Developing Price Strategies and Programs

Pricing : A tricky issue

Companies face the following pricing related questions
ƒ How to respond to aggressive price cutters
ƒ How to price the same product when it goes through different
channels
ƒ How to price the same product in different countries
ƒ How to price an improved product while still selling the previous
version
ƒ How to price different components of an offering when the
customer wants to make his own choice of components
 Synonyms for Price

ƒ Rent ƒ Special assessment

ƒ Tuition ƒ Bribe
ƒ Fee ƒ Dues
ƒ Fare ƒ Salary
ƒ Rate ƒ Commission
ƒ Toll ƒ Wage
ƒ Premium ƒ Tax
ƒ Honorarium ƒ Income tax
 Common Pricing Mistakes

ƒ Determine costs and take traditional industry margins

ƒ Failure to revise price to capitalize on market changes
ƒ Setting price independently of the rest of the marketing mix
ƒ Failure to vary price by product item, market segment,
distribution channels, and purchase occasion
 Pricing for the first time

A firm must set a price for

the first time
When it develops a new
product, Segment Example
Ultimate Rolls-Royce
When it introduces its Gold Standard Mercedes-
regular product into a new Benz
distribution channel or Luxury Audi
geographical area, and Special Needs Volvo
When it enters bids on new Middle Buick
contract work. Ease/ Convenience Ford Escort
The firm must decide Me Too, but cheaper Hyundai
where to position its Price Alone Kia
product on quality and
price.
Price Should Align with Value
 Basic Pricing Concepts

ƒ Does the price reflect quality

ƒ Should the company pursue market penetration, market
skimming or any other type of pricing objective
ƒ What discounts (Trade, quantity, Cash) and Allowances
(Advertising, Trade-off) the company wishes to offer its
customers.
ƒ Should prices differ by market segments
 Steps in Setting Price

Select the price objective

Determine demand

Estimate costs

Analyze competitor price mix

Select pricing method

Select final price

Selecting the Pricing Objective

ƒ Survival
ƒ Maximum current profit
ƒ Maximum market share
ƒ Maximum market
skimming
ƒ Product-quality
leadership
 Survival Objective

The following conditions compel a company to go for survival

strategy in pricing:
ƒ Company is plagued with over capacity
ƒ There is intense competition, and
ƒ Consumer wants are changing
Companies recover variable cost and some fixed costs to stay
in business.
Survival is a short – run objective.
The firm must learn how to add value or face extinction.
 Maximum Current Profit Objective

ƒ Estimate demand and costs associated with alternative prices

and choose the price that produces maximum current profit,
cash flow or ROI.
Assumption
The firm has knowledge of its demand and cost functions, in
reality these are difficult to estimate.
Problems
The firm may sacrifice long –run performance by ignoring other
marketing-mix variables, competitors reactions and legal
restraints on price.
 Maximize Market Share Objective

Belief
A higher sales volume will lead to lower unit costs and higher
long-run profits.
Set the lowest price assuming market is price sensitive (Market
Penetration Strategy)
Conditions favoring a low price:
1. The market is highly price-sensitive, and a low price
stimulates market growth;
2. Production and distribution costs fall with accumulated
production experience; and
3. A low price discourages actual and potential competition.
 Maximum Market Skimming Objective

Companies unveiling a new technology or launching a new

product innovation set a high price to skim the market.
Market skimming makes sense under the following conditions:
ƒ A sufficient number of buyers have a high current
demand;
ƒ The unit costs of producing a small volume are not so high
that they cancel the advantage of charging what the traffic
will bear;
ƒ The high initial price does not attract more competitors to
the market;
ƒ The high price communicates the image of a superior
product.
 Product – Quality Leadership Objective

Setting a high price to justify quality leadership

 Pricing in non-profit organisations

Nonprofit and public organizations may adopt other pricing

objectives.
A university aims for partial cost recovery,
A nonprofit hospital may aim for full cost recovery in its pricing.
A nonprofit theater company may price its productions to fill the
maximum number of theater seats.
A social service agency may set a service price geared to the
income of the client.
Whatever the specific pricing objective, businesses that use
price as a strategic tool will profit more than those who simply let
costs or the market determine their pricing.
 Determining Demand

Each price will lead to a different level of demand thus have a

different impact on marketing objectives of the firm.
 Determining Demand

Price Sensitivity

Estimating
Demand Curves

Price Elasticity
of Demand
 Price Sensitivity to Demand
Generally speaking, customers are most price-sensitive to products that cost a
lot or are bought frequently compared to low-cost items or items they buy
infrequently.
They are also less price-sensitive when price is only a small part of the total
cost of obtaining, operating, and servicing the product over its lifetime.
Tom Nagle offers the following list of factors associated with lower price
sensitivity:
ƒ The product is more distinctive
ƒ Buyers are less aware of substitutes
ƒ Buyers cannot easily compare the quality of substitutes
ƒ The expenditure is a smaller part of the buyer's total income
ƒ The expenditure is small compared to the total cost of the end product
ƒ Part of the cost is borne by another party
ƒ The product is used in conjunction with assets previously bought
ƒ The product is assumed to have more quality, prestige, or exclusiveness
ƒ Buyers cannot store the product
Companies that are aiming at only price sensitive customers are foregoing
profits.
 Estimating Demand Curves

Most companies make some attempt to measure their demand curves.

