Pricing Strategies

Understanding Pricing Setting the Price Adapting the Price Initiating & Responding to Price Changes

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Understanding Pricing
Market value, or agreed exchange value, that will purchase a definite quantity, weight, or other measure of a good or service. As the consideration given in exchange for transfer of ownership, price forms the essential basis ofcommercial transactions. It may be fixed by a contract (such as sale of goods contract), left to be determined by an agreed upon formula at a future date, or discovered or negotiated during the course of dealings between the parties involved. In commerce, it boils down to what (1) a buyer is willing to pay, (2) a seller is willing to accept, and (3) the competition is allowing to be charged. With product, promotion, and place of marketing mix, it is one of the business variables over which a firm can exercise some degree of control. Pricing is a fundamental aspect of financial modeling, and is one of the four Ps of the marketing mix. The other three aspects are product, promotion, and place. It is also the only revenue generating element amongst the four Ps, the rest being cost centers. Pricing is the manual or automatic process of applying prices to purchase and sales orders, based on factors such as: a fixed amount, quantity, promotion or sales campaign, specific vendor quote, price prevailing on entry, shipment or invoice date, combination of multiple orders or lines, and many others.

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Understanding Pricing
Synonyms for Price Rent Fee Fare Rate Toll Premium Bribe Dues Salary Commission Wage Tax
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Understanding Pricing
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.

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Understanding Pricing
Consumer Psychology and Pricing
Reference Pricing While considering an observed price, consumers often compare it to an internal price (pricing information from memory) or an external frame of reference (regular retail price). A few examples are:

Fair price Typical price Last price paid Upper-bound price, Lower-bound price Competitor prices Expected future price Usual discounted price

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Understanding Pricing
Consumer Psychology and Pricing
Price Quality Inference Many consumers use price as an indicator of quality. Image pricing is especially effective with ego sensitive products such as perfumes and expensive cars. Price Cues Consumers perception of prices are also affected by alternative pricing strategies. A few of them are listed as follows: Left to right pricing ($299 vs. $300) Sale written next to price

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Setting the Price

A company must set a price for the first time when it develops a new product, when it introduces a regular product into a new distribution channel or geographical area. The company must decide where to position its product on quality and price. There are the following six steps in setting the price.

Selecting the Pricing Objective Determining Demand Estimating Costs Analyzing Competitors Mix Selecting a Pricing Method Selecting the Final Price

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Setting the Price

Selecting the Pricing Objective
The company needs to decide where it wants to position its market offering. It can pursue any of the following objectives though pricing.
Survival a firm sets prices covering variable cost and some fixed cost to face overcapacity, intense competition or changing consumer wants. Maximum Current Profit Companies set a price that will maximize the current profit. They do so by estimating demand and cost associated with alternative prices and choose a price that will maximize the current profit. Maximum Market Share A higher sales volume will lead to a lower unit cost and higher long run profit. The companies set the lowest price assuming the market is price sensitive. Maximum Market Skimming Companies unveiling a new technology favor setting higher price to maximize market skimming before the competition catches up. Product Quality Leadership Many brands strive to be affordable luxuries. Products or services characterized by high levels of perceived quality, taste and status with a price just high enough not to be out of the customers reach.

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Setting the Price

Determining Demand

Elastic Demand Inelastic Demand

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Demand

Setting the Price

Estimating Costs
Accumulated Production
The decline in the average costs with accumulated experience in production is called the experience curve or the learning curve.

$10 ---------------------------------------------------------------------------- Current price I B I $8 TI I $6 I Experience $4 I curve I $2

Cost per unit

I
100,000

I
200,000
400,000 Accumulated Production

I
800,000

Activity Based Cost Accounting

Identifying the real costs associated with serving each customer. Both fixed costs and the variable costs are traced to each customer. 12/17/2012 10

Setting the Price

Analyzing Competitors Mix
The company must take competitors costs, prices and possible price reactions into account. The company should first consider the nearest competitors price. If the firms offer contains features not offered by the nearest competitor, their worth to the customer should be evaluated and added to the competitors price. If the competitors offer contains some features not offered by our company, their worth to the customer should be evaluated and subtracted from the companys price. Now the company can decide whether to charge more, equal or less than the competitor.

