PRICING DECISIONS

What is a Price?

• The 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.

Today’s New Pricing Environment

• In the past history price were set by negotiation between buyers and sellers.

• Fixed price policies.(is relatively modern idea)

• Some companies are now reversing fixed pricing trend.

• They are using Dynamic pricing--- charging different prices depending on individual customers and situations.

Pricing: An important but difficult Decision

• Price is the only element in the marketing mix that produces revenue, all other produces costs.

• It is also one of the most flexible elements of the marketing mix.

Factors to consider When Setting Prices.

• Internal Factors Affecting Pricing Decisions

• External Factors Affecting Pricing Decisions

Internal Factors Affecting Pricing Decisions

• Include the Company’s

1. Marketing Objectives

2. Marketing Mix Strategy

3. Costs

4. Organizational considerations.

1. Marketing Objectives.

• A company May seek additional general or specific objectives.

• General Objectives(include survival, current profit maximization, market share leadership, and product quality leadership)

• Specific Objectives (For eg. Prices can be reduced temporarily to create excitement for a product or to draw more customers into a retail store.)

2. Marketing Mix Strategy

• Target costing:- Pricing that starts with an ideal selling price based on customer considerations, and then target costs that will ensure that the price is met. P& G Spin brush electric toothbrush.

3. Costs

• Types of Costs.

1. Fixed Costs

2. Variable Costs

3. Total Costs

4. Costs at Different Levels of Production.

4.Organizational Considerations

• Who within the organization should set prices.

• Prices are often set by top management, divisional or product line managers.

• In industries in which pricing is a key factor(aerospace,steel,railroads,oil companies)companies often have a pricing department to set the best prices or to help others insetting them.

External Factors Affecting Pricing Decisions

• Include the

1. Nature of the Market and demand

2. Competition

3. Other Environmental elements.

The Market and Demand

• Pricing in Different types of Markets.

• Economists Recognize four types of markets, each presenting a different pricing challenge.

1. Under Pure Competition

2. “ Monopolistic Competition

3. “ oligopolistic competition

4. Pure Monoploy

Consumer Perceptions of Price and value

• In the end consumer will decide whether a product’s price is right .

• Price >Value

• Price<Value

Analyzing the Price-Demand Relationship

• 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 charged.

Price Elasticity of Demand

• A measure of the sensitivity of demand to changes in price.

• Marketers also need to know price elasticity- how responsive demand will be to change in price.Consider the two demand curves.

• Price Elasticity of Demand= %change in quantity demanded% change in price

What determines the price elasticity of demand?

• Buyers are less price sensitive when the product is unique or when it is high in quality, prestige or exclusiveness.

• They are less price sensitive when substitute products are hard to find or when they can not easily compare the quality of substitutes.

• And finally buyers are less price sensitive when the total expenditure for a product is low relative to their income .

Competitors Costs, Prices, and offers.

Other External Factors.

1. Economic Conditions.such as boom or recession,inflation, and interest rates affect pricing decisions.

2. How will resellers react to various prices.

3. The government

4. Social Concerns

Pricing Methods or Approaches

Major Considerations in setting Price

Product

Costs

Competitors price and other internal and external factors

Consumer Perceptions of value

Price floor

No profits Before this price

Price Ceiling

No demand above this price

Examine the following approaches

1. The cost based approach(cost-plus pricing, break even analysis, and target profit pricing)

2. The buyer Based approach(value-based pricing)

3. The competition based approach(going-rate and sealed bid pricing)

Cost Based Pricing Approach

• 1. Cost plus pricing:- it is a simplest pricing method adding a standard markup to the cost of the product.

• Note:- Any pricing method that ignores demand and competitor prices is not likely to lead to the best price..

Break Even Analysis and target Profit Pricing.

• Break-even pricing(target profit pricing):- setting price to break even on the costs of making and marketing a product ; or setting price to make a target profit.

• Target pricing uses the concept of a break even chart, which shows the total cost and total revenue expected at different sales volume levels.

The buyer Based approach

• Value Based Pricing:- setting price based on buyers perceptions of value rather than on the seller’s cost.

• Comparison between cost based and value based pricing.shown by a diagram.

Value Pricing

• Offering just the right combination of quality and good service at a fair price.

• EDLP

Competition Based Pricing

• Competition based pricing is going rate pricing.

Pricing Strategies

1. New-Product Pricing Strategies

2. Product Mix Pricing Strategies

3. Price Adjustment Strategies

1.New Product Pricing Strategies

1. Market –Skimmimg pricing

2. Market-penetration Pricing

1.Market-Skimming pricing

• Setting a high price for a new product to skim maximum revenues layer by layer from the segments willing to pay the high price; the company makes fewer but more profitable sales.

2.Market Penetration Pricing

• Setting a low price for a new product in order to attract a large number of buyers and a large market share. Eg dell computers.

2.Product Mix Strategies

• Product line Pricing

• Optional-product pricing

• Captive-product pricing

• By-product Pricing

• Product bundle pricing

• Setting price steps between product line items

• Pricing optional or accessory products sold with the main product

• Pricing product that must be used with the main product

• Pricing low value by product to get rid of them

• Pricing bundle of products sold together

1. Product Line Pricing

• Setting the price steps between various products in a product line based on cost differences between the products, customer evaluations of different features, and competitors prices.

2. Optional-product pricing

• The pricing of optional or accessory products along with a main product.

3. Captive-Product pricing

• Setting a price for products that must be used along with a main product, such as blades for a razor and film for a camera.

4.By-Prodcut pricing

• Setting a price for by-products in order to make the main product’s prce more competitive

Product Bundle pricing

• Combining several products and offering the bundle at a reduced price.