Developing pricing strategies

Contents in this module

 Pricing
• Understanding price
• Setting the price
• Adapting the price
• Responding to price changes
 What is price ?
• the amount of money exchanged by a
customer for a product or service.

• To the seller price is revenue, the primary

source of profits.

• The price paid is based on the satisfaction consumers

expect to receive from a product and not necessarily
the satisfaction they actually receive.
 Pricing
• Price also termed: fees, fares, rent, duty, interest,
toll, minimum balance, premium.

• Pricing is almost always a top management decision

• Often in large corporations Product managers work

on pricing and seek approval of top management
for implementation
 Importance of price
• Price is the most important determinant of the
profitability of a business

• Pricing is a high risk decision, a mistake can

affect profits, growth and future.
 Price

Price is the only marketing variable to appear on the

revenue side of profit equation:
PROFIT = REVENUE – COSTS
PROFIT =(PRICE x QUANTITY)i.e REVENUE -
- PRODUCT COSTS
- PROMOTION EXPENSES
- DISTRIBUTION EXPENSES
- OTHER EXPENSES.
 Pricing
• Pricing decisions are always team decisions
involving marketing , sales , Operations,
finance, departments etc.
• Each function brings in largely cost inputs such
as material cost, machine cost , labour cost,
finance cost etc.
• Marketing and sales bring in the competitor
and customer perspectives.
 Pricing
• The competitor inputs cover a wide range of
factors concerning industry, technology, global
scenario.
• The customer inputs cover essentially
economics and behavioral issues.

• Buyers respond to price differences rather

than to specific prices
 The Importance of Pricing Decisions

• Price is the only P which represents revenue

rather than an expense
• Pricing and the Marketing Mix
– Price and Place
– Price and Product
– Price and Promotion
 Importance of pricing
• Rapid technological changes reduces
profitability
• Product proliferation causes product blurring
• Increased demand for performed and
attached services
• Increased competition
• Government supervision
 Price as seen by buyers
• Price paid= product + service+ quality + repair
facilities + packaging + credit +loyalty points+
premiums + convenience of delivery, location,
time.
Price as seen by channel members
• Price = brand name +guaranteed quality
+repair facilities + replacement +availability
+price stability +adequate margin +promotion
aid.
 Price
• Price reflects the total company philosophy
• All the three Ps of marketing revolve around
the price.
• Price reflects the product strategy.
• Price reflects the distribution channel used.
• Price is often driven by the promotion and
advertising plan.
 Setting Pricing Process

1. Selecting the pricing

objective

2. Determining demand

3. Estimating costs

4. Analyzing competitors’
costs, prices, and offers

5. Selecting a pricing
method

6. Selecting final price

Pricing Objectives
 2.Determining Demand
• Price sensitivity
– Implications for branding!!
• Estimating demand curves
– Done primarily through marketing research
• Price elasticity of demand
– Elastic vs. Inelastic
 2.1.Estimating Demand
• Demand refers to customers’ desire for products
– How much of a product do consumers want?
– How will this change as the price goes up or down?
• Identify demand for an entire product category in
markets the company serves
• Predict what the company’s market share is likely to
be
 3.Estimating Costs
• Types of Costs
– Fixed
– Variable
– Total
– Average
Types of Costs

Fixed Costs Variable Costs

(Overhead)
Costs that don’t Costs that do vary
vary with sales or directly with the
production levels. level of production.

Executive Salaries Raw materials

Rent

Total Costs
Sum of the Fixed and Variable Costs for a Given
Level of Production
 4.Analyzing competitors’
costs, prices, and offers
• Consider competitors’ costs, prices, and possible
reactions when developing a pricing strategy
• Pricing strategy influences the nature of competition
• Low-price low-margin strategies inhibit competition
• High-price high-margin strategies attract competition
• Benchmarking costs against the competition is
recommended
•
 4.Competitive Analysis
• Only after we determine market demand and
company costs
• We need to examine…
– Product features
– Perceived value
PC marketing
has become
extremely price
competitive.
Knowledge of
competitive
prices, offers,
and costs is
key to pricing
strategy.
 5.Select Pricing Method
• Markup pricing (cost-plus)
• Target-return pricing (breakeven analysis)
• Perceived-value pricing (buyers perception of the
product is key, not cost so what is the product worth to
consumer sets the price.)

• Value pricing
• Going-rate pricing (customary)
• EDLP
• Auction-type pricing
Price Determination Methods

• Markup Pricing

Price = Unit Cost + Markup

Price Determination Methods

Break-Even Analysis
$ Total Revenue

Profit
Total Cost

Loss Fixed Cost

BEP
Quantity (units)
 Price Determination methods

• Cost-Based Pricing: Break-Even Analysis and

Target Profit Pricing
– Break-even charts show total cost and total revenues
at different levels of unit volume.
– The intersection of the total revenue and total cost
curves is the break-even point.
– Companies wishing to make a profit must exceed the
break-even unit volume.

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Price Determination Methods

• Target-Return Pricing

(Desired return X Invested capital)

Price = Unit Cost +
Expected Unit Sales
 Step 6: 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.

