PRICE

Presented by:
Sushil Nirbhavane
Assistant Professor
 Introduction
Food for Thought: Think about pricing

1. Petroleum prices in India

2. Telecom Industry and Pricing

3. FMCG product prices and runaway success of sachet products

4. Big Bazaar’s Success

5. Prices, indirect taxes, and GST

6. Food inflation, onion prices, and commodity hoarding

 Introduction
Meaning: Price is the one element of the marketing mix that
Produces revenue; the other elements produce costs.

Prices are perhaps the easiest element of the marketing

program to adjust.

Price is everywhere. Everything comes for price. Different

terms – rent, fees, fare, rate, interest, toll, premium,
honorarium, bribe, salary, commission, wage, income
taxes…

Major determinant of a buyer’s choice. Important factor in

determining sales and profitability – McKinsey Study
 Introduction
Price is an exchange value of the goods or services in terms
of money.

How companies price?

Small companies - Boss

Large companies – Top management + Product Line Managers. Top management decides
pricing objectives and policies.

Pricing Department reports to Marketing Department, Finance Department, or Top

Management.
 Consumer Psychology and
Pricing

1. Reference Prices: How sellers manipulate reference

prices

2. Price-Quality Inferences: Price as an indicator of quality,

scarcity as means of quality and premium pricing

3. Price Cues: Sale signs and 9-ending prices, low-price

image, bargain/discount
 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

 1. Selecting the Pricing
Objective

1. Survival

2. Maximum current profit

3. Maximum market share

4. Maximum market skimming

5. Product-quality leadership

6. Other objectives
 1. Selecting the Pricing
Objective
1. Survival
- overcapacity, intense competition or changing consumer
wants

2. Maximum Current Profit

- Estimate demand and cost

3. Maximum Market Share

- Market-penetration pricing
- Conditions that favor a low price – The price-sensitive
Market and a low price stimulates market growth;
production and distribution costs fall with accumulated
Production Experience; and a low price discourages actual
and potential competition
 1. Selecting the Pricing
Objective

4. Maximum Market Skimming

5. Product-quality leadership

6. Other objectives

- Nonprofit and public organizations

 2. Determining Demand
1. Price sensitivity: Customers are more price sensitive to the
products that cost a lot or are bought frequently. Customers are
less price sensitive when - product is more distinctive, buyers are
less aware of substitutes, buyers cannot easily compare the quality
of substitutes, expenditure is a smaller part of the buyer’s total
income, the product is assumed to have more quality, prestige, or
exclusiveness.

2. Estimating Demand Curves: Statistical analysis-Data for past

prices, quantities sold etc. (longitudinal and cross-sectional data),
Price experiments (variations in prices and use of internet),
Surveys

3. Price Elasticity of Demand: Elastic and Inelastic Demands

 2. Determining Demand

Higher the elasticity, the greater the volume growth

resulting from a 1 percent price reduction.

Demand is likely to be less elastic under the following

conditions: There are few or no substitutes or competitors;
buyers do not readily notice the higher price; buyers are
slow to change their buying habits; buyers think the higher
prices are justified

If demand is elastic, sellers will consider lowering the price.

Price indifference band

 3. Estimating Costs
1. Types of costs and levels of product: Economies of
scale
2. Accumulated Production: Methods improve, workers
Learn shortcuts, materials flow smoothly, and procurement
Costs fall. Decline in average cost with accumulated
Production experience is called the experience curve or
Learning curve.
3. Activity-based cost (ABC): ABC accounting tries to
Identify the real costs associated with serving each
customer. It allocates indirect costs like clerical costs, office
expenses, supplies, etc. to the activities that use them,
rather than in some proportion to direct costs.
4. Target costing: Market research is used to establish a
New product’s desired functions and the price at which the
product will sell, given its appeal and competitors’ price.
 4. Analyzing Competitors’
Costs, Prices, and Offers
Within the range of possible prices determined by market
demand and company costs, the firm must take competitors’
prices and possible price reactions into account. The firm
should first consider the nearest competitor’s price.

1. If the firm’s offer contains features not offered by the

nearest competitor, their worth to the customer should be
evaluated and added to the competitor’s price.

2. If the competitor’s offer contains some features not

offered by the firm, their worth to the customer should be
evaluated and subtracted from the firm’s price.

