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

PricingPricing

M SahniM Sahni

Pricing StrategyPricing Strategy

Set Pricing ObjectiveSet Pricing Objective Estimate DemandEstimate Demand Estimate CostsEstimate Costs Analyze Competitors’ PricesAnalyze Competitors’ Prices Select Pricing Policy/MethodSelect Pricing Policy/Method Set Final PriceSet Final Price


Pricing ObjectivesPricing Objectives

survivalsurvival cover fixed cost and some variable costcover fixed cost and some variable cost very short-run….(avoid extinction)very short-run….(avoid extinction)

profit maximizationprofit maximization requires accurate knowledge of demand, cost functionsrequires accurate knowledge of demand, cost functions


Pricing Objectives Pricing Objectives (cont.)(cont.)

revenue maximizationrevenue maximization costs hard to determinecosts hard to determine assume increase in revenue leads to decrease in unit costs assume increase in revenue leads to decrease in unit costs

(…old BCG model)(…old BCG model)……both production and distribution costs fallboth production and distribution costs fall

works if market is price sensitive works if market is price sensitive low price may discourage competitionlow price may discourage competition

… …market penetration strategymarket penetration strategy


Pricing Objectives Pricing Objectives (cont.)(cont.)

market skimmingmarket skimming highest price that market will bearhighest price that market will bear benefits are barely worthwhile for some customers to buybenefits are barely worthwhile for some customers to buy

……then work down the demand curvethen work down the demand curve works if no cost benefit of increasing volumeworks if no cost benefit of increasing volume image is importantimage is important may or may not discourage competitionmay or may not discourage competition


Estimate Demand (…curve)Estimate Demand (…curve)– unique valueunique value– awareness of substitutesawareness of substitutes– difficult to compare alternativesdifficult to compare alternatives– price relative to incomeprice relative to income– inventory effectinventory effect

Can customer hold inventory?Can customer hold inventory?


Estimate Costs (supply curve)Estimate Costs (supply curve)

cost structure at different levels of productioncost structure at different levels of production……old long run average cost curvesold long run average cost curves

experience curves from BCG modelexperience curves from BCG model……profit is a function of market share.profit is a function of market share.

penetration versus skimmingpenetration versus skimming……How is supply curve affected?How is supply curve affected?


Analyze Competitors’ PricesAnalyze Competitors’ PricesWhat is the structure of the market?What is the structure of the market?

oligopoly versus pure competitionoligopoly versus pure competition

Select Pricing Policy/MethodSelect Pricing Policy/Methodsingle or multiple pricessingle or multiple prices

administered pricingadministered pricingceiling and floor prices versus the level of competitionceiling and floor prices versus the level of competition


Cost Based PricingCost Based Pricing

cost plus, markup pricingcost plus, markup pricingeasy, costs known, minimizes price competitioneasy, costs known, minimizes price competition

ignores demand elasticity, not profit maximizingignores demand elasticity, not profit maximizing

target return of investmenttarget return of investmentuse breakeven analysis to find a price to yield a target ROIuse breakeven analysis to find a price to yield a target ROI

……use sales volume to derive price…?use sales volume to derive price…?


Demand Based PricingDemand Based Pricing

perceived valueperceived valuerequires detailed knowledge of buyer behavior and demand requires detailed knowledge of buyer behavior and demand

elasticityelasticity

only true profit maximizing strategyonly true profit maximizing strategy

ignores costs and competitorsignores costs and competitors


Demand Based Pricing Demand Based Pricing (cont.)(cont.)

demand differentialdemand differential

price discriminationprice discrimination

yield maximization pricingyield maximization pricingsell at multiple prices to multiple segmentssell at multiple prices to multiple segments

not based on marginal costs of dealing with eachnot based on marginal costs of dealing with each

daily, weekly, or seasonal pricingdaily, weekly, or seasonal pricing

geographic, physical, or electronic barriersgeographic, physical, or electronic barriers


Competition Based PricingCompetition Based Pricing

going rate pricinggoing rate pricingused when costs difficult to measureused when costs difficult to measure

competitors lack differential advantagecompetitors lack differential advantage

sealed bidsealed bidforces competitors to lowest priceforces competitors to lowest price

Pricing strategiesPricing strategies Premium pricingPremium pricing

Uses a high price, but gives a good Uses a high price, but gives a good product/service exchange e.g. Mercedesproduct/service exchange e.g. Mercedes

Penetration pricingPenetration pricingoffers low price to gain market share - offers low price to gain market share -

then increases pricethen increases pricee.g. Reliance Telecom - to attract new e.g. Reliance Telecom - to attract new

clients clients

Economy pricingEconomy pricingplaced at ‘no frills’, low priceplaced at ‘no frills’, low pricee.g. Soups, biscuits - ‘economy’ brandse.g. Soups, biscuits - ‘economy’ brands

Price skimmingPrice skimming where prices are high - usually during introductionwhere prices are high - usually during introduction e.g new albums or films on releasee.g new albums or films on release ultimately prices will reduce to the ‘parity’ultimately prices will reduce to the ‘parity’

Psychological pricingPsychological pricing to get a customer to respond on an emotional, to get a customer to respond on an emotional,

rather than rational basis rather than rational basis .e.g 99p not Rs1 ‘price point perspective.e.g 99p not Rs1 ‘price point perspective

