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PRICING DECISIONS

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 Based Pricing g ‰Competition

Session Coverage-Pricing Decisions
‰New Product Pricing Strategies ‰Product-mix Pricing Strategies ‰Price P i Adj Adjustment t t St Strategies t i ‰Price Changes

PRICE
Price is amount of money and/or other it items with ith utility tilit needed d dt to acquire i a product.

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 .The Importance of Price to Marketers • Pricing only element that produces Revenue .

customer ( (Nimer) ) Is this all? .Purpose of Pricing The purpose of price is not to recover costs but to capture the perceived value costs. of the product in the minds of the customer.

Current Pricing Trends in Indian Markets 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 12 25 20 4 10 Times of India-November 20. 2011 .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 7 Lux L  Soap S 10 75 65 Less 7 15.

quality. value and brand image. • Research R h id identified tifi d 4 segment t of f shoppers Brand loyal: relatively uninterested in price System y beaters: p prefer certain brands but buy them at reduced price. Deal shoppers: Driven by low prices .CUSTOMER’S MIND • Some customers interested in low prices. while other segment interested in service.

Value is also very important . So.CUSTOMER’S MIND •Uninvolved: Not motivated by either a brand or low price. Study had differentiation in demographics. psychographic factors responsible for different degree of price sensitivity.

y improvements A study of 1000 companies: McKinsey found that a 1% increase in price would improve profits by 7% assuming no change in sales volume.Importance of Pricing-McKinsey Research Pricing is extremely important. small changes in price can translate into huge p in p profitability. .

Factors Affecting Pricing Decisions • Two Types of Factors: 1. Internal Factors 2. External Factors .

3. 2 2.INTERNAL FACTORS Aim is to recover cost of manufacturing and marketing through price. 4 4. 1. 5. Corporate & Marketing objective of firm Image sought by firm through Pricing Characteristics of Product P i elasticity Price l ti it of fd demand d Stage of product in its life cycle .

Cost of manufacturing and marketing Extent of differentiation practiced C Composition iti of f product d t li line of f products d t Other elements of market mix of firm and their interaction with pricing. 6 7. . 8 8.INTERNAL FACTORS 6. 9.

EXTERNAL FACTORS 1 Market Characteristic (Demand 1. Bargaining power of major customers 4. (Demand. Competitors p p pricing gp policy y 6. Government control/regulation on pricing 7 Other relevant legal aspects 7. Customer and Competition) 2 Buyer behavior with respect to product 2. Bargaining power of major suppliers 5. 3. .

cartels . Societal (Social) Considerations 8 9. Understanding reached if any with price cartels.EXTERNAL FACTORS 8.

87-33.75-6.75 .5) Author g gets 10-15% of wholesale p price Author s Share = Rs 3.50 &12.Where does the money go? Why do textbooks cost so much??? Authors + Publishers = 75% R t il Retailers = 25% Suppose price of book is Rs 50 (37.63 Author’s 3 75 6 63 Publisher’s Share= Rs 31.

Salaries of sales force. . they cover cost of MR. Art. Revised Editions.takes 1-1. distribution of promotional material AND OVERHEAD Costs-Office.5 years Publishers share looks more (Rs 32-33) 32-33). Computers etc Spend 15-20 lakh upfront. . Design. Distribution.Where does the money go? Author: Takes 3 long years to develop book. . Production.

5 5% Publisher = 7.5% Retailer = 5% % .Where does the money go? Retailers: Personal and Operation Cost=50 % Marketing Cost =13-15% Taxes = 10-15% Income: Author =7 7.

.PRICING SURVEY RESEARCH 9 % Companies GUESS about Price 37% C Companies i match t h what h t COMPETITORS Charge for similar offerings 52% Companies p choose p price that cover costs and provide fair profit.

Setting Pricing Policy .

1. Profit maximization in short term 1 2. 6. Keeping parity with competition . g a particular market share 3. Achieving 4. Deeper penetration in the market 5 Entering new markets 5.1 PRICING OBJECTIVES 1. Profit optimization (to make something as good d as it can b be) )i in l long t term.

services Firms seek to meet basket of returns through pricing policies policies.Providing stimulate economic development.Providing 7 Providing commodities at prices affordable by weaker sections.PRICING OBJECTIVES 7. 8 Providing commodities at a price that 8. These 2 objectives are relevant only to providers of essential commodities and public utility services. NO FIRM IS SATISFIED WITH SINGLE OBJECTIVE .

33% Share. but industry highly competitive. • Have increased the prices and working on differentiation . Economy. AP BA and d LG • Asian Paints (Uses Price to Protect MS) • M. • LG (MS to Profitability)-Came in 2001-Objective was volume/MS. • British Airways (Enhance Profitability) • Started focusing of Business/Executive & Economy Class Have reduced no of seats in Economy Class.Firms use pricing for Variety of Obj i Objectives-AP.Leader. Now objective is Profitability.Profits came down to 2% of sales in 2005. Has reduced prices of all items to protect MS.

Determining ee g Demand e a d – Price sensitivity – Total Cost of Ownership – Estimating Demand Curves – Price Elasticity of Demand • Inelastic • Elastic .Setting the Price 2.

Overhead. wages Average Cost (= Total cost / No of units in Production) .Setting the Price 3. Salaries – Variable Cost Changes with production Can be eliminated in the short run Examples: Cost of materials that go directly into the product. Estimating g Cost – Types of Cost and Levels of Production • Fixed costs • Variable cost • Total cost • Average cost • Fixed cost: – Does not change with production • Examples: Rent.

