PRICING

STRATEGIES
 MARKET CLASSIFICATION
AND PRICING

 Pricing is engulfed by uncertainty. You have to know the

costs to price an item, to know the costs you need to
know the demand which is uncertain. Certain acts of god
further complicates the uncertainty.
 Pricing depends on the market in which the firm operates.
 Type of product and number of competitors must be
considered
 MARKET CLASSIFICATION
AND PRICING
Differentiated
Market Configuration Identical Product
Product
Monopolistic
Many buyers & sellers Perfect competition
competition
Differentiated
Many buyers, few sellers Pure Oligopoly
Oligopoly
Differentiated
Few buyers, many sellers Pure Oligopsony
Oligopsony

Many buyers, one seller Monopoly

MARKET CLASSIFICATION AND PRICING
MARKET CLASSIFICATION AND PRICING

 Pure Competition: Many buyers and many sellers -

Identical product. Ex.: Commodities market, stock
market. Firm cannot raise above the market price. Firms
do not have control over pricing
MARKET CLASSIFICATION AND PRICING

 Pure Competition: Many buyers and many sellers -

Identical product. Ex.: Commodities market, stock
market. Firm cannot raise above the market price. Firms
do not have control over pricing
 Monopoly: Many buyers and one seller - Identical
product or service. Usually public utilities fall into this
category. Firms have total or complete control over
pricing
MARKET CLASSIFICATION AND PRICING

 Pure Competition: Many buyers and many sellers -

Identical product. Ex.: Commodities market, stock
market. Firm cannot raise above the market price. Firms
do not have control over pricing
 Monopoly: Many buyers and one seller - Identical
product or service. Usually public utilities fall into this
category. Firms have total or complete control over
pricing
 Monopolistic Competition: Many buyers and many sellers
- Differentiated products. Machine tool marketers. The
firms have greatest price-setting freedom because it is not
going to affect competitors
MARKET CLASSIFICATION AND PRICING
MARKET CLASSIFICATION AND PRICING

 Oligopoly Market: Many buyers, few sellers - They do

not enjoy price-setting freedom as competitors
immediately reciprocate to price changes.
MARKET CLASSIFICATION AND PRICING

 Oligopoly Market: Many buyers, few sellers - They do

not enjoy price-setting freedom as competitors
immediately reciprocate to price changes.
 Oligopsony Market: Few buyers, many sellers - The
price-setting freedom is similar to the one experienced by
monopolistic competition market.
 PRICE-SETTING THEORY

Marginal Cost

Demand
Rupees

Marginal
Revenue

8 Qty of output
 PRICE-SETTING THEORY
 SUPPLY - DEMAND PRICING: It is the price set
where the extra revenue received from selling the last unit
of product is equal to the cost of producing it (marginal
revenue = marginal cost)
Marginal Cost

Demand
Rupees

Marginal
Revenue

8 Qty of output
PRICE-SETTING THEORY
 PRICE-SETTING THEORY

 COST-PLUS PRICING: This pricing method is nothing

but cost + ‘fair’ profit percentage. Cost can be actuals,
estimated or standard. Based mainly on supply conditions
not on demand conditions.
 PRICE-SETTING THEORY

 COST-PLUS PRICING: This pricing method is nothing

but cost + ‘fair’ profit percentage. Cost can be actuals,
estimated or standard. Based mainly on supply conditions
not on demand conditions.
 BREAK-EVEN PRICING: This pricing method studies
various revenues and BEP at higher prices and lower
prices and decides the better or best one.
 PRICE-SETTING THEORY
Total
Revenue I Total
Revenue II
$ in thousands

Total
Cost
BEP II

BEP I
Total Variable Costs

Total Fixed Costs

Output
PRICING STRATEGIES
 PRICING STRATEGIES

 EXPERIENCE CURVE PRICING: The direct labor hours

required to perform a task decreases by a constant percentage as the
number of times the task performed doubles. This is learning curve.
 PRICING STRATEGIES

 EXPERIENCE CURVE PRICING: The direct labor hours

required to perform a task decreases by a constant percentage as the
number of times the task performed doubles. This is learning curve.

