Professional Documents
Culture Documents
Chapter - 9. Designing Pricing Strategies:: High Medium LOW
Chapter - 9. Designing Pricing Strategies:: High Medium LOW
Price:
Sacrifice made by buyer to avail benefits provided by product.
Determine revenues that a firm generates in conjunction with units sold.
3. SUPER VALUE
1. PREMIUM 2. HIGH VALUE STRATEGY
GH
H
I
STRATEGY STRATEGY
PRODUCT
QUALITY 4. OVER 5. MEDIUM
CHANGING VALUE 6. GOOD VALUE
MEDIUM
UM
ME
STRATEGY
D
I
STRATEGY STRATEGY
8. FALSE
LOW
To set pricing policy, firms need to consider various factors. Hence a formal procedure
is used for price setting.
Procedure is:
Select pricing Objectives.
Determine demand.
Estimate costs.
Analyse competition costs/prices/ offers.
Select pricing method.
Select final price.
1
Chapter – 9.
Designing Pricing Strategy.
Survival:
In this case prices are very low. Price covers Variable Cost & some Fixed Cost if
possible.
Occurs if:
o Company has over capacity.
o Company is intense.
o Consumer wants to keep changing.
Can be continued for short period.
2
Chapter – 9.
Designing Pricing Strategy.
Product Quality Leadership:
A company may aim to be product leader in the market.
Create a high quality product.
Price it higher than competition.
Used for:
Premium product (FMCG: Dove).
Low maintenance in Consumer Durables (Compaq).
Determining Demand:
Price has a direct impact on demand & hence on other marketing objectives.
Price Elasticity of demand for a product needs to be understood/analysed.
Buyer’s price sensitivity may be impacted by:
Unique Value Effect:
Uniqueness of product.
Substitute Awareness Effect:
Knowledge of substitutes.
Difficult Comparison Effect:
Quality of substitutes not easy to compare.
Total Expenditure Effect:
Price as a % of monthly earnings.
End Benefits Effect:
If product is a part of a product benefits set, then the value/price
of a product as a % of full benefits.
Shared Cost Benefits:
Is the cost borne by another party?
Example: Bus travel/Motels on a business tour.
Sunk/Investment Effect:
Product used in conjunction with other assets already bought.
Example: Spare parts.
Price Quality Effect:
Does the product have more perceived quality/prestige?
Inventory effect:
Price sensitivity is low if the product cannot be stored by a buyer.
Example: Processed Cheese, Fruits.
Estimating Costs:
3
Chapter – 9.
Designing Pricing Strategy.
Company costs set the floor price.
Costs should cover cost of
Manufacturing/production.
Distribution.
Selling products.
Return on Investment/ Risk.
Many companies may use target costing as a means of reducing costs to pre-planned
desired level.
Mark Up Pricing:
Add standard mark up to product cost.
Example:
Variable cost/ unit = Rs.10/-.
Fixed cost = Rs. 2, 00,000/-.
Expected sales = 40,000 units.
4
Chapter – 9.
Designing Pricing Strategy.
Price = Unit Cost/ (1-desired return).
= 15/ (1-0.2).
= 18.75/-.
This is Net dealer price (NDP). To this trade margin are added to get final
customer price.
Value Pricing:
A comparatively low price is charged for a high quality product/ accepted product.
Used typically in mature markets, which, witnesses continuous “Sale Offers”.
Credibility erosion may be avoided using a low value price which is constant (No
discounts given).
For value pricing to succeed company may need to overhaul manufacturing/
distribution/ sales functions so that costs are minimized & the value price can be
sustained.
Example:
o NIIT’s Swift Program started with 2500/-@16hours course now coming at Rs.
500/- @8 hours plan which is value priced.
o APtech’s Vidya Program started with 2200/-@16hours course now coming at
Rs. 600/- @8 hours plan which is value priced.
5
Chapter – 9.
Designing Pricing Strategy.
Going Rate Pricing:
Here company pays attention to its own costs/ demand.
Price is based on competition’s prices.
Company may charge more/ same/ less than competition.
This would depend on:
Product type.
Market leadership.
Psychological Pricing:
A high price may convey higher quality to consumers (Customer perception).
Sales of certain products may increase with price decrease.
Example: Liquor/Perfumes.
Price may be kept high to serve as a reference point in customer mind. A discount may
give a customer a feeling of getting a good deal.
Odd pricing may give customer a feeling of lower prices.
Example: BATA: 199.95/-.
6
Chapter – 9.
