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Determining Demand Estimating Costs Analyzing competitors costs , prices Selecting a pricing method Selecting the final price

Step 1: Setting the Price - whatever specific objective, business that use price as strategic tool will profit more than those who simply let costs or market determines their price. Step 1 : Selecting the pricing objective: A Company can pursue any 5 marketing Strategy a)Survival : short term objective b) Maximum current profit : companies estimate demand and cost associated with the alternative prices and chose the price that produces profit, cash flow and return on investment . In reality these are difficult to estimate. c) Maximum market share: They believe that higher sales volume will lead to lower unit cost and higher long term profit. They set lower price assuming that market is price sensitive. d) Maximum market skimming : Conditions favoring for setting low price: 1. Price sensitive market and market growth 2. Production and distribution cost falls with accumulated production experience 3. A low price discourage actual and potential competition.  Market Skimming Make sense under the following Condition: 1. If the product has huge demand and sufficient number of buyers. 2. The unit cost of producing is not so high. 3. The high initial price does not attract more competitors to the market. 4. The high price communicates the image of superior product e) Product quality leadership

Step 2 : Determining Demand: Each price will lead to different kind of demand and therefore have impact on marketing objectives. In Normal Case: The higher the price the lower the demand In case of prestige gods: The demand cure sometimes slopes upward Some consumer will take higher price to signify better product. a) Price sensitivity: It sums the reaction of many individuals who have different price sensitivities. What affects price sensitiveness? 1. Customers are most price sensitive to products that cost a lot or bought frequently 2. They are also less price sensitive when price is only a small part of total cost of obtaining , operating and servicing over its life time. The impact of the internet has been to increase customers price sensitivity

b) Estimating demand curves : different approaches to measure the demand curve 1. statistical analysis- past prices, quantity sold and other factor to estimate their relation ship . 2. price experiments :  An alternative approach to change different prices and see how sales are affected in the same territory.  Surveys: ask the buyers to state how many units they would buy AT DIFFERENT PROPOSED PRICES. c) Price elasticity of demand: If the demand changes considerable then the demand is elastic. The demand are likely to be less elastic under the following: 1. There are few or no substitutes or competitors 2. Buyers do not readily notice the higher price 3. Buyers are slow to change their buying habit. 4. Buyers think the higher price are justified.

Step 3 : Estimating Costs: company wants to charge price that covers producing, distributing and selling product including a fair ROI. a) Types of costs – 1. Fixed Cost : Cost that don't vary with production or sales revenue. rent, heat, interest, salaries, and so on regardless of output. 2. Variable Cost: Vary directly with level of production. Eg: Raw materials b) Accumulated production : decline in average cost with accumulated production experience – experience curve c) Differentiated Market Offering: Manufacturers will negotiate different terms with different retail chains. To estimate real profit manufacturer need to use Activity Based Cost accounting instead of standard accounting. Tries to Identify the real cost associated with serving each customer. d) Target costing: Establish Market research to establish desired function – determine price at which product will sell – detect the desire profit margin from the product and leaves the target cost they must achieve – consider reengineering components- the objective is to bring the final cost to the target cost range – succeed – profits /not succeed – they will decide againest developing a product

Step 4 : Analyzing competitors costs , prices:  The firm will consider the nearest competitors price.  If the firm offer contains +Ve differentiation feature then the worth with that of the competitors has to be evaluated and added to the product price  Here the firm can decide whether it can charge more, the same or the less than competitor.

Step 5 : Selecting a pricing method a) Mark-up pricing = unit cost / (1- desired return on sales) b) Target return pricing = unit cost + (desired return x invested capital)/ unit sales c) Perceived value pricing d) Value pricing e) Going rate pricing f) Auction type pricing – English and Dutch auctions 6. Selecting the final price

Adapting the Price 1. Geographical Pricing – Barter , buyback arrangement etc. 2. Price discounts 3. Promotional Pricing : To stimulate early purchase a) Loss leader pricing b) Cash rebates c) Low interest financing d) Longer payment terms e) psychological discounting

Differentiated pricing a) Customer segment pricing b) Product form pricing c) Channel pricing d) Location pricing e) Time pricing

 a) b) c) d) e) f)

Product-Mix Pricing : Product-Line Pricing Optional-Feature Pricing Captive-Product Pricing Two-Part Pricing By-Product Pricing Product-Bundling Pricing