P. 1
Pricing

Pricing

|Views: 246|Likes:
Published by Akash saxena

More info:

Categories:Types, School Work
Published by: Akash saxena on Apr 20, 2010
Copyright:Attribution Non-commercial

Availability:

Read on Scribd mobile: iPhone, iPad and Android.
download as PPTX, PDF, TXT or read online from Scribd
See more
See less

01/23/2011

pdf

text

original

Pricing

BY AKASH SAXENA

Contents
y Pricing decisions y Pricing objectives y Policies methods of setting price y Pricing strategies

By Akash Saxena

The second P
y Price = Customer cost y It should be fixed in such a manner so that the target

customer¶s cost can be minimized while maximizing the company profits

By Akash Saxena

Definition
y Price  The amount of money charged for a product or service, or the sum of the values that consumers exchange for the benefits of having or using the product or service.

By Akash Saxena

Major Influences on Pricing Decisions

Customers influence prices through their effect on demand. Competitors influence prices through their actions. Costs influence prices because they affect supply.
By Akash Saxena

The Nature of Price
y Price  The value exchanged for products in a marketing exchange y Barter  The trading of products; the oldest form of exchange y Terms Used to Describe Price  Tuition, premium, fine, fee, fare, toll, rent, commission, dues, deposit, tips, interest, taxes

By Akash Saxena

The Nature of Price (cont¶d)
y The Importance of Price to Marketers 
It

is the most readily changeable characteristic (under favorable circumstances) of a product.  It is a key element in the marketing mix because it relates directly to generation of revenues and quantities sold.  It is a key component of the profit equation, having strong effect on the firm¶s profitability.  It has symbolic value to customers²prestige pricing.

Profit ! Total Revenues - Total Costs
Profits ! (Price x Quantity Sold) - Total Costs
By Akash Saxena

Types of Costs
Cost
Fi osts Costs th t o ot r with h its produced or sold g s i th

A er ge fi ed cost V ri ble costs

he fi ed cost per unit produced Costs th t r directl with ch nges in the number of units produced or sold he ri ble cost per unit produced

A er ge ot l cost

ri ble cost

he sum of er ge fi ed nd er ge ri ble costs times the quantit produced he sum of the average fi ed cost and the average variable cost he extra cost a firm incurs b producing one more unit of a product

A erage total cost

Marginal cost (MC)
By Akash Saxena

By Akash Saxena

Breakeven Analysis
y Breakeven Point  The point at which the costs of producing a product equal the revenue made from selling the product  The point after which profitability begins

ixed Costs Breakeven ! Point Per - Unit Contri ution to ixed Costs Breakeven Point = Total ixed Costs Unit Price ± Unit aria le Costs

By Akash Saxena

Determining the Breakeven Point

By Akash Saxena

FIGURE 20.7

Factors That Affect Pricing Decisions

By Akash Saxena

FIGURE 20.8

Factors to Consider When Setting Price

Internal Factors
y Marketing objectives y Marketing mix strategies y Costs y Organizational

y Market positioning influences

pricing strategy y Other pricing objectives: 
  

Survival Current profit maximization Market share leadership Product quality leadership Partial or full cost recovery Social pricing

considerations

y Not-for-profit objectives: 


By Akash Saxena

Factors to Consider When Setting Price

Internal Factors
y Marketing objectives y Marketing mix strategies y Costs y Organizational

y Pricing must be carefully

considerations

coordinated with the other marketing mix elements y Target costing is often used to support product positioning strategies based on price y Nonprice positioning can also be used

By Akash Saxena

Factors to Consider When Setting Price

Internal Factors
y Marketing objectives y Marketing mix strategies y Costs y Organizational

y Types of costs: 
 

Variable Fixed Total costs

y How costs vary at different

considerations

production levels will influence price setting y Experience (learning) curve effects on price

By Akash Saxena

Factors to Consider When Setting Price

Internal Factors y Marketing objectives
y Marketing mix strategies y Costs y Organizational

y Who sets the price?  

Small companies: CEO or top management Large companies: Divisional or product line managers

y Price negotiation is common in

considerations

industrial settings y Some industries have pricing departments

By Akash Saxena

Factors to Consider When Setting Price

External Factors
y Nature of market and

y Types of markets 
  

demand y Competitors¶ costs, prices, and offers y Other environmental elements

Pure competition Monopolistic competition Oligopolistic competition Pure monopoly

y Consumer perceptions of price

and value y Price-demand relationship 


Demand curve Price elasticity of demand

By Akash Saxena

Factors to Consider When Setting Price

External Factors
y Nature of market and

y Consider competitors¶ costs, prices,

and possible reactions when developing a pricing strategy y Pricing strategy influences the nature of competition 

demand y Competitors¶ costs, prices, and offers y Other environmental elements 

Low-price low-margin strategies inhibit competition High-price high-margin strategies attract competition

y Benchmarking costs against the

competition is recommended

By Akash Saxena

Factors to Consider When Setting Price

External Factors
y Nature of market and

y Economic conditions 


demand y Competitors¶ costs, prices, and offers y Other environmental elements

Affect production costs Affect buyer perceptions of price and value

y Reseller reactions to prices

must be considered y Government may restrict or limit pricing options y Social considerations may be taken into account