Designing Pricing Strategy.
Company’s Pricing Policy:
Product’s price should be consistent with company’s pricing policies.
Price of others products also need to be seen in this content to position product suitably.
Price Adaptation:
Typically, price set as per procedure seen above is the original product price & pricing
structure.
Real field situation is normally dynamic.
Variations may occur in:
o Geographical Demand/costs.
o Market Segment Requirements.
o Purchase Timings.
o Order levels/Delivery Frequency.
o Guarantees/Service Contracts.
As a result a company may need to adapt/change its final price from time to time.
This is called “Price Adaptation”.
Price adaptation strategy could be:
o Geographical pricing.
o Price Discounts & Allowances.
o Promotional Pricing.
o Discriminatory Pricing.
o Product Mix Pricing.
Geographical Pricing:
Typically occurs for exports/ imports/ international trade.
Manifest through counter trade.
Counter trade is the practice of making payment in part/ full through other items
instead of currency.
Counter trade could be in the form of:
Barter:
Exchange of goods.
No Money.
No third party involved.
Compensation Deals:
Sellers receive some % of payment in cash & the rest in
products.
7
Chapter – 9.
Designing Pricing Strategy.
Buyback Arrangements:
Seller sells capital goods (Plant/Equipments/Technology).
Buyer pays part of payment through products produced with
equipments purchased.
Balance in cash.
Offset:
Seller receives full payment in cash but agrees to spend part of
the money in buying goods from purchaser country within
stipulated time frame.
At times counter trade may involve more than 2 parties.
Cash Discounts:
Cash Discount is a price reduction to buyers who pay their bills promptly.
P I1 I2 I3 R C
2/10 met 30
Example: 2/10 met 30
Credit for 30 days.
2% discounts if bill cleared in 10 days.
Normally used with distributors/ retailers
I3 is selling goods worth Rs. 100 to R & discounts @ 2/10 met 30. In such cases R will borrow
money from a financer on 10th of the month. The maximum amount of interest which R will
pay the financer will be @ 36%
2% discounts = 20 days
1 day = 2/20
30 days = 2/20x 30
8
Chapter – 9.
Designing Pricing Strategy.
=3x12months = 36%
Benefits:
o Retailer will be able to pay money back to I3 at lower interest rates.
o In 10 days there will be some selling: Retailer has to pay interest on lesser
amount than whole of 100.
o This will result in additional generation of income just by going for this
arrangement.
Quantity Discounts:
Quantity Discount is a price reduction to buyers who buy large volumes.
Example:
Rs 25 per unit for up to 99 units.
Rs 23 per unit for 100-Plus units.
Quantity Discount should be offered equally to all customers.
Quantity Discounts amount normally should not exceed cost savings to seller as a
result of selling large quantities (cost savings includes reduced expense on selling
/inventory/ transportation).
Quantity Discount may be offered:
Non Cumulatively: On each order.
Cumulatively: On total order in a given period.
Seasonal Discounts:
Seasonal Discount is price reduction to buyers who buy out of season.
Seasonal Discount allows manufacturer to maintain steadier production schedules.
Allowances:
Other types of price reductions are called allowances.
Types could be:
o Trade in allowances:
Price reduction on new item in exchange for old item.
o Promotional allowances:
Payments/ price reductions to dealers/ distributions to reward them for
their participation in advertising/ sales promotion.
Promotional Pricing:
Promotional pricing techniques are used to stimulates early purchase.
Techniques could be:
Loss leader pricing:
Used by retailers to stimulate additional store traffic by dropping prices
on well known brands.
Special event pricing:
Special prices offered in certain seasons to draw-in most customers.
Cash Rebates:
9
Chapter – 9.
Designing Pricing Strategy.
Consumes offered cash rebates to encourage purchasing within specific
time period.
Often used to clear inventory without reducing list price.
Low interest financing:
Customers offered low interest financing instead of reducing price.
Longer payment terms:
Financial companies stretch their loans over longer periods to bring
down EMI.
As a result product becomes more affordable.
Warrants/ Service contracts:
Company tries to increase by adding on to warranty/ service contracts
terms either free/reduced cost.
Psychological Discounting:
Inflating product price & then discounting it.
May amount to RTB, hence care should be taken while doing this.
Discriminating Pricing:
Companies may offer basic price modification to accomplish difference in customer/
products/ locations.
Discount Pricing /price discount occurs when a company sells a product/ service at a
different prices that do not reflect proportional difference in cost.
