2. Session Coverage-Pricing Decisions
Importance of Pricing
External and Internal Factors Affecting
pricing decisions
Pricing Objectives
Pricing Approaches
Cost Based Pricing
Buyer Based Pricing
p
g
Competition Based Pricing
3. Session Coverage-Pricing Decisions
New Product Pricing Strategies
Product-mix Pricing Strategies
Price Adjustment St t i
P i Adj t
t Strategies
Price Changes
4. PRICE
Price is amount of money and/or other
items with utility needed t acquire a
it
ith tilit
d d to
i
product.
5. The Importance of Price to Marketers
• Pricing only element that produces
Revenue ; Other elements produce
costs
• Prices are the easiest marketing – mix
element to adjust
• Price communicates to the market the
company's intended value positioning of
its product or brand
6. Purpose of Pricing
The purpose of price is not to recover
costs,
costs but to capture the perceived value
of the product in the minds of the
customer.
customer
(
(Nimer)
)
Is this all?
7. Current Pricing Trends in Indian
Markets
You are getting less for your money
You are getting less for your money
Weight (Grams)
Product
Price(Rs) Then
( )
Now
1 Lays Chips
20
68
61
2 Good Day Biscuits
10
100
84.5
3 Dairy Milk Chocolate
20
50
38
4 Britannia Bread
12
400
375
5 Maggi
10
100
80
6 Haldiram Snacks
10
52
48
7L S
Lux Soap
10
75
65
Less
7
15.5
12
25
20
4
10
Times of India-November 20, 2011
8. CUSTOMER’S MIND
•
Some customers interested in low prices,
while other segment interested in
service, quality, value and brand image.
• R
Research id tifi d 4 segment of
h identified
t f
shoppers
Brand loyal: relatively uninterested in price
System beaters: prefer certain brands but
y
p
buy them at reduced price.
Deal shoppers: Driven by low prices
9. CUSTOMER’S MIND
•Uninvolved: Not motivated by either a
Uninvolved:
brand or low price.
Study had differentiation in demographics.
So, psychographic factors responsible for
different degree of price sensitivity. Value is
also very important
10. Importance of Pricing-McKinsey
Research
Pricing is extremely important, small
changes in price can translate into huge
p
p
y
improvements in profitability.
A study of 1000 companies:
McKinsey found that a 1% increase
in price would improve profits by
7% assuming no change in sales
volume.
12. INTERNAL FACTORS
Aim is to recover cost of manufacturing and
marketing through price.
1.
2.
2
3.
4.
4
5.
Corporate & Marketing objective of firm
Image sought by firm through Pricing
Characteristics of Product
Price l ti it f demand
P i elasticity of d
d
Stage of product in its life cycle
13. INTERNAL FACTORS
6.
6
7.
8.
8
9.
Cost of manufacturing and marketing
Extent of differentiation practiced
Composition of product li of products
C
iti
f
d t line f
d t
Other elements of market mix of firm and
their interaction with pricing.
14. EXTERNAL FACTORS
1.
1 Market Characteristic (Demand
(Demand,
Customer and Competition)
2.
2 Buyer behavior with respect to product
3. Bargaining power of major customers
4. Bargaining power of major suppliers
5. Competitors p
p
pricing p y
g policy
6. Government control/regulation on pricing
7.
7 Other relevant legal aspects
16. Where does the money go?
Why do textbooks cost so much???
Authors + Publishers
=
75%
Retailers
R t il
=
25%
Suppose price of book is Rs 50 (37.50
&12.5)
Author gets 10-15% of wholesale price
g
p
Author s
Author’s Share = Rs 3.75-6.63
3 75 6 63
Publisher’s Share= Rs 31.87-33.75
17. Where does the money go?
Author: Takes 3 long years to develop book.
Revised Editions- takes 1-1.5 years
Publishers share looks more (Rs 32-33) they
32-33),
cover cost of MR, Art, Design, Production,
Distribution, Salaries of sales force, distribution
,
,
of promotional material AND
OVERHEAD Costs-Office, Computers etc
Spend 15-20 lakh upfront.
