Developing Pricing Strategies
Developing Pricing Strategies
INTRODUCTION
Process of determining what company will receive in exchange of its products and services.
One of the major element of Marketing Mix.
How much to charge?
How much do customers value your product.
Good Pricing – A balance between Price floor and Price ceiling.
History – Pricing was set by negotiation between buyer & seller.
Pricing was a major determinant in buying process – now-No more….
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Price’s not just a number or an item tag, it goes by many names:
Paying rent for an apartment
Tuition fee for your education
Fare for airline, bus or train
Price for driving on Mumbai Pune express way
Salary of an executive
Generally Handled by Product line managers and approved by top management.
FACTORS INFLUENCING PRICING
Corporate & Marketing
objective of the firm.
The Characteristics of the
product.
Stage of PLC
Cost of Manuf. & Mktg.
Extent of distinctiveness
of the product.
Market Characteristics
(Customers & competition)
Price elasticity
Buying behavior of
customers
Competitors pricing
strategy
Govt. control on pricing
Bargaining power of major
suppliers.
OBJECTIVES FIRMS SEEK IN PRICING
Profit Maximization.
Profit Optimization in long term.
A minimum return on investment.
Achieving a particular sales volume.
Achieving a particular Market share.
Keeping competitor out or keeping them under check.
To make it affordable for the weaker sections
STEPS IN SETTING PRICE
Select the price objective
Determine demand
Estimate costs
Analyze competitor price mix
Select pricing method
Select final price
SELECT THE PRICE OBJECTIVE
Where company wants to position its market offering.
Survival
Maximize current Profits
Maximizing Market Share
Market skimming pricing
Product Quality Leadership
DETERMINE DEMAND
Price Sensitivity: High with the advent of Internet
Estimating Demand Curves
Price Elasticity of Demand
ESTIMATING COST
Fixed costs
Variable costs
Total costs
Average cost
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ANALYZE COMPETITOR PRICE MIX
Whether to charge same, less or more than the competitor?
Market share objective: likely change in the price.
Profit maximization: likely change in the advertising budget
or product quality.
SELECTING PRICING METHOD
Markup pricing
Mark up price= Unit cost/1 – Desired return on sales
Target-return pricing: The firm determines the price that
would yield its target ROI.
Target Return Pricing= Unit cost+ Desired return*Invested Capital
Unit Sales
TRY YOURSELF
Variable cost = Rs. 20
Fixed Cost = 400000
Expected Unit Sales = 60000
Mark up %age = 15%
SELECTING PRICING METHOD
Perceived-value pricing Pricing based upon customer perceived value.
Delivering more value than competitors
Made up of elements like, Buyer’s image of the product performance
The delivery channels
The warranty quality
Customer Support Supplier’s reputation
Trustworthiness
Esteem
CATERPILLAR USES PERCEIVED VALUE TO SET
PRICES
$ 90000 is the if its equivalent to the competitors.
$ 7000 is price premium for superior durability
$ 6000 is price premium for superior reliability
$ 5000 is price premium for superior service
$ 2000 is price premium for long warranty on
parts
$ 110000 normal price to cover superior value
- $10000 Discount
$ 100000 Final Price
SELECTING PRICING METHOD
Going-rate pricing
Auction-type pricing
Value pricing : EDLP, HLP
Essence of Pricing to value
Value>price>Cost (We do not seek)
Price>Value>Cost (We do not seek)
Price>Cost>Value (We do not seek)
Price=Value>Cost (This is what we seek)
PRICING TO CAPTURE VALUE
PC priced at Rs. 10000
Laptop Priced at Rs. 8000
Car for Rs. 1 Lakh
SELECTING THE FINAL PRICE
Impact of other Marketing activities
Company Pricing Policies
Gain & Risk sharing Pricing
Impact of price on other parties
PRICE-ADAPTATION STRATEGIES
Geographical Pricing
Discounts
Differentiated Pricing
Promotional Pricing
PROMOTIONAL PRICING
Loss Leader Pricing:
To stimulate store traffic.
Low interest Financing
Longer Payment Terms
Special event pricing
Warranties and service contracts
Free or low cost service contract.
Psychological Discounting
DIFFERENTIATED PRICING
When companies sell a product or a service at two or more
prices that do not reflect a proportional difference in cost.
Customer segment Pricing
Location pricing
Time pricing
Channel Pricing
Image Pricing/Prestige Pricing