12/10/20141 Pricing policy Dr. Vesselin Blagoev. 12/10/20142 Pricing methods Cost Competition Marketing Pricing methods.

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Pricing policyPricing policy Dr. Vesselin Blagoev

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Pricing methodsPricing methods

Cost

Competition

Marketing

Pricing methods

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Possible Pricing Possible Pricing ObjectivesObjectives

Pricing objectives

Status quo oriented

Sales oriented

Profit oriented

Non-price competition

Meeting competition

Growth in market share

EURO or unitsales growth

Maximize profits

Target return

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Price as seen by ConsumersPrice as seen by ConsumersList Price -

Less: Discounts

( Quantity, Seasonal, Cash, Temporary sales)

Less: Allowances

(Trade-inns)

Less: Rebate and coupon value

Plus: Taxes

Product:• Physical

• Service

• Assurance of quality

• Repair facilities

• Packaging

• Credit

• Trading stamps

Place of delivery or when available

equals

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Price setting methodsPrice setting methods

Price setting

Markup

Average-costpricing

Break-evenPont (BEP)

Perception price

Bait pricing Psychologicalpricing

Price lining Prestige pricing

Bundle pricing Complementaryproduct

Bid pricing

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Cost based Cost based methodsmethods

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CostsCostsFixed costs are those costs that

remain unchanged no matter how much is produced (rent, depreciation, managers’ salaries, insurance, employees’ salaries)

Variable costs – changing expenses, closely related to the output

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Cost-oriented pricingCost-oriented pricing MarkupMarkup

The Markup is a money amount

(EUR, $, BGN), or percent,

added to the cost of products to get the selling price

Example: Cost 1 Euro + 0.50 Euro markup = 1.50 Euro

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Average-cost pricingAverage-cost pricing

Average-cost pricing means adding a reasonable markup to the average cost of a product

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Full cost pricing Full cost pricing ((Cost-oriented pricing)Cost-oriented pricing)

Year 1Direct costs (per unit) = 2Fixed costs = 200,000Expected sales = 100,000

Cost per unitDirect costs = 2Fixed costs (200,000:100,000) = 2Full costs = 4Mark-up (10%) = 0.40Price (cost+mark-up) = 4.40

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Full cost pricing Full cost pricing ((Cost-oriented pricing)Cost-oriented pricing)

Year 2Expected sales = 50,000

Cost per unitDirect costs = 2Fixed costs (200,000:50,000) = 4Full costs = 6Mark-up (10%) = 0.60Price (cost+mark-up) = 6.60

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Cost-oriented pricing Cost-oriented pricing Full cost pricing Full cost pricing

It leads to an increase in price as sales fall

Sales estimates are made before the price is set – illogical procedure

It focuses at the internal costs, rather than to the customers willingness to pay

Overheads are difficult to estimate in a multi-products company

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Average and marginal Average and marginal costcost

Average cost : the average cost for all

productsMarginal cost : the cost to produce one

more unit.

Example: 275 Euro is the cost to produce 9 units and 280 Euro – to produce 10 units. Then the marginal cost is the additional cost (5 Euro) to produce 1 more unit.

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Direct cost pricingDirect cost pricingUse of direct cost (or marginal cost).

This involves calculating only the costs for materials and labor + mark-up.

This price does not cover the full costs. It is applied in some service businesses, such as hotels, airlines, where the product can not be stored (the unused capacity means lost revenue).

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BEP pricingBEP pricing

Break-even point represents the quantity where the firm’s total cost will just equal its total revenue

Total fixed costs

BEP (units) =

Fixed cost contribution

per unit

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BEP pricingBEP pricingT

otal

rev

enue

and

cos

t (U

SD

000)

Units of production (000)

100

75

50

25

Profit area

Loss area

Total cost curve

Total revenue curve

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BEP pricingBEP pricingLet us take an example:

Let the price of product A = 1.2 Euro

Let the total fixed cost is 30,000 Euro.

Let the variable cost is 0.80 Euro. Then the fixed cost of that product is (1.2 – 0.8) = 0.4 Euro per unit.