18. Where does the money go?
Retailers:
Personal and Operation Cost=50 %
Marketing Cost
=13-15%
Taxes
= 10-15%
Income:
Author
=75%
7.5
Publisher = 7.5%
Retailer = 5%
%
19. PRICING SURVEY RESEARCH
9 % Companies GUESS about Price
37% C
Companies match what
i
t h h t
COMPETITORS Charge for similar offerings
52% Companies choose p
p
price that cover
costs and provide fair profit.
21. 1.
1 PRICING OBJECTIVES
1.
1 Profit maximization in short term
2. Profit optimization (to make something
as good as it can b ) i l
d
be) in long t
term.
g
3. Achieving a particular market share
4. Deeper penetration in the market
5.
5 Entering new markets
6. Keeping parity with competition
22. PRICING OBJECTIVES
7.Providing
7 Providing commodities at prices affordable by
weaker sections.
8.Providing
8 Providing commodities at a price that
stimulate economic development.
These 2 objectives are relevant only to
providers of essential commodities and public
utility services
services.
Firms seek to meet basket of returns through
pricing policies NO FIRM IS SATISFIED WITH
policies.
SINGLE OBJECTIVE
23. Firms use pricing for Variety of
Objectives-AP, BA and LG
Obj i
AP
d
• Asian Paints (Uses Price to Protect MS)
• M.Leader, 33% Share, but industry highly competitive.
Has reduced prices of all items to protect MS.
• British Airways (Enhance Profitability)
• Started focusing of Business/Executive & Economy
Class.
Class Have reduced no of seats in Economy
Economy.
• LG (MS to Profitability)-Came in 2001-Objective was
volume/MS.Profits came down to 2% of sales in 2005.
Now objective is Profitability.
• Have increased the prices and working on differentiation
24. Setting the Price
2. Determining Demand
ee
g e a d
– Price sensitivity
– Total Cost of Ownership
– Estimating Demand Curves
– Price Elasticity of Demand
• Inelastic
• Elastic
25. Setting the Price
3. Estimating Cost
g
– Types of Cost and Levels of Production
• Fixed costs
• Variable cost
• Total cost
• Average cost
•
Fixed cost:
– Does not change with production
• Examples: Rent, Overhead, Salaries
– Variable Cost
Changes with production
Can be eliminated in the short run
Examples: Cost of materials that go directly into the product, wages
Average Cost (= Total cost / No of units in Production)
26. Setting the Price
Selecting a Pricing
Method
PRICING METHODS/STRATEGIES
1. Cost based pricing
2. Demand B
2 D
d Based P i i
d Pricing
3. Competition Based pricing
4. Value Pricing
5.
5 Product line oriented pricing
6. Tender Pricing
7. Differentiated Pricing
7 Diff
ti t d P i i
27. COST BASED PRICING-2
Following methods are commonly used:
1. Mark-up Pricing/Cost plus pricing
2. Absorption cost pricing/full cost pricing
2 Ab
ti
t i i /f ll
t i i
3. Target rate of return pricing
28. COST BASED PRICING-3
Mark-up Pricing/Cost plus pricing:
Selling price of product is fixed by adding
margin to its cost price.
price
•Slower the turnaround, larger mark-up
•Used by companies, who do not have
y
p
,
manufacturing of their own.
29. Mark-up or Cost Plus Pricing-4
• TO SET PRICE:
• 1) Estimate Total Cost Per Unit
Formula
• 2) Apply the “Formula”
– e.g., TOTAL COST + 30-50% or anything%
• Problem
– IGNORES demand
• Advantage
– SIMPLE
31. COST BASED PRICING-6
1. Target rate of return pricing
Estimated Unit Cost = Rs12 50
Rs12.50
b. Estimated Sales Volume = 80,000 units
c. TOTAL COST = R 10 00 0 00
Rs 10,00,0,00
d. Target ROI = 20%
.20 x Rs10,000,00 =Rs 2,000,00 Needed
Profit
32. COST BASED PRICING 7
PRICING-7
Needed (Target) Revenue =
Total Cost + Profit
= R 10 000 00 + R 2 000 00 =
Rs10,000,00 Rs 2,000,00
Rs12,000,00
Unit Price
= REVENUE / VOLUME
= Rs12,000,00 / 80,000
=Rs15.00
=Rs15 00 / Unit Price
34. Break Even
Break-Even
• Cost Volume Price and Profits
Cost, Volume,
interrelated
• A particular volume level and its
associated cost level generates a
particular profit level
level.
