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Principles of marketing Pricing Understanding & Capturing Customer Value Pricing Source: Google Search Pricing • 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. • Value-based pricing Setting price based on buyers’ perceptions of value rather than on the seller’s cost Customer perceptions of value Price Ceiling No demand above this price Other internal and external considerations Maketing strategy, objectives, and mix Nature of the market and demand Competitors' strategies and prices Product costs Price floor No profits below this price Factors to set up price Cost based pricing Design good product Determine product costs Set price based on cost Convince buyers of product's value Assess customer needs & value perceptions Set targets price to match customer perceived value Determine costs that can be incurred Design product to deliver desired value at target price • Good-value pricing Offering just the right combination of quality and good service at a fair price • Value added pricing Attaching value-added features & services to differentiate a company’s offers & charging higher prices Company & product cost • Cost-based pricing Setting prices based on the costs for producing, distributing, and selling the product plus a fair rate of return for effort and risk • Fixed costs (overhead) Costs that do not vary with product or sales level • Variable costs Costs that vary directly with the level of production • Total Costs The sum of the fixed and variable costs for any given level of production • Experience curve The drop in the average per-unit production cost that comes with accumulated production experience • Cost plus pricing Adding a standard markup to the cost of the product Source: Google Search Long run avg cost curve Source: Google Search Experience Curve Company & product cost • • • • Break-even pricing Setting price to break even on the costs of making and marketing a product, or setting price to make a target profit Target costing Pricing that starts with an ideal selling price, then targets costs that will ensure that the price is met Organizational consideration – The market and demand – Pricing in different types of markets Analyzing the price-demand relationship – Demand curve: A curve that shows the number of units the market will buy in a given time period, at different prices that might be charged – Price elasticity: A measure of the sensitivity of demand to changes in price Price elasticity of demand = % change in quantity demanded % change in price Company & product cost Fixed Costs Unit cost = Varialble Cost + UnitSales Price elasticity of demand = % change in quantity demanded % change in price Unit Cost Mark up price = (1 - Desired return on sales) Fixed Cost Break Even Volume = Price - Variable Cost Return on investment pricing Rupee markup = selling price - cost Markup ROI X investment ROI price = Unit cost + Unit sales Break Even Analysis fixed costs Break-even-volume = price - unit variable cost Exercise • Refurbished Rs. 50 million • Fixed Cost Rs. 100 million • Variable cost Rs. 12,500 • Expected sales 100,000 Pricing Strategies Pricing Strategies • • • • • Market Skimming Pricing 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 company makes fewer but more profitable sales Market penetration pricing Setting a low price for a new product in order to attract a large number of buyers & a large market share Product line pricing Setting the price steps between various products in a product line based on cost differences between the product, 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 products that must be used along with a main product, such as blades for a razor and film for a camera Pricing Strategies • By-product pricing Setting a price for by-products in order to make the main product’s price more competitive • Product bundle pricing Combining several products & offering the bundle at a reduced price • Discount A straight reduction in price on purchase during a stated period of time • Allowance Promotional money paid by manufacturers to retailers in return for an agreement to feature the manufacturer’s products in some way • Segmented pricing Selling a product or service at two or more prices, where the difference in prices is 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 Pricing Strategies • Reference prices Prices that buyers carry in their minds & refer to when they look at a given product • Promotional pricing Temporality 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 the country or world • FOB-origin 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-delivered pricing A geographical pricing strategy in which the company charges the same price plus freight to all customers, regardless of their location • Dynamic Adjusting prices continually to meet the characteristics and needs of individual customers and situations Pricing Strategies • 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 some city as a basing point and charges all customers the freight cost from that 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 Pricing Strategies • International Pricing • Initiating Price changes • Initiating price cuts • Initiating price increases • Buyer reaction to price changes • Competitors Reaction to price changes • Anti competitive agreements • Horizontal agreements • Vertical agreements • Abuse of Dominance • Unfair trade practices Assessing & Responding to Competitor Price Changes Has competitor cut price No Hold current price: continue to monitor competitor's price Yes Will lower price No negatively affer our market share & profits Reduce price Yes No Can/should effective action be taken Yes Raise perceived value Improve quality and increase price Launch low-price "fighting brand" Marketing by Numbers Pricing, Breakeven & Margin Analysis • Fixed Costs Costs that do not vary with production or sales level • Variable costs Costs that vary directly with the level of production • Cost – plus pricing (or markup pricing)