By Akash Saxena

Factors Affecting Pricing Decisions
y Organizational and Marketing Objectives  Prices should be set that are consistent with the organization¶s goals and mission.  Prices must be compatible with marketing objectives (e.g., setting premium prices to enhance a product¶s quality image). y Types of Pricing Objectives  Setting prices low to increase market share  Using temporary price reductions to gain market share  Lowering prices to raise cash quickly

By Akash Saxena

Factors Affecting Pricing Decisions (cont¶d)

y Costs 
Set

a floor price²products must be sold above their costs if the firm is to remain in business.  Reducing costs increases productivity and profitability. Ù Using labor-saving technologies Ù Focusing on quality Ù Establishing efficient manufacturing processes
y Other Marketing Mix Variables 
Price/quality

image of the product or brand  Selective or intensive product distribution  Product pricing used as a promotional tool
By Akash Saxena

Factors Affecting Pricing Decisions (cont¶d)

y Channel Member Expectations  To make a profit at least equivalent to the potential profit from handling a competitor¶s brand  To earn a profit commiserate with the effort and resources the channel member expends on the product  To receive discounts for volume purchases and prompt payment  To be supported by the producer with training, advertising, sales promotion, and return policies

By Akash Saxena

Factors Affecting Pricing Decisions (cont¶d)

y Customers¶ Interpretation and Response  What meaning does the product¶s price have to the customer?  Does the customer respond to the price by moving closer to or farther away from making a purchase?  Internal reference price ÙA price developed in the buyer¶s mind through experience with the product  External reference price ÙA comparison price provided by others
By Akash Saxena

Factors Affecting Pricing Decisions (cont¶d)

y Buyers¶ responses to price  Value consciousness
ÙConcern

about price and quality to pay low prices 

Price

consciousness sensitivity
drawn to products that signify prominence and status

ÙStriving 

Prestige
ÙBeing

By Akash Saxena

Factors Affecting Pricing Decisions (cont¶d)

y Competition 
Pricing

to match competitors¶ prices  Judging competitors¶ responses to adjusting prices  Changes in an industry¶s market structure cause and create pricing opportunities.
y Legal and Regulatory Issues 
Price

controls intended to curb inflation  Controls that set/regulate prices for specific products  Regulations and laws to prohibit price fixing, and deceptive and discriminatory pricing

By Akash Saxena

Price Discounting
y Trade (Functional) Discounts 
A

reduction off the list price given by a producer to an intermediary for performing for performing certain functions from list price for purchasing large quantities

y Quantity Discounts 
Deductions

y Cumulative Discounts 
Quantity

discounts aggregated over a stated period reductions in price based on specific factors

y Noncumulative Discounts 
One-time

By Akash Saxena

Price Discounting (cont¶d)
y Cash Discount  A price reduction given to buyers for prompt payment or cash payment y Seasonal Discount  A price reduction given to buyers for purchasing goods or services out of season y Allowance  A concession in price to achieve a desired goal

By Akash Saxena

By Akash Saxena

Pricing for Business Markets
y Geographic Pricing  Reductions for transportation costs and other costs related to the physical distance between buyer and seller
Ty e
F.O.B. factory F.O.B. destination Uniform eora ic ricin Zone ricin Base- oint ricin

Pricin met od
T e rice of t e merc andise at t e factory, efore s i ment rice indicatin t at t e roducer is a sor in s i in costs C ar in all customers t e same rice, re ard less of eo ra ic location Pricin ased on trans ortation costs eo ra ic zones it in major

Geo ra ic ricin com inin factory rice and frei t c ar es from t e ase oint nearest t e uyer t costs y t e

Frei t a sor tion sor tion of all or art of actual frei ricin seller
By Akash Saxena

Pricing for Business Markets (cont¶d)
y Transfer Pricing  The price of products that one organizational unit charges when selling to another unit in the same organization  Actual full cost ÙAll fixed and variable costs divided by the number of units produced  Standard full cost ÙPricing based on what it would cost to produce the goods at full plant capacity.  Cost plus investment ÙFull cost plus internal cost of assets used in production

By Akash Saxena

Pricing for Business Markets (cont¶d)
y Transfer Pricing (cont¶d)  Market-based pricing
ÙMarket

price less marketing and selling costs

By Akash Saxena

General Pricing Approaches
y Cost-Based Pricing: Cost-Plus Pricing  Adding a standard markup to cost  Ignores demand and competition  Popular pricing technique because: Ù It simplifies the pricing process Ù Price competition may be minimized Ù It is perceived as more fair to both buyers and sellers

