“Pricing Management”

Satyam
Office: 302, Block C, New Campus
Office Hours: by appointment (via email)
Email- satyam@iimranchi.ac.in
Introduction

• What is price?
• Misleading
• Buyer uses price to compare alternatives
• Buyer is not always taking into consideration the total cost of his purchase
• He wants to believe he is making a ‘Smart Decision’
What is Price?

• Price is the sacrifice that one party pays another to receive something
in exchange

• For our case, price is a monetary value charged by an organization for

the sales of its products
Pricing

Forms

Price
$31.50 $33.50

Components Functions
Changing Price Environment

Buyers

I’ll pay $235.00

Instant Price Comparisons

Get Products Free

Name Your Own Price

Changing Price Environment

Sellers

Selective Pricing

Negotiate Prices Monitor Customers

Developing Pricing Strategies and Programs

• Common Pricing Mistakes

• Determine costs and take traditional industry margins
• Failure to revise price to capitalize on market changes
• Setting price independently of the rest of the marketing mix
• Failure to vary price by product item, market segment, distribution channels,
and purchase occasion
Consumer Psychology and Pricing
Price-Quality Inferences

Reference Prices

$1.99
Price Endings
Possible Consumer Reference Prices

• “Fair price” • Lower-bound price

• Typical price • Competitor prices

• Last price paid • Expected future price

• Upper-bound price • Usual discounted price

Price Cues

• “Left to right” pricing ($299 vs. $300)

• Odd number discount perceptions

• Even number value perceptions

• Ending prices with 0 or 5

• “Sale” written next to price

Setting the Price

6 Select Final Price

5 Price Method
4 Competitor Analysis
3 Estimate Costs
2 Determine Demand
1 Pricing Objective
Step 1: Selecting the Pricing Objective
Survival
Maximum Current Profit
Maximum Market Share
Maximum Market Skimming
Product-Quality Leadership
Other Objectives
Step 2: Determining Demand

Price sensitivity
Estimating demand curves
Price Elasticity of Demand
Step 3: Estimating Costs
Demand Price Ceiling

Price

Price Floor
Profit

Costs
Step 3: Estimating Costs

Types of Costs

Accumulated Production

Activity-Based Cost Accounting

Target Costing
Estimating Costs

Types of costs

Fixed Costs
Variable Costs Total Costs
(overhead)
Step 4: Analysing Competitors’ Offers

Price

Costs Reaction

“A”
“B”

Worth to Customer
Step 5: Selecting a Pricing Method

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

Variable cost per toaster $10

Fixed costs $300,000
Expected unit sales 50,000
Some Firms Just Use Mark-ups
Target-Return Pricing
Target-Return Pricing
Perceived-Value Pricing
Customer’s perceived-value

• Performance $$$
• Warranty $
• Customer support $
• Reputation $$
Value Pricing

EDLP
THOUSANDS OF

LOW PRICES
EVERY DAY
throughout the store

P1 C1 P2 C2
High
Pricing
Low
Going-Rate Pricing

Commodities

Follow the Leader

Auction Pricing
English auction
(ascending bids)

Dutch auction
(descending bids)

Sealed-bid auction
Selecting the Final Price
Impact on others

Brand
Quality

Pricing Policies

Gain-and-risk-sharing