Developing Pricing Strategies

INTRODUCTION

Process of determining what company will receive in exchange of its products and services.

One of the major element of Marketing Mix.

How much to charge?

How much do customers value your product.

Good Pricing – A balance between Price floor and Price ceiling.

History – Pricing was set by negotiation between buyer & seller.

Pricing was a major determinant in buying process – now-No more….

CONTINUES…

Price’s not just a number or an item tag, it goes by many names:

Paying rent for an apartment

Tuition fee for your education

Fare for airline, bus or train

Price for driving on Mumbai Pune express way

Salary of an executive

Generally Handled by Product line managers and approved by top management.

FACTORS INFLUENCING PRICING

Corporate & Marketing

objective of the firm.

The Characteristics of the

product.

Stage of PLC

Cost of Manuf. & Mktg.

Extent of distinctiveness

of the product.

Market Characteristics

(Customers & competition)

Price elasticity

Buying behavior of

customers

Competitors pricing

strategy

Govt. control on pricing

Bargaining power of major

suppliers.

OBJECTIVES FIRMS SEEK IN PRICING

Profit Maximization.

Profit Optimization in long term.

A minimum return on investment.

Achieving a particular sales volume.

Achieving a particular Market share.

Keeping competitor out or keeping them under check.

To make it affordable for the weaker sections

STEPS IN SETTING PRICE

Select the price objective

Determine demand

Estimate costs

Analyze competitor price mix

Select pricing method

Select final price

SELECT THE PRICE OBJECTIVE

Where company wants to position its market offering.

Survival

Maximize current Profits

Maximizing Market Share

Market skimming pricing

Product Quality Leadership

DETERMINE DEMAND

Price Sensitivity: High with the advent of Internet

Estimating Demand Curves

Price Elasticity of Demand

ESTIMATING COST

Fixed costs

Variable costs

Total costs

Average cost

CONTINUES…

ANALYZE COMPETITOR PRICE MIX

Whether to charge same, less or more than the competitor?

Market share objective: likely change in the price.

Profit maximization: likely change in the advertising budget

or product quality.

SELECTING PRICING METHOD

Markup pricing

Mark up price= Unit cost/1 – Desired return on sales

Target-return pricing: The firm determines the price that

would yield its target ROI.

Target Return Pricing= Unit cost+ Desired return*Invested Capital

Unit Sales

TRY YOURSELF

Variable cost = Rs. 20

Fixed Cost = 400000

Expected Unit Sales = 60000

Mark up %age = 15%

SELECTING PRICING METHOD

Perceived-value pricing Pricing based upon customer perceived value.

Delivering more value than competitors

Made up of elements like, Buyer’s image of the product performance

The delivery channels

The warranty quality

Customer Support Supplier’s reputation

Trustworthiness

Esteem

CATERPILLAR USES PERCEIVED VALUE TO SET

PRICES

$ 90000 is the if its equivalent to the competitors.

$ 7000 is price premium for superior durability

$ 6000 is price premium for superior reliability

$ 5000 is price premium for superior service

$ 2000 is price premium for long warranty on

parts

$ 110000 normal price to cover superior value

- $10000 Discount

$ 100000 Final Price

SELECTING PRICING METHOD

Going-rate pricing

Auction-type pricing

Value pricing : EDLP, HLP

Essence of Pricing to value

Value>price>Cost (We do not seek)

Price>Value>Cost (We do not seek)

Price>Cost>Value (We do not seek)

Price=Value>Cost (This is what we seek)

PRICING TO CAPTURE VALUE

PC priced at Rs. 10000

Laptop Priced at Rs. 8000

Car for Rs. 1 Lakh

SELECTING THE FINAL PRICE

Impact of other Marketing activities

Company Pricing Policies

Gain & Risk sharing Pricing

Impact of price on other parties

PRICE-ADAPTATION STRATEGIES

Geographical Pricing

Discounts

Differentiated Pricing

Promotional Pricing

PROMOTIONAL PRICING

Loss Leader Pricing:

To stimulate store traffic.

Low interest Financing

Longer Payment Terms

Special event pricing

Warranties and service contracts

Free or low cost service contract.

Psychological Discounting

DIFFERENTIATED PRICING

When companies sell a product or a service at two or more

prices that do not reflect a proportional difference in cost.

Customer segment Pricing

Location pricing

Time pricing

Channel Pricing

Image Pricing/Prestige Pricing