NILAMADHAB MOHANTY

CIMP
 The meaning of pricing
 Why is it important for a marketer to understand the pricing
strategy?
 How should a company set prices for products or services?
 Objectives in making pricing decisions

 What are the different pricing strategies and how do they

interact with other components of marketing mix?
 Adapting the price
 Initiating and responding to the price changes

Pricing strategies and programs 2

 The amount of money and/or other items with utility charged for a
good or service
 Utility is an attribute with the potential to satisfy wants
 Thus price may involve more than money

 Customer's point of view

 Value is the sole justification for price

Value = Perceived benefits - Perceived costs

 Marketer’s perspective
 It represents marketers' assessment of the value customers see
in the product or service and are willing to pay for a product or
service
 Price is the only element in the marketing mix that produces
revenue; all other elements represent costs

What Is a Price? 3
 Understanding consumer pricing psychology
 Setting the price
 Selecting the pricing objective
 Determining demand
 Estimating costs
 Analyzing competitors’ costs, prices, and offers (evaluate from customer
perspective, compare, value, and reaction)
 Selecting a pricing method
 Selecting final price

 Adapting the price

 Geographical pricing
 Price discounts and allowances
 Promotional pricing
 Discriminatory pricing
 Product-mix pricing
 Initiating and responding to price changes
 Initiating price cuts
 Initiating price increases

Pricing strategies and policies 4

 Two views
 Consumers are price takers
 Consumers actively process price information

 Purchase decisions are based on perception of price

 Lower price threshold below which prices signal inferior or unacceptable quality
 Upper price threshold above which prices are prohibitive and the product appears not worth
the money
 How consumers develop perception regarding prices
 Reference prices
 comparing an observed price to an internal reference price they remember or an external frame of
reference such as a posted “regular retail price
 Price-quality inferences
 price as an indicator of quality
 When this information is not available, price acts as a signal of quality
 Price endings
 Odd – even number : 299 vs. 300
 9 endings
 0 or 5

 Effective when
 consumers’ price knowledge is poor,
 when they purchase the item infrequently or are new to the category, and
 when product designs vary over time, prices vary seasonally, or quality or sizes vary across
stores
Consumer psychology and pricing 5
 Survival

 Maximum current profits

 Maximum market share (market-penetration pricing)

 Market skimming—appeals to high end market segments

 Product-quality leadership—premium quality connotes premium

price
 Other pricing objectives—cost recovery (partial or full), social
pricing

Setting the price

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- Selecting the pricing objective
 Each price will lead to a different level of demand
 The higher the price, the lower the demand
 For prestige goods, higher the price, more is the demand
 Factors influencing demand estimation
 Price sensitivity
 Price elasticity of demand

Determining demand 7
 Price sensitivity
 The market’s probable purchase quantity at alternative prices
 Customers are less price sensitive to low-cost items or items they buy
infrequently
 Less price sensitive when
 There are few or no substitutes or competitors
 They do not readily notice the higher price
 They are slow to change their buying habits
 They think the higher prices are justified
 Price is only a small part of the total cost of obtaining, operating, and servicing
the product over its lifetime
 Price elasticity of demand
 How responsive demand is to a change in price
 If demand hardly changes with a small change in price, we say the
demand is inelastic.
 If demand changes considerably, demand is elastic
 If demand is elastic, sellers will consider lowering the price. A lower
price will produce more total revenue

Price senstitivity and price elasticity of demannd 8

 The company wants to charge a price that covers its cost of
producing, distributing, and selling the product, including a fair
return for its effort and risk
 Types of costs and levels of production (fixed, variable, and
total costs)
 Accumulated production (learning curve pricing)
 Differentiated marketing offers
 Target costing—determine price that must be charged
according to market research

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 Types of costs and levels of production
 Fixed
 Variable
 Total costs
 Accumulated production (learning curve pricing)
 Costs change with production scale and experience

 Target costing
 Determine price that must be charged according to market
research
 This price less desired profit margin leaves the target cost
the marketer must achieve

Estimating cost 10
 Analyzing competitors’ costs, prices, and offers
 Take competitors’ costs, prices, and possible price reactions into
account
 Understand the competitor’s current financial situation, recent sales,
customer loyalty, and corporate objectives

Analyzing competitors’ 11
 3 major considerations
 Costs set a floor to the price
 Competitor’s prices and price of the substitute provide an
orienting point
 Customer’s assessment of unique features establishes the price
ceiling
 Methods for setting price
 Markup pricing
 Target return pricing
 Perceived value pricing
 Value pricing
 Going rate pricing

Selecting a pricing method 12

 Variable cost per unit = Rs 100
 Fixed costs = Rs 30,00,000
 Expected unit sales = 50,000
 Investment = Rs 1,000,000

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 Add a standard markup to the product’s cost
 Unit cost = variable cost + (fixed cost/unit sales)
= 100 + (30,00,000/50,000) =160
 If the mark up is 20%
 Markup price = unit cost/ (1 - desired return on sales)
= 160/ (1-0.2) = 160/0.8 = 200

 Markups are generally higher on

 seasonal items (to cover the risk of not selling),
 specialty items,
 slower-moving items,
 items with high storage and handling costs, and
 demand-inelastic items, such as prescription drugs.

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 The firm determines the price that yields its target rate of
return on investment

 Target-return price =
unit cost + ((desired return * invested capital)/unit
sales)
if expected ROI is 20%
The target return price = 160 + (( 0.2 * 1,000,000)/50,000) = 180

What if you don’t reach the expected sales?

