Lt-16 Pricing - The Second P of Marketing

Pricing :
The Second P of Marketing

16
Pricing:
Understanding and
Capturing Customer Value
What Is a Price?
Customer Perceptions of Value
Consumer Psychology and Price
Other Internal and External Considerations
Affecting Price Decisions
Pricing Process
Topic Outline
Amount of money charged for a product or
service.

The sum of all the values that consumers
give up in order to gain the benefits of having
or using a product or service.

The only P in the marketing mix that
produces revenue; all other elements
represent costs
What Is a Price?
Synonyms for Price
Rent
Tuition
Fee
Fare
Rate
Toll
Premium
Honorarium
Special assessment
Bribe
Dues
Salary
Commission
Wage
Tax
Common Pricing Mistakes
Determine costs and take traditional industry margins

Failure to revise price to capitalize on market changes

Setting price independently of the rest of the marketing mix

Failure to vary price by product item, market segment,
distribution channels, and purchase occasion
Factors to Consider When Setting Prices

Factors to Consider When Setting Prices
Understanding how much value consumers place on the
benefits they receive from the product and setting a price that
captures that value

Value-based pricing uses the buyers perceptions of value,
not the sellers cost, as the key to pricing. Price is considered
before the marketing program is set.

Value-based pricing is customer driven

Cost-based pricing is product driven

1. Customer Perceptions of Value

Two Alternative Approaches of
Determining Price of a Product

Copyright 2009 Dorling Kindersley (India) Pvt. Ltd. 14-9
Gillette Commands a
Price Premium
Consumer Psychology
and Pricing
Reference Prices
Price-quality inferences
Price endings
Price cues
Possible Consumer Reference Prices
Fair price
Typical price
Last price paid
Upper-bound price
Lower-bound price
Competitor prices
Expected future
price
Usual discounted
price
Consumer Perceptions vs. Reality for Cars
Overvalued Brands
Land Rover
Kia
Volkswagen
Volvo
Mercedes
Undervalued Brands
Mercury
Infiniti
Buick
Lincoln
Chrysler
Tiffanys
Price-Quality Relationship
Price Cues
Left to right pricing ($299 vs. $300)

Odd number discount perceptions

Even number value perceptions

Ending prices with 0 or 5

Sale written next to price
When to Use Price Cues
Customers purchase
item infrequently

Customers are new

Product designs vary
over time

Prices vary seasonally

Quality or sizes vary
across stores
Steps in Setting Price
Select the price objective
Determine demand
Estimate costs
Analyze competitor price mix
Select pricing method
Select final price
Step 1: Selecting the Pricing Objective
Survival

Maximum current profit

Maximum market share

Maximum market skimming

Product-quality leadership
SURVIVAL:
When Companies are plagued with overcapacity, intense competition, or
changing consumer wants.
As long as prices cover variable costs and some fixed costs, the company stays
in business.
Survival is a short-run objective; in the long run, the firm must learn how to add
value or face extinction.
MAXIMUM CURRENT PROFIT
Many companies try to set a price that will maximize current profits.
They estimate the demand and costs associated with alternative prices and choose the
price that produces maximum current profit, cash flow, or rate of return on investment.
This strategy assumes that the firm has knowledge of demand levels

MAXIMUM MARKET SHARE
Some companies want to maximize their market share. They believe that a higher sales
volume will lead to lower unit costs and higher long-run profit. They set the lowest price,
assuming the market is price sensitive. They have have knowledge of its demand and
cost functions.
Conditions favoring setting a low price: (1) The market is highly price sensitive, and a low
price stimulates market growth; (2) production and distribution costs fall with accumulated
production experience; and (3) a low price discourages actual and potential competition.

MAXIMUM MARKET SKIMMING: Companies unveiling a new technology
favor setting high prices to maximize market skimming. where prices start
high and are slowly lowered over time.
Conditions:
(1) A sufficient number of buyers have a high current demand;
(2) the unit costs of producing a small volume are not so high that they cancel the
advantage of charging what the traffic will bear;
(3) the high initial price does not attract more competitors to the market;
(4) the high price communicates the image of a superior product.

