PRICING DECISIONS

(DESIGNING PRICING STRATEGIES AND

PROGRAMMES)
http://www.prenhall.com/solomonvideo/5e/index.html
“YOU DON’T SELL THROUGH PRICE.
YOU SELL THE PRICE.”
 Price is an important indicator determining
how much of the quantity will be bought.
 Price is the monetary value of a product or
service.
 Price is the marketing-mix element that
produces revenue; the others produce costs.
 Price is one of the most flexible element; it can
be changed quickly , unlike other elements.
 Marketing Mix

Revenue
Cost Product Price Producer

Cost Place Promotion Cost

 SETTING PRICING POLICY
( FACTORS TO BE CONSIDERED )
 (1) Selecting the pricing objective
 (2) Determining demand
 (3) Estimating costs
 (4) Analyzing competitors’ costs, prices,
and offers
 (5) Selecting a pricing method
 (6) Selecting the final price
 Setting the Price
6 Select Final Price
5 Price Method
4 Competitor Analysis
3 Estimate Costs
2 Determine Demand
1 Pricing Objective
STRATEGIC PRICING PROCESS
(2) Study (4) Integrate
Consumer Pricing with
Behav. M.Mix

(1) Select (6) Determine

Target Market Strategic Price

(3) Identify (4) Relate cost

Competition & Demand
 PRICING OBJECTIVES
 The company first decides where it wants to
position its market offering. The clearer a
firm’s objectives, the easier it is to set price.
 A company can pursue any of five major
objectives through pricing :
 Survival
 Maximum current profit
 Maximum market share (market penetration)
 Maximum market skimming
 Product-quality leadership
FACTORS AFFECTING PRICING
DECISIONS

 Internal Conditions : ( Product differentiation,

Marketing Mix, Orgn. Factors/Costs, Orgn.
Objectives and goals.
 External Conditions : ( Govt. Regulations,
Economic Conditions, Demand Position,
Buyer’s Attitude and Behaviour, Competition,
Substitutes, Suppliers, Cost of Factors of
Production )
SELECTION OF PRICING METHOD
 Before selecting a price, the company
should study the three Cs :
- the customers’ demand schedule
- the cost function
- the competitors’ prices
 Costs set a floor to the price and Market
Demand sets the upper ceiling.
Competitors’ prices and the prices of
substitutes provide an orienting point.
 Estimating Costs
Demand Price Ceiling

Price

Price Floor
Profit

Costs
 High Price
(No possible

)
demand at this price

Ceiling price

Three Cs Customers’
assessment of unique
Model for product features
Orienting point
Price Setting Competitors’ prices
and prices of
substitutes
Costs
Floor Price

Low Price
(No possible
profit at this price)
 PRICE SETTING METHOD
 (1) MARKUP PRICING (FULL COST
PRICING) : The most elementary pricing
method is to add a standard markup to the
product’s cost.
Unit Cost = Variable Cost + Fixed Cost
--------------
Unit Sales
Markup Price = Unit Cost
------------
( 1- desired return on sales )
PRICE SETTING METHOD
 (1) MARKUP PRICING ( Contd. )
Example :
Suppose a product manufacturer has the
following costs and sales expectations :
Variable Cost per Unit = Rs. 10.00
Fixed Cost = Rs. 3,00,000
Expected Unit Sales = 50,000
Unit Cost = 10.00 + 3,00,000 / 50,000 = Rs. 16.00
Manufacturer wants to earn 20 % markup on sales
Markup Price = 16 / ( 1-0.2 ) = Rs.20.00
 PRICE SETTING METHOD

 (2) TARGET-RETURN PRICING : the firm

determines the price that would yield its target
rate of return on investment (ROI). The target-
return price is given by the following formula:
Target-return price=
Unit cost + desired return x invested capital
--------------------------------------------
Unit Sales

( Contd. )
 PRICE SETTING METHOD
 (2) TARGET-RETURN PRICING(Contd):
in the above example , if total investment
is Rs. 10,00,000/- and company wants to
earn a 10 % ROI then
Target-return price = 16.00 + .10 x 10,00,000 = Rs. 18.00
------------------
50,000
Break-even volume = Fixed cost / Price - Variable Cost
= 3,00,000 / 18 - 10
= 37,500 units
Target-Return Pricing
PRICE SETTING METHOD
 (3) PERCEIVED-VALUE PRICING :
Companies see the buyers’ perception of value,
as the key to pricing. They use non-price
variables of the marketing mix to build up
perceived value in buyers’ minds. It helps in
product positioning.
Perceived-Value Pricing
Customer’s perceived-value

