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Pricing policyPricing policy Dr. Vesselin Blagoev
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Pricing methodsPricing methods
Cost
Competition
Marketing
Pricing methods
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Possible Pricing Possible Pricing ObjectivesObjectives
Pricing objectives
Status quo oriented
Sales oriented
Profit oriented
Non-price competition
Meeting competition
Growth in market share
EURO or unitsales growth
Maximize profits
Target return
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Price as seen by ConsumersPrice as seen by ConsumersList Price -
Less: Discounts
( Quantity, Seasonal, Cash, Temporary sales)
Less: Allowances
(Trade-inns)
Less: Rebate and coupon value
Plus: Taxes
Product:• Physical
• Service
• Assurance of quality
• Repair facilities
• Packaging
• Credit
• Trading stamps
Place of delivery or when available
equals
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Price setting methodsPrice setting methods
Price setting
Markup
Average-costpricing
Break-evenPont (BEP)
Perception price
Bait pricing Psychologicalpricing
Price lining Prestige pricing
Bundle pricing Complementaryproduct
Bid pricing
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Cost based Cost based methodsmethods
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CostsCostsFixed costs are those costs that
remain unchanged no matter how much is produced (rent, depreciation, managers’ salaries, insurance, employees’ salaries)
Variable costs – changing expenses, closely related to the output
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Cost-oriented pricingCost-oriented pricing MarkupMarkup
The Markup is a money amount
(EUR, $, BGN), or percent,
added to the cost of products to get the selling price
Example: Cost 1 Euro + 0.50 Euro markup = 1.50 Euro
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Average-cost pricingAverage-cost pricing
Average-cost pricing means adding a reasonable markup to the average cost of a product
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Full cost pricing Full cost pricing ((Cost-oriented pricing)Cost-oriented pricing)
Year 1Direct costs (per unit) = 2Fixed costs = 200,000Expected sales = 100,000
Cost per unitDirect costs = 2Fixed costs (200,000:100,000) = 2Full costs = 4Mark-up (10%) = 0.40Price (cost+mark-up) = 4.40
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Full cost pricing Full cost pricing ((Cost-oriented pricing)Cost-oriented pricing)
Year 2Expected sales = 50,000
Cost per unitDirect costs = 2Fixed costs (200,000:50,000) = 4Full costs = 6Mark-up (10%) = 0.60Price (cost+mark-up) = 6.60
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Cost-oriented pricing Cost-oriented pricing Full cost pricing Full cost pricing
It leads to an increase in price as sales fall
Sales estimates are made before the price is set – illogical procedure
It focuses at the internal costs, rather than to the customers willingness to pay
Overheads are difficult to estimate in a multi-products company
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Average and marginal Average and marginal costcost
Average cost : the average cost for all
productsMarginal cost : the cost to produce one
more unit.
Example: 275 Euro is the cost to produce 9 units and 280 Euro – to produce 10 units. Then the marginal cost is the additional cost (5 Euro) to produce 1 more unit.
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Direct cost pricingDirect cost pricingUse of direct cost (or marginal cost).
This involves calculating only the costs for materials and labor + mark-up.
This price does not cover the full costs. It is applied in some service businesses, such as hotels, airlines, where the product can not be stored (the unused capacity means lost revenue).
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BEP pricingBEP pricing
Break-even point represents the quantity where the firm’s total cost will just equal its total revenue
Total fixed costs
BEP (units) =
Fixed cost contribution
per unit
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BEP pricingBEP pricingT
otal
rev
enue
and
cos
t (U
SD
000)
Units of production (000)
100
75
50
25
Profit area
Loss area
Total cost curve
Total revenue curve
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BEP pricingBEP pricingLet us take an example:
Let the price of product A = 1.2 Euro
Let the total fixed cost is 30,000 Euro.
Let the variable cost is 0.80 Euro. Then the fixed cost of that product is (1.2 – 0.8) = 0.4 Euro per unit.