✴ BCG’s Experience Curve Pricing: It says prices (in Rs.) must

be reduced as the industry gains experience as it produces more
and more units, to maintain competitive stability.
 PRICING STRATEGIES

 EXPERIENCE CURVE PRICING: The direct labor hours

required to perform a task decreases by a constant percentage as the
number of times the task performed doubles. This is learning curve.

✴ BCG’s Experience Curve Pricing: It says prices (in Rs.) must

be reduced as the industry gains experience as it produces more
and more units, to maintain competitive stability.

✴ Different products and different industries follow different

experience curves. Silicon Transistor industry stabilized at 77%
slope. IC chips have 73% slope.
 PRICING STRATEGIES

 EXPERIENCE CURVE PRICING: The direct labor hours

required to perform a task decreases by a constant percentage as the
number of times the task performed doubles. This is learning curve.

✴ BCG’s Experience Curve Pricing: It says prices (in Rs.) must

be reduced as the industry gains experience as it produces more
and more units, to maintain competitive stability.

✴ Different products and different industries follow different

experience curves. Silicon Transistor industry stabilized at 77%
slope. IC chips have 73% slope.

✴ Prices are predictable. If you know competitor’s experience

curve and your industry’s experience curve will help you to
compare your competitor’s price and pitch your product
accordingly.
 EXPERIENCE CURVE PRICING
400

350

300

250

200

150

100

50

0 40 80 120 160 200

 EXPERIENCE CURVE PRICING
400

350

300

250

200

150

100

50

0 40 80 120 160 200

NEW PRODUCT PRICING
 NEW PRODUCT PRICING

 PRICE SKIMMING
 NEW PRODUCT PRICING

 PRICE SKIMMING

✴ The buyer is innovator, early adopter, a risk taker

 NEW PRODUCT PRICING

 PRICE SKIMMING

✴ The buyer is innovator, early adopter, a risk taker

✴ Supplier has patent and hard-to-copy innovation i.e. a

technology that is too difficult and time consuming to reverse-
engineer or a technique which requires time to gain expertise
 NEW PRODUCT PRICING

 PRICE SKIMMING

✴ The buyer is innovator, early adopter, a risk taker

✴ Supplier has patent and hard-to-copy innovation i.e. a

technology that is too difficult and time consuming to reverse-
engineer or a technique which requires time to gain expertise

✴ Variable costs are a high proportion of total costs

 NEW PRODUCT PRICING

 PRICE SKIMMING

✴ The buyer is innovator, early adopter, a risk taker

✴ Supplier has patent and hard-to-copy innovation i.e. a

technology that is too difficult and time consuming to reverse-
engineer or a technique which requires time to gain expertise

✴ Variable costs are a high proportion of total costs

✴ Barriers to competitive entry are high - financial or marketing or

other types
NEW PRODUCT PRICING
 NEW PRODUCT PRICING

 MARKET PENETRATION
 NEW PRODUCT PRICING

 MARKET PENETRATION

✴ With heavy fixed costs and low variable costs, common sense is
to build sales volume and economies of scale quickly
 NEW PRODUCT PRICING

 MARKET PENETRATION

✴ With heavy fixed costs and low variable costs, common sense is
to build sales volume and economies of scale quickly

✴ Many close substitutes are available, low price will discourage

competition
 NEW PRODUCT PRICING

 MARKET PENETRATION

✴ With heavy fixed costs and low variable costs, common sense is
to build sales volume and economies of scale quickly

✴ Many close substitutes are available, low price will discourage

competition

✴ In this market, customers are conservative and traditional and

less risk takers
 NEW PRODUCT PRICING

 MARKET PENETRATION

✴ With heavy fixed costs and low variable costs, common sense is
to build sales volume and economies of scale quickly

✴ Many close substitutes are available, low price will discourage

competition

✴ In this market, customers are conservative and traditional and

less risk takers

✴ Easy to copy product and few barriers for competitors to enter

PRODUCT-LINE PRICING
 PRODUCT-LINE PRICING

 When a complementary relationship exists within the product line,

the demand for one product may be enhanced by a lower price on
another.
 PRODUCT-LINE PRICING

 When a complementary relationship exists within the product line,

the demand for one product may be enhanced by a lower price on
another.