PRODUCT-QUALITY LEADERSHIP A company might aim to be the
product-quality leader in the market.
To create a perception about products as of high quality, taste, and status the
company may charge a price just high enough not to be out of consumers' reach

OTHER OBJECTIVES Nonprofit and public organizations may have
other pricing objectives.
A university aims for partial cost recovery, knowing that it must rely on private
gifts and public grants to cover the remaining costs.
A nonprofit hospital may aim for full cost recovery in its pricing.
Step 2: Determining Demand
Price Sensitivity
Estimating
Demand Curves
Price Elasticity
of Demand

PRICE SENSITIVITY
The demand curve shows the market's probable purchase quantity at
alternative prices. It sums the reactions of many individuals who have
different price sensitivities.

The first step in estimating demand is to understand what affects price
sensitivity.
Generally, customers are most price sensitive to products that cost a
lot or are bought frequently.

They are less price sensitive to low-cost items or items they buy
infrequently.

They are also less price sensitive when price is only a small part of the
total cost of obtaining, operating, and servicing the product over its
lifetime.

A seller can charge a higher price than competitors and still get the
business if the company can convince the customer that it offers the
lowest total cost of ownership (TCO).
Factors Leading to Less Price
Sensitivity
The product is more distinctive
Buyers are less aware of substitutes
Buyers cannot easily compare the quality of substitutes
The expenditure is a smaller part of buyers total income
The expenditure is small compared to the total cost of
the end product
Part of the cost is paid by another party
The product is used with previously purchased assets
The product is assumed to have high quality and
prestige
Buyers cannot store the product
ESTIMATING DEMAND CURVES
Most companies make some attempt to measure their demand curves
using several different methods.

Statistical analysis of past prices, quantities sold, and other factors can reveal
their relationships. The data can be longitudinal (over time) or cross-sectional
(different locations at the same time). Building the appropriate model and fitting
the data with the proper statistical techniques calls for considerable skill.

Price experiments can be conducted.
Bennett and Wilkinson systematically varied the prices of several products sold in a
discount store and observed the results.

An alternative approach is to charge different prices in similar territories to see how
sales are affected. Still another approach is to use the Internet. An e-business could
test the impact of a 5 percent price increase by quoting a higher price to every fortieth
visitor to compare the purchase response.

Surveys can explore how many units consumers would buy at different
proposed prices, although there is always the chance that they might understate
their purchase intentions at higher prices to discourage the company from
setting higher prices.
3

Inelastic
and Elastic Demand

PRICE ELASTICITY OF DEMAND

Marketers need to know how responsive, or elastic,
demand would be to a change in price

Demand is likely to be less elastic under the following
conditions:
(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 habits;
(4) buyers think the higher prices are justified.
Step 3: Estimating Costs
Types of Costs
Target Costing
Accumulated
Production
Activity-Based
Cost Accounting
Cost Terms and Production
Fixed costs

Variable costs

Total costs

Average cost

Cost at different
levels of production

Step 3: Estimating Costs
Demand sets a ceiling on the price the company can charge for its
product. Costs set the floor.
The company wants to charge a price that covers its cost of producing,
distributing, and selling the product, including a fair return for its effort and
risk. Yet, when companies price products to cover full costs, the net result
is not always profitability.
A company's costs take two forms, Fixed Costs and Variable Costs
Fixed costs (also known as overhead) are costs that do not vary with
production or sales revenue. A company must pay bills each month for rent,
heat, interest, salaries, and so on, regardless of output.

Variable costs vary directly with the level of production

Total costs consist of the sum of the fixed and variable costs for any
given level of production.

Average cost is the cost per unit at that level of production; it is equal to total
costs divided by production. Management wants to charge a price that will at
least cover the total production costs at a given level of production.
ACTIVITY-BASED COST ACCOUNTING :
ABC accounting tries to identify the real costs associated with
serving each customer.

It allocates indirect costs like clerical costs, office expenses,
supplies, and so on, to the activities that use them, rather than in
some proportion to direct costs.

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' prices.

Deducting the desired profit margin from this price leaves the target
cost that must be achieved.
Cost per Unit as a Function of
Accumulated Production
Tata motors developed Nanoits
small car with a target price
Step 5: Selecting a Pricing Method
Markup pricing

Target-return pricing

Perceived-value pricing

Value pricing

Going-rate pricing

Auction-type pricing
Practice Question
A consumer purchases a flat iron to straighten
her hair for Rs. 7,500 from a salon at which
she gets her hair cut. If the salons markup is
40 percent and the wholesalers markup is 15
percent, both based on their selling prices, for
what price does the manufacturer sell the
product to the wholesaler?