30,000 EuroBEP =

0.40 Euro= 75,000 units

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Competitors Competitors based based

methodsmethods

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Immediate Competitors

Technically Similarproduct

Secondary competitors

Different products solving the

same problem in similar way

Tertiary competitors

Different products solving or eliminating the problem in a different way

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Competitor-oriented Competitor-oriented pricingpricing

Going-rate pricing: the prices used by the competitors. No price differentiation (away from the marketing principles)

Below the competitionAbove the competition

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Competitor-oriented pricingCompetitor-oriented pricing

Bid pricingBid pricing

Bid pricing means offering a specific price for each possible job rather than setting a price that applies to all customers, i.e. building contractors.

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Competitor-oriented pricingCompetitor-oriented pricing

Bid pricingBid pricing

Expected profit = Profit x Probability of winning

Profit = Bidding price - Costs

Based on past experience about the pricing (bidding) policy of the competitors

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Competitor-oriented pricingCompetitor-oriented pricing

Bid pricingBid pricing

Bid price200021002200230024002500

Profit0

100200300400500

Probability0.990.900.800.400.200.10

Expected0

901601208050

Which bid price do you recommend ?

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Competitor-oriented pricingCompetitor-oriented pricing

Bid pricingBid pricing

Bid price200021002200230024002500

Profit0

100200300400500

Probability0.990.900.800.400.200.10

Expected0

901601208050

The recommended bid price is EUR 2200 – based on the Expected Profit criterion

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Marketing Marketing methodsmethods

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Marketing Orientated

Pricing

Market factors

Value to customers

CompetitionEffect on

distributors/retailers

PoliticalFactors

Price-qualityrelationship

Marketing Strategy

Costs

Explicability

Negotiatingmargins

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Reference pricing Reference pricing Price liningPrice lining

The customers have a “feeling” about the price levels and compare the tag-price with those levels.

Setting a few price levels for a product line and then marking all items at these prices. For example, most watches are priced between 30 and 200 BGN. And the prices are 30, 70, 110, 150, 200.

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Value pricingValue pricing

Value pricing means setting a fair price level for a marketing mix that really gives customers what they need.

Toyota is an example of a company which has different marketing mixes for different markets, each one offering more compared to the competing offerings.

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Perception pricingPerception pricingA tractor with a relatively very high price

USD 90,000 Competitors’ price + 7,000 for superior durability

+ 6,000 for superior reliability + 5,000 for superior after sale service + 2,000 for additional guarantee on parts

USD 110,000 a deserved price - 10,000 discount

USD 100,000 our deserved list price

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Perception pricingPerception pricing

Weight Characteristics Pro ducts

% A B C

25 Durability 40 40 20

30 Reliability 33 33 33

30 Delivery terms 50 25 25

15 Quality of service 45 35 20

100% 41.65 32.65 24.9

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Psychological pricingPsychological pricing

Psychological pricing means setting prices that have special appeals to target customers. Some scholars believe that there are whole ranges of prices that potential customers see as the same. Price cuts within the range do not increase the demand.

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Psychological pricingPsychological pricing

Demand curve when Psychological pricing is appropriate

Pric

e (E

UR

)

Quantity

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Prestige pricingPrestige pricing

Prestige pricing is setting a rather high price to suggest high quality or high status

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Prestige pricingPrestige pricing

Lowering the prices will reposition the business/product, resulting in a failure to attract the target market

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Skimming priceSkimming price

A skimming price policy (skim the cream) is based on selling to the top of the market products at the highest possible price. It is applied by the market leaders only (image, high quality products, new products)

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Conditions for charging Conditions for charging high priceshigh prices

Lack of competition Product provides high valueCustomers have high ability to payConsumer and bill payer are differentHigh pressure to buy

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Complementary Complementary product pricingproduct pricing

Complementary product pricing is setting prices on several products as a group. One of them can be priced very low so that the demand for the whole group will increase and maximize the profit.

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Bait pricingBait pricing

Bait pricing is setting some very low prices to attract customers, and trying to sell some more expensive models or brands once the customer is in the store

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Odd-even pricingOdd-even pricing

Odd-even pricing is setting prices that end in certain numbers, i.e. number 5, number 9 or 99.

