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& NonprofitsBusinessesMusiciansArtists & DesignersTeachers+ all categoriesMost FollowedPopular..Sign Up|Log In..We've updated our privacy policy! Click here to read about it.inShare.0Embed DocCopy LinkReadcastCollections15CommentGo Back Pricing StrategySourabh Kumar SahaCalcutta Business School PGDM-2008 Page 1Abst ract :From time to time we come across instances where businesses are not realiz ing their fullpotential when setting prices. Sometimes this can mean missed reve nue, in other cases it canhave a negative effect on the brand sending a mixed me ssage of what it stands for. In eithercase profits can be lost. In this research paper , we take a look at the key factors to consider whenreviewing your pricin g strategy. Price is the only revenue generating element amongst the4ps,the rest being cost centers. Pricing is the manual or automatic process of applying pric es topurchase and sales orders, based on factors such as: a fixed amount, quanti ty break, promotion orsales campaign, specific vendor quote, price prevailing on entry, shipment or invoice date,combination of multiple orders or lines, and ma ny others. Automated systems require more setupand maintenance but may prevent p ricing errors. In setting pricing policy, a company estimatesthe demand curve, t he probable quantities it will sell at each possible price. It estimates how its costs vary at different levels of output . In this paper , we also study situati ons when companiesoften face situations where they may need to cut or raise pric es. The firm facing a competitor'sprice change must try to understand the compet itor's intent and the likely duration of the change. Pricing StrategySourabh Kumar SahaCalcutta Business School PGDM-2008 Page 2Intr oduction :One of the four major elements of the marketing mix is price. Pricing is an important strategicissue because it is related to product positioning. Fur thermore, pricing affects other marketingmix elements such as product features, channel decisions, and promotion. Price is the oneelement of the marketing mix t hat produces revenue; the other elements produce costs. Prices areperhaps the ea siest element of the marketing program to adjust; product features, channels, an deven promotion take more time. Price also communicates to the market the compan y's intendedvalue positioning of its product or brand. A well-designed and marke ted product can command aprice premium and reap big profits.Motivation :Developi ng strategy is one thing-managing the change process to embed that strategy in t heorganization is quite another. The truth is that implementing effective pricin g strategy involveschanging the expectations and behaviors of all of the actors involved in the sales process.Customers must learn that they will be treated fai rly and that abusive purchase tactics will not berewarded with ad hoc discounts. Sales must learn that they will be rewarded for closing dealsthat increase firm profitability rather than using price as a tactical lever to increase sales vol ume.Finance must learn to look beyond cost as a determinant of price to better u nderstand thetradeoffs between price, cost, and marketresponse. Financial incenti ves are, without question,one of themost powerful levers for behavioral change a mong salespeople. What a price should do :A well chosen price should do three thi ngs:Achieve the financial goals of the company (e.g., profitability)Fit the real ities of the marketplace (Will customers buy at that price?)Support a product's positioning and be consistent with the other variables in themarketing mix price is influenced by the type of distribution channel used, the type of promotions used, and the quality of the productPrice will usually need to be relatively hig h if manufacturing is expensive, distribution isexclusive, and the product is su pported by extensive advertising and promotional campaignsA low price can be a v iable substitute for product quality, effective promotions, or an energeticselli ng effort by distributorsFrom the marketers point of view, anefficient priceis a price that is very close to the maximumthat customers are prepared to pay. In e conomic terms, it is a price that shifts most of theconsumer surplus to the prod ucer. A good pricing strategy would be the one which could balancebetween the pr ice floor(the price below which the organization ends up in losses) and the pric