 Ex. Hospital equipment, Metal strapping machine, JCBs...

LEASING
 LEASING

 Roughly 27% of of all private-sector investment in equipment is

financed through leasing
 LEASING

 Roughly 27% of of all private-sector investment in equipment is

financed through leasing

 A lease is a contract through which the owner of the equipment, in

return for a periodic rental payment, allows the lessee to use the
equipment
 LEASING

 Roughly 27% of of all private-sector investment in equipment is

financed through leasing

 A lease is a contract through which the owner of the equipment, in

return for a periodic rental payment, allows the lessee to use the
equipment

 From batteries to fork-lift trucks to an entire crores worth rice mill -

every thing is leased
 LEASING

 Roughly 27% of of all private-sector investment in equipment is

financed through leasing

 A lease is a contract through which the owner of the equipment, in

return for a periodic rental payment, allows the lessee to use the
equipment

 From batteries to fork-lift trucks to an entire crores worth rice mill -

every thing is leased

 Two types of leases

 LEASING

 Roughly 27% of of all private-sector investment in equipment is

financed through leasing

 A lease is a contract through which the owner of the equipment, in

return for a periodic rental payment, allows the lessee to use the
equipment

 From batteries to fork-lift trucks to an entire crores worth rice mill -

every thing is leased

 Two types of leases

✴ Financial (full-payout) leases: Long term, non-cancelable

contracts, fully amortized during the term. (production
machinery). Lessee pays operating expenses and liabilities of
equipment
LEASING
 LEASING

 Two types of leases

 LEASING

 Two types of leases

✴ Operating leases: Short term, cancelable contracts, not fully

amortized. Lessor (owner) pays operating expenses and
liabilities of ownership (JCB)
 LEASING

 Two types of leases

✴ Operating leases: Short term, cancelable contracts, not fully

amortized. Lessor (owner) pays operating expenses and
liabilities of ownership (JCB)

 Economic benefits to lessee

 LEASING

 Two types of leases

✴ Operating leases: Short term, cancelable contracts, not fully

amortized. Lessor (owner) pays operating expenses and
liabilities of ownership (JCB)

 Economic benefits to lessee

✴ Avoiding capital lock-up (cash purchase cost of an asset)

 LEASING

 Two types of leases

✴ Operating leases: Short term, cancelable contracts, not fully

amortized. Lessor (owner) pays operating expenses and
liabilities of ownership (JCB)

 Economic benefits to lessee

✴ Avoiding capital lock-up (cash purchase cost of an asset)

✴ Improved cash flow and more working capital available

 LEASING

 Two types of leases

✴ Operating leases: Short term, cancelable contracts, not fully

amortized. Lessor (owner) pays operating expenses and
liabilities of ownership (JCB)

 Economic benefits to lessee

✴ Avoiding capital lock-up (cash purchase cost of an asset)

✴ Improved cash flow and more working capital available

✴ Free from capital equipment obsolescence tension

 LEASING

 Two types of leases

✴ Operating leases: Short term, cancelable contracts, not fully

amortized. Lessor (owner) pays operating expenses and
liabilities of ownership (JCB)

 Economic benefits to lessee

✴ Avoiding capital lock-up (cash purchase cost of an asset)

✴ Improved cash flow and more working capital available

✴ Free from capital equipment obsolescence tension

 Sometimes, manufacturer himself act as lessor - John Deere for farm

equipment and few pump companies too
LEASING
 LEASING
 Reasons for business marketer to get involved in leasing:
 LEASING
 Reasons for business marketer to get involved in leasing:

✴ It gives the marketer a chance to expand into a segment where

otherwise the customers could not have afforded the product
 LEASING
 Reasons for business marketer to get involved in leasing:

✴ It gives the marketer a chance to expand into a segment where

otherwise the customers could not have afforded the product

✴ It also helps the marketer to target the segment which has not
made an outright purchase considering the risk involved
 LEASING
 Reasons for business marketer to get involved in leasing:

