DEVELOPING PRICING

STRATEGIES AND
PROGRAMS
RAVIMOHAN
1

OBJECTIVES OF THE MODULE

You will be able to explain about Understanding

Pricing, A changing price environment ,Buyers
pricing, Sellers pricing, How companies price,
Pricing Initiatives in GE, Characteristics of Good
pricing, Consumer Psychology and Pricing,
Possible Consumer reference price, Reference
Pricing, Price Quality Inferences, Price Cues,
Setting The Price, Selecting the Price Objective,
Price Sensitivity , Estimating Demand Curves,
2

OBJECTIVES OF THE MODULE CONTD

Price Elasticity of Demand, Estimating Costs,
Types of Costs and levels of Production,
Analysing Competitor Cost Price and
Offers, Adapting The Price, Auction type
Pricing, Promotional Pricing ,Differentiated
Pricing, Initiating and Responding to Price
Changes, How to fight Low cost Rivals.

UNDERSTANDING PRICING

Price is not just a number on a tag. Price comes in

many forms and performs many functions. Rent,
tuition , fares, fees. Tolls retainers, wages and
commissions all may in some way be the price you
pay for some good or service.
Traditionally price has been the major determinant
of a buyers choice. And this is still the case with a
majority of the buyers across the globe. Although
nonprice factors have become quite important in
the last few decades, price still remains an
important factor in determining sales and
profitability.
4

A CHANGING PRICE ENVIRONMENT

Pricing practices have changed significantly
in recent years. Many firms are buckling the
low price trend and have been successful in
trading consumers up to more expensive
products and services by combining unique
product formulations with engaging
marketing campaigns.
Eg LG Electronics India.

BUYERS PRICING
Get instant pricing comparisons from thousands of
vendors.
Name their price and have it met.
Get products free.

SELLERS PRICING
Monitor customer behaviour and tailor offers to
individuals.
Give certain customers access to special prices.
Negotiate prices in online auctions and exchanges.

HOW COMPANIES PRICE?

Pricing is fixed by the product line managers in large
companies. Even here the top management sets pricing
objectives and policies and then approves the prices
proposed by lower levels of management.
In industries where pricing is a key factor(aerospace,
railroads and oil companies) , companies will always
establish a pricing department to set or assist others in
determining appropriate prices.
We determine our costs and take our industrys traditional
margins. We are getting our sales force better trained and
equipped with better tools and metrics.

PRICING INITIATIVES IN GE

A matrix organisation dedicated to pricing has been

created.
The CMO reporting to the CEO, leads the pricing
initiative.
Dedicated pricing managers focus on product
pricing.
Pricing has been added to GE executive education
curriculum and is mandatory.
A global pricing council made up of pricing leaders
from each GE business unit.
Within large business units, specialised Industry
Pricing Councils cater to unique industry needs.
8

CHARACTERISTICS OF GOOD PRICING

Have a product or service that truly stands out.
Know your up-selling plan from the beginning.
Once you have decided that a product will be given away for
free, do not change your mind.
Access to your product should be one click away.
Make sure the major bugs have been exterminated.
Harness the collective intelligence of your users.
Keep improving the product to give users more reasons to
stick with it.
Identify range of revenue sources .
Timing is everything.
9

CONSUMER PSYCHOLOGY AND PRICING

takers
Many economist assume that consumers are price
and accept prices at face value or as given. Marketers
recognise that consumers often actively process price
information, interpreting prices in terms of their knowledge from
prior purchasing experience, formal communication
(advertising, sales calls , and brochures) , informal
communication (friends, colleagues, or family members ),
points of purchase or online resources, or other factors.
Purchase decisions are based on how consumers perceive
prices and what they consider the current actual price to be
not the marketers stated price. Customers may have a lower
price threshold below which prices signal inferior or
unacceptable quality. Eg. Armani, GAP,H&M.