Thus, the firm can decide whether it can charge more, the
same, or less than competitor..
5. Selecting a Pricing Method
High Price
(No possible demand at this price)
Ceiling Price

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)
 5. Selecting a Pricing Method
1. Markup Pricing

2. Target-Return Pricing

3. Perceived-Value Pricing

4. Value Pricing

5. Going Rate Pricing

6. Auction-Type Pricing

7. Group Pricing
 5. Selecting a Pricing Method
1. Markup Pricing: The most elementary method is to add
a standard markup to the product’s cost.

The manufacturer’s unit cost is given by:

fixed cost
Unit Cost = variable cost + ------------
unit sales

Unit cost
Markup Price = -------------------------------
1 – desired return on sales
 5. Selecting a Pricing Method
Markups are generally higher on seasonal items (to cover
the risk of not selling), specialty items, slower-moving
items, items with high storage and handling costs, and
demand-inelastic items, such as prescription drugs.

Standard markups or any pricing method does not make

sense or cannot be optimal if it ignores current demand,
perceived value and competition.

Markup pricing is popular because –

1. Seller can determine costs much easily than they can
estimated demand.
2. It simplifies pricing.
3. It is fairer to both buyers and sellers.
 5. Selecting a Pricing Method
Target-return Pricing: The firm determines the price that
would yield its target rate of return on investment (ROI).

desired Invested
return x capital
Target-return price = unit cost + -------------------------
unit sales
 5. Selecting a Pricing Method
Target-return Pricing:

fixed cost
Break-even volume = -------------------------
(price – variable cost)

The manufacturer should search for ways to lower its fixed

and variable costs, because lower costs will decrease its
required break-even volume.

Target-return pricing tend to ignore price elasticity and

competitors’ prices.
 5. Selecting a Pricing Method

Perceived-Value Pricing: Perceived value is made up of

several elements such as the buyer’s image of the product
performance, the channel deliverables, the warranty,
customer support, and softer attributes such as supplier’s
reputation, trustworthiness, and esteem.

Furthermore, each potential customer places different

weights on these different elements, with the result that
some will be price buyers, others will be value buyers and
still others will be loyal buyers. Companies need different
strategies for these three groups.
 5. Selecting a Pricing Method
For price buyers – companies need to offer stripped-down
products and reduced services.

For value buyers – companies must keep innovating new

value and aggressively reaffirming the value.

For loyal buyers – companies must invest in relationship

building and customer intimacy.

The key to perceived-value pricing is to deliver more value

than the competitor and to demonstrate this to prospective
buyers.
 5. Selecting a Pricing Method
Value Pricing: Winning loyal customers by charging a fairly
low price for a high-quality offering.

Value pricing is not a matter of simply setting lower prices;

it is a matter of reengineering the company’s operations to
become a low-cost producer without sacrificing quality, and
lowering prices significantly to attract a large number of
value-conscious customers.

EDLP, high-low pricing, increased advertizing and

promotions.
 5. Selecting a Pricing Method
Going-Rate Pricing: The firm bases its price largely on
competitors’ prices. The firm might charge the same, more,
or less than major competitor/competitors.

Auction-type Pricing: English auctions (ascending bids),

Dutch auctions (descending bids), sealed-bid auctions.

Group Pricing: Consumers and business buyers can join

groups to avail a volume discount and other concessions.
 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, including the
impact of other marketing activities, company pricing
policies, gain-and-risk-sharing pricing, and the impact of
price on other parties.

Impact of Other Marketing Activities: the final price must

take into account the brand’s quality and advertizing relative
to the competition.
 6. Selecting the Final Price
Farris and Reibstein Study: Relationship among relative
price, relative quality, and relative advertising for 227
consumer businesses.

1. Brands with average relative quality but high relative

advertizing budgets were able to charge premium prices.
Consumers apparently were willing to pay higher prices for
known products than for unknown products.
2. Brands with high relative quality and high relative
advertising obtained the highest prices. Conversely, brands
with low quality and low advertising charged lowest prices.
3. The positive relationship between high prices and high
advertising held most strongly in the later stages of the
product life cycle for market leaders.
 6. Selecting the Final Price
Company Pricing Policies: the price must be consistent with
company pricing policies.

Gain-and-Risk-Sharing Pricing: Guarantying value.

Impact of Price on Other Parties: Reactions of distributors,

dealers, customers, competitors, regulating agencies, etc.
 Factors Affecting Pricing
Decisions
1. Objectives of the business
2. Cost of the product
3. Market position
4. Competitor’s prices
5. Distribution channel policy
6. Price elasticity and demand elasticity
7. Stage in PLC
8. Product differentiation
9. Buying patterns of the customers
10. Economic environment
11. Government policies
12. Impact of other marketing activities
13. Impact on other parties