pricing for class

7/29/2019 Pricing for Class

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PRICERajdeep Chakraborti


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Introduction

Why do customers buy designer-labeled clothes and luxury cars?

Why are those items more expensive

when they dont cost so much more tomake?

Answer: The perceived value


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Behind value-pricing strategies there are a fewimportant concepts:

Customers are value conscious rather than priceconscious e.g. some customers will pay extra forprompt delivery.Ex: DTDC has different price band for different duration

Customers assign a personal value to a product orservice ex: a teenager is willing to pay a premium pricefor a concert performed by his idol.

The selling price is based on customers perceived

value rather than on the vendors costsex: the convenience charge we have to pay for onlinemovie tickets


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Contd.

When customers evaluatecompeting products, they areusually comparing value.

To increase the value of yourproducts, you can either add benefits

or reduce the perceived risk factorsrather than resorting to reducing yourprice.


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Adding benefits

Value-added benefits do not replace comprehensive product information but arecomplimentary strategies to help converting visitors into customers and giving you thecompetitive edge.Try these value-pricing strategies:

Special packaging e.g. recyclable containers, gift wrapping with card

Package deals (for convenience) e.g. bundles, "all inclusive" value pack, Combo Offers

Fullfilment options e.g. instant download, Online receipt of insurance policy

Payment options e.g. monthly and yearly plans

Free training material e.g. online manual, video, audio

Personalised service e.g. "I oversee each account

Free product updates and Bonus offers

Certification e.g. license, training certificate (ex SAS Certification)


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Reducing perceived risks For new customers, there is always an element of risk inpurchasing from a new vendor. These are examples of value-

pricing strategies to boost confidence and credibility:

A professionally designed website

Free trials or samples

Extended warranty option

Free after-sales service

Your credentials, length of time in business, list ofimportant clients

Guarantees of satisfaction "satisfaction guaranteed"

User-friendly privacy, security and refund policies Testimonials, endorsements, reviews

Easy access with contact options e.g. toll free number,chat live


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The Final Words

Naturally, everyone loves value formoney but does not necessarily wantthe cheapest option. What value do

customers perceive in your productand how much are they willing to pay?Value comes at a price!

Were not the cheapest butwe

offer value.


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Yes, But What Does It

Cost? Price is the value that customers give

up or exchange to obtain a desired

product

Payment may be in the form of money,

goods, services, favors, votes oranything else that has value to theother party


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Opportunity Costs

The value of something that is givenup to obtain something else alsoaffects the price of a decision

Example: the cost of going to college ischarged in tuition and fees but also includes

the opportunity cost of what a studentcannot earn by working instead


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The price of four different purchases


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Identify objectives & constraints

Estimate demand & revenue

Determine cost, volume and profit

Set an approximate price level

Set List or Quoted price

Make adjustments to list price

Steps in setting price


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Identifying Pricing constraints

Demand for the Product Class, Product, and

Brand

Newness of the Product: Stage in the ProductLife Cycle

Single Product versus a Product Line

Cost of Producing and Marketing the Product

Cost of Changing Prices & Time Period TheyApply

Competitors Prices


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Pricing Objectives

Sales or market share objectives

Profit objectives

Competitive effect objectives

Customer satisfaction objectives

Image enhancement objectives

Social Responsibility


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Estimating Demand

Demand refers to customers desire forproducts

How much of a product do consumers want?

How will this change as the price goes up ordown?

Identify demand for an entire productcategory in markets the company serves

Predict what the companys market share islikely to be


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The Price Elasticity of Demand

How sensitive are customers to changesin the price of a product?

Price elasticity of demand is a measureof the sensitivity of customers tochanges in price.