✴ It gives the marketer a chance to expand into a segment where

otherwise the customers could not have afforded the product

✴ It also helps the marketer to target the segment which has not
made an outright purchase considering the risk involved

✴ It helps the marketer, many times, to sell complementary

products in that product line
 LEASING
 Reasons for business marketer to get involved in leasing:

✴ It gives the marketer a chance to expand into a segment where

otherwise the customers could not have afforded the product

✴ It also helps the marketer to target the segment which has not
made an outright purchase considering the risk involved

✴ It helps the marketer, many times, to sell complementary

products in that product line

✴ Increase the chances for future leases or purchases from the

supplier
 LEASING
 Reasons for business marketer to get involved in leasing:

✴ It gives the marketer a chance to expand into a segment where

otherwise the customers could not have afforded the product

✴ It also helps the marketer to target the segment which has not
made an outright purchase considering the risk involved

✴ It helps the marketer, many times, to sell complementary

products in that product line

✴ Increase the chances for future leases or purchases from the

supplier

 Problem with leasing strategy is that salespeople are specialists in

technical aspects but not in financial aspects (Xerox - Consulting
Service Representative for leasing and rental options and Sold
Equipment Representative for outright purchases.
COMPETITIVE BIDDING
 COMPETITIVE BIDDING
 This refers to situation where the buyer asks two or more competing
suppliers to submit or quote prices and associated data on a
proposed purchase or contract
 COMPETITIVE BIDDING
 This refers to situation where the buyer asks two or more competing
suppliers to submit or quote prices and associated data on a
proposed purchase or contract

 Main intention of bidding is to obtain most reasonable prices

 COMPETITIVE BIDDING
 This refers to situation where the buyer asks two or more competing
suppliers to submit or quote prices and associated data on a
proposed purchase or contract

 Main intention of bidding is to obtain most reasonable prices

 Price reduction is not the only objective or reason for undertaking

bidding, other reasons include:
 COMPETITIVE BIDDING
 This refers to situation where the buyer asks two or more competing
suppliers to submit or quote prices and associated data on a
proposed purchase or contract

 Main intention of bidding is to obtain most reasonable prices

 Price reduction is not the only objective or reason for undertaking

bidding, other reasons include:

✴ Public institutions bid to avoid accusations of ‘rigging’ purchase

price
 COMPETITIVE BIDDING
 This refers to situation where the buyer asks two or more competing
suppliers to submit or quote prices and associated data on a
proposed purchase or contract

 Main intention of bidding is to obtain most reasonable prices

 Price reduction is not the only objective or reason for undertaking

bidding, other reasons include:

✴ Public institutions bid to avoid accusations of ‘rigging’ purchase

price
✴ The temptation of supplier to illicitly influence the purchase
officer is eliminated
 COMPETITIVE BIDDING
 This refers to situation where the buyer asks two or more competing
suppliers to submit or quote prices and associated data on a
proposed purchase or contract

 Main intention of bidding is to obtain most reasonable prices

 Price reduction is not the only objective or reason for undertaking

bidding, other reasons include:

✴ Public institutions bid to avoid accusations of ‘rigging’ purchase

price
✴ The temptation of supplier to illicitly influence the purchase
officer is eliminated
✴ By minimizing the cost, purchase officer is improving the profits
 COMPETITIVE BIDDING
 This refers to situation where the buyer asks two or more competing
suppliers to submit or quote prices and associated data on a
proposed purchase or contract

 Main intention of bidding is to obtain most reasonable prices

 Price reduction is not the only objective or reason for undertaking

bidding, other reasons include:

✴ Public institutions bid to avoid accusations of ‘rigging’ purchase

price
✴ The temptation of supplier to illicitly influence the purchase
officer is eliminated
✴ By minimizing the cost, purchase officer is improving the profits
✴ In a ‘straight re-buy’ situations, competitive bids acts as cross-
check
COMPETITIVE BIDDING
 COMPETITIVE BIDDING

