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pricing decisions
Deepak bhattacharya
What is Price?
The amount of money needed to purchase something Price is that which is given in an exchange to acquire goods or services. Price is the only revenue generating element amongst the 4ps, the rest being cost centers.
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What is Pricing?
The evaluation of something in terms of its price Pricing is one of the four Ps of the marketing mix. The other three aspects are product, promotion, and place. Pricing is an important strategic issue because it is related to product positioning.
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Role of Pricing
Pricing affects other marketing mix elements such as product features, channel decisions, and promotion. Price becomes a hub around which the System revolves. Price provides income. Price times the quantity sold results in the total income from a commodity. Price determines the quantity supplied and consumed. Price serves a signal Copyright Welingkars 7 Price transfers ownership DHRM 2009
Pricing Methods
Cost-plus pricing - set the price at the production cost plus a certain profit margin. Target return pricing - set the price to achieve a target return-on-investment. Value-based pricing - base the price on the effective value to the customer relative to alternative products. Psychological pricing - base the price on factors such as signals of product quality, popular price points, and what the consumer perceives to be fair.
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Pricing Objectives
Current profit maximization - seeks to maximize current profit, taking into account revenue and costs. Current profit maximization may not be the best objective if it results in lower long-term profits. Current revenue maximization - seeks to maximize current revenue with no regard to profit margins. The underlying objective often is to maximize long-term profits by increasing market share and lowering costs. Maximize quantity - seeks to maximize the number of units sold or the number of customers served in order to decrease long-term costs as predicted by the experience curve.
Maximize profit margin - attempts to maximize the unit profit margin, recognizing that quantities will be low.
Quality leadership - use price to signal high quality in an attempt to position the product as the quality leader. Partial cost recovery - an organization that has other revenue sources may seek only partial cost recovery. Survival - in situations such as market decline and overcapacity, the goal may be to select a price that will cover costs and permit the firm to remain in the market. In this case, survival may take a priority over profits, so this objective is considered temporary. Status quo - the firm may seek price stabilization in order to avoid price wars and Copyright of profit. 9 maintain a moderate but stable levelWelingkars DHRM 2009
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Note : These steps are interrelated and are not necessarily performed in the above order. Nonetheless, the above list serves to present a starting framework.
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Price Discounts
Quantity discount - offered to customers who purchase in large quantities. Cumulative quantity discount - a discount that increases as the cumulative quantity increases. Cumulative discounts may be offered to resellers who purchase large quantities over time but who do not wish to place large individual orders. Seasonal discount - based on the time that the purchase is made and designed to reduce seasonal variation in sales. For example, the travel industry offers much lower off-season rates. Such discounts do not have to be based on time of the year; they also can be based on day of the week or time of the day, such as pricing offered by long distance and wireless service providers. Cash discount - extended to customers who pay their bill before a specified date. Trade discount - a functional discount offered to channel members for performing their roles. For example, a trade discount may be offered to a small retailer who may not purchase in quantity but nonetheless performs the important retail function. Promotional discount - a short-term discounted price offered to stimulate sales.
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4 cs of pricing
Customers Demand Situations Company - Cost/Marketing Objectives Channels Competition
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Elasticity of Demand
Price elasticity of demand (PED) is defined as the responsiveness of the quantity demanded of a good to a change in its price. Elasticity of Demand is defined as the percentage change in the quantity demanded of a product divided by the percentage change in the price of the product. Elasticity Measure Consumer sensitivity to changes in the price.
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The availability of Substitute goods and services. The Prices relative to a consumers Purchasing Power. Product Durability. The Existence of other Product uses.
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Types of Costs
Types of Costs
Variable Costs
Fixed Costs
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Price Determinants
Stages of a Product Life Cycle Competition Distribution Strategy Promotion Strategy Perceived Quality
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Pricing Limits
Price Too High Little or No Demand Study Price Ceiling and Price Floor Range of Possible Prices Product Costs Boundaries of a product Price too Low or No profits
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Pricing Methods
Cost Oriented Pricing Markup Pricing Break Even Pricing Target Return Pricing Profit Maximization Pricing Key-stoning
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Consumer Access to Services Efficient Network Access for Competitors and Service Providers Sustainable Market Expansion Efficient Allocation of Economic Resources
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Mark Up Pricing
Mark-up pricing is an aspect of average cost pricing in which firms calculate the average cost of a product and add on a mark-up, or profit. Developed by Polish economist Michal Kalecki (1899-1970)
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Profit Maximization
Profit is the difference between a firm's total revenue and its total opportunity cost. Total revenue is the amount of income earned by selling products A Method of setting prices that occur when Marginal revenue equals Marginal Cost. Marginal Revenue is the change in total revenue resulting from a one unit change in sales. Marginal Cost is additional cost associated with producing one more unit of output.
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Key-Stoning
A pricing method of marking merchandise for resell to an amount that is double the wholesale price.
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Q:1 Are there Substitute Ways of Meeting a need? Q:2 Is it Easy to compare Prices? Q:3 Who Pays the Bill? Q:4 How Great is the total expenditure? Q:5 How Significant is the End Benefit Q:6 Is there already a sunk investment related to purchase ?
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Value in pricing focuses on how much will the customer save. Reference Prices are the price the consumer expects to pay and customers may have a reference price.
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Psychological Pricing
Psychological Pricing means setting prices that have special target to appeal to target customers. Price Lining: A pricing technique in which a store to offer all merchandise in a given category at certain prices, such as 100 INR and 200 INR. Odd Even pricing: A form of psychological pricing that suggests buyers are more sensitive to certain ending digits. Prestige Pricing: Setting a high price on a product to attract quality- or status-conscious consumers
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PRICE Strategy
Basic Strategies for Setting Price
Price Skimming
Penetration Pricing
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Price Skimming
Inelastic Demand
Unique Advantages/Superior Legal Protection of Product Technological Breakthrough Blocked Entry to Competitors
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Penetration Pricing
Advantages
Discourages or blocks competition from market entry Boosts sales and provides large profit increases Can justify production expansion
Disadvantages
Requires gear up for mass production Selling large volumes at low prices Strategy to gain market share may fail
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Disadvantages
Strategy may ignore demand and/or cost
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