eceiling(the price beyond which the organization experiences a no demand situati on). Pricing StrategySourabh Kumar SahaCalcutta Business School PGDM-2008 Page 3Unde rstanding Pricing Price is not just a number on a tag or an item : Price is all around us. You pay rent foryour apartment, tuition for your education, and a fee to your physician or dentist. The airline,railway, taxi, and bus companies char ge you a fare; the local utilities call their price a rate; andthe local bank ch arges you interest for the money you borrow. The price for driving your car onFl orida's Sunshine Parkway is a toll, and the company that insures your car charge s you apremium. The guest lecturer charges an honorarium to tell you about a gov ernment official whotook a bribe to help a shady character steal dues collected by a trade association. Clubs orsocieties to which you belong may make a special assessment to pay unusual expenses. Yourregular lawyer may ask for a retainer t o cover her services. The "price" of an executive is asalary, the price of a sal esperson may be a commission, and the price of a worker is a wage.Finally, altho ugh economists would disagree, many of us feel that income taxes are the price w epay for the privilege of making money.Throughout most of history, prices were s et by negotiation between buyers and sellers."Bargaining" is still a sport in so me areas. Setting one price for all buyers is a relatively modernidea that arose with the development of large-scale retailing at the end of the nineteenth cent ury.F. W. Woolworth, Tiffany and Co., John Wanamaker, and others advertised a "s trictly one-pricepolicy," because they carried so many items and supervised so m any employees.Today the Internet is partially reversing the fixed pricing trend. Computer technology ismaking it easier for sellers to use software that monitor s customers' movements over the Weband allows them to customize offers and price s. New software applications are also allowingbuyers to compare prices instantan eously through online robotic shoppers. As one industryobserver noted, "We are m oving toward a very sophisticated economy. It's kind of an arms racebetween merc hant technology and consumer technology.Traditionally, price has operated as the major determinant of buyer choice. This is stillthe case in poorer nations, amo ng poorer groups, and with commodity-type products. Althoughnonprice factors hav e become more important in recent decades, price still remains one of themost im portant elements determining market share and profitability. Consumers and purch asingagents have more access to price information and price discounters. Consume rs put pressure onretailers to lower their prices. Retailers put pressure on man ufacturers to lower their prices. Theresult is a marketplace characterized by he avy discounting and sales promotion.How Companies Price :Companies do their pric ing in a variety of ways. In small companies, prices are often setby the boss. I n large companies, pricing is handled by division and product-line managers. Eve nhere, top management sets general pricing objectives and policies and often app roves the pricesproposed by lower levels of management. In industries where pric ing is a key factor (aerospace,railroads, oil companies), companies will often e stablish a pricing department to set or assistothers in determining appropriate prices. This department reports to the marketing department,finance department, or top management. Others who exert an influence on pricing include salesmanager s, production managers, finance managers, and accountants.Executives complain th at pricing is a big headache and one that is getting worse by theday. Many compa nies do not handle pricing well, and throw up their hands at "strategies" liketh is: "We determine our costs and take our industry's traditional margins." Other commonmistakes are: Price is not revised often enough to capitalize on market ch anges; price is set Pricing StrategySourabh Kumar SahaCalcutta Business School PGDM-2008 Page 4inde pendently of the rest of the marketing mix rather than as an intrinsic element o f market-positioning strategy; and price is not varied enough for different prod uct items, market segments,distribution channels, and purchase occasions.Others have a different attitude: They use price as a key strategic tool. These "powerp ricers" have discovered the highly leveraged effect of price on the bottom line. They customizeprices and offerings based on segment value and costs.The importa nce of pricing for profitability was demonstrated in a 1992 study byMcKinsey & C ompany. Examining 2,400 companies, McKinsey concluded that a 1 percentimprovemen

t in price created an improvement in operating profit of 11.1 percent. By contra st, 1percent improvements in variable cost, volume, and fixed cost produced prof it improvements,respectively, of only 7.8 percent, 3.3 percent, and 2.3 percent. Effectively designing and implementing pricing strategies requires a thoroughund erstanding of consumer pricing psychology and a systematic approach to setting, adapting,and changing prices.PriceSupplyDemandQuantityFig : Graph showing how th e supply and demand for the goods generally affects pricesBecause there is a rel ationship between price and quantity demanded, it is important tounderstand the impact of pricing on sales by estimating the demand curve for the product. Forex isting products, experiments can be performed at prices above and below the curr ent price inorder to determine theprice elasticity of demand.Inelastic demand in dicates that price increasesmight be feasible. Pricing StrategySourabh Kumar SahaCalcutta Business School PGDM-2008 Page 5Pric ing in Competitive Markets:Law of Demand: all other