Download Price

Issues in Pricing
Useful Price terms
Gross Revenue
Net Revenue
Gross Margin
Contribution
Break-Even Volume
Useful Price terms
FOB :
Free on Board
FOR :
Free on Rail
CIF :
Cost Insurance Freight
Useful Price Concepts
Reservation Price
Zone of agreement
Customer Surplus
Useful Price Concepts
Price Elasticity
Price Sensitivity
Customers are price sensitive to products that cost a lot or are bought frequently. They are less price sensitive to
Products that cost less or are bought infrequently. They are also less price sensitive to products that form a small
Part of the total cost that they are spending on a particular need / want
Demand is inelastic when (1) there are few substitute or competitors (2) buyers do not notice higher price
(3) Buyers feel price increase is justified (4) buyers are slow to change their buying habits.
There could be price indifference bands within which price changes have little or no effect.
Price Elasticity Formula
   dQ / Q /  dP / P
Useful Price Concepts
Administered Price Mechanism (APM)
explicit
implicit
Administered Price Mechanisms (APM) : regulation of price
structure by the government
(i) the price may be set by some government agency like the
Bureau of Industrial Costs and prices (BICP) or the Tariff
Commission and the firm has to abide by it - e.g. Rs.1 per kwh
to SEBs by NTPC as set by power ministry
(ii) the price may be set by a firm within the framework or on
basis of a formula given by the government. e.g. set a tariff that
allows 16% rate of return
(iii) the same efficiency produces apparently higher return on
depreciated plants
 Implicit administered price mechanisms : Tax concessions, amortisation of
license fees, tax breaks for investments available for e.g. to the infrastructure
industries such as telecom indirectly influence prices and competition.
Useful Price Concepts
Direct
Price Discrimination
Indirect
Temporal
Direct Price Discrimination
- customer segment pricing – electricity – residential and industrial use
- product form pricing – Dettol hard soap different from liquid soap;
satchets vs bottle
- image pricing – Haute couture products and ego sensitive products such as
perfumes and expensive cars priced differently
- location pricing – Movie tickets in PVR/INOX different from other theatres
Indirect Price Discrimination
- Quantity discounts
- Block Pricing e.g. landline telephone in bimonthly bills
Temporal Price Discrimination
- telephones time of day
- books – first hardcover, then paper back, then economy editions –
price skimming
Useful Price Concepts
Bundling
Reservation Price Table
products
S
e
g
m
e
n
t
s
Y
Z
A
B
12
4
4
12
Bundling
Two products A, B; Two equal segments – Y,Z
Variable cost of A < 4, B < 4
As other forms of discrimination among Y,Z is difficult
P(A) = 12; P(B) = 12; Z do not buy A, Y do not buy B
Bundling Offer – P(A) = 12, P(B) = 12, P(A,B) = 16
All buy both A,B
Useful Price Concepts
Reference Price
Cartels / Collusive pricing
Generic pricing strategies
market skimming
market penetration
value for money
Industrial pricing methods
published list prices
competitive bidding
cost-plus pricing
NOBLE and GRUCA
Industrial pricing
Pricing strategy definitions
Strategy
Description
New product pricing situation
Price Skimming
Penetration pricing
Experience Curve Pricing
We set the initial price high and then systematically reduce it
over time. Customers expect prices to eventually fall.
We initially set the price low to accelerate product adoption
We set the price low to build volume and reduce costs through
accumulated experience
Competitive Pricing Situation
Leader Pricing
Parity Pricing
Low-Price Supplier
We initiate a price change and expect the other firms to follow.
We match the price set by the overall market or the price leader.
We always strive to have the low price in the market.
Product Line pricing Situation
Complementary product Pricing
Price Bundling
Customer Value Pricing
Cost-based Pricing Situation
Cost-Plus pricing
We price the core product low when complementary items such
as accessories, suppliers, spare parts, services etc., can be
priced with a higher premium.
We offer this product as part of a bundle of several products,
usually at a total price that gives our customers an attractive
savings over the sum of individual prices.
We price one version of our product at very competitive levels,
offering fewer features than are available on other versions
.
.We establish the price of the product at a point tat gives us a
specified percentage profit margin over our costs.
