PRICING

This Chapter will CoverIntroduction to PriceFactors Influencing Pricing DecisionsSteps in Price setting (Including Various Pricing Methods)Adapting the PriceInitiation & Responding to price Change

PRICEPrice is not just number tagPrice is the only element of Marketing Mix that produces revenue.Price is the easiest marketing mix element to adjustPrice also communicates to the market the companys intended value positioning of its product or brand

Factors Influencing Pricing DecisionsInternal Factors Image sought by the firm through pricing Dark Fantasy Biscuits, Dove Soap, Perfumes & cosmetics

Product Attributes - Apple Phone, Casting hair Colour

Stage of Product Life cycle Electronic Goods

Consumer Psychology & Pricing Bata Prices

Factors Influencing Pricing DecisionsExternal FactorsMarket Characteristics (Demand, Customers) Flats in Metro cities , Coffee, Sanitizer

Availability of substitutes or alternatives in the marketCoke & Pepsi, Tour Packages

Buyer behaviour and purchasing power in respect of product - Onions

Availability of resources - Expensiveness of Home Loans

Factors Influencing Pricing DecisionsExternal FactorsBargaining power of major customers and suppliers Walmart , (organised retail)Competitive Pricing policy _Coke & Pepsi, Nirma (wheel by HUL)Technological upgradation Mobile Handsets, laptopsGovernment controls and relevant legal aspects - LPG GasTaxes and duties BEST fare, Air fareNature & climatic conditions Raincoats, Woolen Products, Cold drinksSocial considerations and political intervention Price of Gold, Electricity

Steps in Price settingSelecting Pricing ObjectiveDetermining the DemandEstimate CostsAnalyzing Competitors costSelecting Pricing MethodSelecting Final Price

Step 1- Selecting the Pricing Objective

Survival : ITC Glucose Biscuits, Two wheelers sold by Chinese manufacturers in African MarketMaximum market Share - Big Bazar, tide?Maximum Market skimming - Medicine for AidsProduct quality leadership - Apple Phone, Taj, BMWPenetration Pricing - Nano, Nirma

Step 1- Selecting the Pricing Objective

Other Objectives -Partial cost Recovery LPG prices, News Papers

Step 2 - Determine the DemandEach price will lead to a different level of DemandThe relationship is usually reverseIn case of prestigious goods the demand curve may lead upwards

First step in estimating demand is to understand what affects price

Estimate the DemandChanges in Demand can be estimated by usingSurvey technique,Price ExperimentsStatistical analysis

Factors leading to price sensitivity Page 354

Comprehensive study of 40 year period showed thatPrice elasticity is more for durable goodsPrice elasticity is higher for products in the introduction/growth stage of PLCInflation led to substantially high price elasticityPrice elasticity is higher at the individual item level than at the overall brand level

Step 3- Estimate costsFixed CostsVariable CostTotal cost

Step 4 - Analyze Competitor's costs, prices and offersCompare Features of the products with that of competitor and decide the priceCompetitors price can be a special problem when Number of firms are few, Product is homogeneous and buyers are highly informed

Pricing method Only the method have changed

Step 5 - Select the Pricing MethodHigh PriceCeiling PriceFloor PriceLow PriceCustomers Assessment of Unique Product FeaturesOrienting PointCompetitors Prices & Price of SubstitutesCostsNo Possible Demand At this PriceNo Possible Profit at this Point

Compare EON with Nano

Pricing MethodsMark Up PricingTarget Return PricingPerceived Value PricingValue PricingGoing Rate PricingAuction Type Pricing

Mark Up PricingElementary methodAdd a standard mark up to the products costIt gives clear indication of profit earned.Used for : Home made products, Bouquets, Flower arrangements

Target Return PricingFirm determines the price that would yield its target return on investmentTarget Return Price = Unit Cost + Desired Return X Invested Capital___________________________________________Unit SalesUsed for - Turnkey Projects

Perceived Value PricingValue as perceived by the customer.Made up of several elements :- Quality, Customer supportSofter attributes such as suppliers reputation, trust worthiness and esteem.Companies must deliver the value promised by their value proposition

Perceived Value Pricing - exampleNike, a well-known brand of today, endorsed in professional NBA player Michael Jordan and created a special line of shoes called the Air Jordan(s). Nike seems to understand all too well the need to develop strong customer-perceived value. In addition, Air Jordans released a limited edition every year with a set amount available.

Value PricingWin Loyal customers by charging fairly low price for high quality offering.It is a matter of reengineering the companys operations to become a low cost producer without sacrificing quality to attract a large number of value conscious customers.E.g. Gillette (page 361)

Going Rate PricingFirm bases its price largely on competitors pricesE.g. Coke & Pepsi, Staple products

Auction Type PricingEnglish Auctions (Ascending Bids) One seller and many buyersDutch Auctions (Descending bids) One seller and many buyers or one buyer and many sellersSealed bid auctions

Step 6 Selecting the Final PriceMust consider following factors Impact of other Marketing ActivitiesCompany Pricing PoliciesGain & Risk Sharing pricing Seller offers to absorb part or all the risk if it does not deliver the full promised value.Impact of price on other parties

Managing the Price (Adapting)Geographical PricingPrice discounts & AllowancesPromotional PricingDifferentiated Pricing

Geographical PricingDifferent price to different customers at different locationsPerishable items like alphanso mangoes, Mithai

Geographical PricingVarious forms of Counter trade (to collect money)

BarterCompensation deal : British Manufacturer sold planes to Brazil for 70% cash & rest in CoffeeBuy back arrangement : Sulzer Group buying tires from Ligdag of PuneOffset - Seller receives full payment in cash but agrees to spend substantial amount of the money in that coutnry within a stated time period

Price Discounts and AllowancesDiscount Price reduction to buyer.1. Quantity discountFunctional Discount (Offered by a manufacturer to trade channel members if they will perform certain functions)Offers by liquor companies in Diwali3. Seasonal discountsAllowance An extra payment designed to gain reseller participation in special program.

Promotional PricingLoss leader pricing Stores drop the price on well known brands to stimulate additional store traffic.Special Event Pricing Diwali OffersCash Rebates Pantaloons offer of cash discount on credit card buyingLow interest Financing Auto loans at 0% interestLonger Payment terms Housing loansWarranties and service contracts Laptops giving additional warrantiesPsychological discounting Buy 3 get 1 free

Differentiated PricingCharge price depending on intensity of customers needCharge less who buy large volumesDifferent amounts to different class of buyers as followsLeevise offer for loyal customers of free leevise purchases

Different amounts to different class of buyersCustomer Segment pricing : Lower fare to senior citizensProduct form pricing -Image Pricing Garnier hair colour & Loreal Hair colourChannel Pricing Coke in Five Star Hotel & in ordinary restaurantLocation Pricing Theater varying seat pricesTime Pricing Happy hour Pricing of tourist buses

Initiating and Responding to Price change

Initiating Price CutPrice cut initiated due to Excess plant capacity, to dominate the market.It may lead to certain traps Low Quality trapFragile Market share trapShallow Pockets trapPrice war trap

Initiating Price IncreasesPrices are increased due to InflationIn anticipation of something happening e.g increase in taxationOver demand