits
• The profit ratio is lower (profit on
sales)
Pricing strategy
• Skimming & penetration pricing
strategies are only guides &
cannot be applied in all
situations
• Choice of an appropriate
pricing strategy for new
product is based on
- firms objectives
- Relevant customer segments
- Impact of price on the actions
of competition
- Cost considerations
- Distribution strategies
Product life cycle considerations

• Gro wth
more customers start use for
product, competitors are able to
offer substitutes ---- price
decision
• Marketers face a pressure of
lowering the prices below
introduction stage
• Buyers develop different
purchasing policy as more than
one suppliers enter the market ,
thus, making the innovator firm
to lower the price
Maturity stage pricing strategy

• Competitors are well-

entrenched & aggressive
• To increase sales
volume,marketer has to cut into
competitor’s mkt share
• Pricing strategy : lowering the
price
• Buyers – cost benefit analysis of
various suppliers
Decline stage pricing strategy

• Reduce cost to earn profit &

not price
• Cut price to increase the
sales volume & use the
product to sell other
products in the product mix
• If competitors withdrawn
from the mkt, marketers can
consider selective increase
in price in some segment
which are not price sensitive
Competitive bidding
• Clo se d b id
Starts with a formal invitation to
potential suppliers to submit written,
sealed bids & all bids are opened &
reviewed at a pre established time
• Open bid
Suppliers make a series of oral or
written offers up to a specified date
 Competitive bidding
Developing bids is a costly & time
consuming process

Awarding of bids is highly

dependent on PRIC E

• Bi dding Strat egy

- Prebid Analysis
- Bid Determination
Prebid analysis
• Company objectives
Assist the firm in deciding what
type of business to pursue, when to
bid, & the level of pricing to use
• Sc re eni ng Bi d oppor tuni ties
3 stages in screening
 A identification of criteria deemed
important in evaluating contracts
 A measure of their relative importance
 An evaluation of bid opportunity

To assess the value of various bids,

marketing mgr must consider – plant
capacity, competition, delivery
requirements & profits
Bid Determination
Optimal bid price is dependent
on
• Perception of how competitors
might bid
• Profit to be expected if the bid is
accepted
• Probability that contract will be
won
A high bid with a large expected profit
has LOW probability of acceptance
A low bid with little or no profit has
HIGH probability of acceptance
• Price determination in competitive
bidding
------- Probability model (evaluating
potential profits)
Bidding model
Obj : To determine the optimum
level of profit if the bid is accepted
& likelihood of its acceptance
Optimum bid – Offers highest
expected payoff.
It would maximize E(A) as expressed in the equation

E(A) = P(A) x T(A)

Where,

A = Bid price in rupees

E(A) = Expected profit at bid price A
P(A) = Probability of acceptance of the bid price A
T(A) = Profit if the bid price is accepted
 Assessment on possible bid prices
Bid price Total
cost/unit
P(A) T(A) = E(A) =
A-C P(A)x T(A
(A) (c )

450 350 0.00 100 0

440 350 0.05 90 4.50
430 350 0.15 80 12
420 350 0.25 70 17.50
410 350 0.40 60 24
400 350 0.50 50 25
390 350 0.60 40 24
380 350 0.72 30 21
370 350 0.85 20 17
360 350 0.90 10 9
350 350 0.92 0 0
 Price Negotiation
• Negotiation – Price,service, delivery,
technical assistance, product
characteristics & quality
• Process begins with quotation/ bid ,
later modified to reflect
requirements of buyers & strengths
of seller
• Employed – new products
• With no experience in estimating
cost – sellers prefer to negotiate
• Buyers – negotiated price is closer to
right price than original quotations
• Sellers – requires skill, experience &
preparation
Negotiation Strategy

 A negotiated strategy
 A dictatorial strategy
 A defensive strategy
 A gamesmanship strategy

100 %
defensive strategy Buy-
ers negotiated strategy
stre- X
ngth

5% Sellers strength 100 %

gamesmanship strategy dictatorial strategy

5%
Measuring buyer & seller strength

• Buyers strength
- organization size
- amount of past purchase
- future buying power
- business periodicity
- need for the product
• Sellers strength
- company image
- product quality & uniqueness
- delivery capability
- technical assistance
- post sale service
Measurement table
Strength Scale Weights Total
Criteria Value score
(1-10)
Org. size 9 4 36

Past
purchase

Repeat
Purchase

Total score =
% score = 54% & 62%
Evaluating Buyer & Seller product
Need
• Tactics in negotiation process
depend on buyers need for the
product w.r.t to sellers need for the
sale
• Buyers product need classified as
- Acute , Moderate or marginal
• Sellers need to make sale
>Acute – operating well below
capacity,or to secure prototype
order leading to repeat business
>Marginal – production is near full
capacity or no repeat orders
Determining key Negotiable factors

• Seller – determine where the buyer

stands w.r.t all factors relevant to
negotiation
• Factors – 3 categories
 Non – Negotiable factors
 Prime trade – off candidates
 Non value factors

Most industrial negotiations aim at

win – win result