 Price reduction is not the only objective or reason for undertaking

bidding, other reasons include:
 COMPETITIVE BIDDING

 Price reduction is not the only objective or reason for undertaking

bidding, other reasons include:

✴ In a ‘new-task’ purchase situation, price information obtained

through bids come in handy
 COMPETITIVE BIDDING

 Price reduction is not the only objective or reason for undertaking

bidding, other reasons include:

✴ In a ‘new-task’ purchase situation, price information obtained

through bids come in handy
✴ Buyer can assess range of prices in the market
 COMPETITIVE BIDDING

 Price reduction is not the only objective or reason for undertaking

bidding, other reasons include:

✴ In a ‘new-task’ purchase situation, price information obtained

through bids come in handy
✴ Buyer can assess range of prices in the market
✴ Buyer can learn who and under what conditions, lowest price is
provided
COMPETITIVE BIDDING
 COMPETITIVE BIDDING

 There are three types of bidding procedures according to the level of

formalization: from least formal to highly formal - Informal bidding,
Open bidding and Closed bidding
 COMPETITIVE BIDDING

 There are three types of bidding procedures according to the level of

formalization: from least formal to highly formal - Informal bidding,
Open bidding and Closed bidding

 Informal bidding - salespeople are asked to stop-by, briefed about

the purchase and asked to quote. This can be done on phone for few
simple purchases. This happens in purchases of lesser cost.
 COMPETITIVE BIDDING

 There are three types of bidding procedures according to the level of

formalization: from least formal to highly formal - Informal bidding,
Open bidding and Closed bidding

 Informal bidding - salespeople are asked to stop-by, briefed about

the purchase and asked to quote. This can be done on phone for few
simple purchases. This happens in purchases of lesser cost.

 Open bidding - Here specifications are drawn up, suppliers

contacted, final date for written submission drafted. If supplier bids
before the date, buyer sometimes opens the bid and can ask the
supplier in case of any changes possible? This is risky and should be
avoided.
 COMPETITIVE BIDDING

 There are three types of bidding procedures according to the level of

formalization: from least formal to highly formal - Informal bidding,
Open bidding and Closed bidding

 Informal bidding - salespeople are asked to stop-by, briefed about

the purchase and asked to quote. This can be done on phone for few
simple purchases. This happens in purchases of lesser cost.

 Open bidding - Here specifications are drawn up, suppliers

contacted, final date for written submission drafted. If supplier bids
before the date, buyer sometimes opens the bid and can ask the
supplier in case of any changes possible? This is risky and should be
avoided.

 Closed bidding - Here sealed tenders are submitted which are

opened in public to avoid any sort of discrepancies in bidding.
COMPETITIVE BIDDING
 COMPETITIVE BIDDING

 Formal Bidding Procedures: RFP or RFQ or an Invitation to Bid.

This form has:
 COMPETITIVE BIDDING

 Formal Bidding Procedures: RFP or RFQ or an Invitation to Bid.

This form has:

✴ Specifications - Product, Service and Shipping

 COMPETITIVE BIDDING

 Formal Bidding Procedures: RFP or RFQ or an Invitation to Bid.

This form has:

✴ Specifications - Product, Service and Shipping

✴ Quantities, Weights
 COMPETITIVE BIDDING

 Formal Bidding Procedures: RFP or RFQ or an Invitation to Bid.

This form has:

✴ Specifications - Product, Service and Shipping

✴ Quantities, Weights

✴ Date of formal opening of bid

 COMPETITIVE BIDDING

 Formal Bidding Procedures: RFP or RFQ or an Invitation to Bid.

This form has:

✴ Specifications - Product, Service and Shipping

✴ Quantities, Weights

✴ Date of formal opening of bid

✴ Bond or tender amount (token amount) acts as guarantee

 COMPETITIVE BIDDING

 Formal Bidding Procedures: RFP or RFQ or an Invitation to Bid.

This form has:

✴ Specifications - Product, Service and Shipping

✴ Quantities, Weights

✴ Date of formal opening of bid

✴ Bond or tender amount (token amount) acts as guarantee

✴ Labor and material performance bond (about 50% of bid)