Pricing

BY
AKASH SAXENA
 Contents

Pricing decisions
Pricing objectives
Policies methods of setting price
Pricing strategies

By Akash Saxena
 The second P

Price = Customer cost

It should be fixed in such a manner so that the target
customer’s cost can be minimized while maximizing
the company profits

By Akash Saxena
 Definition
Price
 The amount of money charged for a product or service,
or the sum of the values that consumers exchange for
the benefits of having or using the product or service.

By Akash Saxena
 Major Influences on
Pricing Decisions

Customers influence prices through

their effect on demand.
Competitors influence prices through
their actions.
Costs influence prices because they
affect supply.

By Akash Saxena
 The Nature of Price

Price
 The value exchanged for products in a marketing exchange
Barter
 The trading of products; the oldest form of exchange
Terms Used to Describe Price
 Tuition, premium, fine, fee, fare, toll, rent, commission, dues,
deposit, tips, interest, taxes

By Akash Saxena
 The Nature of Price (cont’d)

The Importance of Price to Marketers

 It is the most readily changeable characteristic (under favorable
circumstances) of a product.
 It is a key element in the marketing mix because it relates directly
to generation of revenues and quantities sold.
 It is a key component of the profit equation, having strong effect
on the firm’s profitability.
 It has symbolic value to customers—prestige pricing.

Profit = Total Revenues - Total Costs

Profits = (Price x Quantity Sold) - Total Costs
By Akash Saxena
 Types of Costs
Cost
Fixed costs Costs that do not vary with changes in the
units produced or sold
Average fixed cost The fixed cost per unit produced

Variable costs Costs that vary directly with changes in the

number of units produced or sold

Average variable cost The variable cost per unit produced

Total cost The sum of average fixed and average

variable costs times the quantity produced

Average total cost The sum of the average fixed cost and the
average variable cost

Marginal cost (MC) The extra cost a firm incurs by producing

one more unit of a product
By Akash Saxena
By Akash Saxena
 Breakeven Analysis

Breakeven Point
 The point at which the costs of producing a product equal the
revenue made from selling the product
 The point after which profitability begins

Breakeven = Fixed Costs

Point Per - Unit Contribution to Fixed Costs

Breakeven = Total Fixed Costs

Point Unit Price – Unit Variable Costs

By Akash Saxena
 Determining the Breakeven Point

FIGURE 20.7
By Akash Saxena
 Factors That Affect Pricing Decisions

FIGURE 20.8
By Akash Saxena
 Factors to Consider When Setting Price

Internal  Market positioning influences

pricing strategy
Factors
 Marketing objectives
 Other pricing objectives:
 Survival
 Marketing mix strategies  Current profit maximization
 Market share leadership
 Costs
 Product quality leadership
 Organizational  Not-for-profit objectives:
considerations  Partial or full cost recovery
 Social pricing

By Akash Saxena
 Factors to Consider When Setting Price

Internal  Pricing must be carefully

coordinated with the other
Factors
 Marketing objectives
marketing mix elements
 Target costing is often used to
 Marketing mix strategies support product positioning
 Costs strategies based on price
 Organizational  Nonprice positioning can also
be used
considerations

By Akash Saxena
 Factors to Consider When Setting Price

Internal  Types of costs:

Variable
Factors

 Fixed
 Marketing objectives
 Total costs
 Marketing mix strategies  How costs vary at different
 Costs production levels will influence
 Organizational price setting
 Experience (learning) curve
considerations
effects on price

By Akash Saxena
 Factors to Consider When Setting Price

Internal  Who sets the price?

 Small companies: CEO or top
Factors
 Marketing objectives
management
 Large companies: Divisional or
 Marketing mix strategies product line managers
 Costs  Price negotiation is common in
industrial settings
 Organizational
 Some industries have pricing
considerations departments

By Akash Saxena
 Factors to Consider When Setting Price

External  Types of markets

 Pure competition
Factors
 Nature of market and


Monopolistic competition
Oligopolistic competition
demand  Pure monopoly
 Competitors’ costs, prices,  Consumer perceptions of price
and value
and offers
 Price-demand relationship
 Other environmental
 Demand curve
elements  Price elasticity of demand

By Akash Saxena
 Factors to Consider When Setting Price

 Consider competitors’ costs, prices,

External and possible reactions when

developing a pricing strategy
Factors
 Nature of market and
 Pricing strategy influences the
nature of competition
 Low-price low-margin strategies
demand inhibit competition
 Competitors’ costs, prices,  High-price high-margin strategies
attract competition
and offers  Benchmarking costs against the
 Other environmental competition is recommended
elements

