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Pricing
Sanjeev Varshney
Price
Benefits vs. Sacrifice
© 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Price is a Signal



Prices can be both
too high and too low
Price too low may
signal poor quality
Price set too high
might signal low value
© 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
The 5 C’s of Pricing
Costs
Customers
Value
Company
Objectives
Competition
Channel
Members
© 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
1st C: Company Objectives
Profit
oriented
Achieve a target return — pricing product to achieve a
specified percentage return on sales or investment.
Maximize profits — followed by the most companies
Sales
Oriented
Increase sales volume.
Maintain or increase market share.
Competitor To discourage more competitors from entering the
market
Oriented
Customer
Oriented
Target a market segment of consumers who highly
value a particular product benefit and set prices
relatively high (referred to as premium pricing)
© 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
2nd C: Customers
© 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
3rd C: Costs

Variable Costs
–

Fixed Costs
–

Vary with production
volume
Unaffected by production
volume
Total Cost
–
Sum of variable and fixed
costs
© 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
4th C: Competition
• Oligopoly
• Monopoly
• Pure
© 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
5th C: Channel Members


Manufacturers, wholesalers and retailers can
have different perspectives on pricing strategies
Manufactures must protect against gray market
transactions
© 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Pricing Strategies
Cost Based
Pricing
Strategies
Competition
Based
© 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Value Based
Value-Based Methods
Setting prices that
focus on the overall
value of the product
Consumer perceptions
Question: How would you estimate
the value of the product ?
© 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Value Thermometer
True Economic Value= Cost of Next Best Alternative + Value of
performance
Differential
Some other Pricing Methods



Perceived Value Pricing
Performance based pricing (Conjoint
analysis)
Life Cycle based Pricing or Value in Use
Pricing
Psychological Factors Affecting ValueBased Pricing Strategies
Reference
pricing
Price-quality
relationship
Psychology
pricing
strategies
Odd prices
© 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Everyday low
pricing
(EDLP)
The Price-Quality Relationship
Lacking experience,
consumers use price as
an indicator of quality
Products/brands that
consumers have little
knowledge about, price
becomes crucial
Discussion question
Whine ranges in price from under Rs. 200 a
bottle to over Rs. 2000 a bottle. How do you
know which to choose?
© 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
New Product Pricing
Price skimming
Penetration Pricing
© 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Market Entry Strategies

Market-Skimming Pricing - suitable if:
–
–
–

Product has desirable distinctive features
Demand is fairly inelastic
Product is protected from competition
Market-Penetration Pricing - suitable if:
–
–
–
–
A large mass market exists for the product
Demand is highly elastic
Economies of scale are possible
Fierce competition exists or can be expected
soon
Pricing Tactics
Pricing strategy
Pricing tactics
© 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Business to Business Pricing Tactics
and Discounts
Cash
Discounts
Seasonal
Discounts
Pricing Tactics &
Discounts
Uniform
Delivered
vs.
Zone Pricing
Allowances
Quantity
Discounts
© 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Pricing Tactics Aimed at Consumers
Price
lining
Pricing Tactics
for
Consumers
Leader
pricing
Price
bundling
© 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Price Lining


Marketers establish a price floor and a price
ceiling and set prices in between
Allows for easy comparison
© 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Price Bundling

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

Encourage sales of slow moving items
Encourage stock up
Encourage trial of new brand
Incentive to purchase
© 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Leader Pricing
Enticing consumers
into the store with the
popular aggressively
priced item and
hoping they will pick
up other items while
shopping
© 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Consumer Price Reductions
Markdowns
Coupons
and rebates
Consumer Price
Reductions
Seasonal
discounts
© 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Quantity
discounts for
consumers
Seasonal Discounts
Encourage consumers to use services or purchase
products year round
© 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
SELECT PRICING OBJECTIVE
SELECT METHOD OF DETERMINING THE BASE PRICE:
Cost-plus
pricing
Price based on
both demand
and costs
Price set in
relation to
market alone
DESIGN APPROPRIATE STRATEGIES:
Price vs. nonprice
competition
Skimming vs.
penetration
Discounts and allowances
Freight payments
One price vs.
flexible price
Psychological pricing
Leader pricing
Everyday low vs.
high-low pricing
Resale price
maintenance