Unit No.

Price
 Syllabu
1. s
Price Basics
2. Setting the
Price
3. Adapting the price
4. Price Change
 Pricing
• Price is something that is paid in return for
obtaining the product or service
• The Price can defined as a sum of all values
that a consumer exchanges in return for the
benefits that are offered by the usage of the
product or the benefits that are obtained
by availing the service.
 Price Has Many Names

• Rent • Fees
• Tuition • Dues
• Fare • Interest
• Monthly • Donation

paymen
t
 Pricing Procedure
• Select pricing objective
• Determine demand
• Estimate costs
• Analyze competition
• Select pricing method
• Select final price
 Setting the Price

Pricing Procedure • Survival

• Select pricing objective
• Determine demand
• Estimate costs
• Analyze competition
• Select pricing method
• Select final price
• Maximize current profits
• Maximize market share
– Penetration strategy
• Market skimming
– Skimming strategy
• Product quality leaders
• Partial cost recovery
 Setting the Price

Pricing Procedure • Understand factors that

• Select pricing objective
• Determine demand
• Estimate costs
• Analyze competition
• Select pricing method
• Select final price
affect price sensitivity
• Estimate demand
curves
• Understand price
elasticity of demand
– Elasticity
– Inelasticty
 Marketing Strategies

Conditions Under Which Demand

is Less Elastic:
• There are few or • Buyers are slow to
no substitutes change their buying
• Buyers do not readily habits and search for
notice the higher lower prices
price • Buyers think higher
prices are justified
 Marketing Strategies
Conditions Under Which Consumers are
Less Price Sensitive:
• Product is more distinctive
• Buyers are less aware of substitutes
• Buyers cannot easily compare
quality of substitutes
• The expenditure is a lower part of
buyer’s total income
• The expenditure is small compared
to the total cost
• Part of the cost is borne by
another party
• The product is used with assets
previously bought
• The product is assumed to have
more quality, prestige, or
exclusiveness
• Buyers cannot store the
product
 Setting the Price

Pricing Procedure • Types of costs and levels of

• Select pricing objective
• Determine demand
• leads to cost reduction via
Estimate costs
• Analyze competition
• Select pricing method
• Select final price
production must be
considered
• Accumulated production
the experience curve
• Differentiated marketing
offers create different cost
levels
 Setting the Price
• Key Pricing Terms:
– Fixed costs: do not vary directly with changes in
level of production
– Variable costs: vary with production
– Total costs: sum of fixed and variable costs a given
level of production
– Average cost: cost per unit at a given level of
production
 Setting the Price
Pricing Procedure
• Select pricing objective
• Determine demand
• Estimate costs
• Analyze competition
• Select pricing method
• Select final price
• Firms must analyze the
competition with respect
to:
– Costs
– Prices
– Possible price reactions
• Pricing decisions are also
influenced by quality of
offering relative to
competition
 Setting the Price
Pricing Procedure
• Select pricing objective
• Determine demand
• Estimate costs
• Analyze competition
• Select pricing method
• Select final price
• Select method:
• Markup pricing
• Target return pricing
• Perceived value pricing
• Value pricing
• Going rate pricing
• Sealed bid pricing
• Cost based Approach
• Market Based Approach
 Setting the Price
Pricing Procedure
• Select pricing objective
• Determine demand
• Estimate costs
• Analyze competition
• Select pricing method
• Select final price
• Requires consideration of
additional factors:
– Psychological pricing
– Gain-and-risk-sharing pricing
– Influence of other marketing
mix variables
– Company pricing policies
– Impact of price on other
parties
 Concept 1:
6 Steps in Setting the Price
Selecting the Determining Estimating
pricing objective demand costs
Price
objective Deman Cost
d s

Surveys Learning
Demand curve
Survival (B/E) Maximize profit elasticity Fixed and
Variable
Maximize
market Cost per
Statistical unit of
share analysis Price
Product production
• leadership
experiment
Maximize market s
skimming

