pricing

PRICING PRODUCTS

UNERSTANING AND CAPTURING CUSTOMER VALUE

CHAPTER NO. 10

PRICE

DefinitionThe amount of money charged for a product or service, or the sum of the values that consumers exchange for the benefits of having or using the product or service.

Amounting of money refers to Cost Value Expense Worth

Factors to Consider When Setting Prices

Customer perceptions of value

Other internal and external considerations

Marketing strategy, objective and mix.

Nature of the market and demand Competitors strategies and prices

Product cost

Price floor No profits below this price

Cost-Based Pricing

Setting prices based on the costs for producing distributing and selling the product plus a fair rate of return for effort and risk.

Value-based Pricing

Setting prices based on buyer’s perceptions of value rather than on the seller’s cost.

Types of Value-Based Pricing

Good value pricing Right combination of quality Good service at a fair price

Value added pricing value-added features services

Value-Based Pricing versus Cost-Based Pricing

Product Cost Price Value Customers

Customers value Price Cost Product

Cost-Based Pricing

Value-Based Pricing

TYPES OF COST

FIXED COST

Cost that do not vary with production or sales level.

Examples

factory land, building

machinery

management salaries

property taxes

insurance

rent

VARIABLE COST

Cost that vary directly with the level of production.

Examples

direct material cost

direct labor cost

factory supplies

TOTAL COST

the sum of fixed and variable cost for any given level of production.

Total cost = fixed cost + variable cost

COST AT DIFFERENT LVELS OF PRODUCTION

Example Total fixed cost = 100,000 Rs.

No. of units = 10

Per unit cost = 100,000/10 = 10,000 Rs. No. of units = 100

Per unit cost = 100,000/100 = 1000 Rs. No. of units = 1000

Per unit cost = 100,000/1000 = 100 Rs.

COST PER UNIT AT DIFFERERNT VELS OF PRODUCTION PER PERIOD

10 100 1000

Cos

t per

uni

t

12

3

LEARNING CURVE

Definition

The drop in the average per unit production cost that comes with accumulated production experience.

10

20

30

1000 2000 3000

Accumulated production

Cos

t pe

r un

it LEARNING CURVE

COST BASED PRICING

Cost-plus Pricing

Adding a standard mark up to the cost of the product.

EXAMPLE

Suppose

Variable cost = 10

Fixed cost = 3,00,000

Expected unit sales = 50,000

Unit cost = variable cost + Fixed cost

Unit sales

Unit cost = 10 + 30000050000 = 16

Mark up price = Unit cost

1 – desired return on sales

=16

1 – 0.2

= 20

BREAK EVEN ANALYSIS AND TARGET PROFIT PRICING

Break Even Pricingsetting price to break even on the cost of making and marketing a product

Break Even Volumethe point at which total revenue and total cost curves cross each other.

Example

Break even volume =

Fixed cost

Price – variable cost

= 300000

20 – 10

= 30,000 units

Total cost = fixed cost + variable cost

600

800

1000

10 20 30 40 50

Sales volume in units (Thousands)

Cos

t in

Rup

ees

(T

hous

ands

)

Total revenue

Target profit

Total Cost

200

400

30 40 5020 30 40 5010 20 30 40 50

Internal Factors

1. Overall Marketing Strategy

2. General Pricing Objective Survival Current profit maximization Market share leadership Customer retention and relationship building

Other Internal & External Considerations Affecting Price Decisions

3. Marketing Mix Tools

Decisions made or other marketing is variables may affect pricing decisions.

Target Costing

4. Organizational Consideration Small Companies Large Companies Industrial Market

EXTERNAL FACTORS

1. The Market An Demand

a) Pricing in different types of marketing

Pure competition

Monopolistic competition

Oligopolistic competition

Pure monopoly

ANALYZING THE PRIC -DEMANDRELATIONSHIP

DEMAND CURVE

A curve that shows the number of units the market will buy in a given time period, at different prices that might be changed.

INVERSALY RELATED

Demand and price are inversely related; that is, the higher the price and lower the demand.

the demand curve some times slopes up word

C. PRICE ELASTICITY

Inelastic

If demand are hardly changes with small change in price, we say demand is inelastic.

Elastic

If demand changes greatly, we say the demand is elastic.

pric

e p2

P1

P’2

P’1

Quantity demanded per period Quantity demanded per period

A. Inelastic B. Elastic

Q2 Q1 Q’2 Q’1

FORMULA

Price elasticity of demand = -%change in quantity demand

%change in price

2. COMPETITORS STRATEGIES AND PRICE

cost, price, and market offerings nature of competition it faces. A high- price, high-margin strategy A low- price, low margin strategy

3. OTHER EXTERNAL FACTORS

Economic condition

The government