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WHAT IS PRICE
RENT FOR APARTMENT
TUTION FOR EDUCATION
FEE FOR DENTIST/DOCTOR
FARE FOR AUTORICKSHAW
RATE FOR ELECTRICITY/WATER/GAS
TOLL FOR ROAD-EXPRESS HIGHWAY
PREMIUM FOR INSURANCE
WHAT IS PRICE
HONARARIUM FOR GUEST LECTURER
RETAINER FOR LAWYER/ADVISOR
SALARY FOR EXECUTIVE
COMMISSION FOR SALESMAN
BRIBE FOR CORRUPT PERSONNEL
WAGE FOR WORKMAN
TAX FOR GOVERNANCE
SITTING FEE FOR DIRECTORS
? WHAT IS PRICE
WHO SETS THE PRICE
HOW IS IT SET
WHEN TO SET A PRICE
1. INTRODUCING A NEW PRODUCT
2. INTRODUCING IN THE NEW CHANNEL/MARKET
3. BIDS ON NEW CONTRACT WORK
POSITIONING ON QUALITY AND PRICE
SEGMENT EXAMPLE(AUTOMOBILES)
ULTIMATE MERCEDES-BENZ
LUXURY CAMI-TOYOTA-BMW
SPECIAL NEEDS LANCER – QUALIS
MIDDLE OPEL – OCTRA
EASE/CONVENIENCE ESTEEM
ME TOO BUT CHEAPER
ZEN
PRICE ALONE MARUTI 800
Nine Price-Quality Strategies
Price Price
P P
R R
O O
D D
C C
T T
qualitqualityy
HighHigh MediuMediumm
LowLow
HighHigh 1.Premium 1.Premium
StrategyStrategy
2.High Value2.High Value
StrategyStrategy
3.Super-3.Super-value value StrategyStrategy
MediumMedium 4.Overcharging 4.Overcharging
StrategyStrategy
5.Medium-5.Medium-value Strategyvalue Strategy
6.Good-6.Good-value value StrategyStrategy
LowLow 7.Rip-off 7.Rip-off StrategyStrategy
8.False 8.False economy economy StrategyStrategy
9.Economy9.Economy
StrategyStrategy
Price-Quality StrategiesPrice-Quality Strategies
• THE DIAGONAL STRATEGIES- 1,5,9 CAN THE DIAGONAL STRATEGIES- 1,5,9 CAN CO-EXIST IN THE SAME MARKET.CO-EXIST IN THE SAME MARKET.
• THE CELLS ABOVE THE DIAGONAL ARE THE CELLS ABOVE THE DIAGONAL ARE STRATEGIES 2,3 AND 6.THESE ARE WAYS STRATEGIES 2,3 AND 6.THESE ARE WAYS TO ATTACK THE DIAGONAL POSITIONS.TO ATTACK THE DIAGONAL POSITIONS.
• POSITIONING STRATEGIES 4,7,AND 8 –POSITIONING STRATEGIES 4,7,AND 8 –THERE IS AN OVER-PRICING OF THE THERE IS AN OVER-PRICING OF THE PRODUCT IN RELATION TO ITS QUALITY.PRODUCT IN RELATION TO ITS QUALITY.
SIX STEP PROCEDURE FOR PRICE SETTLING
1. SELECTING THE PRICING OBJECTIVES
2. DETERMING DEMAND
3. ESTIMATING COST
4. ANALYZING COMPETITORS, COSTS, PRICES AND OFFERS
5. SELECTING A PRICING METHOD
6. SELECTING THE FINAL PRICE
SELECTING THE PRICING OBJECTIVES
1. SURVIVAL
2. MAXIMUM CURRENT PROFIT
3. MAXIMUM SALES GROWTH
4. MAXIMUM MARKET SKIMMING
5. PRODUCT QUALITY LEADERSHIP
6. OTHER PRICING OBJECTIVE
DETERMINING DEMAND
DEMAND HAS AN INVERSE RELATIONSHIP WITH PRICE – CETRIS PARIBUS
INELASTIC AND ELASTIC DEMAND
PRICE
15
10
10 20 30
QTY DEMAND
dy 5
dx 10
dy 5
dx 30
PRICE
15
10
10 20 30
QTY DEMAND dx 5 dy 10
RELATIVELY IN ELASTIC DEMAND
dx 5 dy 30
MORE ELASTIC DEMAND
FACTORS AFFECTING PRICE SENSITIVITY
1. UNIQUE VALUE EFFECT
2. SUBSTITUTE AWARENESS EFFECT
3. DIFFICULT COMPARISON EFFECT
4. TOTAL EXPENDITURE EFFECT
5. END BENEFIT EFFECT
6. SHARED COST EFFECT
7. SUNK INVESTMENT EFFECT
8. PRICE – QUALITY EFFECT
9. INVENTORY EFFECT
• BUYERS ARE NORMALLY PRICE SENSITIVE.BUYERS ARE NORMALLY PRICE SENSITIVE.
