DEVELOPING PRICING STRATEGIES AND PROGRAMS

Ms.Kiran Sharma

CHAPTER QUESTIONS How do consumers process and

evaluate prices? How should a company set prices

initially for products or services? How should a company adapt prices to

meet varying circumstances and opportunities?

When should a company initiate a price change?

How should a company respond to a competitor’s price challenge?

GILLETTE COMMANDS A PRICE PREMIUM

SYNONYMS FOR PRICE

Rent Tuition Fee Fare Rate Toll Premium Honorarium

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

CHANGING PRICING ENVIRONMENT

For Buyers Get instant price comparisons from thousands of

vendors – (www.mySimon.com) Name their price and have it met –

(www.priceline.com) Get products free

For Sellers Monitor customer behavior and tailor offer to

individuals Give certain customers access to special prices

Both Buyers and Sellers may Negotiate prices in Online auctions and exchanges

CONSUMER PSYCHOLOGY AND PRICING

Reference Prices

Price-quality inferences

Price cues

POSSIBLE CONSUMER REFERENCE PRICES

“Fair 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

TIFFANY’S PRICE-QUALITY RELATIONSHIP

PRICE CUES

“Left to right” pricing (Rs.2999 vs. Rs.3000)

Odd number discount 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 (overcapacity, intense competition, changing consumer wants)

• Maximum current profit (can estimate the demand and cost associated with alternative prices)

• Maximum market share (market skimming)

• Maximum market skimming

• Product-quality leadership

STEP 2: DETERMINING DEMAND

Price Sensitivity

Estimating Demand Curves

Price Elasticity of Demand

FACTORS LEADING TO LESS PRICE SENSITIVITY The product is more distinctive, low cost items, or

items they buy infrequently. There are no or few substitutes or competitors Buyers cannot easily compare the quality of

substitutes Buyers are slow to change their buying habits. Buyer do not readily notice the higher price 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, hence feel higher price is justified. Buyers cannot store the product

ESTIMATING DEMAND CURVES

PRICE ELASTICITY OF DEMANDINELASTIC AND ELASTIC DEMAND

STEP 3: ESTIMATING COSTS

Types of Costs

Target Costing

Accumulated Production

Activity-Based Cost Accounting

COST TERMS AND PRODUCTION

Fixed costs (rent, salaries) Variable costs (Raw material,

microprocessor chips, packaging material)

Total costs Average cost Cost at different levels of

production

COST PER UNIT AS A FUNCTION OF ACCUMULATED PRODUCTION

TARGET COSTING - TATA MOTORS DEVELOPED ‘NANO’ ITS SMALL CAR WITH A TARGET PRICE

STEP 4: ANALYZING COMPETITORS COSTS, PRICES AND OFFERS

Analyze competitor in terms of financial situation, recent sales, customer loyalty, product efficacy.

STEP 5: SELECTING A PRICING METHOD

Markup pricing Target-return pricing Perceived-value pricing ( Buyer’s image,

warranty, product performance, supplier reputation, trust)

Value pricing (Higher volumes at lower prices)

Going-rate pricing (competitor prices) Auction-type pricing

BREAK-EVEN CHART

AUCTION-TYPE PRICING

English auctions

Dutch auctions

Sealed-bid auctions

STEP 6: SELECTING THE FINAL PRICE

• Impact of other marketing activities• Company pricing policies• Impact of price on other parties

PRICE-ADAPTATION STRATEGIES

Geographical Pricing

Discounts/Allowances

Differentiated Pricing

Promotional Pricing

PRICE-ADAPTATION STRATEGIES

Countertrade Barter Compensation deal Buyback

arrangement Offset

Discounts/ Allowances Cash discount Quantity discount Functional discount Seasonal discount

11-30

GEOGRAPHICAL PRICING - BARTER The least complex and oldest form of

bilateral, non-monetary counter-trade A direct exchange of goods or services

between two parties

Country X

Exporter/Importer

Exporter/ Importer

Country Y

Goods/Services

SWITCH TRADING

11

-31

Exporter Exporter

Switch trader

Country X Country Y

Country Z

Goods/ services A

Goods/ Services B

Payment or Goods/Services C

COUNTER PURCHASE1

1-3

2

Exporter

Country X

Exporter

Exporter

Country Y

Country Y

Goods/Services

Goods/Services

Payment( Hard Currency)

Payment( Hard Currency

BUY BACK (COMPENSATION)1

1-3

3

Exporter(capital goods or technology or Licenser)

ImporterOrLicensee

Country X Country YCapital goods or technology

Payment

Output from Capital goods/ technology

Payment

PROMOTIONAL PRICING TACTICS Loss-leader pricing

(drop prices on well known brand)

Special-event pricing Cash rebates Low-interest financing Longer payment terms Warranties and service

contracts Psychological

discounting (was Rs 599 Now Rs 549)

DIFFERENTIATED PRICING

Customer-segment pricing

Product-form pricing

Image pricing Channel pricing Location pricing Time pricing

PRICING FOR RURAL MARKETS

• A large proportion have a low and seasonal income

• Several approaches adopted by retailers and companies to address this

• Rural retailers often extend credit• Retailers also “break the bulk” and sell in

loose form, in small quantities• Companies use a similar strategy by

introducing “low-unit packing” or LUP• Companies also develop low-priced products

with a target price for rural markets• Companies might offer refill packs or

recyclable and reusable packs

INITIATING PRICE INCREASES

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