Target Return Pricing Method
Break-Even Chart
Exercises: 1
a) If the unit variable costs for each flat iron are Rs.
2000 and the manufacturer has fixed costs totaling
Rs. 10,000,000, how many flat irons must this
manufacturer sell to break even?

a) How many must it sell to realize a profit of Rs.
40,000,000?

Fixed cost
Breakeven volume =
Price Variable Cost
So,
Rs. 10,000
Breakeven volume = = 1,818 flat
irons
Rs. 7,500 Rs. 2,000

If the manufacturer wants to realize a Rs. 40,000,000 profit,
then this amount is added to the fixed costs in the
numerator:
Rs. 10,000,000 + Rs. 40,000,000
Breakeven volume = ___
Rs. 7,500 Rs. 2,000

= 9,090.91 or 9,091 flat irons

Perceived-Value Pricing
Customers perceived-value

Performance $$$
Warranty $
Customer support $
Reputation $$
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 quality,
customer support, and
softer attributes such as the supplier's reputation, trustworthiness,
and esteem.

Furthermore, each potential customer places different weights on these different
elements result ing in following group of buyer :

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 their value.

For loyal buyers, companies must invest in relationship building and
customer intimacy.

**Companies need different strategies for these three groups.

Value Pricing

Through Value pricing companies charge a fairly low price for a high-
quality offering fom its customers.

However, 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

An important type of value pricing is everyday low pricing (EDLP), which
takes place at the retail level. A retailer who holds to an EDLP pricing policy
charges a constant low price with little or no price promotions and special
sales. These constant prices eliminate week-to-week price uncertainty and
can be contrasted to the "high-low" pricing of promotion-oriented
competitors. In high-low pricing, the retailer charges higher prices on an
everyday basis but then runs frequent promotions in which prices are
temporarily lowered below the EDLP level
Value Pricing
P1 P2 C1 C2
Level of
Quality
THOUSANDS OF
LOW
PRICES
EVERY DAY
throughout the store
EDLP
High
Low
Pricing

Going Rate Pricing

In going-rate pricing, the firm bases its price largely on
competitors' prices. The firm might charge the same, more, or
less than major competitor(s).

In oligopolistic industries that sell a commodity such as steel,
paper, or fertilizer, firms normally charge the same price.

The smaller firms "follow the leader," changing their prices when
the market leader's prices change rather than when their own
demand or costs change.

Some firms may charge a slight premium or slight discount, but
they preserve the amount of difference.
Auction-Type Pricing
English auctions
Dutch auctions
Sealed-bid auctions
Auction Pricing
English auction
(ascending bids)
Dutch auction
(descending bids)
Sealed-bid auction
English auctions (ascending bids). One seller and many
buyers. e.g. sites such as Yahoo! and eBay,

Dutch auctions (descending bids). One seller and many
buyers, or one buyer and many sellers. In the first kind, an
auctioneer announces a high price for a product and then slowly
decreases the price until a bidder accepts the price. In the other,
the buyer announces something that he wants to buy and then
potential sellers compete to get the sale by offering the lowest
price.

Sealed-bid auctions. Would-be suppliers can submit only one
bid and cannot know the other bids. A supplier will not bid below
its cost but cannot bid too high for fear of losing the job. The net
effect of these two pulls can be described in terms of the bid's
expected profit. Using expected profit for setting price makes
sense for the seller that makes many bids.
Step 6: Selecting the Final Price
Impact of other marketing activities

Company pricing policies

Gain-and-risk sharing pricing

Impact of price on other parties
Marketing Discussion
Think of all the pricing methods
described in the chapter.
As a consumer, which pricing method
do you personally prefer to deal with?
Why?

Variable Cost/Unit 12500.00
Fixed Cost 10,00,00,000
Units Sales 100000.00
Mark-up% 0.20
Mark up Price ?

Total Investment 50,00,00,000
Investor Return on Investment 0.25
RoI Pricing ?

