Pricing Strategies

Week 5

Lecture Outline

Defining Pricing, its Objectives

Factors affecting Pricing

Procedures for Setting the Price

Types of Pricing Strategies

To understand how consumer process and evaluate prices

To understand how should a company set prices initially for products &

services

To understand that when company should initiate a price changes

To understand the decision on how much of the strategic pricing gap between

cost and perceived value to capture.

Learning Outcomes

Gillette Commands a

Price Premium

Price

Pricing is a fundamental aspect of financial modeling, and is one of the four

Ps of the marketing mix .

Price is the only revenue generating element amongst the four Ps , the rest

being cost centers

A well chosen price should do three things:

Achieve the financial goals of the company (e.g., profitability)

Fit the realities of the marketplace (Will customers buy at that price?)

Support a product's positioning and be consistent with the other variables in

the marketing mix.

Price is influenced by the type of distribution channel used, the type of

promotions used, and the quality of the product

Price will usually need to be relatively high if manufacturing is expensive,

distribution is exclusive, and the product is supported by extensive advertising

and promotional campaigns

A low price can be a viable substitute for product quality, effective

promotions, or an energetic selling effort by distributors

Pricing is the process of determining what a company will receive in

exchange for its products. Pricing factors are manufacturing cost, market

place, competition, market condition, quality of product.

Price

Synonyms for Price

Rent

Tuition

Fee

Fare

Rate

Toll

Premium

Honorarium

Special assessment

Bribe

Dues

Salary

Commission

Wage

Tax

Common 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

Failure to identify the competitive forces acting in the market place.

Failure to sense the customer perceptions about the product.

Factors Affecting Pricing

Cost of the Product or Service, distribution involved & promoting

the product

Benefits to be transferred to customers in forms of discounts &

premiums

ROI

Maximize Profits

Competitors Price

Government Regulation

Market Share

Setting The 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

Step 2: Determining Demand

Price Sensitivity

Estimating

Demand Curves

Price Elasticity

of Demand

Inelastic and Elastic Demand

Factors Leading to Less Price Sensitivity

The product is more distinctive

Buyers are less aware of substitutes

Buyers cannot easily compare the quality of substitutes

The expenditure is a smaller part of buyers total income

The expenditure is small compared to the total cost of the end product

Part of the cost is paid by another party

The product is used with previously purchased assets

The product is assumed to have high quality and prestige

Buyers cannot store the product

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 Analyze Competitors Price Mix

Firm must take into consideration the competitors price mix to note the

reactions.

It depends upon the firm to charge more, the same or less than competitor.

Whether competitor reacts in a standard way, or take it as a fresh challenge

must be accounted along with his recent sales, customer loyalty and corporate

objectives.

It depends upon the competitor what are his pricing objectives whether he

wants large market share or higher profits and then accordingly marketer should

try to set the price.

Step 5: Selecting a Pricing Method

Markup Pricing

Target-Return Pricing

Perceived-value Pricing

Value Pricing

Going-Rate Pricing

Auction-Type Pricing

Break-Even Chart

Auction-Type Pricing

English auctions (Ascending Bids)

Dutch auctions (Descending Bids)

Sealed-bid auctions

Step 6: Selecting the Final Price

Impact of other marketing activities (Brands quality, advertising

relative to the competition,)

Company pricing policies (Average quarterly balance by banks,

cancellation charges on tickets. Regulation & collusion is important)

Gain-and-risk sharing pricing ( product has a high perceived level of

risk )

Impact of price on other parties (dealers, distributors, suppliers,

competitors & government)

Price-Adaptation Strategies

Geographical Pricing

Discounts/Allowances

Differentiated Pricing

Promotional Pricing

Cont..

Countertrade

Barter

Compensation deal

Buyback arrangement

Offset

Discounts/ Allowances

Cash discount

Quantity discount

Functional discount

Seasonal discount

Allowance

Promotional Pricing Tactics

Loss-leader pricing

Special-event pricing

Cash rebates

Low-interest financing

Longer payment terms

Warranties and service

contracts

Psychological discounting

Cont.

Special festival pricing

by

Coca-Cola on the

occasion of Ramzan in

Pakistan.

Differentiated Pricing (To accommodate, customers,

products & locations)

Customer-Segment Pricing

Product-Form Pricing

Image Pricing

Channel Pricing

Location Pricing

Time Pricing

Yield Pricing

A company sells a product or service at two or more prices that do not reflect a

difference in costs.

In 1st degree of discrimination seller charges separate price depending on intensity

of demand.

In 2nd degree of discrimination seller charges less from buyers who buy large

volume.

In 3rd degree of discrimination seller charges different amount from different

buyers.

Pricing for Rural Markets

A large proportion have a low and seasonal income

Several approaches adopted by retailers and companies to address this

Rural retailers often extend credit

Retailers also break the bulk and sell in loose form, in small quantities

Companies use a similar strategy by introducing low-unit packing or LUP

Companies also develop low-priced products with a target price for rural

markets

Companies might offer refill packs or recyclable and reusable packs

Increasing Prices

Delayed quotation pricing

Escalator clauses

Unbundling

Reduction of discounts

Brand Leader Responses to Competitive Price Cuts

Maintain price

Maintain price and add value

Reduce price

Increase price and improve quality

Launch a low-price fighter line

For U To Take a Decision?

Is the right price a fair price?

Take a position:

1. Prices should reflect the value that

consumers are willing to pay.

or

2. Prices should primarily just reflect the cost

involved in making a product.