Prepare a break even chart
 Break even volume = fixed cost / (price - variable cost)

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 Perceived value is made up of
 Buyer’s image of the product performance,
 The channel deliverables,
 The warranty quality,
 Customer support,
 The supplier’s reputation, trustworthiness, and esteem
 $90,000 is the tractor’s price if it is only equivalent to the competitor’s tractor
 $7,000 is the price premium for Caterpillar’s superior durability
 $6,000 is the price premium for Caterpillar’s superior reliability
 $5,000 is the price premium for Caterpillar’s superior service
 $2,000 is the price premium for Caterpillar’s longer warranty on parts
 $110,000 is the normal price to cover Caterpillar’s superior value
 – $10,000 discount
 $100,000 final price

 The key to perceived-value pricing is

 to deliver more unique value than the competitor and to demonstrate this to
prospective buyers.
 Fully understand the customer’s decision-making process

 Advertising, sales force, and the Internet can be used to communicate and
enhance perceived value in buyers’ minds

Perceived value pricing 16

 Low cost high quality
 Reengineering the company’s operations to become a low-cost
producer without sacrificing quality, to attract a large number of
value conscious customers
 IKEA, liquid Tide detergent

 EVERYDAY LOW PRICING (EDLP).

 A retailer charges a constant low price with little or no price promotions
and special sales.
 Constant prices eliminate week-to-week price uncertainty and the
“high-low” pricing of promotion-oriented competitors
 EDLP provides time and money value to customer
 Constant sales and promotions are costly

 HIGH-LOW PRICING,
 The retailer charges higher prices on an everyday basis but runs
frequent promotions with prices temporarily lower than the EDLP level
 For supermarkets a combination of high-low and everyday low
pricing strategies, with increased advertising and promotions can
help overcome threat of competition from their counterparts and
alternative channels

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 Firm bases its price largely on competitors’ prices
 Smaller firms “follow the leader,” changing their prices when the
market leader’s prices change rather than when their own demand
or costs change
 Useful where costs are difficult to measure or competitive
response is uncertain

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 English auctions (ascending bids)
 Have one seller and many buyers
 The highest bidder gets the item
 For selling antiques, cattle, real estate, and used equipment and
vehicles
 Dutch auctions (descending bids)
 One seller and many buyers, or one buyer and many sellers
 One seller and many buyers :
 An auctioneer announces a high price for a product and then slowly
decreases the price until a bidder accepts.
 One buyer and many sellers :
 The buyer announces something he or she wants to buy, and potential sellers
compete to offer the lowest price
 Sealed-bid auctions
 Would-be suppliers submit only one bid; they cannot know the other
bids

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 Factors influencing selection of final price
 Impact of other marketing activities such as brand’s quality and
advertising relative to the competition
 high quality brand with high relative advertising budget obtain highest prices

 Company pricing policies

 The price must be consistent with company pricing policies
 The aim is to ensure that salespeople quote prices that are reasonable to
customers and profitable to the company
 Gain-and-risk-sharing pricing
 The seller has the option of offering to absorb part or all the risk if it
does not deliver the full promised value
 The impact of price on other parties
 How will distributors and dealers feel about the contemplated price?
 Will the sales force be willing to sell at that price?
 How will competitors react?
 Will suppliers raise their prices when they see the company’s price?
 Will the government intervene and prevent this price from being
charged?
Selecting final price 20
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 Developing a pricing structure that reflects variations in
geographical demand and costs, market-segment
requirements, purchase timing, order levels, delivery
frequency, guarantees, service contracts, and other factors

 Geographical pricing
 Price discounts and allowances
 Promotional pricing
 Discriminatory pricing
 Product-mix pricing

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 How to price its products to different customers in different
locations and countries.
 Higher prices to distant customers to cover the higher shipping
costs, or a lower price to win additional business?
 How should it account for exchange rates and the strength of
different currencies?
 Another question is how to get paid.
 Countertrade : offer other items in payment
 Barter : directly exchange goods, with no money and no third party
involved

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 Discount
 A price reduction to buyers who pay bills promptly
 “2/10, net 30,”

 Quantity Discount
 A price reduction to those who buy large volumes
 “$10 per unit for fewer than 100 units; $9 per unit for 100 or more units.”

 Functional Discount/ trade discount

 To trade channel members if they will perform certain functions, such as
selling, storing, and record keeping.
 Seasonal Discount
 A price reduction to those who buy merchandise or services out of
season
 Allowance
 An extra payment designed to gain reseller participation in special
programs

Adapting the price 24

 Used to stimulate early purchase
 Loss-leader pricing
 Drop the price on well known brands to stimulate additional store traffic
 Profitable if the revenue on the additional sales compensates for the lower
margins on the loss-leader items
 Special event pricing
 Special prices in certain seasons

 Special customer pricing

 Special prices exclusively to certain customers

 Cash rebates
 Low-interest financing
 Longer payment terms
 Warranties and service contracts
 Psychological discounting
 sets an artificially high price and then offers the product at substantial savings;
 “Rs359, Rs 299.”

Adapting the price

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 Company sells a product or service at two or more prices that
do not reflect a proportional difference in costs

 Customer-segment pricing
 Different prices for different groups
 Product-form pricing
 Different versions priced differently
 Image pricing
 Same product at two different levels
 Channel pricing (location pricing)
 Same product priced differently at different locations
 Time pricing
 Same product priced differently at different day, time or season

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 Initiating price cuts
 Excess capacity
 Drive to dominate the market

 Initiating price increases

 Cost inflation
 Anticipatory pricing
 Overdemand

 Reactions to price changes

 Customer reactions
 Competitor reactions

 Responding to competitors’ price changes

 Maintain price
 Raise perceived quality
 Reduce price
 Increase price and improve quality
 Launch low-price fighter line

Initiating and responding to price changes

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