Pricing

Marketing Management – II (MM-II) Prof. Nirali Shah

Section E & F nirali@ximb.ac.in
MBA-BM (Batch 2020-2022)
 Topics to be covered

• Understanding pricing
• Reading: Pricing and the psychology of consumption
• Setting the price
• Adapting the price
• Reading: The good-better-best approach to pricing
• Initiating and responding to price changes
• Reading: How to fight a price war

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 Understanding pricing

• Forms of price

Rent Tuition Fares

Rates Fees

Tolls Retainers Wages

Salary Bids

Time & material

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 Understanding pricing

• Pricing must take care of 4 Cs

Competition Company Customer

Context

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 Understanding pricing: In a digital world

Buyers can Sellers can Both can

• Get instant price • Monitor customer • Negotiate
comparisons behavior
• Check prices at the • Tailor (customized)
point of purchase offers
• State the price • Give certain
• Get products free customers access to
special prices

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 Understanding pricing:
In a changing environment
• Sharing economy vis-à-vis Ownership economy

• Two pillars of sharing economy

– Barter
– Renting

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 Understanding pricing:
Consumer psychology and pricing

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 Reading:

Pricing and the psychology of consumption

Authors: John Gourville and Dilip Soman

Source: Harvard Business Review

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 Understanding pricing:
Consumer psychology and pricing
• Price takers vis-à-vis price information processors

• Price perception
Price-quality Price endings
Reference prices
inferences & other cues
• Fair price
• Typical price
• Last price paid
• Upper-bound price
• Lower-bound price
• Historical competitors price
• Expected future price
• Usual discounted price
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Setting the price

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 Setting the price

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 the final price

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Setting the price: Selecting pricing objective

Survival Current profit Market share

Target profit on
Product-quality Market
the entire
leadership skimming
product line

Keeping Keeping parity

Minimum ROI competition with
out competition

Keeping
Achieving sales Entering new
product
volume market
affordable

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 Setting the price: Determining demand

• Price-demand relationship

• Price sensitivity

• Estimating demand curves

• Price elasticity of demand

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 Setting the price: Estimating cost

• Type of costs and levels of production

• Accumulated production
– Experience curve or learning curve

• Target costing

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 Setting the price:
Analyzing competitors’ costs, prices and offers
• Value-based competitors

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 Setting the price: Selecting a pricing method

• Cost-based pricing
• Demand-based pricing
• Competition-oriented pricing
• Product line-oriented pricing
• Affordability-based pricing
• Perceived value pricing
• Value pricing
• Differentiated pricing
• Auction-type pricing
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 Setting the price: Cost-based pricing

• Markup pricing / Cost-plus pricing

Unit cost = Variable cost + Fixed cost per unit

Mark up price = Unit cost / (1- Desired return on sales)

• Absorption cost pricing

• Target-return pricing
Unit cost + (Desired return * Invested capital / Unit sales)

Break-even volume = Fixed cost / (Price – Variable cost)

• Marginal cost pricing

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 Setting the price: Demand-based pricing

• Skimming pricing

• “What the traffic can bear” pricing

• Surge pricing

• Premium pricing

• Penetration pricing

• Predatory pricing

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Setting the price: Competition-oriented pricing

Going rate pricing

Discount pricing

EDLP

Premium pricing

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Setting the price: Auction-type pricing

English auction

Dutch auction

Sealed-bid auction

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 Setting the price: Selecting the final price

• Impact of other marketing activities

• Company pricing policies

• Gain- and risk-sharing pricing

• Impact of price on other parties

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Adapting the price

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 Adapting the price

• Differentiated pricing
• Geographical pricing
• Price discounts and allowances
• Promotional pricing

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 Reading:

The good-better-best approach to pricing

Author: Rafi Mohammed

Source: Harvard Business Review

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 Adapting the price: Differentiated pricing

Customer-
segment pricing

Product-form
Time pricing
pricing

Yield pricing

Location pricing Image pricing

Channel pricing

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Adapting the price: Geographical pricing

Barter

Compensation
Offset
deal

Buyback
arrangement

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 Adapting the price:
Price discounts and allowances

Discount

Allowance
Quantity
(Trade-in,
discount
promotional)

Seasonal Functional /
discount trade discount

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Adapting the price: Promotional pricing

Loss-leader Special event

pricing pricing
Warranties &
service
Longer contracts Special
payment customer
terms pricing
Psychological
discounting
Low-interest
Cash rebates
financing
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Initiating and responding to price changes

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 Reading:

How to fight a price war

Authors:
Akshay R. Rao, Mark E. Bergen, and Scott Davis

Source: Harvard Business Review

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 Initiating and responding to price changes

• Initiating price cuts • Low-quality trap

• Fragile-market-share trap
• Shallow-pockets trap
• Price-war trap
• Initiating price increases
Circumstances: • Delayed quotation pricing
• Cost inflation • Escalator clauses
• Over demand • Unbundling
• Reduction of discounts

• Anticipating competitive responses

• Responding to competitors’ price changes

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