Developing Pricing Strategies and Programs

1. Developing Pricing Strategies and Programs Ms.Kiran Sharma

2. Chapter Questions • How do consumers process and evaluate prices? • How should a company set prices initially for products or services? • How should a company adapt prices to meet varying circumstances and opportunities? • When should a company initiate a price change? • How should a company respond to a competitor’s price challenge?

3. Gillette Commands a Price Premium

4. Synonyms for Price • Rent • Tuition • Fee • Fare • Rate • Toll • Premium • Honorarium • Bribe • Dues • Salary • Commission • Wage • Tax

5. Common Pricing Mistakes • Determine costs and take traditional industry margins • Failure to revise price to capitalize on market changes • Setting price independently of the rest of the marketing mix • Failure to vary price by product item, market segment, distribution channels, and purchase occasion

6. Changing Pricing Environment • For Buyers • Get instant price comparisons from thousands of vendors – (www.mySimon.com) • Name their price and have it met – (www.priceline.com) • Get products free • For Sellers • Monitor customer behavior and tailor offer to individuals • Give certain customers access to special prices • Both Buyers and Sellers may • Negotiate prices in Online auctions and exchanges

7. Consumer Psychology and Pricing Reference Prices Price-quality inferences Price cues

8. Possible Consumer Reference Prices • “Fair price” • Last price paid • Upper-bound price • Lower-bound price • Competitor prices • Expected future price • Usual discounted price

9. Consumer Perceptions vs. Reality for Cars Overvalued Brands • Land Rover • Kia • Volkswagen • Volvo • Mercedes Undervalued Brands • Mercury • Infiniti • Buick • Lincoln • Chrysler

10. Tiffany’s Price-Quality Relationship

11. Price Cues • “Left to right” pricing (Rs.2999 vs. Rs.3000) • Odd number discount perceptions • Ending prices with 0 or 5 • “Sale” written next to price

12. When to Use Price Cues • Customers purchase item infrequently • Customers are new • Product designs vary over time • Prices vary seasonally • Quality or sizes vary across stores

13. Steps in Setting Price Select the price objective Determine demand Estimate costs Analyze competitor price mix Select pricing method Select final price

14. Step 1: Selecting the Pricing Objective • Survival (overcapacity, intense competition, changing consumer wants) • Maximum current profit (can estimate the demand and cost associated with alternative prices) • Maximum market share (market skimming) • Maximum market skimming • Product-quality leadership

15. Step 2: Determining Demand Price Sensitivity Estimating Demand Curves Price Elasticity of Demand

16. Factors Leading to Less Price Sensitivity • The product is more distinctive, low cost items, or items they buy infrequently. • There are no or few substitutes or competitors • Buyers cannot easily compare the quality of substitutes • Buyers are slow to change their buying habits. • Buyer do not readily notice the higher price • Part of the cost is paid by another party • The product is used with previously purchased assets • The product is assumed to have high quality and prestige, hence feel higher price is justified. • Buyers cannot store the product

17. Estimating Demand Curves

18. Price Elasticity of demandInelastic and Elastic Demand

19. Step 3: Estimating Costs Types of Costs Accumulated Production Activity-Based Cost Accounting Target Costing

20. Cost Terms and Production • Fixed costs (rent, salaries) • Variable costs (Raw material, microprocessor chips, packaging material) • Total costs • Average cost • Cost at different levels of production

21. Cost per Unit as a Function of Accumulated Production

22. TARGET COSTING - Tata motors developed ‘Nano’ its small car with a target price

23. Step 4: analyzing competitors costs, Prices and Offers • Analyze competitor in terms of financial situation, recent sales, customer loyalty, product efficacy.

24. Step 5: Selecting a Pricing Method • Markup pricing • Target-return pricing • Perceived-value pricing ( Buyer’s image, warranty, product performance, supplier reputation, trust) • Value pricing (Higher volumes at lower prices) • Going-rate pricing (competitor prices) • Auction-type pricing

25. Break-Even Chart

26. Auction-Type Pricing English auctions Dutch auctions Sealed-bid auctions

27. Step 6: Selecting the Final Price • Impact of other marketing activities • Company pricing policies • Impact of price on other parties

28. Price-Adaptation Strategies Geographical Pricing Discounts/Allowances Promotional Pricing Differentiated Pricing

29. Price-Adaptation Strategies Countertrade • Barter • Compensation deal • Buyback arrangement • Offset Discounts/ Allowances • Cash discount • Quantity discount • Functional discount • Seasonal discount

30. Geographical pricing - Barter • The least complex and oldest form of bilateral, non-monetary counter-trade • A direct exchange of goods or services between two parties Exporter/ Importer Country X Goods/Services Country Y Exporter/ Importer

31. Switch Trading Exporter Exporter Country Y Country X Goods/ services A Switch trader Country Z Payment or Goods/Services C Goods/ Services B

32. Counter Purchase Exporter Exporter Country Y Goods/Services Country X Payment ( Hard Currency) Exporter Country Y Goods/Services Payment ( Hard Currency

33. Buy Back (Compensation) Exporter (capital goods or technology or Licenser) Importer Or Licensee Country X Capital goods or technology Country Y Payment Output from Capital goods/ technology Payment

34. Promotional Pricing Tactics • Loss-leader pricing (drop prices on well known brand) • Special-event pricing • Cash rebates • Low-interest financing • Longer payment terms • Warranties and service contracts • Psychological discounting (was Rs 599 Now Rs 549)

35. Differentiated Pricing • Customer-segment pricing • Product-form pricing • Image pricing • Channel pricing • Location pricing • Time pricing

36. Pricing for rural markets • A large proportion have a low and seasonal income • Several approaches adopted by retailers and companies to address this • Rural retailers often extend credit • Retailers also “break the bulk” and sell in loose form, in small quantities • Companies use a similar strategy by introducing “low-unit packing” or LUP • Companies also develop low-priced products with a target price for rural markets • Companies might offer refill packs or recyclable and reusable packs

37. Initiating price Increases Delayed quotationpricing Escalator clauses Unbundling Reduction of discounts

38. Brand Leader Responses to Competitive Price Cuts • Maintain price • Maintain price and add value • Reduce price • Increase price and improve quality • Launch a low-price fighter line