How should a company set prices intially for products and services.

1. How should a companyHow should a company
initially set pricesinitially set prices
for their products or sevices?for their products or sevices?

8. Setting Pricing PolicySetting Pricing Policy
1.1. Selecting the pricingSelecting the pricing
objectiveobjective
2. Determining demand2. Determining demand
3. Estimating costs3. Estimating costs
4.4. Analyzing competitors’Analyzing competitors’
costs, prices, and offerscosts, prices, and offers
5.5. Selecting a pricingSelecting a pricing
methodmethod
6. Selecting final price6. Selecting final price

12. It is set as objective when:
•If they are plagued with overcapacity.
•Intense competition
•Changing consumer wants

13. • Setting a price that produces maximum
profit.
• The firm knows its demand and cost
functions.
• The company may sacrifice long run
performance.

14. • Higher sales volume will lead to lower unit
costs and higher long run profit.
• Lowest price possible is set.
• Market penetration is their main
motivation.

16. • The market is highly price sensitive and
low price stimulates market growth.
• Production and distributed costs fall with
accumulated production experience
• Low price discourages actual and
potential competition.

17. • Start high and slowly drop over time.
• May not work if competitors price low.
• Can lead to outcry, when consumers buy
at high price in beginning.

19. • Sufficient buyers have a high current
demand.
• The unit costs of producing a small volume
are high enough .
• Initial high price doesn’t attract competition.
• High price communicates superior product
quality.

20. • Some brands wants to be- “affordable
luxuries”
• Brands like, Rolls Royce, BMW, Armani
have positioned themselves as quality
leaders.
• They charge premium prices.

23. Price SensitivityPrice Sensitivity

25. • There are few or no substitutes or
competitors.
• They are slow to change their buying
habits
• They do not readily notice the higher price.
• They are slow to change their buying
habits.
• They think the higher prices are justified.

26. • The product is more distinctive
• Buyers are less aware of substitutes
• Buyers cannot easily compare the quality
• Part of cost is borne by another party.
• Buyers cannot store the product.
• Price is small compared to buyers’s
income

27. • Surveys
• Price Experiments.
• Statistical Analysis

29. • Greater the volume growth resulting from
a 1 percent price reduction.
• Makes sense as long as cost price and
selling price doesn’t vary proportionately.
• Long run price elasticity may differ from
short run price elasticity.

30. • 1 percent decrease in prices led to 2.62
percent increase In sales.
• Price elasticity were higher for durable goods.
• Inflation led to higher price elasticities
• Promotional Price elasticities were higher
than actual price.
• They are higher at the individual term.

33. • Variable Costs
• Fixed costs
• Total Costs= Variable Costs + Fixed costs

34. Costs at different levels of production
Cost per unit at different levels of production

40. • Firms must analyze the competition with respect to:
 Costs
 Prices
 Possible price reactions
• Pricing decisions are also influenced by quality of
offering relative to competition

42. • Price-setting begins with the three “Cs”
• Select pricing method:
– Markup pricing
– Target-return pricing
– Perceived-value pricing
– Value pricing
– Going-rate pricing
– Auction-type pricing
– Group pricing

43. Three C’sThree C’s

44. 14-44
Costs Competitors’
prices and
prices of
substitutes
Customers’
assessment
of unique
product
features
Low PriceLow Price
No possibleNo possible
profit atprofit at
this pricethis price
High PriceHigh Price
No possibleNo possible
demand atdemand at
this pricethis price

45. 14-45
1. Markup pricing
Variable cost per unit =10$ , fixed cost =300,000$
Expected unit sales = 50,000 unit
the unit cost is given by:
Unit cost = 10$ + 300,000/50,000 =16$
Assume the manufacturer wants to earn a 20 percent
markup on sales, the markup price is given by:
Markup price = unit cost /(1- desired return on sales)
=16/(1- 0.2)= 20$
It will make profit of 4$ per unit

46. 14-46
Target-return price = unit cost + desired return * invested capital Unit
sales
2.Target-Return Pricing
Target-return price =16$ + 0.20 * 1,000,000
$50,000
pricing used to achieve a planned or target rate of return on
investment

47. 14-47

48. 14-48
3. Perceived-Value Pricing
• Companies base their price on the customer’s perceived
value.
• The key to perceived-value pricing is to deliver more value
than the competitor and to demonstrate this to prospective
buyers.
• There are three groups of buyers :
Price buyers
Value buyers
Loyal buyers

49. 14-49
4. Value Pricing
• Win loyal customer by charging a fairly low
price for a high-quality offering, that means :
reengineering the companies operations to be
low-cost without sacrificing quality.
5. Going-Rate Pricing
• The firm bases its price largely on competitors’
prices. (smaller firms “follow the leader”).
• It is quite popular where costs are difficult to
measure or competitive response is uncertain.

50. 14-50
6. Auction-Type Pricing
• One major purpose of auctions is to dispose of excess
inventories or used goods.
• Three major types of auctions:
1- English auctions (ascending bids).
2- Dutch auctions (descending bids).
3- Sealed-bid auctions.
7. Group Pricing
• Consumers and business buyers join groups to buy at a
lower price (www.volumebuy.com).

52. • Requires consideration of additional factors:
– Psychological pricing
– Influence of other marketing mix variables
– Company pricing policies
– Gain-and-risk-sharing pricing
– Impact of price on other parties

53. Thank You.Thank You.