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Week 5

Pricing Strategies

Lecture Outline

Defining Pricing, its Objectives

Factors affecting Pricing


Procedures for Setting the Price

Types of Pricing Strategies

Learning Outcomes

To understand how consumer process and evaluate prices


To understand how should a company set prices initially for products &
services
To understand that when company should initiate a price changes
To understand the decision on how much of the strategic pricing gap between
cost and perceived value to capture.

Gillette Commands a
Price Premium

Price

Pricing is a fundamental aspect of financial modeling, and is one of the four


Ps of the marketing mix .
Price is the only revenue generating element amongst the four Ps , the rest
being cost centers

A well chosen price should do three things:


Achieve the financial goals of the company (e.g., profitability)
Fit the realities of the marketplace (Will customers buy at that price?)
Support a product's positioning and be consistent with the other variables in
the marketing mix.

Price is influenced by the type of distribution channel used, the type of


promotions used, and the quality of the product
Price will usually need to be relatively high if manufacturing is expensive,
distribution is exclusive, and the product is supported by extensive advertising
and promotional campaigns
A low price can be a viable substitute for product quality, effective
promotions, or an energetic selling effort by distributors
Pricing is the process of determining what a company will receive in
exchange for its products. Pricing factors are manufacturing cost, market
place, competition, market condition, quality of product.

Price

Synonyms for Price

Rent

Tuition
Fee

Fare
Rate

Toll
Premium

Honorarium

Special assessment
Bribe
Dues
Salary
Commission
Wage
Tax

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
Failure to identify the competitive forces acting in the market place.
Failure to sense the customer perceptions about the product.

Factors Affecting Pricing


Cost of the Product or Service, distribution involved & promoting
the product
Benefits to be transferred to customers in forms of discounts &
premiums

ROI
Maximize Profits
Competitors Price
Government Regulation
Market Share

Setting The Price

Select the price objective


Determine demand
Estimate costs
Analyze competitor price mix

Select pricing method


Select final price

Step 1: Selecting the Pricing Objective

Survival
Maximum Current Profit
Maximum Market Share
Maximum Market Skimming
Product-Quality Leadership

Step 2: Determining Demand

Price Sensitivity
Estimating
Demand Curves
Price Elasticity
of Demand

Inelastic and Elastic Demand

Factors Leading to Less Price Sensitivity

The product is more distinctive


Buyers are less aware of substitutes
Buyers cannot easily compare the quality of substitutes
The expenditure is a smaller part of buyers total income
The expenditure is small compared to the total cost of the end product
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
Buyers cannot store the product

Step 3: Estimating Costs

Types of Costs
Accumulated
Production
Activity-Based
Cost Accounting
Target Costing

Cost Terms and Production

Fixed costs
Variable costs
Total costs
Average cost
Cost at different levels
of production

Step 4 Analyze Competitors Price Mix

Firm must take into consideration the competitors price mix to note the
reactions.
It depends upon the firm to charge more, the same or less than competitor.
Whether competitor reacts in a standard way, or take it as a fresh challenge
must be accounted along with his recent sales, customer loyalty and corporate
objectives.
It depends upon the competitor what are his pricing objectives whether he
wants large market share or higher profits and then accordingly marketer should
try to set the price.

Step 5: Selecting a Pricing Method

Markup Pricing
Target-Return Pricing
Perceived-value Pricing
Value Pricing
Going-Rate Pricing
Auction-Type Pricing

Break-Even Chart

Auction-Type Pricing

English auctions
(Ascending Bids)

Dutch auctions
(Descending Bids)

Sealed-bid auctions

Step 6: Selecting the Final Price

Impact of other marketing activities (Brands quality, advertising


relative to the competition,)

Company pricing policies (Average quarterly balance by banks,


cancellation charges on tickets. Regulation & collusion is important)

Gain-and-risk sharing pricing ( product has a high perceived level of


risk )

Impact of price on other parties (dealers, distributors, suppliers,


competitors & government)

Price-Adaptation Strategies

Geographical Pricing
Discounts/Allowances
Promotional Pricing

Differentiated Pricing

Cont..

Countertrade

Discounts/ Allowances

Barter

Cash discount

Compensation deal

Quantity discount

Buyback arrangement

Functional discount

Offset

Seasonal discount
Allowance

Promotional Pricing Tactics


Loss-leader pricing
Special-event pricing
Cash rebates
Low-interest financing

Longer payment terms


Warranties and service
contracts
Psychological discounting

Cont.

Special festival pricing


by
Coca-Cola on the
occasion of Ramzan in
Pakistan.

Differentiated Pricing (To accommodate, customers,


products & locations)
A company sells a product or service at two or more prices that do not reflect a
difference in costs.
In 1st degree of discrimination seller charges separate price depending on intensity
of demand.
In 2nd degree of discrimination seller charges less from buyers who buy large
volume.
In 3rd degree of discrimination seller charges different amount from different
buyers.

Customer-Segment Pricing
Product-Form Pricing
Image Pricing
Channel Pricing
Location Pricing
Time Pricing
Yield Pricing

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

Increasing Prices

Delayed quotation pricing


Escalator clauses
Unbundling
Reduction of discounts

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

For U To Take a Decision?

Is the right price a fair price?

Take a position:
1.

Prices should reflect the value that


consumers are willing to pay.

or

2. Prices should primarily just reflect the cost


involved in making a product.