• HOWEVER THE FOLLOWING LIST OF HOWEVER THE FOLLOWING LIST OF FACTORS ARE ASSOCIATED WITH LOWER FACTORS ARE ASSOCIATED WITH LOWER PRICE SENSITIVITYPRICE SENSITIVITY
( TOM NAGLE):( TOM NAGLE):
1) THE PRODUCT IS MORE DISTINCTIVE1) THE PRODUCT IS MORE DISTINCTIVE
( ROLLS-ROYCE)( ROLLS-ROYCE)
BUYERS & PRICE SENSITIVITY
3) BUYERS CANNOT EASILY COMPARE THE 3) BUYERS CANNOT EASILY COMPARE THE QUALITY OF SUBSTITUTES. ( OPEN HEART QUALITY OF SUBSTITUTES. ( OPEN HEART SURGERY)SURGERY)
2) BUYERS ARE LESS AWARE OF SUBSTITUTES2) BUYERS ARE LESS AWARE OF SUBSTITUTES ( PETROL AND DIESEL)( PETROL AND DIESEL)
4) THE EXPENDITURE IS A SMALLER PART OF 4) THE EXPENDITURE IS A SMALLER PART OF THE BUYER’S TOTAL INCOME. THE BUYER’S TOTAL INCOME. (COSMETICS, SALT, PERFUMES) (COSMETICS, SALT, PERFUMES)
5) THE EXPENDITURE IS SMALL COMPARED TO 5) THE EXPENDITURE IS SMALL COMPARED TO THE TOTAL COST OF THE END PRODUCT.THE TOTAL COST OF THE END PRODUCT.
( FURNISHING OF THE HOUSE, INK FOR A PEN, ( FURNISHING OF THE HOUSE, INK FOR A PEN, REFILL FOR A PRINTER)REFILL FOR A PRINTER)
6)PART OF THE COST IS BORNE BY ANOTHER 6)PART OF THE COST IS BORNE BY ANOTHER PARTY.PARTY.
( MEDICAL INSURANCE)( MEDICAL INSURANCE)
7) THE PRODUCT IS USED IN CONJUNCTION 7) THE PRODUCT IS USED IN CONJUNCTION WITH ASSETS PREVIOUSLY BOUGHT.WITH ASSETS PREVIOUSLY BOUGHT.( SPARE PARTS FOR MACHINERIES)( SPARE PARTS FOR MACHINERIES)
8) THE PRODUCT IS ASSUMED TO HAVE 8) THE PRODUCT IS ASSUMED TO HAVE MORE QUALITY, PRESTIGE, OR MORE QUALITY, PRESTIGE, OR EXCLUSIVENESS.EXCLUSIVENESS.
( PAINTINGS, JEWELLERY)( PAINTINGS, JEWELLERY)
9) BUYERS CANNOT STORE THE PRODUCT9) BUYERS CANNOT STORE THE PRODUCT ( PERISHABLE ESSENTIAL COMMODITIES)( PERISHABLE ESSENTIAL COMMODITIES)
METHODS OF ESTIMATING DEMAND V/S PRICES
1. STATISTICALLY ANALYSING PAST RELATIONSHIP
2. PRICE EXPERIEMENTS
3. BUYER RESPONSE
PRICE ELASTICITY OF DEMAND
IT IS IMPORTANT TO KNOW THE PRICE ELASTICITY OF DEMAND TO FIX THE PRICE. DEMAND IS LESS ELASTIC UNDER THE FOLLOWING CONDITIONS
Contd…
1. NO OR FEW SUBSTITUTES
2. ESSENTIALS
3. BUYERS REALLY CANNOT NOTICE THE PRICE CHANGE
4. THE PRODUCT BECOMES MORE ESSENTIAL / NEEDED / PEAK DEMAND
5. BUYERS ARE SLOW TO CHANGE THEIR BUYING HABITS
6. HIGHER PRICES ARE JUSTIFIED ON QUALITY VALUE
ESTIMATING COST
DEMAND SETS A CEILING ON PRICE.