• Impact of other marketing activities

• Company pricing policies
• Gain-and-risk-sharing pricing
• Impact of price on other parties
 Pricing strategies
• Premium Pricing
• Penetration Pricing
• Economy Pricing.
• Price Skimming.
• Optional Product Pricing.
• Captive Product Pricing
• Product Bundle Pricing.
• Promotional Pricing
• Geographical Pricing & Value pricing
 Premium Pricing.
• Use a high price where there is a unique brand. This
approach is used where a substantial competitive
advantage exists and the marketer is safe in the
knowledge that they can charge a relatively higher
price. Such high prices are charged for luxuries such as
Jet Airways, Bose Acoustics, Taj Resorts.
• An example of premium pricing is seen in the
luxury car industry.
• Companies like Tesla can get away with higher
prices because they’re offering products, like
autonomous cars, that are more unique than
anything else on the market.
 Value-Based Pricing

– Uses buyers’ perceptions of value rather than seller’s

costs to set price.
– Measuring perceived value can be difficult.
– Consumer attitudes toward price and quality have
shifted during the last decade.
• Introduction of less expensive versions of established
brands has become common.

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 Value based pricing
• Some industries subject to value-based
pricing models include:
• Fashion
• Cosmetics
• Technology
• A value-based pricing model is the opposite of
cost-plus pricing. Cost-plus pricing looks
at cost of goods sold and markup
percentage to determine a price.
 Competition-Based Pricing

Also called going-rate pricing

May price at the same level, above,

or below the competition

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 Examples: new-product pricing
• Market-skimming pricing
• Price skimming is a product pricing strategy by
which a company is setting the highest initial price
for a product and then lowers it over time.
• What is meant by price skimming is that the
company is “skimming” customer segments by
lowering the price over time. 
• Market-penetration pricing
 Market-skimming pricing

• Setting a high price for a new product to skim

maximum revenues layer by layer from the
segments willing to pay the high price: the
company makes fewer but more profitable
sales.
 Penetration Pricing
• Price set to ‘penetrate the market’
• ‘Low’ price to secure high volumes
• Typical in mass market products – chocolate bars,
food stuffs, household goods, etc.
• Suitable for products with long anticipated life cycles
• May be useful if launching into a new market
 Economy Pricing.
• This is a no frills low price. The costs of marketing
and promoting a product are kept to a minimum.

• Budget airlines are famous for keeping their

overheads as low as possible and then giving the
consumer a relatively lower price to fill an aircraft.
The first few seats are sold at a very low price
(almost a promotional price) and the middle
majority are economy seats, with the highest price
being paid for the last few seats on a flight (which
would be a premium pricing strategy).
 Bundle Pricing

• Bundle pricing is a pricing strategy

used by retailers, where they create a
bundle of products and offer them at
a lower price than if each product
was bought separately.

• BOGO
 Bundle Pricing Vocabulary

• Here are some vocabulary and abbreviations

used by retailers when referring to bundle
pricing.

• Term Meaning
• BOGOF Buy One Get One Free
• B2G1F Buy Two Get One Free
• Buy X Get -Y Off Buy X or more and get Y% off
Adapting Prices: Price Discounts and
Allowances

• Cash Discounts

• Trade Sales Promotion Allowances

• Quantity Discounts
Adapting Prices: Geographical Pricing

FOB Origin Pricing

Uniform Delivered
Price

Zone Pricing

Freight Absorption
Pricing
Competitive Bidding and Negotiated Pricing

• Sealed-bid Pricing

• Reverse Auctions
 Tender Pricing
• Many contracts awarded on a tender basis
• Firm (or firms) submit their price for carrying out the
work
• Purchaser then chooses which represents best value
• Mostly done in secret
 English auction
• One seller many buyers ( antiques, real
estate)OLX , Ebay, Amazon)
The highest bidder gets the item (MSP)
 Dutch auction
• Descending bids
• One seller and many buyers or one buyer
many sellers
( airlines bidding for international freight
business of a company or a mail service) Speed
post.
 Sealed bid auctions
• Open tender
• Closed / limited tender ( govt. projects,
railways, defence)
 Pricing changing
• Initiating price cuts
• Initiating price increases
 Responding to competitors’ price
changes
• Maintain price
• Maintain price and add value
• Reduce price
• Increase price and improve quality
• Launch a low-price fighter line
 Price types
• C&F
• CIF
• FOR
• FOB
• EX-WORKS
• Maximum Retail Price
• List Price
• Basic Price
For Example a company is producing a product a product/service at cost of 35/-
per piece. Then MRP is fixed according as follows:

•Manufacturing cost=35/-
•Packaging/Presentation Cost= 5/-
•Margin 25%= 35*25/100=8.75/-
•Total Cost=35+5+8.75=48.75/-
•GST: 4.76/-
•CnF margin 6%= 4.08/-
•Stockiest margin 10%=7.21/-
•Retailer Margin 20%= 15.88/-
•Transportation Cost: 1.30/-
•Marketing/Advertisement Expenses: 14.50/-
•Other Expenses: 3/-
Maximum retail price = 35 (MC) + 5 (PC) + 8.75 (M) + 4.08 (CFM) +7.21
(SM) + 15.88 (RM) + 4.76 (GST) + 1.30 (T) + 14.50/- (M) + 3/-(O) = 99.48,
in round figure is 100/-.
 Maximum Retail Price Calculation
Formula
Manufacturing Cost + Packaging Cost + Profit
Margin + CnF margin + Distributor Margin +
Retailer Margin + GST + Transportation +
Marketing/advertisement expenses + other expenses
etc.