10

POSSIBLE CONSUMER REFERENCE PRICES

Fair Price (what the product should cost)
Typical Price.
Last Price Paid.
Upper Bound Price (reservation price or what most
consumers would pay)
Lower Bound Price (Lower threshold price or the least
consumer would pay).
Competitor Prices.
Expected Future Price.
Usual Discounted Price.
11

REFERENCE PRICING

Research has shown that although customers may have

fairly good knowledge of the range of prices involved,
surprisingly few can accurately recall specific prices of
products. When examining products, however, consumers
often employ reference prices , comparing an observed price
to an internal reference price they remember or to an
external frame of reference such as posted regular retail
price.
When consumers evoke one or more of these frames for
reference , their perceived price can vary from the stated
price. Research on reference prices has found that
unpleasant surprises- when perceived price is lower than
the stated price- can have a greater impact on purchase
likelihood than pleasant surprises.
12

PRICE-QUALITY INFERENCES
Many consumers use price as an indicator f quality.
Image pricing is especially effective with ego-sensitive
products such as perfumes and expensive cars. A
bottle of perfume priced at Rs 5000 might contain Rs
500 worth of scent, but gift givers pay Rs 5000 to
communicate their high regard for the receiver.
Price and quality perceptions of cars interact. Higher
quality priced cars are perceived to be higher price
than they actually are. Eg Tiffany & Co.

13

PRICE CUES

Consumer perceptions of prices are also affected by

alternate pricing strategies. Many sellers believe that
prices should end in an odd number. Eg Bata Pricing.
Research has shown that consumers tend to process
prices in a left to right manner rather than by rounding.
Price encoding in this fashion is important if there is a
mental price break at the higher, rounded price.
Sale signs next to prices have been shown to spur
demand , but only if not overused.
Limited availability (Eg three days only) also can spur
sales among consumers actively shopping for a product.

14

SETTING THE PRICE

Step 1 : Selecting the Pricing Objective.

SURVIVAL.
MAXIMUM CURRENT PROFIT.
MAXIMUM MARKET SHARE. Eg IKEA.
MAXIMUM MARKET SKIMMING.
PRODUCT QUALITY LEADERSHIP.
OTHER OBJECTIVES.

15

SETTING THE PRICE CONTD

Step 2 : Determining the Demand.
PRICE SENSITIVITY.
The product is more distinctive.

The buyers are less aware of substitutes.

Buyers cannot easily compare the quality of
substitutes.
The expenditure is a smaller part of the buyers
total income.

16

PRICE SENSITIVITY
The expenditure is small compared to the total cost of
the end product.
Part of the cost is borne by another party.
The product is used in conjunction with assets
previously bought.
The product is assumed to have more quality, prestige
or exclusiveness.
Buyers cannot store the product.

17

ESTIMATING DEMAND CURVES

SURVEYS.
PRICE EXPERIMENTS.
STATISTICAL ANALYSIS.
PRICE ELASTICITY OF DEMAND
The average price elasticity across all products ,
markets, and time periods.
Price elasticity magnitudes were higher for durable
goods than for other goods, and higher for products
in the introduction/growth stages of the Product
Lifecycle than in the mature/decline stages.

18

PRICE ELASTICITY OF DEMAND CONTD

Inflation led to substantially higher price elasticities,
especially in the short run.
Promotional price elasticities were higher than actual
price elasticities in the short run( although the
reverse was true in the long run).
Price elasticities were higher at the individual item or
SKU level than the overall brand level.

19

ESTIMATING COSTS
STEP 3 : ESTIMATING COSTS.
TYPES OF COSTS AND LEVELS OF PRODUCTION.

FIXED COSTS.
VARIABLE COSTS.
TOTAL COSTS.
AVERAGE COST.
ACTIVITY BASED COST ACCOUNTING.

ACCUMULATED PRODUCTION.
TARGET COSTING.

