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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
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•
•
•
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
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•
•
•
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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
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Discount
A straight reduction in price on purchase during a stated period of time
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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
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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
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Uniform-delivered pricing
A geographical pricing strategy in which the company charges the same
price plus freight to all customers, regardless of their location
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Dynamic
Adjusting prices continually to meet the characteristics and needs of
individual customers and situations
Pricing Strategies
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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
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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
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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
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International Pricing
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Initiating Price changes
• Initiating price cuts
• Initiating price increases
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Buyer reaction to price changes
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Competitors Reaction to price changes
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Anti competitive agreements
• Horizontal agreements
• Vertical agreements
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Abuse of Dominance
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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
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Fixed Costs
Costs that do not vary with production or sales level
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Variable costs
Costs that vary directly with the level of production
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Cost – plus pricing (or markup pricing)