Download Pricing - Prof Marshal Sahni

Pricing
M Sahni
Pricing Strategy
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Set Pricing Objective
Estimate Demand
Estimate Costs
Analyze Competitors’ Prices
Select Pricing Policy/Method
Set Final Price
Pricing Strategy
Pricing Objectives
survival
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cover fixed cost and some variable cost
very short-run….(avoid extinction)
profit maximization
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requires accurate knowledge of demand, cost functions
Pricing Strategy
Pricing Objectives
(cont.)
revenue maximization
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costs hard to determine
assume increase in revenue leads to decrease in unit costs
(…old BCG model)
…both production and distribution costs fall
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works if market is price sensitive
low price may discourage competition
…market penetration strategy
Pricing Strategy
Pricing Objectives
(cont.)
market skimming
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highest price that market will bear
benefits are barely worthwhile for some customers to buy
…then work down the demand curve
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works if no cost benefit of increasing volume
image is important
may or may not discourage competition
Pricing Strategy
Estimate Demand (…curve)
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unique value
awareness of substitutes
difficult to compare alternatives
price relative to income
inventory effect
Can customer hold inventory?
Pricing Strategy
Estimate Costs (supply curve)
cost structure at different levels of production
…old long run average cost curves
experience curves from BCG model
…profit is a function of market share.
penetration versus skimming
…How is supply curve affected?
Pricing Strategy
Analyze Competitors’ Prices
What is the structure of the market?
oligopoly versus pure competition
Select Pricing Policy/Method
single or multiple prices
administered pricing
ceiling and floor prices versus the level of competition
Pricing Strategy
Cost Based Pricing
cost plus, markup pricing
easy, costs known, minimizes price competition
ignores demand elasticity, not profit maximizing
target return of investment
use breakeven analysis to find a price to yield a target ROI
…use sales volume to derive price…?
Pricing Strategy
Demand Based Pricing
perceived value
requires detailed knowledge of buyer behavior and demand
elasticity
only true profit maximizing strategy
ignores costs and competitors
Pricing Strategy
Demand Based Pricing
(cont.)
demand differential
price discrimination
yield maximization pricing
sell at multiple prices to multiple segments
not based on marginal costs of dealing with each
daily, weekly, or seasonal pricing
geographic, physical, or electronic barriers
Pricing Strategy
Competition Based Pricing
going rate pricing
used when costs difficult to measure
competitors lack differential advantage
sealed bid
forces competitors to lowest price
Pricing strategies
 Premium
pricing
 Uses
a high price, but gives a good
product/service exchange e.g. Mercedes
 Penetration
pricing
 offers
low price to gain market share then increases price
 e.g. Reliance Telecom - to attract new
clients
 Economy
 placed
pricing
at ‘no frills’, low price
 e.g. Soups, biscuits - ‘economy’ brands
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Price skimming
 where
prices are high - usually during
introduction
 e.g new albums or films on release
 ultimately prices will reduce to the ‘parity’
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Psychological pricing
 to
get a customer to respond on an emotional,
rather than rational basis
 .e.g 99p not Rs1 ‘price point perspective
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Product line pricing
 rationale
of a product range
 chocolates
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Pricing variations
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‘off-peak’ pricing, early booking discounts,etc
 Optional
product-pricing
 e.g.
optional extras - BMW famously
under-equipped
 Captive
product pricing
 products
that complement others
 e.g Gillette razors (low price) and blades
(high price)
 Product-bundle
pricing
 sellers
combine several products at the
same price
 e.g software, books, CDs.
 Promotional
e.g.
pricing
toothpaste, soups, etc
Pricing Strategies
Select Final Price
psychological pricing, prestige pricing
know demand elasticity
start high, work toward costs
discounts
cash, trade, quantity, or seasonal
promotional pricing
loss leaders
Pricing Strategy
Select Final Price
price lining
odd pricing
perception
(cont.)
Pricing Strategy
Price cuts
excess capacity leads to margin squeezes (aka price wars)
build market share not brand loyalty
low cost producer will always win
Price Quotations
 List
prices: Established prices
normally quoted to potential
buyers
 Market
price: Price that an
intermediary or final consumer
pays for a product after
subtracting any discounts,
rebates, or allowances from the
list price
 Reductions
from List Price
– Cash discount: price reduction
offered to a consumer, industrial user,
or marketing intermediary in return for
prompt payment of a bill
 2/10
net 30, a common cash discount
notation, allows consumers to subtract 2
percent from the amount due if payment is
made within 10 days
 Trade
Discounts: payment to a
channel member or buyer for
performing marketing functions;
also known as a functional
discount
 Quantity
discount: price
reduction granted for a largevolume purchase
– Justified on the grounds that large
orders reduce selling expenses,
storage, and transportation costs
– Cumulative quantity discounts
reduce prices in amounts determined
by purchases over stated time periods
– Non-cumulative quantity
discounts provide one-time
reductions in the list price
 Allowances
– Trade-in: credit allowance given for a
used item when a new item is purchased
– Promotional allowance: advertising or
promotional funds provided by a
manufacturer to other channel members
in an attempt to integrate the
promotional strategy within the channel
 Rebates:
refund for a portion of the
purchase price, usually granted by the
product’s manufacturer
 Geographic
Considerations
– FOB (free on board) plant or FOB
origin: Price quotation that does not
include shipping charges. Buyer pays
all freight charges to transport the
product from the manufacturer
– Freight absorption: system for
handling transportation costs under
which the buyer may deduct shipping
expenses from the costs of goods
– Uniform-delivered price: system for
handling transportation costs under which all
buyers are quoted with the same price,
including transportation expenses
– Zone pricing: system for handling
transportation costs under which the market is
divided into geographic regions and a different
price is set in each region
– Basing-point system: system for handling
transportation costs in which the buyer’s costs
included the factory price plus freight charges
from the basing-point city nearest the buyer.
Seeks to equalize competition between distant
marketers.
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Odd pricing: pricing policy based on the belief
that a price ending with and odd number just below
a round number is more appealing
 Price-Quality
Relationships
– Without other cues, price serves as
an important indicator of a
product’s quality to buyers
– Customers often view price as an
indicator of a product’s overall
quality and may be willing to pay a
higher price