The options available are:
ƒ Statistically analyzing past prices, quantities sold, and other factors
to estimate their relationships.
ƒ Conduct price experiments.
ƒ Ask buyers how many units they would buy at different proposed
prices
In measuring the price-demand relationship, the market researcher
must control for various factors that will influence demand like
The competitor's response
Changes in other marketing-mix factors besides price
 Price Elasticity Of Demand

If demand hardly changes with a small change in price, we say

the demand is inelastic.
If demand changes considerably, demand is elastic.
Demand is likely to be less elastic under the following conditions:
ƒ There are few or no substitutes or competitors;
ƒ Buyers do not readily notice the higher price;
ƒ Buyers are slow to change their buying habits;
ƒ Buyers think the higher prices are justified.
Estimating Costs

Types of Costs

Accumulated
Production

Activity-Based
Cost Accounting

Target Costing
 Cost Terms and Production

ƒ Fixed costs or overheads

ƒ Variable costs
ƒ Total costs
ƒ Average cost
ƒ Cost at different levels of
production
Cost per Unit as a Function of
Accumulated Production
 Experience Curve Pricing

Disadvantages:
Aggressive pricing might give the product a cheap image.
The strategy also assumes that the competitors are weak.
Finally, the strategy leads the company into building more plants
to meet demand while a competitor innovates a lower-cost
technology and obtains lower costs than the market-leader
company, which is now stuck with the old technology.
Most experience curve pricing focuses on manufacturing costs,
while all costs can be improved.
 Differentiated Marketing Offers
Companies selling a differentiated market offerings need to
resort to Activity Based Costing (ABC) instead of standard
accounting.
ABC accounting tries to identify the real costs associated with
serving each customer.
Both variable and overhead costs must be tagged back to each
customer.
 Target Costing

ƒ Costs change with

production scale and
experience.
ƒ They can also
change as a result of
a concentrated effort
by designers,
engineers, and
purchasing agents to
reduce them.
 Analysing Competitor’s Costs, Prices,
and Offers
The firm must take the competitors' costs, prices, and possible
price reactions into account
Depending on how Firms offer in viewed in relation to
competitors – the firm may charge more or less price than
competitors.
The firm must be aware, however, that competitors can change
their prices in reaction to the price set by the firm.
Selecting a pricing method

ƒ Markup pricing
ƒ Target-return pricing
ƒ Perceived-value pricing
ƒ Value pricing
ƒ Going-rate pricing
ƒ Auction-type pricing, and
ƒ Group pricing
 Mark Up Pricing

The most elementary pricing method is to add a standard

markup to the product's cost.
Find out the
ƒ Costs Fixed Costs, Variable costs, and Market demand
ƒ Calculate the unit cost
ƒ Decide the Mark up needed
ƒ Price the product
 Unit costs

Suppose a toaster manufacturer has the following costs and

sales expectations:
Variable cost per unit 10
Fixed cost 300,000
Expected unit sales 50,000
The manufacturer's unit cost is given by:
Fixed cost
Unit costs = Variable cost +
Unit sales

10+ 300,000 / 50,000 = 16

 Mark Up the cost

Now assume the manufacturer wants to earn a 20 percent

markup on sales.
The manufacturer's markup price is given by:
Unit Cost 16
Mark Up Price = Unit cost / 1- desired mark up

= 16/ 1-.2 = 20
 Target Return Pricing
In target-return pricing, the firm determines the price that would
yield its target rate of return on investment (ROI).
Target pricing is used by General Motors, which prices its
automobiles to achieve a 15 to 20 percent ROI.
This method is also used by public utilities, which need to
make a fair return on their investment.
Suppose the toaster manufacturer has invested 1 million in the
business and wants to set a price to earn a 20 percent ROI,
specifically 200,000.
The target-return price is given by the following formula:
Target Return Price =
Unit cost + Desired Return x Invested capital
Unit sales
16 + .2 x 10,00,000/ 50,000 = 20
 Break even volume

The ROI on 10,00,000 is based on a unit sales of 50,000 units.

Most companies that operate their pricing on ROI, they work
on Break even volume

Breakeven volume: Fixed cost/ Price – Variable costs

= 3,00,000
20-10
= 30,000 Units
Break-Even Chart
 Value Pricing

ƒ Perceived value pricing

ƒ Value pricing
ƒ Going rate pricing
ƒ Auction type pricing
Perceived Value Pricing
 Auction-Type Pricing

ƒ English auctions (Ascending bids)

ƒ Dutch auctions (Descending bids)
ƒ Sealed-bid auctions
ƒ Group Pricing (Motorola)
 Selecting the Final Price
ƒ Psychological pricing
Price and Quality Leadership perception
ƒ Gain and risk sharing
The influence of other marketing mix elements
ƒ Brands with average relative quality but high relative advertising
budgets were able to charge premium prices. Consumers apparently
were willing to pay higher prices for known products than for
unknown products.
ƒ Brands with high relative quality and high relative advertising
obtained the highest prices. Conversely, brands with low quality and
low advertising charged the lowest prices.
ƒ The positive relationship between high prices and high advertising
held most strongly in the later stages of the product life cycle for
market leaders.
Price discounts and allowances
Thank You!