Competitor's Price 18000.00
Customer Perception 17500.00

Bep
Q.1 Find out the Floor and Ceiling price for this NG LCD
Q.2 What will be the Mark-up price here?
Q.3 What will be the ROI price here?
Q.4 Which price will you charge from the customers & why?
Lecture 17

Pricing Strategies
1. New-Product Pricing Strategies

2. Product Mix Pricing Strategies

3. Price Adjustment Strategies

4. Price Changes
Topic Outline
1. New-Product Pricing Strategies
a. Market-skimming pricing
High initial prices to skim revenue layers from the market
Conditions
Product quality and image must support the price
Buyers must want the product at the price
Costs of producing the product in small volume should not cancel the
advantage of higher prices
Competitors should not be able to enter the market easily
b. Market- penetration pricing
setting a low initial price in order to penetrate the market quickly and
deeply to attract a large number of buyers quickly to gain market
share
Conditions
Price sensitive market
Inverse relationship of production and distribution cost to sales growth
Low prices must keep competition out of the market
2. Product Mix Pricing Strategies
Product
line pricing
Optional-
product
pricing
Captive-
product
pricing
By-product
pricing
Product
bundle
pricing
Product Mix Pricing Strategies
i) Product line pricing : takes into account the cost
differences between products in the line, customer
evaluation of their features, and competitors prices
ii) Optional-product pricing takes into account optional or
accessory products along with the main product
iii) Captive-product pricing involves products that must be
used along with the main product
iv) Two-part pricing involves breaking the price into:
Fixed fee
Variable usage fee
v) Product bundle pricing combines several products at a
reduced price
vi) By-product pricing refers to products with little or no
value produced as a result of the main product. Producers
will seek little or no profit other than the cost to cover
storage and delivery
Adapting the Price
Possible Reasons variations in
Geographical demand & Cost
Market-segment requirements,
purchase timing,
order levels,
delivery frequency,
guarantees,
service contracts,

3. Price-Adjustment Strategies
Discount and
allowance
pricing
Segmented or
Differentiated pricing
Psychological
pricing
Promotional
pricing
Geographic
pricing
Dynamic
pricing
International
pricing
Price-Adjustment Strategies
1. Discount and allowance pricing reduces
prices to reward customer responses such as
paying early or promoting the product

Types of Discounts
Cash discount
Quantity discount
Functional discount
Seasonal discount
Allowance

2. Promotional Pricing
Promotional pricing is when prices are temporarily
priced below list price or cost to increase demand
Loss leaders
Special event pricing
Cash rebates
Low-interest financing
Longer warrantees
Free maintenance

2. Promotional Pricing Tactics
Loss-leader pricing. Supermarkets and department stores often drop the price on
well-known brands to stimulate additional store traffic. This pays if the revenue on the
additional sales compensates for the lower margins on the loss-leader items.

Cash rebates. Auto companies and other consumer-goods companies offer cash
rebates to encourage purchase of the manufacturers' products within a specified time
period. Rebates can help clear inventories without cutting the stated list price.

Special-event pricing. Sellers will establish special prices in certain seasons to draw in
more customers.

Low-interest financing. Instead of cutting its price, the company can offer customers
low-interest financing. Automakers have even announced no-interest financing to attract
customers.

Warranties and service contracts. Companies can promote sales by adding a free or
low-cost warranty or service contract.

Longer payment terms. Sellers, especially mortgage banks and auto companies,
stretch loans over longer periods and thus lower the monthly payments.
Psychological discounting. This strategy involves setting an artificially high price and
then offering the product at substantial savings; for example, "Was $359, now $299.
3. Differentiated Pricing
Price discrimination
occurs when a company sells a product or service at two or more prices that do not
reflect a proportional difference in costs.