30,000 EuroBEP =
0.40 Euro= 75,000 units
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Competitors Competitors based based
methodsmethods
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Immediate Competitors
Technically Similarproduct
Secondary competitors
Different products solving the
same problem in similar way
Tertiary competitors
Different products solving or eliminating the problem in a different way
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Competitor-oriented Competitor-oriented pricingpricing
Going-rate pricing: the prices used by the competitors. No price differentiation (away from the marketing principles)
Below the competitionAbove the competition
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Competitor-oriented pricingCompetitor-oriented pricing
Bid pricingBid pricing
Bid pricing means offering a specific price for each possible job rather than setting a price that applies to all customers, i.e. building contractors.
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Competitor-oriented pricingCompetitor-oriented pricing
Bid pricingBid pricing
Expected profit = Profit x Probability of winning
Profit = Bidding price - Costs
Based on past experience about the pricing (bidding) policy of the competitors
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Competitor-oriented pricingCompetitor-oriented pricing
Bid pricingBid pricing
Bid price200021002200230024002500
Profit0
100200300400500
Probability0.990.900.800.400.200.10
Expected0
901601208050
Which bid price do you recommend ?
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Competitor-oriented pricingCompetitor-oriented pricing
Bid pricingBid pricing
Bid price200021002200230024002500
Profit0
100200300400500
Probability0.990.900.800.400.200.10
Expected0
901601208050
The recommended bid price is EUR 2200 – based on the Expected Profit criterion
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Marketing Marketing methodsmethods
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Marketing Orientated
Pricing
Market factors
Value to customers
CompetitionEffect on
distributors/retailers
PoliticalFactors
Price-qualityrelationship
Marketing Strategy
Costs
Explicability
Negotiatingmargins
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Reference pricing Reference pricing Price liningPrice lining
The customers have a “feeling” about the price levels and compare the tag-price with those levels.
Setting a few price levels for a product line and then marking all items at these prices. For example, most watches are priced between 30 and 200 BGN. And the prices are 30, 70, 110, 150, 200.
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Value pricingValue pricing
Value pricing means setting a fair price level for a marketing mix that really gives customers what they need.
Toyota is an example of a company which has different marketing mixes for different markets, each one offering more compared to the competing offerings.
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Perception pricingPerception pricingA tractor with a relatively very high price
USD 90,000 Competitors’ price + 7,000 for superior durability
+ 6,000 for superior reliability + 5,000 for superior after sale service + 2,000 for additional guarantee on parts
USD 110,000 a deserved price - 10,000 discount
USD 100,000 our deserved list price
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Perception pricingPerception pricing
Weight Characteristics Pro ducts
% A B C
25 Durability 40 40 20
30 Reliability 33 33 33
30 Delivery terms 50 25 25
15 Quality of service 45 35 20
100% 41.65 32.65 24.9
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Psychological pricingPsychological pricing
Psychological pricing means setting prices that have special appeals to target customers. Some scholars believe that there are whole ranges of prices that potential customers see as the same. Price cuts within the range do not increase the demand.
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Psychological pricingPsychological pricing
Demand curve when Psychological pricing is appropriate
Pric
e (E
UR
)
Quantity
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Prestige pricingPrestige pricing
Prestige pricing is setting a rather high price to suggest high quality or high status
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Prestige pricingPrestige pricing
Lowering the prices will reposition the business/product, resulting in a failure to attract the target market
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Skimming priceSkimming price
A skimming price policy (skim the cream) is based on selling to the top of the market products at the highest possible price. It is applied by the market leaders only (image, high quality products, new products)
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Conditions for charging Conditions for charging high priceshigh prices
Lack of competition Product provides high valueCustomers have high ability to payConsumer and bill payer are differentHigh pressure to buy
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Complementary Complementary product pricingproduct pricing
Complementary product pricing is setting prices on several products as a group. One of them can be priced very low so that the demand for the whole group will increase and maximize the profit.
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Bait pricingBait pricing
Bait pricing is setting some very low prices to attract customers, and trying to sell some more expensive models or brands once the customer is in the store
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Odd-even pricingOdd-even pricing
Odd-even pricing is setting prices that end in certain numbers, i.e. number 5, number 9 or 99.