By Akash Saxena
 Factors to Consider When Setting Price

External  Economic conditions

Affect production costs
Factors

 Affect buyer perceptions of
 Nature of market and price and value
demand  Reseller reactions to prices
 Competitors’ costs, prices, must be considered
and offers  Government may restrict or
 Other environmental limit pricing options
 Social considerations may be
elements
taken into account

By Akash Saxena
 Factors Affecting Pricing Decisions

Organizational and Marketing Objectives

 Prices should be set that are consistent with the organization’s
goals and mission.
 Prices must be compatible with marketing objectives (e.g.,
setting premium prices to enhance a product’s quality image).
Types of Pricing Objectives
 Settingprices low to increase market share
 Using temporary price reductions to gain market share

 Lowering prices to raise cash quickly

By Akash Saxena
 Factors Affecting Pricing Decisions (cont’d)

Costs
 Set a floor price—products must be sold above their costs if the
firm is to remain in business.
 Reducing costs increases productivity and profitability.
 Using labor-saving technologies
 Focusing on quality
 Establishing efficient manufacturing processes
Other Marketing Mix Variables
 Price/quality image of the product or brand
 Selective or intensive product distribution
 Product pricing used as a promotional tool

By Akash Saxena
 Factors Affecting Pricing Decisions (cont’d)

Channel Member Expectations

 To make a profit at least equivalent to the potential profit
from handling a competitor’s brand
 To earn a profit commiserate with the effort and resources
the channel member expends on the product
 To receive discounts for volume purchases and prompt
payment
 To be supported by the producer with training, advertising,
sales promotion, and return policies

By Akash Saxena
 Factors Affecting Pricing Decisions (cont’d)

Customers’ Interpretation and Response

 What meaning does the product’s price have to the
customer?
 Does the customer respond to the price by moving closer to
or farther away from making a purchase?
 Internal reference price
 A price developed in the buyer’s mind through experience
with the product
 External reference price
 A comparison price provided by others

By Akash Saxena
 Factors Affecting Pricing Decisions (cont’d)

Buyers’ responses to price

 Value consciousness
 Concern about price and quality
 Price consciousness
 Striving to pay low prices
 Prestige sensitivity
 Being drawn to products that signify prominence and status

By Akash Saxena
 Factors Affecting Pricing Decisions (cont’d)

Competition
 Pricing
to match competitors’ prices
 Judging competitors’ responses to adjusting prices

 Changes in an industry’s market structure cause and create pricing

opportunities.
Legal and Regulatory Issues
 Price controls intended to curb inflation

 Controls that set/regulate prices for specific products

 Regulations and laws to prohibit price fixing, and deceptive and
discriminatory pricing

By Akash Saxena
 Price Discounting

Trade (Functional) Discounts

Areduction off the list price given by a producer to an intermediary
for performing for performing certain functions
Quantity Discounts
 Deductions from list price for purchasing large quantities

Cumulative Discounts
 Quantity discounts aggregated over a stated period

Noncumulative Discounts
 One-time reductions in price based on specific factors

By Akash Saxena
 Price Discounting (cont’d)

Cash Discount
A price reduction given to buyers for prompt payment or cash
payment
Seasonal Discount
A price reduction given to buyers for purchasing goods or
services out of season
Allowance
A concession in price to achieve a desired goal

By Akash Saxena
By Akash Saxena
 Pricing for Business Markets
Geographic Pricing
 Reductions for transportation costs and other costs related to
the physical distance between buyer and seller
Type Pricing method
F.O.B. factory The price of the merchandise at the factory, before
shipment
F.O.B. destination A price indicating that the producer is absorbing
shipping costs
Uniform geo- Charging all customers the same price, regardless of
graphic pricing geographic location
Zone pricing Pricing based on transportation costs within major
geographic zones
Base-point pricing Geographic pricing combining factory price and
freight charges from the base point nearest the buyer
Freight absorption Absorption of all or part of actual freight costs by the
pricing seller

By Akash Saxena
 Pricing for Business Markets (cont’d)

Transfer Pricing
 The price of products that one organizational unit charges
when selling to another unit in the same organization
 Actual full cost
 All fixed and variable costs divided by the number of units
produced
 Standard full cost
 Pricing based on what it would cost to produce the goods at full
plant capacity.
 Cost plus investment
 Full cost plus internal cost of assets used in production

By Akash Saxena
 Pricing for Business Markets (cont’d)

Transfer Pricing (cont’d)

 Market-based pricing
 Market price less marketing and selling costs

By Akash Saxena
 General Pricing Approaches

Cost-Based Pricing: Cost-Plus Pricing

 Adding a standard markup to cost
 Ignores demand and competition

 Popular pricing technique because:

 It simplifies the pricing process
 Price competition may be minimized
 It is perceived as more fair to both buyers and sellers

