Basic Pricing Strategies and Practices

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Why does Gillette command a premium price?

Definition:

• In ordinary usage, price is the quantity of payment or compensation given by one party to another in return for goods or services.

Price is what you pay….

Tuition

Interest

Retainer

Salary

For what you get.

Education

Use of money

Use of building/equipment

Taxi ride / rickshaw ride

Services of a lawyerConsultant’s services over a period of time

Services of white-collar jobs

Services of blue-collar jobs

Source: Ch. 12, Marketing (Reference book) by Michael Etzel, Bruce Walker

Selling Price & Buying Price

• Price can sometimes alternatively refer to the quantity of payment requested by a seller of goods or services – called the ‘asking price’ or ‘selling price’.

• the actual payment may be called the transaction price or traded price.

• Likewise, the bid price or buying price is the quantity of payment offered by a buyer of goods or services.

Objectives of Pricing

• Short-term profit maximization

• Short-term revenue maximization

• Maximize quantity

• Maximize profit margin

• Differentiation

• Survival

Source: http://entrepreneurs.about.com/od/salesmarketing/a/pricingstrategy.htm

Summation of Objectives

• Profit objectives e.g.– Targeted profit return– Maximize profits

• Volume/Sales objectives e.g.– Dollar or unit sales growth– Market share growth

• Status-quo objectives e.g.– Match competitors’ price

Factors affecting pricing:

• Estimated demand• Cost of the product• Competition

– Directly similar products– Available substitutes– Unrelated products

• Other marketing mix elements– Product– Distribution channels– Promotion

Major Approaches to Pricing

1. Price Vs. Non-price competition

2. Market entry strategies

3. Discounts and allowances

4. Geographic pricing strategies

5. Special pricing strategies

1. Price Vs. Non-price competition

• Price competition focuses on low prices for differentiation

• Non-price competition may involve quality, workmanship, design etc. to differentiate

Price competition

Examples..

Non-price competition

2. Market entry strategies

• Market Skimming Price

• Market Penetration Price

Market skimming: LCD TVs

Source: http://ww.avsforum.com/avs-vb/showthread.php?t=681034

• Started as a one-product one-man outfit in 1969 by a chemist Karsanbhai Patel.

• The new yellow powder detergent was priced at Rs. 3.50 per kg, at a time when HLL's Surf was priced at Rs 15 for market penetration.

"It all started to earn a side income, and at that stage, I had never imagined this kind of success."

- Karsanbhai Patel, CMD, Nirma Ltd.

3. Discounts and allowances

• Quantity discounts

• Trade discounts

• Cash discounts

• Rebates

Quantity discounts

Trade discounts

Cash Discount

Rebates

4. Geographic pricing strategies

• Point of production pricing

• Uniform delivered pricing

• Zone delivered pricing

• Freight absorption pricing

5. Special pricing strategies

• One price and flexible price strategies

• Price lining

• Odd pricing

• Leader pricing

• Everyday low pricing (EDLP)

• Resale price maintenance

Odd Pricing

Case-studies in Pricing Strategy

1. McDonald’s Leader Pricing

• McDonald’s menu is recognized world over for its affordability. A McDonald’s store gets an average of 3,000 walk-ins every day in each of its 165 restaurants in India.

• In September 2009, McDonald’s announced reduction in prices by almost 25% for its lunch and dinner menus. Prices for its extra-value meals like McVeggie and McChicken were reduced to Rs. 85 and 95 respectively from Rs. 110 and 120 respectively.

• McDonald’s began operations in India in 1996. The fast-food chain started making profits after it broke even in 2008.

2. Star Bazaar Pricing Error

1 Chocolate Horlicks Displayed

price: Rs. 230/- Charged: Rs.

257.40

2 Toor Daal (500g) MRP: Rs. 39.00

Charged: Rs. 40.59

3 Himani Mudpack MRP: Rs. 80.00

Charged: Rs. 99.00

4 Amul Cheese Spread MRP: Rs.

55.00 Charged: Rs. 57.00

5 Sugar Powder 100g, MRP: Rs.

7.15 Charged: Rs. 8.91

6 Nescafe Classic, 50g, MRP: Rs.

75.00 Charged: Rs. 88.00

Ethical dilemma?

• Which software would you upgrade first?

price-rise or price-reduction?

3. Price-wars: Coke vs. Pepsi

• Established - Coke: 1886; Pepsi: 1893• 1933: Pepsi struggling to stave off bankruptcy. Dropped price

of its 10c, 12 oz. bottle to 5c, making it a better value (discount)

• Ad jingle of Pepsi “twice as much for a nickel” better known in the US than the Coke ad

Pepsi Coke

Perceived Quality Perceived Quality

Coke vs. Pepsi, Contd.....

Pepsi Coke

First move:PepsiChallenge

Pepsi keeps price advantage through 60s and 70s, when Pepsi charged its bottlers 20% less for its concentrate (trade discount)

With rising ingredient costs, Pepsi could no longer offer twice as much for the same price. So it raised price to Coke’s level giving it a war chest to fuel an aggressive ad campaign

Battle shifted from Price to Quality, with Pepsi targeting the youth What followed was the Pepsi Challenge & “Real Thing” Coke ads

Youth & MiddleClass Segments 2nd move:

Coke’s Ad war

Coke vs. Pepsi, Contd.....P

Perceived quality caught up. Deeper pocketed and lower cost Coke initiated a price war in selective markets where Pepsi was weak in the 70s. (Geographical Pricing)

Other companies moved into the lower left quadrant of the market. (market penetration pricing) But the two major players forced price down to “ultimate value.”

To break price spiral, Coke launched New Coke to keep Coke loyals and induce switching among Pepsi buyers. (market skimming) Rejected by market.

Attempts are on to move to next arena via niches in caffeine and sugar substitutes

GenericsRC Cola

Coke &PepsiPriceSpiral NewCoke

ActualClassic Coke& Pepsi

NewCokeIntended

And the battle goes on..

The end

Basic Pricing Strategies and Practices

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