Pricing Strategy 192-197 Ppt

7/27/2019 Pricing Strategy 192-197 Ppt

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Method adopted by a firm to set its selling price

Depends on the firm's average costs, and onthe customer'sperceived value of the product incomparison
http://www.businessdictionary.com/definition/selling-price.htmlhttp://www.businessdictionary.com/definition/average-cost.htmlhttp://www.businessdictionary.com/definition/customer.htmlhttp://www.businessdictionary.com/definition/perceived-value.htmlhttp://www.businessdictionary.com/definition/perceived-value.htmlhttp://www.businessdictionary.com/definition/customer.htmlhttp://www.businessdictionary.com/definition/average-cost.htmlhttp://www.businessdictionary.com/definition/selling-price.html


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UNDERSTANDING PRICINGPrice is not just a number on a tag

In the past, prices were set by negotiation betweenbuyers and sellers

Bargaining is still prevalent in many parts of Asia


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Many firms are avoiding the low-price trend and havebeen successful in trading consumers up to moreexpensive products and services by combining uniqueproduct formulations with engaging marketing

campaigns.

Todaythe Internet is partially reversing the fixedpricing trend.


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Buyers can

Get instant price comparisons shopping-websites.htm

Name their price & have it met -Priceline.com

Get products for free -Open Source

Sellers can

Monitor customer behavior & tailor offers to them

Give some customers special prices-CDNOW

Both buyers & sellers can

Negotiate prices in online auctions & exchanges
http://localhost/var/www/apps/conversion/tmp/scratch_4/shopping-websites.htmhttp://localhost/var/www/apps/conversion/tmp/scratch_4/shopping-websites.htmhttp://localhost/var/www/apps/conversion/tmp/scratch_4/shopping-websites.htmhttp://localhost/var/www/apps/conversion/tmp/scratch_4/shopping-websites.htm


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Giving away products free via sampling has been asuccessful marketing tactic for years; today with the adventof the Internet software, product and service companies arefollowing the suit


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Purchase decisions are based on how consumers perceiveprices

What they consider is the current actual price but not the

marketers stated price

Consumers may have a lower price threshold below whichprices may signal inferior or unacceptable quality

Upper price threshold above which prices are prohibitiveand seen as not worth the money


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REFRENCE PRICINGWhen examining products, consumers often employ

reference prices

In considering an observed price, consumers oftencompare it to an internal reference price (pricing frommemory)

An external frame of reference (posted regular retailprice)


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PRICE-Quality Inferences

Many consumers use price as an indicator of quality

Some companies adopt exclusivity and scarcity to justify

premium prices


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Price Endings

Many sellers believe that prices should end in an oddnumber

Research has shown that consumers tend to process pricesin a left -to- right manner rather than by rounding

Pricing cues like sale signs and prices that end in a 9 areless effective the more they are employed


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Settingthe

Price


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Pricing

Higherprice

Lowerperceived

value

Companymisses

potentialprofits

11

LowerPrice

HigherPerceived

Value


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Pricing

Lower priceLower

perceivedvalue

Companyfails toharvest

potentialprofits

12

HigherPrice


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Selecting Price Objective

Determining Demand

Estimating Costs

Analyzing Competition

Selecting Pricing Method

Selecting Final Price

Factors of Setting Price


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Survival

Maximum Current Profit

Maximum Market Share

Maximum Market Skimming

Product Quality Leadership

Others

Selecting Price Objectives


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Survival: Over Capacity

Intense Competition

Changing Consumer Wants.

Is a short term objective

Maximum Current Profit

Based on demand and cost function


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Maximum Market Share

Market Penetration Pricing1) Market is price sensitive

2) Production and Distribution costs decrease withincrease in volume.

3) Low price discourages actual and potential competition

HigherSales

Volume

Lower UnitCost

HigherLong-Run

Profit


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Maximum Market Skimming Prices start high and are slowly lowered over time.

Companies unveiling a new technology favor setting high prices.

Example

Technique backfires if competitor prices lower.


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Favourable conditions

Large number of buyers having high current demand.

High initial price deters competitors.

High Price positions product as a superior product.


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Product Quality Leadership

When companies strive to be Affordable Luxuries

Premium Pricing with Loyal Customer Base

Example: - Mercedes, CCD, Taj Hotels

Other Objectives Non Profit Organizations have other pricing objectives.

Pricing affects the public image of certain organizations


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Determining Demand

Price Sensitivity

Estimating Demand Curves

Price Elasticity of Demand


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Pricing Sensitivity The first step in estimating demand is to understand

what affects price sensitivity.

Customers are less price sensitive to

1) Low cost items or items bought infrequently

2) Few substitutes available

3) Slow to change buying habits

4) Higher prices are justified

5) Price is a small percentage ofTotal Cost of Ownership6) Part of the cost is borne by another party

7) Buyers cannot store the product

8) Information is freely available


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Estimating Demand Curves

Surveys Price Experiments Should be performed carefully

Statistical Analysis: Using data analysis tools marketers canoptimize pricing.


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Price Elasticity of Demand

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

I.) If demand hardly changes with a small change in price, we say thedemand is inelastic.

II.) If demand changes considerably, demand is elastic.