factors being the same, high er prices will lead to lower quantitiesbeing demanded.Price Elasticity of Demand (e) = % change in Quantity Demanded / % change in Price.Break Even Point: Point of zero profits, i.e., TR = TC.BEP Quantity: F/[P - UVC] Pricing StrategySourabh Kumar SahaCalcutta Business School PGDM-2008 Page 6Cons ider this matrix:There are many ways to price a product which have been discusse d in detail in the paper.Premium Pricing.Penetration Pricing.Economy Pricing.Pri ce Skimming.Psychological Pricing.Product Line Pricing.Optional Product Pricing. Captive Products Pricing .Product Bundle Pricing.Promotional Pricing.Geographica l Pricing.Value Pricing.A successful pricing strategy must be built on a solid a nalytical foundation which goes wellbeyond high-level customer values or competi tive anecdotes. It requires quantified models of customer decision-making, compe titive economics, and segmented internal economics. Pricing StrategySourabh Kumar SahaCalcutta Business School PGDM-2008 Page 7Comm on pricing mistakes :Pricing is too cost oriented. Companies do not take enough account of the overall marketdemand and consumer psychology.Prices are not revis ed often enough to take advantage of changed conditions in themarketplace.Prices are set independently of the rest of the marketing plan.Prices are not varied e nough for different product items and market segments.Prices are set to match or better a competitor without justification or analysis.Objectives in Setting Pri ce : Increase profits Attract new customers Maintain current customers Increas e profit per customer Introduce new product Generate cash Improve ROIHow to Attra ct New Customers : Introductory coupons / discounts provide incentive maintain reference price Trial offers increase familiarity reduce risk Problem perceive d as unfairMaintain Current Customers : Meet competition Pricing StrategySourabh Kumar SahaCalcutta Business School PGDM-2008 Page 8 ma tching prices add to bundle (as long as customers want it!) Create barriers to e xit contracts / subscriptions automatic billing phone numbers (no longer in t he U.S.) family plans Provide loyalty programs frequent flyer Starbuck cardsIn crease Profit per Customer : Increase prices reduce product? (candy bar pricing) justify/ notify / base on costs Adjust product mix sales incentives for more profitable business Adjust customer mix teenagers vs. seniors Charge for extras whats valuable to customer and cheap to company Get money up front Prepaid subsc riptions Pricing StrategySourabh Kumar SahaCalcutta Business School PGDM-2008 Page 9CONC ERNS IN SETTING PRICE :4Cs Competition CustomerCost CustomPRICING MODELS : Cost-ba sed Pricing Value-based Pricing Flat-Rate Pricing Ala-Carte Pricing Two-Part Pricing Peak Load / Congestion Pricing Dynamic PricingCost-based vs. Value-basedCost Base d Value Based1. Most Common pricing method 1. Optimal Profits2. Easiest Pricing Method 2. Requires Research3. Considered Fair 3. Complicated to administer4. Dif ficult to allocate fixed costs 4. Can be considered unfair5. Sub-optimal Profits Flat-Rate Pricing Single rate per time period: PROS: provides unlimited use increa ses use simple to explain & bill popular with customers / low risk CONS: difficul t to predict average price unfair in that some people subsidize others fair in tha t charges are predictable Pricing StrategySourabh Kumar SahaCalcutta Business School PGDM-2008 Page 10Ala -Carte PricingVariable rate depending on use: PROS: considered fair greater cho

ice greater control CONS: more difficult to explain more difficult to bill more r isk Two-part Pricing ICombines flat rate plus variable:e.g., monthly fee plus co st per minute (declining?) PROS spreads costs more fairly CONS perceived as hass le unpredictableTwo-Part Pricing IICombines down-payment & flat rate per month: PROS: covers fixed costs immediately spreads customers costs fits customers monthly budget generates financing revenues predictable / low risk CONS: increases total cost to customer requires long-term billingPeak Load / Congestion PricingVariabl e rate depending on time of day or week: PROS: spreads use encourages use in unpo pular time considered fair easy to explain CONS: difficult to bill Pricing StrategySourabh Kumar SahaCalcutta Business School PGDM-2008 Page 11Dyn amic PricingVariable rate for each customer: PROS: maximizes profit per customer CONS: difficult to implement requires detailed demand schedule difficult to expla in considered unfairConsumer Psychology and PricingMany economists assume that co nsumers are "price takers" and accept prices at "facevalue" or as given. Markete rs recognize that consumers often actively process price information,interpretin g prices in terms of their knowledge from prior purchasing experience, formalcom munications (advertising, sales calls, and brochures), informal communications ( friends,colleagues, or family members), and point-of-purchase or online resource s. Purchase decisionsare based on how consumers perceive prices and what they co nsider to be the current actualprice not the marketer's