COST SETS THE FLOOR ON PRICE
TYPES OF COST
• FIXED
• VARIABLE
FACTORS TO BE CONSIDERED IN COSTING
1. COST BEHAVIOUR AT DIFFERENT LEVELS OF PRODUCTION PER PERIOD
2. COST BEHAVIOUR AS A FUNCTION OF ACCUMULATED PRODUCTION
3. COST BEHAVIOUR AS A FUNCTION OF DIFFERENTIATED MARKETING OFFERS. i.e ACTIVITY BASED COSTING INSTEAD OF STANDARD COSTING
4. TARGET COSTING – JAPANESE METHOD
ANALYSING COMPETITORS COSTS, PRICES AND OFFERS
TO FIND OUT THE COMPETITIVE COSTS, PRICES AND OFFERING IS REQUIRED -
1.TO BENCH MARK
2.TO FIND OUT COMPARATIVE ADVANTAGES
SELECTING A PRICING METHOD
THREE “C” MODEL FOR PRICE SETTING
1.CUSTOMERS DEMAND SCHEDULE
2.COST FUNCTION
3.COMPETITORS PRICE
1. MARKUP PRICING
2. TARGET RETURN PRICING
3. GOING – RATE PRICING
4. RETENTION PRICING
5. ADMINISTERED PRICE MECHANISM
6. DIFFERENTIAL PRICING
7. SEALED BID PRICING
8. BLACK MARKET PRICING
PRICING METHODS
SELECTING A PRICING METHOD
LOW PRICE HIGH PRICE
NO PROFIT NO DEMANDAT THIS PRICE AT THIS PRICE
COSTS COMPETITOR CUSTOMER PRICE AND PRICES ASSESMENT OF SUBSTITUTES OF UNIQUE PRODUCT VALUE
1. MARK UP PRICING
COST ≠ PLUS –
• ADD A STANDARD MARKUP TO THE PRODUCTS COSTS
DOLL MANUFACTURER
VARIABLE COST PER UNIT Rs 10FIXED COST Rs 3,00,000EXPECTED UNIT SALES 50,000 Nos
UNIT COST = VC + FC = 10 + 3,00,000 = Rs 16
SALES 50,000
ASSUME THE MANUFACTURER WANTS20%FOR MARK UP ON SALES. THE MARKUP IS GIVEN BY ?
MARKUP = UNIT COST = 16 = Rs 20 PRICE 1- DESIRED 1- 0.2
RETURN ON SALES
SUPPOSE THE DEALER WANTS 50%-FOR SELLING PRICE. WHAT SHOULD BE HIS MARKUP PRICE?
MARKUP = UNIT COST = 20 = Rs 40 PRICE 1- DESIRED 1- 0.5
RETURN ON SALES
Rs 40 PER UNIT
THIS IS A MODIFICATION OF COST PRICING APPROACH. THE PRICE WILL GIVE THE TARGET RATE RETURN ON INVESTMENT (ROI)
IN THE ABOVE CASE, IF THE DOLL
MANUFACTURER INVESTED Rs 10 LAKHS IN HIS BUSINESS AND HE WANTS TO ACHIEVE A ROI OF 20% HE WILL APPLY THE FOLLOWING FORMULA
TRP = UNIT COST + DESIRED RETURN x INVESTED
CAPITAL UNIT SALES
16 + .20 x 1,00,000 = Rs 20 50,000
TO KNOW THE BREAK EVEN VOLUME
BREAK EVEN VOLUME = FIXED COST = 3,00,000 = 30,000 UNIT SALES 20 – 10
1200
▬
1000
▬
800
▬
600
▬
400
▬
200
▬
10 20 30 40 50 SALES
TC
FC
BEP
REVENUE
3.PERCEIVED – VALUE PRICING :
THIS PRICING IS BASED ON THE PRODUCTS PERCEIVED VALUE. WHAT IS THE BUYERS PERCEPTION OF VALUE AND NOT SELLERS COST IS BASED FOR FIXING THE PRICE
VALUE PRICING
CHARGING FAIRLY LOW PRICE FOR A HIGH QUALITY OFFERING
