PRICING

Factors Influencing Pricing

1) Price Quality Relationship: Customers use price as an indicator of quality particularly for products where objective measurement of quality is not possible such as drinks and perfumes.

2) Product Line Pricing: Some companies prefer to extend their product lines rather than reduce prices of existing brands in face of price competition.

 Explicability: The company should be able to justify the price it is charging especially if it is on the higher side.

 Competition: a company should be able to anticipate reaction of a competitor to its pricing policies and moves.

 Negotiating margins: In some markets customers expect a price reduction. Price paid is different from list price. In industrial goods this difference can be accounted for by order size discounts, competitive discounts, fast payment discounts etc.

Effect of distributors and retailers

When products are sold through intermediaries and retailers, the list price should reflect the margins required by them

Political Factors
Political factors may act as force to bring down prices.

Earning very high profits

It is not wise to earn extraordinary profits even if current circumstances allow the company to do so. It helps to keep competitors away for long.

 Charging very low prices: Customers come to believe that adequate quality can be provided only at the prices being charged by major ccompanies.

The Process of Pricing

Selecting Pricing Objective

Determine Demand

Estimate costs

Analyze Competition

Select Pricing Method

Select final Price

Pricing Objectives

Determining Demand
Understand factors that affect price sensitivity Estimate demand curves Understand price elasticity of demand
Elasticity Inelasticty

Conditions under which customers are less price sensitive

Product is more distinctive Buyers are less aware of substitutes Buyers cannot easily compare quality of substitutes The expenditure is a lower part of buyers total income The expenditure is small compared to the total cost

 Part of the cost is borne by another party The product is used with assets previously bought The product is assumed to have more quality, prestige, or exclusiveness Buyers cannot store the product

Estimating Costs
Types of costs and levels of production must be considered Accumulated production leads to cost reduction via the experience curve Differentiated marketing offers create different cost levels

Analyze Competition
Firms must analyze the competition with respect to: Costs Prices Possible price reactions Pricing decisions are also influenced by quality of offering relative to competition

Select Pricing Method

1) Cost Oriented Pricing: One of the method of pricing a product is on the basis of its cost. The company can either set the price on the basis of the total cost of the product or on the basis of its variable cost.

a) Full cost pricing

FC + VC + Desired Profit = Cost If estimated sales go down the FC per unit will go up making the product expensive. Drawbacks: It is illogical as sales estimates are made before the price is set. It focuses on internal cost and not customers ability n willingness to pay. Technical problems in setting up the FC.

b) Direct Cost Pricing

The desired profit is added to the direct cost to obtain a price. It does not cover full costs so company fairs losses. It works if there is idle capacity for products and services which cannot be stored.

2) Competitor Oriented Pricing

Another method of pricing a product is on the basis of its competitors. A company can operate at the same price level if its products are undifferentiated. It may adopt a more aggressive stance by lowering its price to win bids or to a get a larger market share

a) Going Rate Pricing

There is no product differentiation. There is some sort of perfect competition. All companies charge the same price and small players follow the price set by the market leaders.

b) Competitive Bidding
The usual process includes drawing up a detailed specification for a product and putting up a tender. Potential suppliers quote a price which is confidential to themselves and the buyer. As the quoted price will increase, profits will rise but the probability of winning the bid will go down. Expected profit = Profit X probability of winning

3) Market Oriented Pricing

Price should be in line with the marketing strategy. Price should be linked to the positioning, strategic objectives, promotions, distributions and product benefits.

a) Pricing New Products

Positioning Strategy: For a new product there is an array of potential target markets. The price of the product may be decided upon the target market and the value that people in that segment place on the product.

 Strategy for new Product Launch

 It is important to understand the characteristics of market segments that can bear high prices. The segment should place high value on the product which means that its differential advantage is substantial.

 Low price is used when it is the only feasible alternative: Products that may have no differential advantage, customers are not rich and pay for themselves, have little pressure to buy and have many suppliers to chose from.

Pricing Existing Products

Strategic objectives for each product will have major bearing on the pricing strategy. For e.g, if a company wants to develop a premium brand it will price its products higher but if it wants to capture the mass market it will have to price its products lower.

BUILD objective
The company wants to increase its market share. In price sensitive markets, the company has to price lower than the competition. If competition raises the prices, the company should be slow to match them and vice versa. For insensitive products, price will depend upon the overall positioning strategy that is appropriate for the product.

HOLD objective
The company wants to maintain its market share and profits. The company reduces or increases prices in reaction to the strategy that is followed by the competitor.

HARVEST objective
The company is focused on increasing its revenues. It wants to maintain profits even if sales fall the company sets premium price in order to achieve this objective. The company is proactive in revising its prices upward

REPOSITIONING Objective
Price change will depend upon the new positioning strategy. If the objective is to build a premium brand, the company will price its products higher. If the company wants to reposition its product for the mass market it will have to price its product at a lower price to make it competitive.

4. Value to the customer

Price should be accurately keyed to the value to the customer. The more value that the product gives compared to competition, the higher price can be charged. There are four ways of estimating value to the customer:

a) Value to the customer

A company asks customers if they would be willing to buy at varying price levels. Up to ten prices are chosen within the range that is usual for the product. Respondents are shown the product and asked if they would buy the product at say Rs. 500. The percentage of the responses of the customers are plotted on a buy response curve.

b) Trade of analysis
Product profiles consisting of product features and prices are described and respondents are asked to name their preferred profile. The customers see price as just one part of the offering. Their choice reveals the trade off the customers are willing to make between features and price.

c) Experimentation
It places a product on sale at different locations with varying prices. Suppose 100 supermarkets are used to test two price levels, 50 stores could be chosen at random and allocated lower prices and the rest could be selling at higher prices. By comparing the sales level and profit contribution, the most appropriate price is chosen

d) EVC analysis
Experimentation is more useful with consumer products. EVC analysis is used for industrial products. Economic value is the value that industrial buyers derive from the product in comparison to the total costs that he incurs in procuring and operating the product. A high EVC may be because the product generates more revenues for the buyer than the competitor.