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New product launch New product launch strategiesstrategies

Slow penetration

Slowskimming

Rapidpenetration

Rapidskimming

Low

High

Low High

Price

Promotion

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Introductory priceIntroductory price

Used to speed new products into a market

The plan is to raise the prices as soon as the introductory offer is over

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Penetration pricingPenetration pricingPenetration pricing policy is based

upon selling to the market at one low price. This is the case when the whole demand curve is fairly elastic. It is very efficient when the economy of scale in production leads to a substantial reduction of the cost. Some scholars call the penetration price ‘stay-out-price’.

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Conditions for charging Conditions for charging low priceslow prices

Only feasible alternativeDominating competitorsMake money laterMake money elsewhereExperience effect (computers)Barrier to entryPredation – an attempt to put other

companies out of business

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Price discriminationPrice discrimination

Price discrimination is selling the same products to different buyers at different prices

if it injures competition ->Robinson-Patman Act (of 1936)

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Price discriminationPrice discriminationIt refers to segmentation of the market and

pricing differences, based on price elasticity characteristics of these segments

Example: Dinner menu for 15 BGN is offered for 10 BGN from 6 to 7 p.m. Time flexible and money sensitive customers will add sales. The variable cost has to be < 7

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DiscountsDiscountsDiscounts are reductions from

the list price given by a seller to buyers who either give up some marketing function or provide the function themselves

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DiscountsDiscountsDiscountsQuantity discounts

Offered to encourage customers to buy in larger amounts.1-3 PCs at 350 EUR

4-6 PCs at 330 EUR

7+ PCs at 300 EUR

Cumulative quantity discounts

Seasonal discounts

Apply to purchases over a given period of time

Encourage buyers to order in low seasons

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DiscountsDiscountsDiscountsNet 10

or Net 30

It means that the customer is given 10 days or 30 days to pay

Cash discounts

Encourage the buyers to pay their bills quickly. Usually the cash discount modifies

the net terms.

2/10 net 30

Means that the buyer can take a 2% discount off the face value of the invoice if the invoice is paid within 10 days.

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DiscountsDiscountsDiscounts

Trade (functional)

discount

A list price reduction given to the channel members for the job they are doing in the sales process

Sale price A temporary discount from the list price to encourage the customers for immediate buying

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AllowancesAllowances

Allowances – like discounts – are given to channel members, customers or final users for doing something or accepting less of something

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AllowancesAllowancesAllowances

Advertising allowances

Price reductions given to firms in the channel to advertise or otherwise promote supplier’ products locally

Stocking allowances

To get shelf space for a product

Push money (prize money)

Called also PMs or spiffs – given to retailers to pass on the salesclerks for aggressively selling certain items

Trade-in allowance

A price reduction given for used products when similar new products are bought

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RebatesRebates

The rebates are refunds paid to consumers after a purchase. Some car dealers offer rebates of USD 500 to 2500 to push the sales of slow-moving models.

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Types of pricesTypes of pricesF.O.B. price – Free On Board

some vehicle at some place. At the point of loading the title to the products passes to the Buyer. Then the Buyer pays the freight and takes responsibility for damage in transit.

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Types of pricesTypes of prices

C.I.F. (Cost Insurance and Freight): The title to the product remains with the Seller until the unloading of the product in the place of destination is done

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Types of pricesTypes of prices

Free custom office in Bourgas. The product must be delivered to the specified place.

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Types of pricesTypes of prices

Zone pricing means making an average freight charge to all buyers within specific geographic areas. The Seller pays the actual freight charges and bills each customer for an average charge.

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DumpingDumping

Dumping is pricing a product sold in a foreign market below the cost of producing it or at a price lower than in its domestic market

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Initiating price changesInitiating price changes

Increase the price Cut the priceValue greater than price Value less than price

Rising costs Excess supply

Excess demand Build objective

Harvest objective Price war unlikely

Stop competitors’ entry

Price jump Price fall

Staged price increases Staged price reduction

Escalator clauses (aver. Salary)

Fighter brands (2nd brand)

Price unbundling (training) Price bundling

Lower discounts Higher discounts

Circumstances

Tactics