Product line pricingProduct line pricing rationale of a product rangerationale of a product range chocolateschocolates

Pricing variationsPricing variations ‘ ‘off-peak’ pricing, early booking discounts,etcoff-peak’ pricing, early booking discounts,etc

Optional product-pricingOptional product-pricinge.g. optional extras - BMW famously under-e.g. optional extras - BMW famously under-

equippedequipped

Captive product pricingCaptive product pricingproducts that complement othersproducts that complement otherse.g Gillette razors (low price) and blades e.g Gillette razors (low price) and blades

(high price)(high price)

Product-bundle pricingProduct-bundle pricingsellers combine several products at the same sellers combine several products at the same

pricepricee.g software, books, CDs.e.g software, books, CDs.

Promotional pricingPromotional pricinge.g. toothpaste, soups, etce.g. toothpaste, soups, etc

Pricing StrategiesPricing Strategies

Select Final PriceSelect Final Price

psychological pricing, prestige pricingpsychological pricing, prestige pricingknow demand elasticityknow demand elasticity

start high, work toward costsstart high, work toward costs

discountsdiscountscash, trade, quantity, or seasonalcash, trade, quantity, or seasonal

promotional pricingpromotional pricingloss leadersloss leaders


Select Final Price Select Final Price (cont.)(cont.)

price liningprice lining

odd pricingodd pricingperceptionperception


Price cutsPrice cutsexcess capacity leads to margin squeezes (aka price wars)excess capacity leads to margin squeezes (aka price wars)

build market share not brand loyaltybuild market share not brand loyalty

low cost producer will always winlow cost producer will always win

Price QuotationsPrice Quotations

List pricesList prices: Established prices : Established prices normally quoted to potential buyersnormally quoted to potential buyers

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

Reductions from List Price Reductions from List Price – Cash discountCash discount: price reduction : price reduction

offered to a consumer, industrial user, offered to a consumer, industrial user, or marketing intermediary in return for or marketing intermediary in return for prompt payment of a bill prompt payment of a bill 2/10 net 302/10 net 30, a common cash discount , a common cash discount

notation, allows consumers to subtract 2 notation, allows consumers to subtract 2 percent from the amount due if payment is percent from the amount due if payment is made within 10 daysmade within 10 days

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

Quantity discountQuantity discount: price reduction : price reduction granted for a large-volume purchasegranted for a large-volume purchase– Justified on the grounds that large Justified on the grounds that large

orders reduce selling expenses, orders reduce selling expenses, storage, and transportation costsstorage, and transportation costs

– Cumulative quantity discountsCumulative quantity discounts reduce prices in amounts determined reduce prices in amounts determined by purchases over stated time periods by purchases over stated time periods

– Non-cumulative quantity discountsNon-cumulative quantity discounts provide one-time reductions in the list provide one-time reductions in the list priceprice

AllowancesAllowances– Trade-inTrade-in: credit allowance given for a : credit allowance given for a

used item when a new item is purchasedused item when a new item is purchased– Promotional allowancePromotional allowance: advertising or : advertising or

promotional funds provided by a promotional funds provided by a manufacturer to other channel members manufacturer to other channel members in an attempt to integrate the in an attempt to integrate the promotional strategy within the channelpromotional strategy within the channel

RebatesRebates: refund for a portion of the : refund for a portion of the purchase price, usually granted by the purchase price, usually granted by the product’s manufacturerproduct’s manufacturer

Geographic Considerations Geographic Considerations – FOB (free on board) plant or FOB FOB (free on board) plant or FOB

originorigin: Price quotation that does not : Price quotation that does not include shipping charges. Buyer pays include shipping charges. Buyer pays all freight charges to transport the all freight charges to transport the product from the manufacturerproduct from the manufacturer

– Freight absorptionFreight absorption: system for : system for handling transportation costs under handling transportation costs under which the buyer may deduct shipping which the buyer may deduct shipping expenses from the costs of goods expenses from the costs of goods

– Uniform-delivered priceUniform-delivered price: system for : system for handling transportation costs under which all handling transportation costs under which all buyers are quoted with the same price, buyers are quoted with the same price, including transportation expensesincluding transportation expenses

– Zone pricingZone pricing: system for handling : system for handling transportation costs under which the market is transportation costs under which the market is divided into geographic regions and a different divided into geographic regions and a different price is set in each regionprice is set in each region

– Basing-point systemBasing-point system: system for handling : system for handling transportation costs in which the buyer’s costs transportation costs in which the buyer’s costs included the factory price plus freight charges included the factory price plus freight charges from the basing-point city nearest the buyer. from the basing-point city nearest the buyer. Seeks to equalize competition between distant Seeks to equalize competition between distant marketers.marketers.

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

Price-Quality RelationshipsPrice-Quality Relationships– Without other cues, price serves as Without other cues, price serves as

an important indicator of a an important indicator of a product’s quality to buyersproduct’s quality to buyers

– Customers often view price as an Customers often view price as an indicator of a product’s overall indicator of a product’s overall quality and may be willing to pay a quality and may be willing to pay a higher pricehigher price