20

ANALYSING COMPETITOR COSTS PRICES

AND OFFERS
Step 4 : ANALYSING COMPETITOR PRICES AND
OFFERS.
SELECTING A PRICING METHOD.

MARKUP PRICING.
TARGET RETURN PRICING.
PERCEIVED VALUE PRICING.
VALUE PRICING.
GOING RATE PRICING.
AUCTION TYPE PRICING.

21

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.
COMPANY PRICING POLICIES.
GAIN AND RISK SHARING PRICING.
IMPACT OF PRICE ON OTHER PARTIES.

22

ADAPTING THE PRICE

GEOGRAPHICAL PRICING (CASH, COUNTER

TRADE, BARTER).

BARTER.
COMPENSATION DEAL.
BUYBACK ARRANGEMENT.
OFFSET.

PRICE DISCOUNTS AND ALLOWANCES

Discount.
Quantity Discount.
Functional Discount.
Seasonal Discount.
Allowance.

23

PROMOTIONAL PRICING

Loss Leader Pricing.

Special Event Pricing.
Cash Rebates.
Low- Interest Financing.
Longer Payment Terms.
Warranties and Service Contracts.
Psychological Discounting.
24

DIFFERENTIATED PRICING
PRICE DISCRIMINATION.
Customer Segment Pricing.
Product Form Pricing.
Image Pricing.
Channel Pricing.
Location Pricing.
Time Pricing.

25

INITIATING AND RESPONDING TO PRICE

CHANGES
INITIATING PRICE CUTS.
Low Quality Trap.
Fragile Market Share Trap.
Shallow Packets Trap.
Price War Trap.

INITIATING PRICE INCREASES.

Delayed Quotation Pricing.

Escalator Clauses.
Unbundling.
Reduction of Discounts.

26

INITIATING PRICE INCREASES CONTD

Shrinking the amount of the product instead of raising the
pricing ( Hershey Foods maintained its candy bar price but
trimmed its size.)
Substituting less-expensive materials or ingredients.
(Many candy bar companies substituted synthetic
chocolate for the real chocolate.
Reducing or moving Product Features (Sears engineered
down a number of its appliances so that they could be
priced competitively with those sold in the discount store.)
Removing or reducing product services, such as
installation or free delivery.

27

INITIATING PRICE INCREASES CONTD

Using less expensive packaging material or larger package
sizes.
Reducing the number of sizes and models offered.
Creating new economy brands (Jewel food stores
introduced 170 generic items selling at 10% to 30% less
than national brands.
RESPONDING TO COMPETITORS PRICE CHANGES
How should a firm respond to a price cut initiated by a
competitor? In general, the best response varies with the
situation. The company must consider the products stage in
the lifecycle, its importance in the companys portfolio, the
companys intentions and resources, the markets price and
quality sensitivity, the behaviour of cost with volume, and
the companys alternative opportunities.

28

HOW TO FIGHT LOW COST RIVALS?

Companies must not use differentiation
tactics in isolation.
Companies must be able to persuade
customers to pay for added benefits.
Companies must first bring cost and benefits
in line.
29

SUMMING UP
At the end of the module you will be able to
explain Understanding Pricing, A changing
Price environment ,Buyers pricing, Sellers
pricing, How companies price, Pricing Initiatives
In GE, Characteristics of Good Pricing, Consumer
Psychology and Pricing, Possible Consumer
Reference price, Reference Pricing, Price Quality
Inferences, Price Cues, Setting The Price,
Selecting the Price Objective, Price Sensitivity ,
Estimating Demand Curves,
30

SUMMING UP CONTD
Price Elasticity of Demand, Estimating Costs,
Types of Costs and levels of Production,
Analysing Competitor Cost Price and Offers,
Adapting The Price, Auction type Pricing,
Promotional Pricing ,Differentiated Pricing,
Initiating and Responding to Price Changes,
How to fight Low cost Rivals.

31

QUESTIONS ??
32

THANK YOU
33