Price Elasticity depends on magnitude and direction of price change.


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Estimating Costs Types of costs

Activity-Based cost accounting

Accumulated Production Target Costing


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Cost Terms and Production

Fixed costsVariable costs

Total costs

Average cost Cost at different

levels of production


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Cost per Unit as a Function of Accumulated

Production


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Target Costing Costs change with production scale and experience.

Target cost can be achieved by bringing downthe cost of each element

Design

Engineering

Manufacturing


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Analyzing Competitors Costs, Prices and

Offers Market Share Objectives :

Match the price differences or changes of thecompetitor

Profit-Maximization Objectives:

Company React by increasing advertising budget andimproving the product quality

Interpretation is the key:Research the competitors financial situation, recentsales, consumer loyalty


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Homogeno

us product


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Markup Pricing

Target-return Pricing

Perceivedvalue Pricing

Value Pricing

Going-rate pricing

Auction-type pricing

M k P i i


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Markup Pricing

Most elementary pricing methodStandard Mark-up is added for profit

Variable cost per unit $10

Fixed Cost $300,000Expected unit sales 50,000

Manufacturers unit cost:

Unit cost = variable cost + fixed cost/Unit sales= $10 + $300000/50,000= $16


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Mark-up price

unit cost=

(1 desired profit on sales)

= $16

(1-0.2)

= $20


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T t R t P i i


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Target-Return Pricing


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Target-Return Pricing

In target-return pricing, the firm determines the price that wouldyield its target return on investments(ROI)

Target-return price= unit cost +(desired return*invested capital)/unit sales=$16+(.20*$1000000)/50000=$20

Break-even volume= fixed cost/(price variable cost)= $300000($20-$10)=30,000

Disadvantages


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Disadvantagesof Target-

Return Pricing

Target-return pricingonly considers ROI

It doesnt considerprice elasticity andcompetitors prices

Perceived ValuePricing

Pricing on customersperceived value.

Companies mustdeliver the valuepromised by theirvalue proposition.

Companies useadvertising and salesforce to enhance

perceived value inbuyers minds.


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Characteristics of perceived value

Buyers image of product performanceChannel deliverablesThe warranty quality

Customer supportSuppliers reputationTrustworthinessEsteem

The key to perceived-value pricing is to delivermore value than the competitor and to demonstratethis to prospective buyers.


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Perceived Value Pricing


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Value Pricing

Winning customers by charging low price for high-qualityoffering


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Re-engineering the companys operations tobecome a low-cost producer without sacrificingquality

A retailer holding every day low pricing(EDLP)charges a constant low price at retaillevel with no price promotions

In high-low pricing, the retailer graduallylowers prices on everyday basis. The pricesare eventually lowered below EDLP level


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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 competitors.


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Auction-type Pricing

Sealed-Bidauction

English

auctions(ascendingbids)

Dutchauctions

(descendingbids)

Auction-type Pricing


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Auction type Pricing

English auctions

(ascending bids)

Dutch auctions

(descending bids)


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Selecting

Impact of other marketing activities

Company pricing policies

Gain-and-risk sharing pricing

Impact of price on other parties


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Price Adaptation StrategiesGeographic Pricing

Price Discounts

and Allowances

Promotional Pricing

Differentiated Pricing


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How to get Paid? Barter Compensation Deal

Buyback Arrangement

Offset


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rice Discounts and Allowances

Discount

Quantity Discount

Functional Discount Seasonal Discount

Allowance


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Promotional Pricing

Longer Payment Terms

Loss-Leader

Pricing

Low Interest

Financing

Warranties andService Contracts

PsychologicalDiscounting

Cash

Rebates

Special Event

Pricing

PromotionalPricing

Tactics


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Psychological Discounting


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Differentiated Pricing Customer-segmented pricing

Product-form pricing

Image pricing Channel pricing

Location pricing

Time pricing


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Initiating Price CutsWhy? Reasons

Excess plant capacity

Declining market share

Drive to dominate market thru low

costs Responding to economic recession


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Caution: Low price traps Low quality trap consumers assume low

quality

Fragile market-share trap lower pricebuys market share but not market loyalty; may

encourage brand switching behavior

Shallow-pockets trap competitors may

have deeper pockets in price war


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Marlboro Friday : the day when Marlboro

man fell off his horse.


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Marlboro Friday : the day when

Marlboro man fell off his horse.

Loss of $10 billion off its market cap ina single day

It took 2 years to fully recover from

Marlboro Friday's loss


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Warning : Smoking Kills !


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Initiating Price increases

Why? Reasons

Cost inflation

Anticipatory pricing

Over-demand

How?Methods

Delayed quotation pricing- Do not set final price until product isfinished or delivered (e.g. industrial construction )

Escalator clauses-Todays price + inflated price (e.g. aircraft Indus.)

Unbundling- Separately price 1 or more element (e.g. Car companies)

Reduction of discounts- remove/reduction of discount


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Responding to competitors Price

ChangesPossible responses:

Maintain price

Maintain price and add value

Reduce price

Increase price and improve quality

launch a low-price fighter fighting

brand


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Responding to Low-Price competitors


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Documents

Pricing Strategy 192-197 Ppt