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Sell Value, not price

Prof. Deepa Rohit, LLIM

In this chapter, we focus on three questions:

How do consumers process and evaluate prices ?


How should a price be set on a product or service for the first time? How should the price be adapted to meet varying circumstances and opportunities?

When should the company initiate a price change, and


how should it respond to a competitors price change?
Prof. Deepa Rohit, LLIM 2

Purchase decisions are based


How consumers perceive prices What consumers consider the current actual price to

be not marketer stated price

Perception of prices
Reference prices Price quality inferences Price Cues

Prof. Deepa Rohit, LLIM

Prof. Deepa Rohit, LLIM

1. Selecting pricing objective


2. Determining Demand

3. Estimating Costs
4. Analyzing Competitors costs, prices & offers 5. Selecting a pricing method 6. Selecting final price
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Positioning strategy

5 major objectives
Survival Maximum Current profit Maximum pricing market share Penetration

Maximum market skimming


Product-quality leadership
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Prof. Deepa Rohit, LLIM

Price set to penetrate the market Low price to secure high volumes Market is highly price-sensitive, and a low price stimulates market growth, Typical in mass market products chocolate bars, food stuffs, household goods, etc. May be useful if launching into a new market Low price discourages actual and potential competition Production and distribution costs fall within accumulated production experience Prof. Deepa Rohit, LLIM 8

Best when:

High price, Low volumes Skim the profit from the market Best when Sufficient number of buyers have a high current demand The unit costs of the producing a small volume are not so high High initial price does not attract more competitors to the market The high price communicates the image of superior quality Suitable for products that have short life cycles or which will face competition at some point in the future (e.g. after a patent runs out) Examples include: Playstation, digital technology, i-phone etc etc.

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1.

Price sensitivity

2.

Estimating demand curve


Surveys Price experiments Statistical analysis

3.

Price elasticity of demand

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Types of costs & levels of production


Fixed costs Variable cost Total cost

Average cost

Accumulated Production Curve


Experience curve (Learning)

Differentiated marketing offers


ABC accounting

Target Costing

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Prof. Deepa Rohit, LLIM

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Based on
Customers demand schedule

Cost function
Competitors prices

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Adding a standard mark up to the products cost

Unit Cost = variable cost + (fixed cost/unit sales) Markup price= unit cost/ (1 desired return on sales) Markups are higher on seasonal products, specialty items, slower-moving items, items with high storage & handling costs, demand in-elastic goods. Ignores current competition demand, perceived value &

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Setting price to target a specified ROI level Target-return price = unit cost + (desired return X investment capital)/unit sales = 16 + (0.20 X 100000) / 50000 = 20 It ignores

Competitors prices Price elasticity of demand

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Break-even volume = fixed cost / (price variable cost)

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Base the price on the customers Perceived value Company must deliver the value promised by their value proposition & customer must perceive this value. Perceived value is based on
Buyers image of the product performance Channel deliverables Warranty quality Customer support Supplier's reputation, trustworthiness & esteem.

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Charging fairly low price for a high quality offerings Its not just setting low prices but reengineering the operations to become low-cost producer,
without compromising on quality
Attracting a large number of value-conscious buyers

Everyday low pricing (EDLP)

High-low pricing

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A firm bases price largely on competitors prices. A firm might charge same, more or less than major competitor. Follow the leader Costs are difficult to measure Where competition response is uncertain,
banks, petrol, supermarkets, electrical goods find very similar prices in all outlets

Best when

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Prof. Deepa Rohit, LLIM

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Company must consider additional factors like


Impact of other marketing mix elements
Relation between pricing, quality and advertising spends Brands having high quality & high spends will fetch higher prices

Company pricing policy


Impact of pricing on other parties Gain & risk sharing pricing

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Companies do not set a single price but rather a pricing structure that reflects variations in
Geographical demand & cost

Market segment requirements


Purchase timing Order levels

Delivery frequency
Guarantees Service contracts
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How to price the products to different customers in different locations & countries

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Discounts and allowances for


Early payment Volume purchase Off-season buying

Types of discounts
Cash discount Quantity discount Trade discount Seasonal discount allowances

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Loss-leader pricing
Supermarkets often drop the price on well known brands to

stimulate additional store traffic


Additional sales revenue compensates for the lower margins on

the loss-leader brands


Special-event pricing Cash rebates Low-interest financing Longer payment terms

Warranties and service contracts


Psychological discounting
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Companies adjust their price to accommodate differences in customers, products, locations etc.

the

Price discrimination occurs when a company sells a product or service at two or more prices that do not reflect proportional difference in costs
depending on intensity of demand Based on volumes Different classes of buyers

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Customer segment pricing e.g. Railways Students, Senior citizens

Product-form differently
Image pricing

pricing

different

versions

are

priced

Channel pricing e.g Coke at multiplex, restaurant etc


Location pricing e.g. theater premium, gold etc Time pricing e.g. Happy hours, multiplex on sat & weekdays

Yield pricing e.g. Airlines


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Market is segmentable The segments show different intensities of demand Members of lower-price segment must not be able to resell the product to the higher price segments Cost of segmenting & policing the market should not exceed the extra revenue derived from price discrimination The practice must not breed customer resentment & ill will Particular form of price discrimination should not be illegal.
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Excess plant capacity

Declining market share


Drive to dominate the market through lower costs Price cut can lead to Low quality trap Fragile-market-share trap Shallow-pockets trap Price war trap
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Conditions for price increases


Cost inflation Anticipatory pricing

Over demand

ways to increase price


Delayed quotation pricing Escalator clauses Unbundling Reduction of discounts
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High product homogeneity


Firm should search ways to enhance its augmented

product
If not found, it will have to meet price reduction

Non-homogeneous product market


Reason for price change ( excess capacity, changing

costs, lead industry)


Temporary or permanent
Effect on firms market share & profits Other competitors reaction
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In case of price cut by smaller brands


Maintain price Maintain price & add value

Reduce price
Increase price & improve quality Launch a low price fighter line

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Shrinking the amount of product instead of raising the price Substituting less expensive materials or ingredients Reducing or removing product features Removing or reducing product services, such as installation or free delivery Using less expensive packaging material or larger package sizes Reducing the number of sizes and models offered Creating new economy brands

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