Pricing M Sahni Pricing Strategy  Set Pricing Objective  Estimate Demand  Estimate Costs  Analyze Competitors’ Prices  Select Pricing Policy/Method

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  • PricingM Sahni

  • Pricing StrategySet Pricing ObjectiveEstimate DemandEstimate CostsAnalyze Competitors PricesSelect Pricing Policy/MethodSet Final Price

  • Pricing StrategyPricing Objectives

    survivalcover fixed cost and some variable costvery short-run.(avoid extinction)

    profit maximizationrequires accurate knowledge of demand, cost functions

  • Pricing StrategyPricing Objectives (cont.)

    revenue maximizationcosts hard to determineassume increase in revenue leads to decrease in unit costs (old BCG model)both production and distribution costs fallworks if market is price sensitive low price may discourage competition market penetration strategy

  • Pricing StrategyPricing Objectives (cont.)

    market skimminghighest price that market will bearbenefits are barely worthwhile for some customers to buythen work down the demand curveworks if no cost benefit of increasing volumeimage is importantmay or may not discourage competition

  • Pricing StrategyEstimate Demand (curve)unique valueawareness of substitutesdifficult to compare alternativesprice relative to incomeinventory effectCan customer hold inventory?

  • Pricing StrategyEstimate Costs (supply curve)

    cost structure at different levels of productionold long run average cost curves

    experience curves from BCG modelprofit is a function of market share.

    penetration versus skimmingHow is supply curve affected?

  • Pricing StrategyAnalyze Competitors PricesWhat is the structure of the market?oligopoly versus pure competition

    Select Pricing Policy/Methodsingle or multiple pricesadministered pricingceiling and floor prices versus the level of competition

  • Pricing StrategyCost Based Pricing

    cost plus, markup pricingeasy, costs known, minimizes price competitionignores demand elasticity, not profit maximizing

    target return of investmentuse breakeven analysis to find a price to yield a target ROIuse sales volume to derive price?

  • Pricing StrategyDemand Based Pricing

    perceived valuerequires detailed knowledge of buyer behavior and demand elasticityonly true profit maximizing strategyignores costs and competitors

  • Pricing StrategyDemand Based Pricing (cont.)demand differentialprice discriminationyield maximization pricingsell at multiple prices to multiple segmentsnot based on marginal costs of dealing with eachdaily, weekly, or seasonal pricinggeographic, physical, or electronic barriers

  • Pricing StrategyCompetition Based Pricing

    going rate pricingused when costs difficult to measurecompetitors lack differential advantage

    sealed bidforces competitors to lowest price

  • Pricing strategiesPremium pricingUses a high price, but gives a good product/service exchange e.g. MercedesPenetration pricingoffers low price to gain market share - then increases pricee.g. Reliance Telecom - to attract new clients Economy pricingplaced at no frills, low pricee.g. Soups, biscuits - economy brands

  • Price skimmingwhere prices are high - usually during introductione.g new albums or films on releaseultimately prices will reduce to the parityPsychological pricingto get a customer to respond on an emotional, rather than rational basis .e.g 99p not Rs1 price point perspectiveProduct line pricingrationale of a product rangechocolatesPricing variations off-peak pricing, early booking discounts,etc

  • Optional product-pricinge.g. optional extras - BMW famously under-equippedCaptive product pricingproducts that complement otherse.g Gillette razors (low price) and blades (high price)Product-bundle pricingsellers combine several products at the same pricee.g software, books, CDs.Promotional pricinge.g. toothpaste, soups, etc

  • Pricing StrategiesSelect Final Price

    psychological pricing, prestige pricingknow demand elasticitystart high, work toward costs

    discountscash, trade, quantity, or seasonal

    promotional pricingloss leaders

  • Pricing StrategySelect Final Price (cont.)

    price lining

    odd pricingperception

  • Pricing StrategyPrice cutsexcess capacity leads to margin squeezes (aka price wars)build market share not brand loyaltylow cost producer will always win

  • Price QuotationsList prices: Established prices normally quoted to potential buyers

    Market price: Price that an intermediary or final consumer pays for a product after subtracting any discounts, rebates, or allowances from the list price

  • Reductions from List Price Cash discount: price reduction offered to a consumer, industrial user, or marketing intermediary in return for prompt payment of a bill 2/10 net 30, a common cash discount notation, allows consumers to subtract 2 percent from the amount due if payment is made within 10 days

  • Trade Discounts: payment to a channel member or buyer for performing marketing functions; also known as a functional discount

  • Quantity discount: price reduction granted for a large-volume purchaseJustified on the grounds that large orders reduce selling expenses, storage, and transportation costsCumulative quantity discounts reduce prices in amounts determined by purchases over stated time periods Non-cumulative quantity discounts provide one-time reductions in the list price

  • AllowancesTrade-in: credit allowance given for a used item when a new item is purchasedPromotional allowance: advertising or promotional funds provided by a manufacturer to other channel members in an attempt to integrate the promotional strategy within the channel

    Rebates: refund for a portion of the purchase price, usually granted by the products manufacturer

  • Geographic Considerations FOB (free on board) plant or FOB origin: Price quotation that does not include shipping charges. Buyer pays all freight charges to transport the product from the manufacturerFreight absorption: system for handling transportation costs under which the buyer may deduct shipping expenses from the costs of goods

  • Uniform-delivered price: system for handling transportation costs under which all buyers are quoted with the same price, including transportation expensesZone pricing: system for handling transportation costs under which the market is divided into geographic regions and a different price is set in each regionBasing-point system: system for handling transportation costs in which the buyers costs included the factory price plus freight charges from the basing-point city nearest the buyer. Seeks to equalize competition between distant marketers.

  • Odd pricing: pricing policy based on the belief that a price ending with and odd number just below a round number is more appealing

  • Price-Quality RelationshipsWithout other cues, price serves as an important indicator of a products quality to buyersCustomers often view price as an indicator of a products overall quality and may be willing to pay a higher price