Issues in Pricing

1. Issues in Pricing

2. Useful Price terms Gross Revenue Net Revenue Gross Margin Contribution Break-Even Volume

3. Useful Price terms FOB : Free on Board FOR : Free on Rail CIF : Cost Insurance Freight

4. Useful Price Concepts Reservation Price Zone of agreement Customer Surplus

5. Useful Price Concepts Price Elasticity Price Sensitivity Customers are price sensitive to products that cost a lot or are bought frequently. They are less price sensitive to Products that cost less or are bought infrequently. They are also less price sensitive to products that form a small Part of the total cost that they are spending on a particular need / want Demand is inelastic when (1) there are few substitute or competitors (2) buyers do not notice higher price (3) Buyers feel price increase is justified (4) buyers are slow to change their buying habits. There could be price indifference bands within which price changes have little or no effect.

6. Price Elasticity Formula

7. Useful Price Concepts Administered Price Mechanism (APM) explicit implicit

8. Administered Price Mechanisms (APM) : regulation of price structure by the government (i) the price may be set by some government agency like the Bureau of Industrial Costs and prices (BICP) or the Tariff Commission and the firm has to abide by it - e.g. Rs.1 per kwh to SEBs by NTPC as set by power ministry (ii) the price may be set by a firm within the framework or on basis of a formula given by the government. e.g. set a tariff that allows 16% rate of return (iii) the same efficiency produces apparently higher return on depreciated plants • Implicit administered price mechanisms : Tax concessions, amortisation of • license fees, tax breaks for investments available for e.g. to the infrastructure • industries such as telecom indirectly influence prices and competition.

9. Useful Price Concepts Direct Indirect Price Discrimination Temporal

10. Direct Price Discrimination - customer segment pricing – electricity – residential and industrial use - product form pricing – Dettol hard soap different from liquid soap; satchets vs bottle - image pricing – Haute couture products and ego sensitive products such as perfumes and expensive cars priced differently - location pricing – Movie tickets in PVR/INOX different from other theatres Indirect Price Discrimination - Quantity discounts - Block Pricing e.g. landline telephone in bimonthly bills Temporal Price Discrimination - telephones time of day - books – first hardcover, then paper back, then economy editions – price skimming

11. Useful Price Concepts Bundling Reservation Price Table products S e g m e n t s B A 12 Y 4 4 Z 12

12. Bundling Two products A, B; Two equal segments – Y,Z Variable cost of A < 4, B < 4 As other forms of discrimination among Y,Z is difficult P(A) = 12; P(B) = 12; Z do not buy A, Y do not buy B Bundling Offer – P(A) = 12, P(B) = 12, P(A,B) = 16 All buy both A,B

13. Useful Price Concepts Reference Price Cartels / Collusive pricing

14. Generic pricing strategies market skimming market penetration value for money

15. Industrial pricing methods published list prices competitive bidding cost-plus pricing

16. NOBLE and GRUCAIndustrial pricing

17. Price – Quality Matrix Price High Price Medium Price Low High Value Strategy Premium Strategy Super Value Strategy Qlty High Qlty Med OverCharging Strategy Medium Value Strategy Good Value Strategy Qlty Low Economy Strategy Rip Off Strategy False Economy Strategy

18. Setting Pricing Policy • Selecting the pricing • objective 2. Determining demand 3. Estimating Costs 4. Analyzing Competitors’ costs, prices, and offers 5. Selecting a pricing Method 6. Selecting the final price

19. Setting the pricing structure or pricing policy • establish pricing objectives (survival, maximum profit, maximum current sales, maximum sales growth (penetration aspect), maximum skimming strategy, product-quality leadership • estimate demand, and demand curve through sensitivity analysis and elasticity considerations • estimate cost structure and cost variation at various output levels • examine competitors costs, prices, policies, offers • choose a pricing method • choose pricing structure

20. Selecting the Pricing Objective Survival – overcapacity, intense competition, changing consumer wants, short term objective Maximize current profit – may sacrifice long run performance Maximize Market share – experience curve – falling cost, market penetration pricing, consumer is price sensitive, low price discourages competition Maximize Market skimming – high price does not attract new entrants, high price indicates superior product Product Quality leadership – Maytag Partial Cost Recovery – Universities with grants

21. Determine Demand Establish Demand Curve – statistics on past data, price experiments, buy intention curve (ask)

22. Estimating Costs Variable Cost, Fixed Cost, Total Cost, Average Cost (= Total cost / No of units in Production) Learning Curve: Decline in average cost with accumulated production experience is called experience curve or learning curve Activity Based Costing (instead of standard cost accounting) : To find real costs of serving each customer Target Costing – First Price is determined from its appeal and competitor prices Next target cost is obtained after deducting profit Achieve target cost by examining design, engg, m/f, sales If target cost is is not possible then drop product

23. Analyzing Competitor’s Costs, Prices, Offers Relative to competitors offering of benefits and their prices what should our firm offer given our benefits

24. Selecting a Pricing Method Ceiling Price – Unique Product Features; Orienting Point – Competition and substitutes; Floor Price - Costs Markup Pricing Target return Pricing Perceived Value Pricing

25. Selecting a Pricing Method Value Pricing Going Rate Pricing Auction type Pricing Group Pricing

26. Markup Pricing = Markup on sales Price = Unit Cost /(1- Desired Markup) Markup Pricing works only if the marked up price brings in the expected level of sales Target Return Pricing Price = Unit Cost + (desired return * invested capital)/ (total sales in units) One example is that it is used by General Motors

27. Perceived Value Pricing (Offer more value than competitor and demonstrate it) Perceived Value Price = F ( buyer’s image of product, channel deliverables, warranty quality, customer support, firm reputation, trustworthiness) Dupont is a major practitioner Price buyers – stripped down product Buyers Value buyers – keep innovating for these buyers Loyal buyers – relationship building and customer initmacy

28. Value Pricing Low price for high quality offering e.g. WalMart. It is as much a philosophy as a method One pricing strategy based on Value Pricing is EDLP Going Rate Pricing Go by competitor’s prices Charge same as, less than or more than competitor’s prices Follow the leader pricing is another example as in Commodity oligopolies such as steel, paper, fertilizers

29. Auction Type Pricing One seller – many buyers, seller puts an item for sale and bidders raise prices to top price e.g. real estate Group Pricing Group together and buy at discounts e.g. cooperatives

30. Selecting Final Price • Factor to consider • psychological pricing – price-quality combination, reference price, odd number pricing ($299/) • Gain and risk sharing pricing -- Large IT orders the buyer may not realize gains; in which case • seller guarantees differences – full or part of it • - Influence of other Marketing Mix elements – such as advertising ( advt-awareness-high price) • - Company pricing policies

31. Price Adaptations -- Geographical -- Price Discounts and Allowances - Cash discount, quantity discount, functional discount (given to intermediaries if they perform certain functions), seasonal discount (off-peak buying), allowances (trade allowance to resellers for participating in trade-ins, promotion allowance given to resellers for participating in advertisement and promotion programs of the firm) -- Promotional pricing - loss leader pricing, special event pricing ( Going to school program of Bata), Cash rebates (as in jeweler shops) low interest financing (0% for 12 months), longer payment terms, warranties / service contracts, psychological discounting (price high and then discount) -- Price discrimination -- Product Mix Pricing - Product line pricing, optional feature pricing (power windows for car), captive product pricing (razor is low price and blade is high price), two part pricing (telephones), bundling

32. Influences on Pricing • Product Costs • Product Value to Customer • Competition • Customer bargaining power • Government Intervention • Bounds of Fairness / Relationship Mktg • Objective of Pricing