Module 5

Pricing strategies

Why understand pricing

to respond to aggressive price cutters How to price the same product when it goes through different channels. How to price the same product in different countries How to price an improved product while still selling the previous version

Four views of Price

The Economist view: Price is set by the forces of supply and Demand. The Accountants View: Price should cover costs so that a profit can be shown. Customers view: Price has to represent good value. Marketers view: Pricing is an opportunity to gain a competitive advantage

What is Price?

The amt 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. We should distinguish between cost to the supplier of producing / providing the product and price paid by the buyer to acquire the product.

SETTING THE PRICE

Selecting the pricing Objective Determining the demand Estimating Costs Analyzing competitors costs, prices and offers Selecting a pricing method Selecting the final Price

Selecting the pricing Objective

A company can pursue any of five major objectives through pricing: survival, maximum current profit, maximum market share, maximum market skimming or product-quality leadership.

Determining the demand

The process of estimating demand leads to: i. Estimating Price sensitivity of market ii. Estimating and analyzing demand curve iii. Determining price elasticity of demand.

Estimating Costs

A companys cost take two forms, fixed and variable. Fixed costs (also known as overhead) are costs that do not vary with production or sales revenue. A company must pay bills each month for rent, heat, interest, salaries and so on. , Regardless of output. Variable costs vary directly with the level of production. These costs tend to be constant per unit produced. Total costs consists have the sum of the fixed and variable costs for any given level of production. Average cost is the cost per unit at the level of production; it is equal to total costs divided by production.

Analyzing competitors costs, prices and offers

While demand sets a ceiling and costs set a floor to pricing, competitors prices provide an in between point you must consider in setting prices. Learn the price and quality of each competitors product or service by: Sending out comparison shoppers Acquire competitors price lists Buy competitors products and analyze them. Ask customers how they perceive the price and quality of each competitors product or service.

Selecting a pricing method

There are three pricing methods that can be employed by a firm: 1. Cost Oriented Pricing 2. Competitor Oriented Pricing 3. Marketing Oriented Pricing

Cost Oriented Pricing

Full cost pricing - Here the firm

determines the direct and fixed costs for each unit of product. The first problem with Full-cost pricing is that it leads to an increase in price as sales fall.

Direct (or marginal) Cost Pricing -This involves the calculation of only those costs,
which are likely to increase as output increases. Indirect or fixed costs (plant, machinery etc) will remain unaffected whether one unit or one thousand units are produced.

Competition-based approach Going-Rate Pricing

In going-rate pricing, the firm bases its price largely on competitors prices, with less attention paid to its own costs or to demand. The firm might charge the same, more, or less than its major competitors. Competitive bidding is a very relevant example of this approach.

Marketing Oriented Pricing

The price of a product should be set in line with the marketing strategy. For new products, price will depend upon positioning, strategy, and for existing products price will be affected by strategic objectives.

Selecting the final Price

Pricing methods narrow the range from which the company must select its final price. In selecting that price, the company must consider additional factors such as :
psychological pricing, gain and risk pricing, the influence of other marketing mix elements on price, company pricing policies, and the impact of price on other parties.

Methods, Strategies, Tactics

Methods: The method used to calculate the actual price set. Strategy: Adopted over the medium to long term to achieve marketing objectives. They have a significant impact on marketing strategy. Tactics: Adopted in the short run to suit particular situations. Limited impact beyond the product itself.

Pricing Strategies

Geographical Pricing Price Discounts and Allowances Discriminatory Pricing Product Mix Pricing Promotional Pricing

Geographical Pricing

money and no third party involved. Compensation Deal: The seller receives some percentage of the payment in cash and the rest in products. Buyback Arrangement: The seller sells a plant, equipment, or technology to another country and agrees to accept as partial payment products manufactured with the supplied equipment. Offset: The seller receives full payment in cash but agrees to spend a substantial amount of the money in that country within a stated time period.

Barter: The direct exchange of goods, with no

Price discounts and allowances

Cash and settlement discounts Quantity discounts Promotional discounts

Promotional Pricing

Loss-leader pricing: Special-event pricing: Cash rebates: Low-interest financing: Longer payment terms: Warranties and service contracts: Psychological discounting:

Discriminatory pricing

Customer-segment pricing: Product-form pricing: Image pricing: Channel pricing: Location pricing: Time pricing:

Product-mix pricing

Product line Pricing: Clothing Optional-feature pricing: Automobile Captive-product pricing: Cell phone Two-part pricing : Phone, amusement park By-product pricing: Meat, chemicals