By Akash Saxena
 General Pricing Approaches

Cost-Based Pricing Example

Variable costs: $20 Fixed costs: $ 500,000
Expected sales: 100,000 units Desired Sales Markup: 20%

Variable Cost + Fixed Costs/Unit Sales = Unit Cost

$20 + $500,000/100,000 = $25 per unit

Unit Cost/(1 – Desired Return on Sales) = Markup Price

$25 / (1 - .20) = $31.25

By Akash Saxena
 General Pricing Approaches

Cost-Based Pricing: Break-Even Analysis and

Target Profit Pricing
 Break-even charts show total cost and total revenues at
different levels of unit volume.
 The intersection of the total revenue and total cost
curves is the break-even point.
 Companies wishing to make a profit must exceed the
break-even unit volume.

By Akash Saxena
 General Pricing Approaches

Break-Even Analysis and Target Profit Pricing

Revenues
1000 Target Profit $200,000
800 Total Costs
Thousands Break-even
of Dollars point
600

400
Fixed Costs
200

0 10 20 30 40 Quantity To Be Sold To
Sales Volume in Thousands of Units Meet Target Profit

By Akash Saxena
 General Pricing Approaches

Value-Based Pricing:
 Uses buyers’ perceptions of value rather than seller’s
costs to set price.
 Measuring perceived value can be difficult.
 Consumer attitudes toward price and quality have
shifted during the last decade.
 Introduction of less expensive versions of
established brands has become common.

By Akash Saxena
 General Pricing Approaches

Value-Based Pricing:
 Business-to-business firms seek to retain pricing power
 Value-added strategies can help

 Value pricing at the retail level

 Everyday low pricing (EDLP) vs. high-low pricing

By Akash Saxena
 General Pricing Approaches

Competition-Based Pricing:
 Also called going-rate pricing
 May price at the same level, above, or below the
competition
 Bidding for jobs is another variation of competition-
based pricing
 Sealed bid pricing

By Akash Saxena
 Pricing strategies
Premium pricing
 Uses a high price, but gives a good product/service
exchange e.g. Mercedez Benz

By Akash Saxena
 Penetration pricing

Penetration pricing
 offers low price to gain market share - then increases price
 e.g. Nirma Washing Powder

By Akash Saxena
 Economy Pricing

Economy pricing
 placed at ‘no frills’, low price
 e.g. Southwest Airlines, Deccan Airlines

By Akash Saxena
 Price Skimming
Price skimming
 where prices are high - usually during introduction
 e.g new albums or films on release
 ultimately prices will reduce to the ‘parity’

By Akash Saxena
 Psychological Pricing

Psychological pricing
 to get a customer to respond on an emotional, rather than
rational basis
 .e.g Rs. 99p not Rs. 100 price point perspective

By Akash Saxena
 Product Line Pricing

Product line pricing

 rationale of a product range
 e.g. Cadbury Chocolates

By Akash Saxena
 Pricing variation

Pricing variations
 ‘off-peak’ pricing, early booking discounts, etc
 e.g Hotels and Resorts

By Akash Saxena
 Optional Product Pricing

Optional product-pricing
 e.g. optional extras - BMW famously under-equipped, Dell

By Akash Saxena
 Geographical Pricing

Geographical pricing
 different prices for customers in different parts of the world
 e.g. Include shipping costs, or place

By Akash Saxena
 Ten ways to ‘increase’ prices without increasing price - Winkler

Revise the discount structure

Change the minimum order size
Charge for delivery and special services
Invoice for repairs on serviced equipment
Charge for engineering, installation
Charge for overtime on rushed orders
Collect interest on overdue accounts

By Akash Saxena
 Produce less of the lower margin models in the
line
Write penalty clauses into contracts
Change the physical characteristics of the
product

By Akash Saxena
 New-Product Pricing Strategies

Market-Skimming  When to use:

 Set a high price for a
new product to “skim”
revenues layer by layer
from the market.
 Company makes fewer,
but more profitable
sales.
• Product’s quality and image must
support its higher price.
• Costs of smaller volume cannot be
so high they cancel the advantage
of charging more.
• Competitors should not be able to
enter market easily and undercut
the high price.

By Akash Saxena
 New-Product Pricing Strategies

Market-Penetration  When to use:

 Set a low initial price in
order to “penetrate”
the market quickly and
deeply.
 Can attract a large
number of buyers
quickly and win a large
market share.
 Market must be highly price
sensitive so a low price
produces more market growth.
 Production and distribution costs
must fall as sales volume
increases.
 Must keep out competition and
maintain low price or effects are
only temporary.

By Akash Saxena
 Thanks
any Questions?

By Akash Saxena