3.GOING – RATE PRICING – MOSTLY BASED ON COMPETITORS PRICE
4.RETENTION PRICING – (GOVT)
5.ADMINISTERED PRICE MECHANISM – (GOVT)
6.DIFFERENTIAL PRICING
7.SEALED BID PRICING
8.BLACK MARKET PRICING – (SHORTAGE SITUATION)
SELECTING THE PRICE
APART FROM PRICING METHOD, THE COMPANY WOULD CONSIDER ADDITIONAL FACTORS SUCH AS -
1. PSYCHOLOGICAL PRICING
2. OTHER MARKETING MIX ELEMENTS
3. COMPANY PRICING POLICIES
4. IMPACT OF PRICE ON OTHER FACTORS
5. LEGAL ENVIRONMENT
ADAPTING THE PRICE GEOGRAPHICAL PRICING - (CASH, COUNTER
TRADE AND BARTER)
COUNTER TRADE TAKES THE FOLLOWING FORMS :
1. BARTER – GOODS FOR GOODS
2. COMPENSATION DEAL – SOME % IN CASH, THE BALANCE IN GOODS
3. BUY BACK ARRANGEMENT – SELLS PLANT, EQUIPMENT, TECHNOLOGY AND BUY BACK PART OF THE PRODUCT MANUFACTURED
4. OFFSET – THE SELLER RECEIVES FULL PAYMENT IN CASH BUT AGREES TO SPEND A SUBSTANTIAL AMOUNT IN THAT COUNTRY IN A STATED TIME PERIOD
PRICE, DISCOUNTS AND ALLOWANCES
COMPANIES REWARDS CUSTOMERS FOR EARLY PAYMENTS, VOLUME PURCHASES AND OFF SEASON BUYING. THEY ARE CALLED
DISCOUNTS
ALLOWANCES
REBATES
QUANTITY DISCOUNTS - THIS IS GIVEN FOR CERTAIN VOLUME PURCHASES.
FUNCTIONAL DISCOUNTS – THEY ARE ALSO CALLED TRADE DISCOUNTS. THIS IS FOR CHANNEL MEMBERS LIKE DISTRIBUTORS, WHOLESALERS, RETAILERS, STOCKISTS, BROKER AGENTS. THIS IS A REWARD FOR STOCK KEEPING, WAREHOUSING, FORWARDING, CLEARING, ACCOUNTING, BILLING, FINANCING, GUARANTEEING etc,.
ALLOWANCES - TRADE IN ALLOWANCE (FOR GIVING THE OLD MODEL LIKE OLD TV OR OLD CAR)
PROMOTIONAL ALLOWANCE – THESE ARE PAYMENTS OR PRICE REDUCTION TO DEALERS IN PARTICPATING IN ADVERTISING AND SALES PROMOTIONAL PROGRAMS
REBATES - REBATES ARE GIVEN TO STIMULATE SALES – REBATES ARE NORMALLY PASSED ON TO THE BUYER. KHADI & VILLAGE INDUSTRIES DEVELOPMENT BOARD GIVE FESTIVAL REBATES FOR THEIR PRODUCTS ESPECIALLY TEXTILES
PROMOTIONAL PRICINGSEVERAL PRICING TECHNIQUES ARE USED TO STIMULATE EARLY PURCHASE AND ALSO INCREASE SALES. THEY ARE
LOSS LEADER PRICING
SPECIAL EVENT PRICING
CASH REBATES
LOW INTEREST FINANCING
LONGER PAYMENT TERMS
WARRANTIES AND SERVICE CONTRACTS
PSYCHOLOGICAL DISCOUNTING
PROMOTIONAL PRICINGLOSS LEADER PRICING - SUPER MARKETS DROPS PRICES ON WELL KNOWN BRANDS. THIS ATTRACTS MORE CUSTOMERS TO THEIR SHOPS AND INCREASE TOTAL SALES.
SPECIAL EVENT PRICING - TO ATTRACT CUSTOMERS IN CERTAIN SEASONS – LIKE ONAM, CHRISTMAS, DIWALI etc,.
