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What is Marketing?

Creating Value
Capturing Value
Communicating Value
Delivering Value

Sustaining Value
The art & science of choosing, acquiring,
retaining, growing customers through
creating, delivering & communicating
superior customer value

Agenda
Gain a Better understanding on importance of
Pricing?
Develop a systematic approach to deciding
pricing
How to respond to Price wars?

4Ps: What is different about


Pricing?
Cost

Revenue
Producer

Cost

Cost

Pricing
How many of you involved in the pricing
decisions in your business?

What do you usually chase?


Profits
Profits = Sales Costs
(ASP x Qty) Costs
(ASP x No. of Customers x Qty) Costs
(ASP x No. of customers x Frequency x Qty)
- Costs

What change will a 1% increase in


Pricing make to your Profits?

Price Rs
Units Sold
Revenue
Costs Rs
Profits Rs

Now
10
100
1000
-970
30

If
10.1
100
1010
-970
40

Then
1%

33.33%

The Power of Pricing


An impact nearly 50% greater
than that of a 1% fall in VC such
as materials and direct labor

More than three times


greater than the impact of a
1% increase in volume

Pricing right is the fastest and most effective way for managers to increase profits.

Pricing
$31.50

Bargaining

$33.50

Changing Price Environment


Buyers
Ill pay $235.00
Instant Price Comparisons

Get Products Free

Name Your Own Price

Changing Price Environment


Sellers

$29.99

$19.99

$24.99

Selective Pricing

Negotiate Prices

Monitor Customers

How Companies Price


Product-line Managers
(w/guidance)

Small Business Owner

Pricing Department

Need a thorough understanding of


consumer pricing psychology and a
systematic approach to setting,
adapting, and changing prices.

What is your advice?

At what price do I price


the softy ice-creams?

A Black T-Shirt

Armani
Rs 2750

Benetton
Rs 1490

FM Rs 490

Consumer Psychology and Pricing


Price-Quality Inferences

Reference Prices
Fair price, Last paid price,
Max/ Min bound price, Usual
discounted price, expected
future price

99
$1.
Price Endings

Setting the Price


6
5

Select Final Price


Price Method

4 Competitor Analysis
3

Estimate Costs

2 Determine Demand

Pricing Objective

Selecting the Pricing Objective


Survival
Maximum Current Profit
Maximum Market Share
Maximum Market Skimming
Product-Quality Leadership
Other Objectives

Setting the Price


6
5

Select Final Price


Price Method

4 Competitor Analysis
3

Estimate Costs

2 Determine Demand

Pricing Objective

Determining Demand
Price sensitivity
Estimating demand curves
Price Elasticity of Demand

Inelastic and Elastic Demand

Setting the Price


6
5

Select Final Price


Price Method

4 Competitor Analysis
3

Estimate Costs

2 Determine Demand

Pricing Objective

Estimating Costs
Types of costs

Fixed Costs
(overhead)

Variable Costs

Total Costs

Find Volume & Cost Impact on Profit

Costs at Varying Levels of Production

Setting the Price


6
5

Select Final Price


Price Method

4 Competitor Analysis
3

Estimate Costs

2 Determine Demand

Pricing Objective

Analyzing Competitors Offers


Price
Costs

Reaction

Worth to Customer

Setting the Price


6
5

Select Final Price


Price Method

4 Competitor Analysis
3

Estimate Costs

2 Determine Demand

Pricing Objective

Selecting a Pricing Method

Pricing Methods
Markup
Target-return
Perceived-Value
Value
Going-rate
Auction-type

Markup Pricing
Variable cost per toaster

$10

Fixed costs

$300,000

Expected unit sales

50,000

What is the Unit Cost?

Used by construction companies, lawyers, and accountants.


This method does not take into account current demand, perceived value, or competition.

Target-Return Pricing

The firm determines the price that yields its target rate of ROI.
Public utilities, which need to make a fair return on investment,
often use this method.

Break Even Point: Target-Return


Pricing

Perceived-Value Pricing
Customers perceived-value

Performance $$$
Warranty $
Customer support $
Reputation $$
(trustworthiness, esteem)

Value Pricing: Not just lower prices


EDLP
THOUSANDS OF

LOW PRICES
EVERY DAY

Level of
Quality

throughout the store

P1

C1

P2 C2

High

Pricing
Low

Prices are reduced giving buyers greater value.

