Download - Fundamentals of Pricing NEN Advanced Course: Getting to Market- Commercializing your Idea
Fundamentals of Pricing
NEN Advanced Course: Getting to Market- Commercializing your Idea
Where to Begin?
• Define the range of acceptable prices for the product/service
• Identify minimum and maximum price that can be charged by the firm
Price Ceiling
• Maximum price is determined by customer value and sensitivity to pricing:– Reference value: cost to the customer of the next best
alternative– Differentiation value: value to the customer of
differences between the firm’s product and the next best alternative
• This value is not always positive – the maximum price may be lesser than the alternative
Price Floor
• Determined by variable costs of producing the product
• Often the price ceiling and price floor are wide apart
Sensitivity to Pricing• Product category factors – sensitivity is lower in low cost
product categories• Who pays?• Price/ Quality Relationships• Competitive factors:
a) Sensitivity is higher• When significant differences between alternate
products are not perceived• Due to presence of more knowledge about alternate
productsb) Sensitivity is dampened when products or prices are not easily comparable
Narrowing the Range of Prices
Two more set of factors determine the appropriate price:1. Risk and Uncertainty 2. Reference prices – competitor’s price, current or
last paid price, perceived fair price (cost + margin), what others are paying, expected price
Narrowing the Range of Prices
• Other Internal factors:1. Is the price consistent with the
– Product’s positioning– Prices of other relevant products in the portfolio– Firm’s desired image?
2. Does the firm have enough capacity to satisfy customer demand at proposed price?
3. How will the target segment feel about the proposed price?
Prof. S.Garimella, IMI, New Delhi
Break-Even Chart
Assessing a Product’s Value to Customers
• Judgments based on an understanding of the buyer’s cost structure
True Economic Value (TEV) = Cost of the Alternative + Value of Performance Differential
• Customer Surveys
Customizing Price to Value Delivered
• Product line sorting• Controlled availability• Price based on buyer characteristics• Price based on transaction characteristics
Integrating Price with other Mix Elements
• A key to effective pricing is to have pricing’s value extraction “in synch’ with the value creation process of the other elements in the Marketing Mix
• Marketing Effort/spend matrix:
No Unit Sales Feasible
Feasible No unit Contribution
High
Low
Low High
Price
Pricing Mistakes
• Determine costs and take traditional industry margins
• Failure to revise price to capitalize on market changes
• Setting price independently of the rest of the marketing mix
• Failure to vary price by product item, market segment, distribution channels, and purchase occasion
Price Cues
• “Left to right” pricing (Rs.299 versus Rs.300)• Odd number discount perceptions• Even number value perceptions• Ending prices with 0 or 5• “Sale” written next to price
Steps in Setting Price
Select the price objective
Determine demand
Estimate costs
Analyze competitor price mix
Select pricing method
Select final price
Step 1: Selecting the Pricing Objective
• Survival• Maximum current profit• Maximum market share• Maximum market
skimming• Product-quality
leadership
Price Sensitivity
Step 2: Determining Demand
Estimating
Demand Curves
Price Elasticity of Demand
Inelastic and Elastic Demand
Step 3: Estimating Costs
Types of Costs
Target Costing
Accumulated Production
Activity-Based Cost Accounting
Cost Terms and Production
• Fixed costs• Variable costs• Total costs• Average cost• Cost at different levels of
production
Step 4: Compare and react to Competitor’s Pricing
Prof. S.Garimella, IMI, New Delhi
Step 5: Selecting a Pricing Method
• Markup pricing• Target-return pricing• Perceived-value pricing• Value pricing• Going-rate pricing• Auction-type pricing
Pricing Strategies
Prof. S.Garimella, IMI, New Delhi
Step 6: Selecting the Final Price
• Impact of other marketing activities
• Company pricing policies• Gain-and-risk sharing
pricing• Impact of price on other
parties
References
• Fundamentals of Pricing, Darden Business Publishing, University of Virginia
• Chapter 26, Pricing: A Value- based Approach, Marketing Management , Text and Cases, Rajiv Lal, John Quelch and Kasturi Rangan, Tata McGraw Hill Publication