• Performance $$$
• Warranty $
• Customer support $
• Reputation $$
PRICE SETTING METHOD
 (4) VALUE PRICING : In recent years, several
companies have adopted value pricing, in
which they charge a fairly low price for a high-
quality offering. Value pricing says that the
price should represent a high-value offer to
consumers.
 V=B/P
PRICE SETTING METHOD
 (5) GOING-RATE PRICING : The
firm bases its price largely on
competitors prices. The firm might
charge the same, more or less than
major competitor(s).
 Going-rate pricing is quite popular,
where costs are difficult to measure
or competitive response is
uncertain, firms feel that the going
price represents a good solution
 Going-Rate Pricing

Commodities

Follow the Leader

PRICE SETTING METHOD
 (6) SEALED-BID PRICING :
Competitive-oriented pricing is common
where firms submit sealed bids for jobs.
The firm bases its price on expectations of
how competitors will price rather than on
a rigid relation to the firm’s costs or
demand. The firm wants to win the
contract, and winning normally requires
submitting a lower price bid. At the same
time, the firm can not set its price below
cost.
SELECTING THE FINAL PRICE
 Pricing methods narrow the range from which
the company must select its final price. In
selecting that price, the company must
consider following additional factors :
- Psychological Pricing ( Image Pricing,
Odd-ending Pricing )
- The influence of other Marketing-Mix
Elements ( the brand’s quality and
advertising relative to competition )
- Company Pricing Policies (reasonable to
customers and profitable to the company )
- Impact of Price on Other Parties
 Consumer Psychology and Pricing
Price-Quality Inferences

Reference Prices

$1.99
Price Endings
 A Black T-Shirt

Armani - $275

Gap - $14.90

H&M - $7.90
PRICE ADAPTATION STRATEGIES
( PRICING TACTICS & TECHNIQUES )
 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.
 As a result of discounts, allowances, and
promotional support, a company rarely
realizes the same profit from each unit
of product that it sells.
PRICE ADAPTATION STRATEGIES
( PRICING TACTICS & TECHNIQUES )
 Following are the several price-
adaptation strategies :
 (1) Geographical Pricing : involves the
company in deciding how to price its
products to different customers in
different locations and countries.
Another issue is how to get paid.
( Contd. )
 PRICE ADAPTATION STRATEGIES
( PRICING TACTICS & TECHNIQUES )
Geographical Pricing ( Contd. )
5 Major Approaches :
 FOB Origin Pricing
 Uniform Delivery Pricing ( Postage
Stamp Pricing )
 Zone Pricing ( Falls between the above
two )
 Base Point Pricing
 Freight Absorption Pricing
PRICE ADAPTATION STRATEGIES
( PRICING TACTICS & TECHNIQUES )
(2) Price Discounts and Allowances :
 Cash Discount ( e.g. “2/10,net 30” )
 Quantity Discount
 Functional Discount
 Seasonal Discount
 Allowances ( Trade-in allowances,
Promotional Allowances )
 PRICE ADAPTATION STRATEGIES
( PRICING TACTICS & TECHNIQUES )
(3) Promotional Pricing :
 Loss-leader pricing
 Special-event pricing
 Cash rebates
 Low-interest financing
 Longer payment terms
 Warranties and service contracts
 Psychological discounting
PRICE ADAPTATION STRATEGIES
( PRICING TACTICS & TECHNIQUES )
(4) Product-Mix Pricing :
 Product-Line Pricing
 Optional-Product Pricing
 Captive-Product Pricing
 Two-Part Pricing
 By-Product Pricing
 Product-Bundling Pricing
PRICE ADAPTATION STRATEGIES
( PRICING TACTICS & TECHNIQUES )
(5) Discriminatory / Differential Pricing :
 Customer-segment pricing
 Product-form pricing
 Image pricing
 Location pricing
 Time pricing
Dealing with Price Changes
Raising Prices

Cutting Prices

Competitor Moves
INITIATING AND RESPONDING TO
PRICE CHANGES
Initiating Price Cuts :Several circumstances
might lead a firm to cut its prices. ( e.g. excess
plant capacity, declining market share,
sometimes to dominate the market through
lower costs, during economic recession ).
But a price cutting strategy involves possible
traps.
 Lower-quality trap,
 Fragile-market-share trap : gains share but
not loyalty,
 Shallow-pockets trap : competitors with
deeper cash reserves have longer staying
power .