Selecting the Selecting Analyze competitors’ costs,

final price pricing method prices, and offers

Final Pricing
price method Competitors
Price
Perceived markup
value
Evaluate the
Gain & risk competitors’
sharing Value
High pricing price and
advertising product value
Target
Going-rate ROI
pricing
Pricing policies Auction- Break-
Price fixing type even point
pricing
Factors Influencing Pricing Decision
Internal Factors
• Organizational Factors
• Marketing Mix
• Product Differentiation
• Cost of the product
• Objectives of the organization
• Product Life Cycle
• Functional Position
 External Factors
• Estimated Demand
• Competitive Reactions
• Suppliers
• Economic Conditions
• Buyers
• Government Regulations
Pricing Strategies
Penetration Pricing
 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
Market Skimming
Market Skimming
• High price, Low volumes
• Skim the profit from the
market
• Suitable for products that have
short life cycles or which will
face competition at some point
in the future (e.g. after a
patent runs out)
• Examples include: Playstation,
jewellery, digital technology,
new DVDs, etc.
Value Pricing
 Value Pricing
• Price set in accordance
with customer
perceptions about the
value of the
product/service
• Examples include status
products/exclusive
products
Loss Leader
 Loss Leader
• Goods/services deliberately sold below cost to
encourage sales elsewhere
• Typical in supermarkets, e.g. Price of Sugar less than
market price in the hope that people will be
attracted to the store and buy other things
• Purchases of other items more than covers ‘loss’ on
item sold
Psychological Pricing
 Psychological Pricing
• Used to play on consumer perceptions
• Classic example – Rs. 9.99 instead of Rs.10.99
• Links with value pricing – high value goods
priced according to what consumers THINK
should be the price
Going Rate (Price Leadership)
 Going Rate (Price Leadership)
• In case of price leader, rivals have difficulty in competing on
price – too high and they lose market share, too low and the
price leader would match price and force smaller rival out
of market
• May follow pricing leads of rivals especially where those rivals
have a clear dominance of market share
• Where competition is limited, ‘going rate’ pricing may be
applicable – banks, petrol, supermarkets, electrical goods –
find very similar prices in all outlets
Tender Pricing
 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
Price Discrimination
Price Discrimination
• Charging a different price
for the same good/service
in different markets
• Requires each market to
be impenetrable
• Requires different price
elasticity of demand in
each market
Destroyer Pricing/Predatory Pricing
 Destroyer/Predatory Pricing

• Deliberate price cutting or offer of ‘free

gifts/products’ to force rivals (normally smaller
and weaker) out of business or prevent new
entrants
• Anti-competitive and illegal if it can be proved
Absorption/Full Cost Pricing
 Absorption/Full Cost Pricing
• Full Cost Pricing – attempting to set price to
cover both fixed and variable costs
• Absorption Cost Pricing – Price set to ‘absorb’
some of the fixed costs of production
Marginal Cost Pricing
 Marginal Cost Pricing
• Marginal cost – the cost of producing ONE extra or ONE fewer
item of production
• MC pricing – allows flexibility
• Particularly relevant in transport where fixed costs may be
relatively high
• Allows variable pricing structure – e.g. on a flight from London
to New York – providing the cost of the extra passenger is
covered, the price could be varied a good deal to attract
customers and fill the aircraft
Contribution Pricing
 Contribution Pricing
• Contribution = Selling Price – Variable (direct costs)
• Prices set to ensure coverage of variable costs and a
‘contribution’ to the fixed costs
• Similar in principle to marginal cost pricing
• Break-even analysis might be useful in such
circumstances
Target Pricing
 Target Pricing
• Setting price to ‘target’ a specified profit level
• Estimates of the cost and potential revenue at
different prices, and thus the break-even have
to be made, to determine the mark-up
• Mark-up = Profit/Cost x 100
Cost-Plus Pricing
 Cost-Plus Pricing
• Calculation of the average cost (AC) plus a
mark up
• AC = Total Cost/Output
Influence of Elasticity
 Influence of Elasticity
• Any pricing decision must be mindful of the impact
of price elasticity
• The degree of price elasticity impacts on the level of
sales and hence revenue
• Elasticity focuses on proportionate (percentage)
changes
• PED = % Change in Quantity demanded/%
Change
in Price
 Influence of Elasticity
• Price Inelastic:
• % change in Q < % change in P
• e.g. a 5% increase in price would be met by a fall in
sales of something less than 5%
• Revenue would rise
• A 7% reduction in price would lead to a rise in sales
of something less than 7%
• Revenue would fall
 Influence of Elasticity
• Price Elastic:
• % change in quantity demanded > % change in
price
• e.g. A 4% rise in price would lead to sales falling
by something more than 4%
• Revenue would fall
• A 9% fall in price would lead to a rise in sales of
something more than 9%
• Revenue would rise
 Concept 2:

4 Price-adaptation strategies

1. Geographical pricing
2. Price discounts and allowances
3. Promotional pricing
4. Differentiated pricing
 Concept 2:
1. Geographical pricing

Barter Compensation deal

Buyback arrangement Offset

 Geographical Pricing
• Company decides how to price its product to different customers
in different location & countries
• Countertrade: offering other items in payment for purchases
FORMS OF COUNTERTRADE
1. Barter- Buyer & seller directly exchange goods
with no money/third party involved
2. Compensation: seller receives some percentage in cash & rest
in Products
3. Buy Agreement: Seller sells a
Backequipment/Technologyplant to another country and accepts as
products manufactured with supplied equipment
4. Offset: The seller recieves full payment in cash but agrees to
spend substantial amount of the money in that country within
stipulated time
 2. Price discounts and allowances

Cash discount Quantity discount

Seasonal discount

Trade discount Allowances

 Price Discount & Allowances

• For Early payment, Volume Purchase & Offseason Buying

Discount A price reduction to buyers who pay bills promptly (2/10 Net
30)

Quantity A price reduction to those who buy large volumes

Discount

Functional Trade Discount offered by a manufacturer to trade channel

Discount members

Seasonal A price reduction t those who buy mercahndise or services

Discount out of season

Allowances An extra payment designe to gain reseller participation in

special programmes
 Concept 2:
3. Promotional pricing

Special-event pricing Longer payment

terms

Low-interest
financing

Cash rebates
Warranties and
service contracts
 Promotional Pricing
Pricing techniques to stimulate early purchase
Promotional Pricing Strategies
Loss Leader Pricing
Special Event pricing
Special customer pricing
Cash Rebates
Low interest financing
Longer Payment Terms
Warranties & Service contracts
Psychological Discounting
Description
Often Drop the price on well known
brands to stimulate additional store
traffic (Supermarket, Department store)
Special prices in certain seasons to draw
in more customers
Special prices to certain customers
Encourages to purchase products in
specified time period
Instead of cutting the price, low interest
finance offered
Stretch loans for long periods thus
lowering monthly installments
Adding a free or low cost warranty or
service contract
Set an artificially high price than offers
product at a substantial saving (359-
299)
 Concept 2:
4. Differentiated pricing
• Price discrimination
• - selling a product at two or more prices

• Customer-segment pricing
• - different customer groups pay different prices
• for the same product or service

• Product-form pricing
• - different versions of the product are priced differently, but not proportionately to
their costs

• Image pricing
• - the same product are priced at two different levels based on image differences
 Concept 2:
4. Differentiated pricing
• Channel pricing
• - a product is priced depending on where it was purchase (fine restaurant, fast-food
chain, or vending machine)

• Location pricing
• - same product is priced differently at different locations even though the cost is the same

• Time pricing
• - prices are varied by season, day, or hour (weekend vs weekdays, “early bird” customers)
 Price Changes

• Initiating Price Cuts is Desirable When a

Firm:
– Has excess capacity
– Faces falling market share due to price
competition
– Desires to be a market share leader
 Price Changes

• Price Increases are Desirable:

– If a firm can increase profit, faces cost
inflation, or faces greater demand than can
be supplied.
• Methods of Increasing Price
• Alternatives to Increasing Price
– Reducing product size, using less expensive
materials, unbundling the product.
 Price Changes
• Buyer reactions to price changes must be
considered.
• Competitors are more likely to react to
price changes under certain conditions.
– Number of firms is small
– Product is uniform
– Buyers are well informed
 Price Changes

• Respond To Price Changes Only If:

– Market share / profits will be negatively
affected if nothing is changed.
– Effective action can be taken:
• Reducing price
• Raising perceived quality
• Improving quality and increasing price
• Launching low-price “fighting brand”
 Public Policy
and Pricing
• Pricing within Channel Levels
– Price-fixing
• Competitors can not work with each other
to set prices
– Predatory pricing
• Firms may not sell below cost with the
intention of punishing a competitor or gaining
higher long- run profits or running a competitor
out of business.
 Public Policy
and Pricing
• Pricing across Channel Levels
– Price discrimination
– Retail price maintenance
– Deceptive pricing
• Bogus reference / comparison pricing
• Scanner fraud
• Price confusion
Thank You