CASH REBATES - THIS IS GIVEN TO BUYERS
LOW INTEREST FINANCING – CAR DEALERS
LONGER PAYMENT TERMS
WARRANTIES AND SERVICE CONTRACTS
PSYCHOLOGICAL DISCOUNTING - ORIGINAL PRICE Rs 500 NOW ONLY Rs 399/-
KOTLER SAYS, “ PROMOTIONAL
PRICING IS ZERO SUM GAME. THEY
WORK, COMPETITORS COPY THEM AND
ITS EFFECT IS LOST. IF THEY DO NOT
WORK, THEY WASTE COMPANY
MONEY”.
DISCRIMINATORY PRICING
CUSTOMER SEGEMENT PRICING – PARKS, MUSEUMS, RAILWAYS
PRODUCT FORM PRICING – DIFFERENT PACKING
IMAGE PRICING – PERFUME
LOCATION PRICING – SEATS IN A THEATRE
TIME PRICING – UTILITIES – HOLIDAY RESORTS, AIRLINES
FOR PRICE DISCRIMINATION CERTAIN CONDITIONS MUST EXIST.
1. MARKET MUST BE SEGMENTABLE
2. LOWER PRICE SEGMENT MUST NOT BE ABLE TO RESELL THE PRODUCT TO HIGHER SEGMENT
3. COMPETITORS SHOULD NOT BE ABLE TO UNDER SELL AT HIGHER PRICE SEGEMENT
4. PRACTICE SHOULD NOT BREED CUSTOMER RESENTMENT
5. SHOULD NOT BE ILLEGAL
IN A CONTROLLED ECONOMY, ESPECIALLY IN
SHORTAGE SITUATION THE GOVERNMENT
OR PUBLIC AUTHORITIES ENFORCE
DISCRIMINATORY PRICE FOR EQUITABLE
DISTRIBUTION OF ESPECIALLY ESSENTIAL
ITEMS AND UTILITIES. IT IS CONTROLLED BY
RATIONING, PERMIT, QUOTA, AND PRICE
FIXING. THIS ALWAYS LEADS TO BLACK
MARKET, BLACK MARKET ECONOMY AND
BLACK MARKET PRICES. WHY ?
PRODUCT MIX PRICING
WHEN A PRODUCT IS A PART OF A PRODUCT MIX, THE PRICING IS MODIFIED TO TAKE CARE OF THE TOTAL REVENUE FROM ALL PRODUCTS AS A MIX. THE COMPANY HERE FIX THE PRICE TO MAXIMISE THE TOTAL REVENUE AND PROFIT. THERE ARE SIX SITUATIONS WHERE PRODUCT MIX PRICING IS ADOPTED
1. PRODUCT LINE PRICING – LIKE A SHOE SHOP OR CLOTH SHOP – DIFFERENT PRICES FOR PRODUCTS IN THE SAME LINE
2. OPTIONAL FEATURE PRICING – EXTENSIVELY ADOPTED BY AUTOMOBILES
3. CAPTIVE PRODUCT PRICING – RAZOR BLADES AND RAZORS. FILMS & CAMERAS
4. TWO – PART PRICING – AS IN TELEPHONE FIXED RENT AND CALL CHARGES AS PER USE
5. BY PRODUCT PRICING
6. PRODUCT – BUNDILING PRICES – SEASON TICKETS IN THEATRES AND RAILWAYS
INITIATING AND RESPONDING TO PRICE CHANGES
INITIATING PRICE CUTS:
1. EXCESS PLANT CAPACITY
2. DECLINING MARKET SHARE
3. DRIVE TO DOMINATE THE MARKET THROUGH LOWER COST
INITIATING AND RESPONDING TO PRICE CHANGES
INITIATING PRICE INCREASE:
1. TO INCREASE PROFIT
2. TO OFFSET COST INFLATION
3. TO EXPLOIT OVER DEMAND
4. TO FOLLOW THE COMPETITOR / MARKET LEADER
INITIATING AND RESPONDING TO PRICE CHANGES
PRICE ADJUSTMENTS:
1. USE OF ESCALATOR CLAUSES
2. PERFORMANCE LINKED PRICING
REACTIONS TO PRICE CHANGES:
1. CUSTOMER REACTION
2. COMPETITORS REACTION
3. AUTHORITIES REACTION
4. PUBLIC REACTION
RESPONDING TO COMPETITORS PRICE CHANGES:
1. MAINTAIN PRICE
2. RAISE PERCEIVED QUALITY
3. REDUCE PRICE
4. INCREASE PRICE AND IMPROVE QUALITY
5. LAUNCH LOW-PRICE FIGHTER LINE