6. Tender Pricing 7 Differentiated 7. Cost based pricing 2 Demand 2. Value Pricing 5 Product line oriented pricing 5.Setting the Price Selecting a Pricing Method PRICING METHODS/STRATEGIES 1. Diff ti t d Pricing Pi i . Competition Based pricing 4. D dB Based dP Pricing i i 3.

Mark-up Pricing/Cost plus pricing 2 Absorption 2. Target rate of return pricing .COST BASED PRICING-2 Following methods are commonly used: 1. Ab ti cost t pricing/full i i /f ll cost t pricing i i 3.

who do not have manufacturing of their own. larger mark-up •Used by y companies. .COST BASED PRICING-3 Mark-up Pricing/Cost plus pricing: Selling price of product is fixed by adding margin to its cost price. p . price •Slower the turnaround.

g. TOTAL COST + 30-50% or anything% • Problem – IGNORES demand • Advantage – SIMPLE ..Mark-up or Cost Plus Pricing-4 • TO SET PRICE: • 1) Estimate Total Cost Per Unit Formula • 2) Apply the “Formula” – e.

Absorption cost pricing (Full Cost Pricing) .COST BASED PRICING-5 2.

50 Rs12 50 b.000 units c. TOTAL COST = R Rs 10 10.00 Needed Profit . Estimated Sales Volume = 80.00 00 0 00 d.00 =Rs 2.COST BASED PRICING-6 1.000. Target ROI = 20% .0.20 x Rs10.000.00. Target rate of return pricing Estimated Unit Cost = Rs12.

000.00 R 10 000 00 + R Rs 2 2.000 =Rs15 00 / Unit Price =Rs15.00 Unit Price = REVENUE / VOLUME = Rs12.000.00 .00 / 80.COST BASED PRICING PRICING-7 7 Needed (Target) Revenue = Total Cost + Profit = Rs10.000.00 000 00 = Rs12.000.

Break-Even Break Even Chart .

Price and Profits interrelated • A particular volume level and its associated cost level generates a particular profit level level. l • Firm can accordingly project profits at different price levels and chose the one that suits them the most. . we h have diff different t profit fit l levels. Volume Volume. • When we consider different price level.Break Even Break-Even • Cost Cost.

25) 5.Review Break Even Break Even Point (in Units) = FC (SP-VC) 5000000 (15. .428 .00-6.71. units .

000 1-(6.429 71 429 .71.000.Review Break Even Break Even Point (in Rupees) FC = 1-(VC/SP) 5 000 000 5.25/15) Rs 85 85.

P t ti Pricing Pi i .2. Skimming Pricing 3 Penetration 3. “What 1 What the traffic can bear?” bear? 2. DEMAND BASED PRICING-1 1.

. What the traffic can bear?” bear? • • • Maximum M i price i th that t a customer t can pay. Buyer opposition or new firms will create y difficulty.DEMAND BASED PRICING-2 1 “What 1. Safe when demand is inelastic.

later settles down at low prices prices. Skimming Pricing 2 High Price+High profits at early stages. Mobile Phones . For example: I-Pod.DEMAND BASED PRICING-3 2.

.DEMAND BASED PRICING-4 3.2.Penetration 3 Penetration Pricing: Penetration through low prices when new product is not a luxury product product.

3. COMPETITION ORIENTED PRICING 1 PRICING-1 Three policy options available: • Premium-Up • Discount-Down Di tD • Parity or going rate pricing-Matching prices of competitors .

firm reputation. paper. customer support. channel deliverables. trustworthiness) Value Pricing Low price for high quality offering e. 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 competitor s prices Charge same as. WalMart.Perceived Value Pricing (Offer more value than competitor and demonstrate it) Perceived Value Price = F ( buyer’s image of product.g. fertilizers . less than or more than competitor’s prices F ll the Follow h leader l d pricing i i is i another h example l as in i Commodity C di oligopolies li li such h as steel. warranty quality.

Value Pricing-Essence Value>Price>Costs (Loss to Seller) Price>Value>Costs (Loss of Market Share) Pi Price>Cost>Value C t V l (Bi (Big L Looser) ) Price=Value>Cost (Good) .

PRICE ADJUSTMENT • • • • • Geographical Pricing Promotional Pricing Di i i t Discriminatory P Pricing i i Discounts and Allowances Product Mix Pricing – Product Line Pricing .

Setting the Price Selecting g the Final Price – 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 .

Adapting the Price • Promotional Pricing – Loss-leader pricing – Special-event Special event pricing – Cash rebates – Low-interest L i t t financing fi i – Longer payment terms – Warranties W ti and d service i contracts t t – Psychological discounting .

special event pricing ( Going to school program of Bata). car) captive product pricing (razor . functional discount (given to intermediaries if they perform certain functions). seasonal discount (off-peak buying). is low price and blade is high price).Product Mix Pricing pricing optional feature pricing (power windows for car). longer payment terms. quantity discount discount. promotion allowance given to resellers for participating in advertisement and promotion programs of the firm) -. warranties / service contracts.Promotional pricing .loss leader pricing.Price Adaptations -.Geographical Pricing -. psychological discounting (price high and then discount) -.Price discrimination -. Cash rebates (as in jeweler shops) low interest financing (0% for 12 months). two part pricing (Mobile Phones) .Price Discounts and Allowances . allowances (trade allowance to resellers for participating in trade-ins.Cash discount discount.Product line pricing.