Rs 399 for razor

Rs 599 for 4 cartridges (Rs 150 each)

Going-Rate Pricing
popular for commodities such as steel, paper, and fertilizer
as all firms normally charge the same price.

Commodities

Small firms follow the leader, changing prices when


the market leader prices change.

Follow the Leader

Auction Pricing
English auction
(ascending bids)

Dutch auction
(descending bids)

Sealed-bid auction

Capturing Value & Creating Value


Value = Price + Quality
PRICE
High

Medium

Premium
Strategy

High Value
Strategy

Stag umbrellas Vs Chinese


competition
Meru Cabs
Goodyear tires price
reference

Low
Super Value
Strategy

High
Medium

Overcharging

Medium Value

Good Value

Rip-Off

False Economy

Economy
Strategy

What is your Value Capturing Strategy?

Low

QUALITY

High Price
(No possible
demand at this price)

Ceiling price

Three Cs
Model for
Price Setting

Customers assessment
of unique product
features
Orienting point
Competitors prices
and prices of
substitutes
Costs
Floor Price

Low Price
(No possible
profit at this price)

Setting the Price


6
5

Select Final Price


Price Method

4 Competitor Analysis
3

Estimate Costs

2 Determine Demand

Pricing Objective

Selecting the Final Price


Customers willing to pay higher prices for known rather than for unknown products

Brand
Quality

Impact on others
parties
Distributors, retailers, customers, competition, legal.
Will any intervene or react?

Pricing Policies
Airlines for changes in bookings, Banks for credit card, Hotels for no shows

Gain-and-risk-sharing

Adapting the Price


Geographic Pricing

Price Discounts
and Allowances

Differentiated Pricing
Promotional Pricing
Geographical demand and costs, market-segment requirements, purchase timing,
order levels, delivery frequency, guarantees, service contracts, and other factors affect pricing

Differentiated Pricing
Customer-segment pricing: Eg Students,
service personnel, senior citizens
Product-form pricing: Pharma, Water (not
Differentiated Pricing
proportional)
Image pricing: Fragrances
Channel pricing: CSD, water
Location pricing: Theatres, airlines
Time pricing: Hotels, airlines, utilities, pubs

Dealing with Price Changes


Raising Prices

Cutting Prices

Competitor Moves

Initiating Price Cuts


Why?
Excess plant capacity, drive to dominate the market
through lower costs
Either the company starts with lower costs than its
competitors, or it initiates price cuts in the hope of
gaining market share and lower costs.
Possible TRAPS:

Low-quality trap
Fragile-market-share trap (mkt share but know loyalty)
Shallow-pockets trap (no staying power)
Price-war trap

Raising Prices

Why?
Cost inflation, Over demand
How?
Delayed quotation pricing: Does not set a final price until
the product is finished or delivered (industrial construction
and heavy equipment)
Escalator clauses: Inflation protection for major industrial
projects, such as aircraft construction and bridge building
Unbundling: Cars & features/ models
Reduction of discounts: sales force not to offer its normal
cash and quantity discounts

Other ways to increase prices


Shrinking the amount of product instead of raising the
price.
Substituting less-expensive materials or ingredients.
(Many candy bar companies substituted synthetic
chocolate for real chocolate to fight cocoa price increases.)
Reducing or removing product features
Removing or reducing product services, such as installation
or free delivery.
Using less-expensive packaging material or larger package
sizes.
Reducing the number of sizes and models offered.
Creating new economy brands.

Responding to Competitors Price


Changes
What if your competitor reduces prices by
5%? What will you do? What are your
options?
What if your competitor increases prices by
5%? What will you do? What are your
options?

Responding to Price Changes


In markets with non homogeneous products:
1) Why did the competitor change the price? To steal
the market, to utilize excess capacity, to meet
changing cost conditions, or to lead an industry-wide
price change?
2) Does the competitor plan to make the price change
temporary or permanent?
3) What will happen to the companys market share and
profits if it does not respond? Are other companies
going to respond?
4) What are the competitors and other firms responses
likely to be to each possible reaction?

Responding to Price Changes


An extended analysis of alternatives may not
always be feasible when the attack occurs
The company may have to react decisively within
hours or days, especially where prices change
with some frequency and it is important to react
quickly (especially where products are
homogeneous)
It would make better sense to anticipate possible
competitors price changes and prepare
contingent responses.

What is the actual Pocket price?


What is your actual Pocket Price?

Further 16.3%
revenue
reduction