Pricing Decisions

Compiled and Presented by: Ms. Kumkum Bharti Assistant Professor Department of Business Administration

Opening Case

Gillette has a tradition of product innovation, beginning with the invention of the safety razor by king C. Gillette in 1901. First twin blade shaving system, TRAC II, IN 1971 First razor with a pivoting head, ATRA, IN 1977 First razor with spring-mounted twin blades, SENSOR IN 1989 First triple- blade system MACH 1998 JAN 2006 saw the launch of the best shaving on the planet with the six- bladed FUSION

Opening Case

P&G, acquired Gillette in 2005 for $ 57 million, spend $200 million in the USA & Over $ 1 million worldwide. Enjoying global market share of over 70 %. FUSION power costs $ 14 for 4 pack compares and $5.21 for a 5 pack of sensor

Pricing decisions

On the basis of company, customers, competition, & the marketing environment. Consist of marketing strategy & brand positioning

What is price?
The amount of money charged for a product or service, or the sum of the values that customers exchange for the benefits of having or using the product or service.

Consideration in Setting Price

Customer Perceptions . of Value
a.

Other External & Internal Considerations Marketing strategy, objectives, and mix Nature of market & demand Competitors strategies & prices

Product Costs

Price Ceiling No demand above this price

b. c.

Price Floor No profits below this price

NOTE: If customers perceive that a products price is greater than its value, they wont buy it. If the company prices a product below its costs, profits will suffer. Between the two extremes right pricing strategy is one that delivers both value to the customers & profits to the company.

Customer perception of value

Exchange of value from producer (benefits of using the product) to customer (price) Value based pricing Uses buyers perceptions of value, not the sellers cost, as the key to pricing First company assesses customers needs & value perceptions. It then sets its targets based on consumer

cost based pricing

Cost Based Pricing: Wrong way to determine pricing

Cost based pricing

Involves setting prices based on the costs of producing, distributing, & selling the product plus a fair rate of return for its efforts & risk. Types of costs

Fixed Variable total

Value Based Pricing: Right Way to Determine Price

Assess customer needs & value perceptions

Set price to match customer perceived value Determine costs that can be incurred Design product to deliver desired value at target price

Value based pricing

Good value pricing offering just the right combination of quality & good service @ a fair price. introducing less expensive versions of established , brand name products Involved redesigning existing brands to offer more quality for a given price or the same quality for less. Concept EDLP ???

Value based pricing

Value added pricing Attaching value-added features & services to differentiate a cos offers & charging higher prices.

Costs at different levels of production

Cost as a function of production experience

Experience curve: learning curve : the drop in the average per-unit production cost comes with accumulated production experience.

Types of pricing

Cost plus pricing Mark- up pricing Target profit pricing

Cost-plus pricing

Simplest method Adding a standard mark-up to the cost of the product Ex: aerospace co.s

Mark up pricing

Unit cost= variable cost+ fixed cost/ unit sales Mar up price= unit cost/ (1- desired return on sales) Each level in distribution channel keeps a mark up on its sales

Break-even analysis & profit pricing

Setting price to breakeven on the costs of making & marketing product, or setting price to make a target profit. BEP is a point where TR Cuts TC BE Volume= fixed cost/ (price- variable cost)

Break-even analysis & profit pricing

Unit price Units demanded needed to breakeven Expected Total units revenue demanded at given price 71000 67000 60000 42000 23000 994000 1072000 1080000 840000 506000 Total costs Profits

14 16 18 20 22

75000 50000 37500 30000 25000

10,10,000 9,70,000 9,00,000 7,20,000 5,30,000

-16000 1,02000 1,80,000 1,20,000 -24000

Overall marketing strategy, objectives and mix

Pricing strategies

Market skimming: Market penetration:

Market skimming:

Setting a high price for a new product to skim maximum revenues layer by layer from the segments willing to pay the high price; the co. makes fewer but more profitable sales. Example: Sony HDTV

Market penetration:

Setting the price for a new product in order to attract a large number of buyers &a large market share. Example: Nirma & wheel

Product mix pricing strategy

Product line pricing Optional product pricing Captive product pricing By-product pricing Product bundle pricing

Product line pricing

Setting the price steps between various products in a product line based on cost differences between the products, customer evaluations of different features, and competitors prices.

Optional product pricing

The pricing of optional or accessory products along with a main product.

Captive product pricing

Setting a price for product that must be used along with a main product, such as blades for a razor and film for a camera.

By-product pricing

Setting a price for by-products in order to make the main products price more competitive.

Product bundle pricing

Combining several products and offering the bundle at a reduced price.

Price adjustment strategies

Discount & allowance pricing Segmented pricing Psychological pricing Promotional pricing Geographical pricing Dynamic pricing International pricing

Discount & allowance pricing

Discount: a straight reduction in price on purchases during a stated period of time. Allowances: promotional money paid by manufacturers to retailers in return for an agreement to feature the manufacturers product in some way.

Segmented pricing

Selling product or service at two or more prices, where the difference in prices in not based on differences in costs.

Psychological pricing

A pricing approach that considers the psychology of prices and not simply the economics; the price is used to say something about the product.

Promotional pricing

Temporarily pricing products below the list price, and sometimes even below cost, to increase short run sales.

Geographical pricing

Setting prices for customers located in different parts of country or world.

FOB pricing Uniform zone pricing Zone pricing Basing point pricing

FOB pricing

A geographical pricing strategy in which goods are placed free on board a carrier, the customer pays the freight from the factory to the destination.

Uniform zone pricing

A geographical pricing strategy in which the company charges the same price plus freight to all customers, regardless of their location.

Zone pricing

A geographical pricing strategy in which the company sets up two or more zones. All customers within a zone pay the same total price; the more distant the zone, the higher the price.

Basing point pricing

A geographical pricing strategy in which the seller designates one city as belong point and charges all customers the freight cost from the city to the customer.

Freight-absorption pricing

A geographical pricing strategy in which the seller absorbs all or part of the freight charges in order to get the desired business.

Dynamic Pricing
Adjusting prices continually to meet the characteristics and needs of individual customers and situations.