In first-degree price discrimination, the seller charges a separate price to each
customer depending on the intensity of his or her demand.
In second-degree price discrimination, the seller charges less to buyers who buy a
larger volume.
In third-degree price discrimination, the seller charges different amounts to different
classes of buyers, as in the following cases:
Customer-segment pricing. Different customer groups are charged different
prices for the same product or service.
Product-form pricing. Different versions of the product are priced differently
but not proportionately to their respective costs
Image pricing. Some companies price the same product at two different
levels based on image differences.
Channel pricing. Coca-Cola carries a different price depending on whether it
is purchased in a fine restaurant, a fast-food restaurant, or a vending machine
Location pricing. The same product is priced differently at different locations
even though the cost of offering at each location is the same
Time pricing. Prices are varied by season, day, or hour. Public utilities vary
energy rates to commercial users by time of day and weekend versus weekday
Special festival
pricing by
Coca-Cola on the
occasion of
Ramzan in
Pakistan.
4. Geographical pricing
It is used for customers in different parts
of the country or the world
FOB-origin pricing
Uniformed-delivered pricing
Zone pricing
Basing-point pricing
Freight-absorption pricing

FOB-origin (free on board) pricing means that the goods are
delivered to the carrier and the title and responsibility passes to the
customer
Uniformed-delivered pricing means the company charges the same
price plus freight to all customers, regardless of location
Zone pricing means that the company sets up two or more zones
where customers within a given zone pay a single total price
Basing-point pricing means that a seller selects a given city as a
basing point and charges all customers the freight cost associated
from that city to the customer location, regardless of the city from
which the goods are actually shipped
Freight-absorption pricing means the seller absorbs all or part of
the actual freight charge as an incentive to attract business in
competitive markets
Dynamic pricing is when prices are adjusted continually to meet the
characteristics and needs of the individual customer and situations
International pricing is when prices are set in a specific country
based on country-specific factors
Economic conditions, Competitive conditions, Laws and regulations,
Infrastructure, Company marketing, objective

4. Geographical Pricing Strategies

Price Changes

Price cuts
Price
increases
Initiating Pricing Changes

Price Changes
Initiating Pricing Changes

Price cuts occur due to:
Excess capacity
Increased market share
Price increase from:
Cost inflation
Increased demand
Lack of supply

Price Changes
Price increases
Product is hot

Company greed
Price cuts
New models will
be available

Models are not
selling well

Quality issues
Buyer Reactions to Pricing Changes

Price Changes
Questions
Why did the competitor change the price?
Is the price cut permanent or temporary?
What is the effect on market share and
profits?
Will competitors respond?
Responding to Price Changes

Price Changes
Solutions
Reduce price to match competition
Maintain price but raise the perceived
value through communications
Improve quality and increase price
Launch a lower-price fighting brand


Chapter 11- slide 69
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Price Changes

Public Policy and Pricing
Price competition is a core element
of our free-market economy. In setting
prices, companies usually are not free
to charge whatever prices they wish.
Many laws govern the rules of fair
play in pricing.
The Monopolies and Restrictive
Trade Practices (MRTP) Act, 1969
The Competition Act, 2002

Salient features of the Competition
Act:
anti-competitive agreements
prohibition of abuse of dominant
positions by an enterprise
regulation of combinations such as
acquisitions, mergers, joint ventures,
takeovers, and amalgamations

Under the MRTP Act, acts such as
misleading consumers about the
prices at which goods and services
are available in the market and false
offers of bargain prices are
considered to be unfair trade practices
The Consumer Protection Act, 1986
(amended in 2002), also safeguards
the interests of consumers

Predatory pricing, or selling and
providing services with the intention of
reducing competition or eliminating
competitors, is not permissible under
the MRTP Act or the Competition Act.

Increasing Prices
Delayed quotation pricing
Escalator clauses
Unbundling
Reduction of discounts
Brand Leader Responses to
Competitive Price Cuts
Maintain price
Maintain price and add value
Reduce price
Increase price and improve quality
Launch a low-price fighter line
Marketing Debate
Is the right price a fair price?

Take a position:
1. Prices should reflect the value that
consumers are willing to pay.

or

2. Prices should primarily just reflect the cost
involved in making a product.
Marketing Discussion
Think of all the pricing methods
described in the chapter.
As a consumer, which pricing method
do you personally prefer to deal with?
Why?

Lt-16 Pricing - The Second P of Marketing

Enviado por

Dados do documento

Título original

Direitos autorais

Formatos disponíveis

Compartilhar este documento

Compartilhar ou incorporar documento

Opções de compartilhamento

Você considera este documento útil?

Este conteúdo é inapropriado?

Direitos autorais:

Formatos disponíveis

Lt-16 Pricing - The Second P of Marketing

Enviado por

Direitos autorais:

Formatos disponíveis

Pricing :

The Second P of Marketing

Você também pode gostar