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Setting the Price

Selecting a Pricing Method
Markup Pricing (Cost plus Pricing) Cost-plus pricing is the simplest pricing method. The firm calculates the cost of producing the product and adds on a percentage (profit) to that price to give the selling price. This method although simple has two flaws; it takes no account of demand and there is no way of determining if potential customers will purchase the product at the calculated price. Price = Cost of Production + Margin of Profit. Target Return Pricing Pricing method whereby the selling price of a product is calculated to produce a particular rate of return on investment for a specific volume of production. The target pricing method is used most often by public utilities, like electric and gas companies, and companies whose capital investment is high, like automobile manufacturers.Target pricing is not useful for companies whose capital investment is low because, according to this formula, the selling price will be understated. Also the target pricing method is not keyed to the demand for the product, and if the entire volume is not sold, a company might sustain an overall budgetary loss on the product. 12/17/2012 12

Setting the Price

Perceived Value Pricing Perceived value is made up of several elements such as buyers image of the product performance, the channel deliverables, the warranty quality, customer support and softer attributes such as suppliers reputation, trustworthiness, and esteem. Each potential customer places different weights on these elements with the result that some will be price buyers, others will be value buyers and still others will be loyal buyers. Value Pricing Price set in accordance with customer perceptions about the value of the product/service. Examples include status products/exclusive products . Going Rate Pricing In going rate pricing, the company bases its price largely on competition prices. The firm might charge same, less or more than the competitors.

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Setting the Price

Selecting the Final Price
While selecting the final price, the company must take the following factors into account: Impact of other marketing activities: the final price must take the brands quality, advertising media, channel selection and services provided The salespeople quote prices that are reasonable to customer and profitable to the company Risk and gain sharing pricing: the company must aware the risk of pricing such as consumers will see uncompetitive price for homogenous products or loss of customers if it does not deliver the full promised value for non homogenous products.

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Adapting the Price

Companies usually do not set a single price, but rather a pricing structure that reflects variations in geographical demand and costs, market segment requirements, purchase timing, order levels, delivery frequency, guarantees, service contracts and other factors.
Hence companies subscribe to several price-adaptation strategies that are as follows: Geographical Pricing: The company decides how to price its products to different customers in different locations and countries. Price Discounts and Allowances: Most companies will adjust their list price and give discounts and allowances for early payment, volume purchases, and off-season buying. Promotional Pricing: Companies can use several pricing techniques to stimulate early purchases or attract customers attention such as loss leader pricing, special event pricing, longer payment terms. Differentiated Pricing or Price Discrimination: Companies often adjust their basic price in customer segment pricing (adult vs. child), product form pricing (1 for $10, 2 for $15), location pricing and time pricing 15

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Initiating & Responding to Price Changes

Companies face situations where they need to cut or raise prices themselves or react to prices changes in the competitive environment. Initiating Price Cuts As a drive to dominate the market through lower cost and excess plant capacity. However a price-cutting strategy involves possible traps: Low quality trap Consumers will assume that the quality is low. Fragile Market Share Trap - A low price buys market share but not market loyalty. Shallow Pockets Trap The higher priced competitors may cut their prices and may have longer staying power because of deeper cash reserves.
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Initiating & Responding to Price Changes

Initiating Price Increases

Companies initiate price changes as a drive to face the cost inflation and the over demand. A price-increase strategy may involve different methods:

Unbundling: the company prices separately one or more elements that were part of the offer such as delivery and installation cost.

Reduction of discounts: the price increase makes the company to instruct its sales force not to offer its normal cash e.g. 30% discount but price already changes.

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Initiating & Responding to Price Changes

Market Leaders Reactions to Price Changes

Maintain price Maintain price and add value Reduce price Increase price and improve quality Launch a low-price fighter line

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