Pricing

1. Pricing M Sahni

2. Pricing Strategy • Set Pricing Objective • Estimate Demand • Estimate Costs • Analyze Competitors’ Prices • Select Pricing Policy/Method • Set Final Price

3. Pricing Strategy Pricing Objectives survival • cover fixed cost and some variable cost • very short-run….(avoid extinction) profit maximization • requires accurate knowledge of demand, cost functions

4. Pricing Strategy Pricing Objectives (cont.) revenue maximization • costs hard to determine • assume increase in revenue leads to decrease in unit costs (…old BCG model) …both production and distribution costs fall • works if market is price sensitive • low price may discourage competition …market penetration strategy

5. Pricing Strategy Pricing Objectives (cont.) market skimming • highest price that market will bear • benefits are barely worthwhile for some customers to buy …then work down the demand curve • works if no cost benefit of increasing volume • image is important • may or may not discourage competition

6. Pricing Strategy Estimate Demand (…curve) • unique value • awareness of substitutes • difficult to compare alternatives • price relative to income • inventory effect Can customer hold inventory?

7. 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?

8. 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

9. 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…?

10. 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

11. 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

12. 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

13. 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 pricing • placed at ‘no frills’, low price • e.g. Soups, biscuits - ‘economy’ brands

14. Price skimming • where prices are high - usually during introduction • e.g new albums or films on release • ultimately prices will reduce to the ‘parity’ • Psychological pricing • to get a customer to respond on an emotional, rather than rational basis • .e.g 99p not Rs1 ‘price point perspective • Product line pricing • rationale of a product range • chocolates • Pricing variations • ‘off-peak’ pricing, early booking discounts,etc

15. 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 pricing • e.g. toothpaste, soups, etc

16. 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

17. Pricing Strategy Select Final Price (cont.) price lining odd pricing perception

18. 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

19. 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

20. 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

21. Trade Discounts: payment to a channel member or buyer for performing marketing functions; also known as a functional discount

22. Quantity discount: price reduction granted for a large-volume 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

23. 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

24. 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

25. 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.

26. Odd pricing: pricing policy based on the belief that a price ending with and odd number just below a round number is more appealing

27. 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