Forms of Discriminating Pricing could be:
o Customer Segment Pricing:
Different prices to different customer groups.
Example:
Railways student concession, Senior citizen discounts.
Banks: Higher % interests for Senior citizen fixed deposits.
o Product Form Pricing:
Different versions of a product are priced differently, but not in
proportion to their costs.
Example: Surf: 1Kg pack/ Sachet.
o Image Pricing:
Same /similar product priced at different levels based on image
difference/ branding.
Example: Clothes/ Wrist watches or Company: Videocon (Kenstar).
o Location Pricing:
Same product priced at different prices based on location even though
costs are the same.
Example: Movie theatre tickets.
o Time pricing:
Price varied as per:
Season.
Week days/Week-ends.
10
Chapter – 9.
Designing Pricing Strategy.
Time of the day (happy hours).
Could be in the form of yield pricing as used by Hotels/ Cruise Ships/
Airline (Air India red).
Red Hour: When there is a hopping flight for Mumbai-Delhi-London,
then the tickets is available for much lower prices for passengers
traveling to Delhi.
For Discriminating Pricing to be successful, conditions are:
Market should be segmentable.
Segment should show different demand intensities.
Members of lower segment should not be able to resell product to higher price
segment.
Competition should not be able to undersell firm higher price segment.
Example: Tide slashed price.
Cost of segmenting & monitoring market should not exceed profits from extra
revenue.
It should not result in customer resentment/ ill-will.
It should not be illegal.
PRICE STEP
LUX/LIRIL
LIFEBUOY
11
Chapter – 9.
Designing Pricing Strategy.
If price step is large, customer may prefer lower product.
Price step is based on:
Customer differences between the two products
Customer evaluation of the differences.
Competition prices.
If price step is larger than cost, company benefits when customer buys higher products.
Example: Cambridge shirts/ trousers.
Cambridge.
Cambridge gold.
Cambridge classic.
Cambridge premium.
Sellers task is to establish perceived quality difference that justify price difference
12
Chapter – 9.
Designing Pricing Strategy.
By Product Pricing:
Production of certain goods may result in by-product.
o Example: Petroleum/Chemicals.
If by-product has value to a customer group, it may be priced as per perceived value.
Income on by-product may help company to face price competition in main product
category better.
Example: Al Kabeer’s
o Meat products (main products).
o Skins (by-products) sold to leather producers.
Setting Objective.
Determining Demand.
Price Setting Estimating Costs.
Analyse Competition.
Select Pricing Method.
Select Final Price.
Barter.
Compensation.
Geographical demand Buyback arrangements.
Market segment Offset.
Price Adaptation Purchase Timing.
Order levels/ Delivery frequency.
Guarantee’s/ Service Contracts.
13
Chapter – 9.
Designing Pricing Strategy.
Price Cuts:
Price cuts may be required due to:
Excess plant capacity.
Declining market share.
Effort to dominate market through lower costs.
Economic Recession.
Price Increases:
A successful price increase can increase profits considerably.
Example:
Product price = Rs. 20/-.
Profit = Rs. 2/-.
10% price increase = Rs. 22/-., Results in 100% profits increase.
(Other things remaining the same).
Price increases may be due to:
Cost Inflation.
Anticipatory Pricing (in anticipation of change in environment/
government policy).
Over Demand.
While increasing prices, company should be careful not to disturb its market
share/customer. Hence company may use various ways to increase price/increase
profits.
Some of the methods could be:
o Decrease amount of the product instead of increasing price.
Example: In sachets there is 8ml shampoo instead of 10ml.
o Substituting ingredients with less expansion.
Example: Cadbury’s 5 star bar (Rs. 2 uses artificial coco powder)
14
Chapter – 9.
Designing Pricing Strategy.
o Remove product features in standardised product, offer them as options. Also
applicable to services offered.
Example: Maruti LX, VX.
o Decrease cost of package material.
Example: Vegetable oil comes in jar & sachets.
o Decrease discounts.
Example: Discount on any Product.
o For long term contracts, use price evaluation clauses.
Example: Software services or maintenance.
o Reduce number of sizes/depth of product.
Example:
20gms 20 units
Lux: 75gms 20 units
175gms 20 units
Profit @ 1/unit
Total Production = 60 units.
Profit = Rs. 2.5/unit.
15
Chapter – 9.
Designing Pricing Strategy.
Further, if company does not respond, what would have happened to its market
share /profits.
Similar analysis and responses are created when competition increases price.
16