Price elasticity of demand = Percentagechange in quantity demanded /Percentage change in price


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Demand Curves


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Elastic and Inelastic DemandCurves


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Influences on Price Elasticity of Demand

Availability of substitute goods or services If a product has a close substitute, its demand will be

elastic (ex: tea vs. coffee)

Time period The longer the time period of delivery, the greater the

likelihood that demand will be more elastic (ex: different airlines charging same price but

taking different duration to reach a destination)

Income effect Change in income affects demand for a product even if

its price remains the same normal goods, luxury goods, inferior goods


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Break-Even Analysis

Technique used to examine therelationship between cost and price and todetermine what sales volume must be

reached at a given price before thecompany will completely cover its totalcosts and past which it will begin making aprofit

All costs are covered but there isnt apenny left over


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Break-even analysis chart


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Marginal Analysis

Provides a way for marketers to look atcost and demand at the same time

Examines the relationship of marginal costto marginal revenue marginal cost is the increase in total costs from

producing one additional unit of a product

marginal revenue is the increase in total income orrevenue that results from selling one additional unit of aproduct


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Marginal Analysis

P i i S i B d


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Pricing Strategies Based onCost

Advantages Simple to calculate

Relatively risk free

Disadvantages Fail to consider

several factors target market

demand competition

product life cycle

products image

Difficult to accurately

estimate costs


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Cost-Plus Pricing

Most common cost-based approach

Marketer figures all costs for the

product and then adds desired profitper unit

Straight markup pricing is the mostfrequently used type of cost-pluspricing

price is calculated by adding a pre-


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Price Floor Pricing

Method for calculating price that considersboth costs and what can be done to assurethat a plant can operate at capacity

Typically used when market conditions make itimpossible for a firm to sell enough

If the price-floor price can be set above the

variable costs, the firm can use the difference toincrease profits or cover fixed costs

P i i St t i B d


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Pricing Strategies Based onDemand

Demand-based pricing means that theselling price is based on an estimateof volume or quantity that a firm can

sell in different markets at differentprices

Demand-Backward Pricing/Chain-Markup Pricing starts with a customer-pleasing price and works backward tocosts

Ex: Tata Nano


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Discounting for ChannelMembers

Trade or functional discounts (ex: NestleMaggi)

Quantity discounts

Cash discounts Seasonal discounts


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Trade Discounts

Pricing structure built around list price

List price, also called suggested retail price,is the price that the manufacturer sets as

the appropriate price for the end consumer

Manufacturers offer discounts becausechannel members perform selling, credit,

storage and transportation services


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Pricing with Electronic Commerce

Dynamic pricing strategies price can be adjusted to meet changes in

the marketplace

online price changes can occur quickly,easily, and at virtually no cost

Auctions

sites offer chance to bid on items

sites offer reverse-price auctions


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Psychological pricing

You must take into consideration the consumer'sperception of your price, figuring things like:

Positioning - If you want to be the "low-cost leader",you must be priced lower than your competition. If

you want to signal high quality, you should probablybe priced higher than most of your competition.ex: Deccan Airways

Popular price points - There are certain "pricepoints" (specific prices) at which people become

much more willing to buy a certain type of product.For example, 99 or 199 or 299" are popular pricepoints. Meals under Rs. 100 are still a popular pricepoint, as are entree or snack items under $1 (e.g.$0.99 "value menu").


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Psychological Pricing

Fair pricing - There is simply a limit towhat consumers perceive as "fair".

If it's obvious that your product only cost Rs.20 to manufacture, even if it deliveredRs.10,000 in value, you cant charge Rs.

1000 for it -- people would just feel like they

were being charged in an unfair manner.

Are the prices of soft drinks fair?


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Some Important PricingStrategies

Product Line Pricing

Price Bundling

Complementary Pricing (ex: Playstation and the games)

Value Pricing (ex: McDonalds and Harley Davidson)

EDLP

Price Discrimination (ex: sr. citizens get tickets at a cheaper rate)

Second Market Discounting (or, dumping)

Periodic Discounting (ex: diwali sale, end of season sale, hafte kasabse sasta din, etc.)


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Deceptive Pricing Practices

Retailers must not claim prices are lower thancompetitors unless it is true

A going out-of-business sale should be the lastsale before going out of business

Bait-and-switch - consumers are lured into storefor a very low price, but then the item is notavailable. A more expensive product is offeredinstead Trading up is acceptable


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Price Fixing

Occurs when two or morecompanies conspire to keep pricesat a certain level

Horizontal price fixing occurs whencompetitors making the same productjointly determine what price they each willcharge

Vertical price fixing occurs whenmanufacturers attempt to force the retailerto charge the suggested retail price


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Thank You !

pricing for class

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