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New product launch New product launch strategiesstrategies
Slow penetration
Slowskimming
Rapidpenetration
Rapidskimming
Low
High
Low High
Price
Promotion
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Introductory priceIntroductory price
Used to speed new products into a market
The plan is to raise the prices as soon as the introductory offer is over
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Penetration pricingPenetration pricingPenetration pricing policy is based
upon selling to the market at one low price. This is the case when the whole demand curve is fairly elastic. It is very efficient when the economy of scale in production leads to a substantial reduction of the cost. Some scholars call the penetration price ‘stay-out-price’.
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Conditions for charging Conditions for charging low priceslow prices
Only feasible alternativeDominating competitorsMake money laterMake money elsewhereExperience effect (computers)Barrier to entryPredation – an attempt to put other
companies out of business
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Price discriminationPrice discrimination
Price discrimination is selling the same products to different buyers at different prices
if it injures competition ->Robinson-Patman Act (of 1936)
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Price discriminationPrice discriminationIt refers to segmentation of the market and
pricing differences, based on price elasticity characteristics of these segments
Example: Dinner menu for 15 BGN is offered for 10 BGN from 6 to 7 p.m. Time flexible and money sensitive customers will add sales. The variable cost has to be < 7
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DiscountsDiscountsDiscounts are reductions from
the list price given by a seller to buyers who either give up some marketing function or provide the function themselves
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DiscountsDiscountsDiscountsQuantity discounts
Offered to encourage customers to buy in larger amounts.1-3 PCs at 350 EUR
4-6 PCs at 330 EUR
7+ PCs at 300 EUR
Cumulative quantity discounts
Seasonal discounts
Apply to purchases over a given period of time
Encourage buyers to order in low seasons
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DiscountsDiscountsDiscountsNet 10
or Net 30
It means that the customer is given 10 days or 30 days to pay
Cash discounts
Encourage the buyers to pay their bills quickly. Usually the cash discount modifies
the net terms.
2/10 net 30
Means that the buyer can take a 2% discount off the face value of the invoice if the invoice is paid within 10 days.
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DiscountsDiscountsDiscounts
Trade (functional)
discount
A list price reduction given to the channel members for the job they are doing in the sales process
Sale price A temporary discount from the list price to encourage the customers for immediate buying
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AllowancesAllowances
Allowances – like discounts – are given to channel members, customers or final users for doing something or accepting less of something
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AllowancesAllowancesAllowances
Advertising allowances
Price reductions given to firms in the channel to advertise or otherwise promote supplier’ products locally
Stocking allowances
To get shelf space for a product
Push money (prize money)
Called also PMs or spiffs – given to retailers to pass on the salesclerks for aggressively selling certain items
Trade-in allowance
A price reduction given for used products when similar new products are bought
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RebatesRebates
The rebates are refunds paid to consumers after a purchase. Some car dealers offer rebates of USD 500 to 2500 to push the sales of slow-moving models.
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Types of pricesTypes of pricesF.O.B. price – Free On Board
some vehicle at some place. At the point of loading the title to the products passes to the Buyer. Then the Buyer pays the freight and takes responsibility for damage in transit.
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Types of pricesTypes of prices
C.I.F. (Cost Insurance and Freight): The title to the product remains with the Seller until the unloading of the product in the place of destination is done
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Types of pricesTypes of prices
Free custom office in Bourgas. The product must be delivered to the specified place.
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Types of pricesTypes of prices
Zone pricing means making an average freight charge to all buyers within specific geographic areas. The Seller pays the actual freight charges and bills each customer for an average charge.
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DumpingDumping
Dumping is pricing a product sold in a foreign market below the cost of producing it or at a price lower than in its domestic market
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Initiating price changesInitiating price changes
Increase the price Cut the priceValue greater than price Value less than price
Rising costs Excess supply
Excess demand Build objective
Harvest objective Price war unlikely
Stop competitors’ entry
Price jump Price fall
Staged price increases Staged price reduction
Escalator clauses (aver. Salary)
Fighter brands (2nd brand)
Price unbundling (training) Price bundling
Lower discounts Higher discounts
Circumstances
Tactics