• When we consider different price level, we
have diff
h
different profit l
t
fit levels.
l
• Firm can accordingly project profits at
different price levels and chose the one
that suits them the most.
35. Review Break Even
Break Even Point
(in Units)
=
5,71,428 units
, ,
FC
(SP-VC)
5000000
(15.00-6.25)
36. Review Break Even
Break Even Point
(in Rupees)
FC
= 1-(VC/SP)
5,000,000
5 000 000
1-(6.25/15)
Rs 85 71 429
85,71,429
37. 2. DEMAND BASED PRICING-1
1. What
1 “What the traffic can bear?”
bear?
2. Skimming Pricing
3. Penetration Pricing
3 P
t ti P i i
38. DEMAND BASED PRICING-2
1. What
1 “What the traffic can bear?”
bear?
•
•
•
Maximum price th t a customer can pay.
M i
i that
t
Safe when demand is inelastic.
Buyer opposition or new firms will create
y
difficulty.
39. DEMAND BASED PRICING-3
2.
2 Skimming Pricing
High Price+High profits at early stages, later
settles down at low prices
prices.
For example: I-Pod, Mobile Phones
41. 3. COMPETITION ORIENTED
PRICING-1
PRICING 1
Three policy options available:
• Premium-Up
• Di
Discount-Down
tD
• Parity or going rate pricing-Matching
prices of competitors
42. Perceived Value Pricing (Offer more value than competitor and demonstrate it)
Perceived Value Price = F ( buyer’s image of product, channel deliverables, warranty quality,
customer support, firm reputation, trustworthiness)
Value Pricing
Low price for high quality offering e.g. WalMart.
It is as much a philosophy as a method
One pricing strategy based on Value Pricing is EDLP
Going Rate Pricing
Go by competitor’s prices
competitor s
Charge same as, less than or more than competitor’s prices
Follow h l d
F ll the leader pricing is another example as in Commodity oligopolies such as
i i i
h
l
i C
di
li
li
h
steel, paper, fertilizers
45. Setting the Price
Selecting the Final Price
g
– Psychological Pricing
• Reference price
p
• Brands with average relative quality but high relative
advertising budgets charge premium prices
• Brands with high relative quality and high relative
advertising budgets obtained the highest prices
• The positive relationship between high advertising
budgets and high prices held most strongly in the
later stages of the product life cycle for market
leaders
– Company Pricing Policies
– Impact of Price on Other Parties
– Geographical Pricing
– Discriminatory Pricing
46. Adapting the Price
• Promotional Pricing
– Loss-leader pricing
– Special event pricing
Special-event
– Cash rebates
–L
Low-interest financing
i t
t fi
i
– Longer payment terms
–W
Warranties and service contracts
ti
d
i
t t
– Psychological discounting
47. Price Adaptations
-- Promotional pricing
- loss leader pricing, special event pricing ( Going to school program of Bata), Cash rebates (as in
jeweler shops) low interest financing (0% for 12 months), longer payment terms,
warranties / service contracts, psychological discounting (price high and then discount)
-- Geographical Pricing
-- Price Discounts and Allowances
- Cash discount quantity discount functional discount (given to intermediaries if they perform
discount,
discount,
certain functions), seasonal discount (off-peak buying), allowances (trade allowance
to resellers for participating in trade-ins, promotion allowance given to resellers for
participating in advertisement and promotion programs of the firm)
-- Price discrimination
-- Product Mix Pricing
pricing
car)
- Product line pricing, optional feature pricing (power windows for car), captive product pricing (razor
is low price and blade is high price), two part pricing (Mobile Phones)