Price – Quality Matrix
Price High
Qlty High
Qlty Med
Qlty Low
Premium
Strategy
Price Medium
High Value
Strategy
OverCharging
Strategy
Medium Value
Strategy
Rip Off
Strategy
False Economy
Strategy
Price Low
Super Value
Strategy
Good Value
Strategy
Economy
Strategy
Setting Pricing Policy
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 pricing structure or pricing policy
 establish pricing objectives (survival, maximum profit, maximum current
sales, maximum sales growth (penetration aspect), maximum skimming
strategy, product-quality leadership
 estimate demand, and demand curve through sensitivity analysis and
elasticity considerations
 estimate cost structure and cost variation at various output levels
 examine competitors costs, prices, policies, offers
 choose a pricing method
 choose pricing structure
Selecting the Pricing Objective
Survival – overcapacity, intense competition, changing consumer wants,
short term objective
Maximize current profit – may sacrifice long run performance
Maximize Market share – experience curve – falling cost, market
penetration pricing, consumer is price sensitive,
low price discourages competition
Maximize Market skimming – high price does not attract new entrants,
high price indicates superior product
Product Quality leadership – Maytag
Partial Cost Recovery – Universities with grants
Determine Demand
Establish Demand Curve – statistics on past data, price
experiments, buy intention curve (ask)
Estimating Costs
Variable Cost, Fixed Cost, Total Cost,
Average Cost (= Total cost / No of units in Production)
Learning Curve: Decline in average cost with accumulated production
experience is called experience curve or learning curve
Activity Based Costing (instead of standard cost accounting) :
To find real costs of serving each customer
Target Costing – First Price is determined from its appeal and competitor prices
Next target cost is obtained after deducting profit
Achieve target cost by examining design, engg, m/f, sales
If target cost is is not possible then drop product
Analyzing Competitor’s Costs, Prices, Offers
Relative to competitors offering of benefits and their prices what should
our firm offer given our benefits
Selecting a Pricing Method
Ceiling Price – Unique Product Features; Orienting Point – Competition and
substitutes; Floor Price - Costs
Markup Pricing
Target return Pricing
Perceived Value Pricing
Selecting a Pricing Method
Value Pricing
Going Rate Pricing
Auction type Pricing
Group Pricing
Markup Pricing = Markup on sales
Price = Unit Cost /(1- Desired Markup)
Markup Pricing works only if the marked up price brings in the expected level of sales
Target Return Pricing
Price = Unit Cost + (desired return * invested capital)/ (total sales in units)
One example is that it is used by General Motors
Perceived Value Pricing (Offer more value than competitor and demonstrate it)
Perceived Value Price = F ( buyer’s image of product, channel deliverables, warranty quality,
customer support, firm reputation, trustworthiness)
Dupont is a major practitioner
Price buyers – stripped down product
Buyers
Value buyers – keep innovating for these buyers
Loyal buyers – relationship building and customer initmacy
Value Pricing
Low price for high quality offering e.g. WalMart.
It is as much a philosophy as a method
One pricing strategy based on Value Pricing is EDLP
Going Rate Pricing
Go by competitor’s prices
Charge same as, less than or more than competitor’s prices
Follow the leader pricing is another example as in Commodity oligopolies such as
steel, paper, fertilizers
Auction Type Pricing
One seller – many buyers, seller puts an item for sale and bidders raise prices to top price
e.g. real estate
Group Pricing
Group together and buy at discounts e.g. cooperatives
Selecting Final Price
Factor to consider
-psychological pricing – price-quality combination, reference price, odd number pricing ($299/)
- Gain and risk sharing pricing -- Large IT orders the buyer may not realize gains; in which case
seller guarantees differences – full or part of it
- Influence of other Marketing Mix elements – such as advertising ( advt-awareness-high price)
- Company pricing policies
Price Adaptations
-- Geographical
-- Price Discounts and Allowances
- Cash discount, quantity discount, functional discount (given to intermediaries if they perform
certain functions), seasonal discount (off-peak buying), allowances (trade allowance
to resellers for participating in trade-ins, promotion allowance given to resellers for
participating in advertisement and promotion programs of the firm)
-- Promotional pricing
- loss leader pricing, special event pricing ( Going to school program of Bata), Cash rebates (as in
jeweler shops) low interest financing (0% for 12 months), longer payment terms,
warranties / service contracts, psychological discounting (price high and then discount)
-- Price discrimination
-- Product Mix Pricing
- Product line pricing, optional feature pricing (power windows for car), captive product pricing (razor
is low price and blade is high price), two part pricing (telephones), bundling
Influences on Pricing
•Product Costs
• Product Value to Customer
• Competition
• Customer bargaining power
• Government Intervention
• Bounds of Fairness / Relationship Mktg
• Objective of Pricing