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PRICING

PRICING. PRICING METHODS. At the end of this module the learning outcomes are What is the concept of pricing? What steps need to be followed in fixing prices? What are the various types of pricing methods?. PRICING METHODS. Suggested Readings

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PRICING

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  1. PRICING PRICING

  2. PRICING METHODS At the end of this module the learning outcomes are • What is the concept of pricing? • What steps need to be followed in fixing prices? • What are the various types of pricing methods? PRICING

  3. PRICING METHODS Suggested Readings • Marketing Management by Philip Kotler, Millenium edition, Chapter – 15 PRICING

  4. PRICING METHODS What is pricing? Pricing is customer‘s perception of the value of the product. PRICING

  5. PRICING METHODS PRICE • One of the element of Marketing Mix • Produces revenue • Other elements result in costs • Very flexible • Changed quickly • Other elements relatively more difficult to change Needs to be handled well? PRICING

  6. PRICING METHODS Pricing policy – six step procedure • Selecting the pricing objective • Determining demand • Estimating costs • Analyzing competitor’s cost, prices and offers • Selecting a price method • Selecting final price PRICING

  7. PRICING METHODS Setting the price objective Can be many • Survival • Maximum current profit • Maximum market share • Maximum market skimming PRICING

  8. PRICING METHODS Example-Intel Market Skimming strategy: • New chip (Pentium 4) launched • Artificially high priced 1000 $ • High margin • Who pays 1000 $ • People who can’t wait • Gradually reduce price • Increases volume • Prices drop down to 50% after 2 yrs. • Pentium 5 will be ready • Pentium 4 will be phased out Intel skims the market. PRICING

  9. PRICING METHODS Example- Market – Penetration Strategy • Launch at a lower market price • Gain market share AKAIColor TV • Priced very low • How? • Chinese kits- Cheap. • Old for new. • Offered exchange schemes • Prices lowered further • Customer pays the difference • By 1998, was the no. 3 player in the market success story. PRICING

  10. PRICING METHODS 2. Determining demand • Price is related to demand • How sensitive is demand to price • Price elasticity of demand critical • Suppose price is increased by Rs.1 lac of two cars • Maruti 800 • Mercedes. • Where will be more affect on demand • Maruti – 800 Price is highly elastic to demand in Maruti – 800 PRICING

  11. PRICING METHODS Price is highly inelastic to demand in case of Mercedes • Estimating price elasticity of demand is critical. • This depends on • No of substitutes • Habits of consumers • Quality difference • Do buyers really notice the change in price? PRICING

  12. PRICING METHODS 3. Estimating costs. • Price = costs + profit • Costs are of two types • Fixed cost • Variable cost Fixed cost • Do not change with volume sales Examples • Salaries of sales personnel • Cost of building • Cost of trucks. PRICING

  13. PRICING METHODS Variable costs • Vary with sales volume. • Cost of raw material Maruti – 800 • Cost of wheel • Cost of engine • Cost of carburetor Pricing has to be such that it recovers all costs in the long run PRICING

  14. PRICING METHODS 4. Analyzing competitor’s costs prices and offers Pricing has to consider • Competitor’s costs and prices • Image of competitors products • In a price war-    • Winner is the one who has the lowest cost • Do not try to fight on prices if your costs are higher then your competitors PRICING

  15. PRICING METHODS 5. Selecting a pricing method. Earlier we understood: • Customer’ s demand. • Costs • Competitors prices / cost Six methods of pricing • Mark up pricing • Target – return pricing • Perceived- value pricing • Value- pricing • Going- rate pricing • Sealed- bid pricing PRICING

  16. PRICING METHODS 1. Mark – up pricing • Estimate costs • Add profit margin • Arrive at prices Cost + Profit Margin = PRICE • Profit Margin • Depend on many factors • High on seasonal items • Fixed by government • Life saving drugs • Fertilizers • Electricity PRICING

  17. PRICING METHODS 2. TARGET – RETURN PRICING • You investment in a business • You expect a return • Return varies from individual to individual EXAMPLE • Suppose you invest 10 Lac Rs to make mixers • You want 20% return on investment = 0.2 x 10 Lacs = 2 Lacs • Your costs are Rs 16/ mixer No .of mixers to be sold = 50,000 Target – return price = Unit Cost + (desired return x invested capital) Unit Sales PRICING

  18. PRICING METHODS = Rs 16 + 0.20 x 1000000 50,000 = Rs 20 If you sell 50000 mixers at a price of Rs 20, you well earn a return on investment of 20% PRICING

  19. PRICING METHODS 3. Perceived-value pricing • Base price on perceived value • Buyer’s perception of value and not seller’s cost, as the key to pricing . Example HP – Printers • HP – Leader in printers • How to increase sales? • Reduces prices of low end printers • Affordable • Volume has increased • Increased prices of consumables • Ribbons, cartridges • High margins PRICING

  20. PRICING METHODS 4. Value pricing • Low value pricing for a high offering Compaq – Computers • Strong brand • Lowering prices • Competition from local assemblers • Making customers shift from assemblers to branded manufacturers PRICING

  21. 5. Going rate pricing • Basis of price largely on competitor prices • Prices almost identical • Typically in oligopolistic markets Example Airtel, Essar, Reliance – Delhi • Earlier Airtel, Essar • Prices almost identical • When one changes prices • Other follows • Launch of Dolphin – MTNL • Lower monthly charges • Lower airtime changes • Essar, Airtel, Reliance also lower PRICING

  22. PRICING METHODS 6. Sealed – bid prices • Common as “Tenders” • Each company bids a price which is confidential • Company quoting lower prices likely to get business • If you bid very low price, your profit is less • High bid, less chances of getting order • You have to assess what your competitor will bid? PRICING

  23. PRICING METHODS Sealed bid – Example DTC • Runs buses • Requires tyres • Invites bids • Tyre manufacturer bid • CEAT, MRF, Goodyear, Apollo • Each has to put the “Right Price” • To be the lowest • Not very low • Sometimes MRF Wins • Sometimes Goodyear wins • Understanding each other’s strategy in the past situation critical PRICING

  24. Setting the Price The Three Cs Model for Price Setting PRICING

  25. PRICING METHODS 7. Selecting the Final Price • Discussed various pricing methods • Which one will suit the company • Other factors • Psychological Pricing Bata – Example • Shoe price Rs. 999.95 paise • Three – Figure pricing b. Influence of other Marketing – Mix elements • Product quality • Positioning Can Lifebuoy be priced at Rs. 35/- Can Mercedes be priced at Rs. 10 Lacs. PRICING

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