By Akash Saxena

General Pricing Approaches Cost-Based Pricing Example
Variable costs: $20 Fixed costs: $ 500,000 Expected sales: 100,000 units Desired Sales Markup: 20% Variable Cost + Fixed Costs/Unit Sales = Unit Cost $20 + $500,000/100,000 = $25 per unit Unit Cost/(1 ± Desired Return on Sales) = Markup Price $25 / (1 - .20) = $31.25

By Akash Saxena

General Pricing Approaches
y Cost-Based Pricing: Break-Even Analysis and

Target Profit Pricing   

Break-even charts show total cost and total revenues at different levels of unit volume. The intersection of the total revenue and total cost curves is the break-even point. Companies wishing to make a profit must exceed the break-even unit volume.

By Akash Saxena

General Pricing Approaches
Break-Even Analysis and Target Profit Pricing
Revenues 1000 T ousands of Dollars 800 600 400 Fixed Costs 200 0 10 20 30 40 Quantity To Be Sold To Meet Target Profit Break-even point Target Profit $200,000 Total Costs

Sales olume in T ousands of Units

By Akash Saxena

General Pricing Approaches
y Value-Based Pricing:  Uses buyers¶ perceptions of value rather than seller¶s costs to set price.  Measuring perceived value can be difficult.  Consumer attitudes toward price and quality have shifted during the last decade.
Ù Introduction

of less expensive versions of established brands has become common.

By Akash Saxena

General Pricing Approaches
y Value-Based Pricing:  Business-to-business firms seek to retain pricing power Ù Value-added strategies can help  Value pricing at the retail level Ù Everyday low pricing (EDLP) vs. high-low pricing

By Akash Saxena

General Pricing Approaches

y Competition-Based Pricing:  Also called going-rate pricing  May price at the same level, above, or below the competition  Bidding for jobs is another variation of competitionbased pricing Ù Sealed bid pricing

By Akash Saxena

Pricing strategies
y Premium pricing
Ù Uses

a high price, but gives a good product/service exchange e.g. Mercedez Benz

By Akash Saxena

Penetration pricing
y Penetration pricing
Ù offers

low price to gain market share - then increases price Ù e.g. Nirma Washing Powder

By Akash Saxena

Economy Pricing
y Economy pricing
Ù placed

at µno frills¶, low price Ù e.g. Southwest Airlines, Deccan Airlines

By Akash Saxena

Price Skimming
y Price skimming Ù where prices are high - usually during introduction Ù e.g new albums or films on release Ù ultimately prices will reduce to the µparity¶

By Akash Saxena

Psychological Pricing
y Psychological pricing Ù to get a customer to respond on an emotional, rather than rational basis Ù .e.g Rs. 99p not Rs. 100 price point perspective

By Akash Saxena

Product Line Pricing
y Product line pricing Ù rationale of a product range Ù e.g. Cadbury Chocolates

By Akash Saxena

Pricing variation
y Pricing variations Ù µoff-peak¶ pricing, early booking discounts, etc Ù e.g Hotels and Resorts

By Akash Saxena

Optional Product Pricing
y Optional product-pricing
Ù e.g.

optional extras - BMW famously under-equipped, Dell

By Akash Saxena

Geographical Pricing
y Geographical pricing
Ù different

prices for customers in different parts of the world Ù e.g. Include shipping costs, or place

By Akash Saxena

Ten ways to µincrease¶ prices without increasing price - Winkler
y Revise the discount structure y Change the minimum order size y Charge for delivery and special services y Invoice for repairs on serviced equipment y Charge for engineering, installation y Charge for overtime on rushed orders y Collect interest on overdue accounts

By Akash Saxena

y Produce less of the lower margin models in the

line y Write penalty clauses into contracts y Change the physical characteristics of the product

By Akash Saxena

New-Product Pricing Strategies

Market-Skimming
‡ 

‡

When to use:
Product¶s quality and image must support its higher price. Costs of smaller volume cannot be so high they cancel the advantage of charging more. Competitors should not be able to enter market easily and undercut the high price.

Set a high price for a new product to ³skim´ revenues layer by layer from the market. Company makes fewer, but more profitable sales.

‡

‡

‡

By Akash Saxena

New-Product Pricing Strategies

Market-Penetration
‡  

When to use:
Market must be highly price sensitive so a low price produces more market growth. Production and distribution costs must fall as sales volume increases. Must keep out competition and maintain low price or effects are only temporary.

Set a low initial price in order to ³penetrate´ the market quickly and deeply. Can attract a large number of buyers quickly and win a large market share. 

‡ 

By Akash Saxena

By Akash Saxena

You're Reading a Free Preview

Download
scribd
/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->