stated price. They may h ave a lower price threshold below whichprices may signal inferior or unacceptabl e quality, as well as an upper price threshold abovewhich prices are prohibitive and seen as not worth the money.Understanding how consumers arrive at their per ceptions of prices is an importantmarketing priority. Here we consider three key topics reference prices, price-quality inferences,and price endings.REFERENCE P RICESPrior research has shown that although consumers may have fairly good knowl edge of the range of prices involved, surprisingly few can recall specific price s of products accurately. When examining products, however, consumers often empl oyreference prices.In consideringan observed price, consumers often compare it t o an internal reference price (pricing informationfrom memory) or an external fr ame of reference (such as a posted "regular retail price").All types of referenc e prices are possible. Sellers often attempt to manipulate referenceprices. For example, a seller can situate its product among expensive products to imply that itbelongs in the same class. Department stores will display women's apparel in separatedepartments differentiated by price; dresses found in the more expensive department are assumedto be of better quality. Reference-price thinking is also encouraged by stating a highmanufacturer's suggested price, or by indicating th at the product was priced much higheroriginally, or by pointing to a competitor' s high price. Clever marketers try to frame the price to signal the best value p ossible. For example, arelatively more expensive item can be seen as less expens ive by breaking the price down intosmaller units. A $500 annual membership may b e seen as more expensive than "under $50 amonth" even if the totals are the same When consumers evoke one or more of these frames of reference, their perceived pricecan vary from the stated price. Research on reference prices has found that "unpleasantsurprises" when perceived price is lower than the stated price can h ave a greater impact onpurchase likelihood than pleasant surprises. Pricing StrategySourabh Kumar SahaCalcutta Business School PGDM-2008 Page 12PRI CE-QUALITY INFERENCES Many consumers use price as an indicator of quality. Image pricing is especially effectivewith ego-sensitive products such as perfumes and expensive cars. A $100 bottle of perfumemight contain $10 worth of scent, but g ift givers pay $100 to communicate their high regard forthe receiver.Price and q uality perceptions of cars interact. Higher-priced cars are perceived to possess high quality. Higher-quality cars are likewise perceived to be higher priced tha n they actuallyare. When alternative information about true quality is available , price becomes a less significantindicator of quality. When this information is not available, price acts as a signal of quality.Some brands adopt scarcity as a means to signify quality and justify premium pricing.Some automakers have buck ed the massive discounting craze that shook the industry and areproducing smalle r batches of new models, creating a buzz around them, and using the demand torai se the sticker price. Waiting lists, once reserved for limited-edition cars like

Ferraris, arebecoming more common for mass-market models, including Volkswagen and Acura SUVs andToyota and Honda minivans.PRICE CUES Consumer perceptions of p rices are also affected by alternative pricingstrategies. Many sellers believe t hat prices should end in an odd number. Many customers see astereo amplifier pri ced at $299 instead of $300 as a price in the $200 range rather than $300range. Research has shown that consumers tend to process prices in a "left-to-right" ma nnerrather than by rounding. Price encoding in this fashion is important if ther e is a mental pricebreak at the higher, rounded price. Another explanation for " 9" endings is that they convey thenotion of a discount or bargain, suggesting th at if a company wants a high-price image, it shouldavoid the odd-ending tactic. One study even showed that demand was actually increased one-third by raising th e price of a dress from $34 to $39, but demand was unchanged when the pricewas i ncreased from $34 to $44.Prices that end with "0" and "5" are also common in the marketplace as they are thought to beeasier for consumers to process and retrie ve from memory. "Sale" signs next to prices have beenshown to spur demand, but o nly if not overused: Total category sales are highest when some, butnot all, ite ms in a category have sale signs; past a certain point, use of additional sale s igns willcause total category sales to fall. Setting the PriceA firm must set a price for the first time when it develops a new product, when it introduces itsr egular product into a new distribution channel or geographical area, and when it enters bids onnew contract work. The firm must decide where to position its pro duct on quality and price. Mostmarkets have three to five price points or tiers. Marriott Hotels is good at developing differentbrands for different price point s: Marriott Vacation Club Vacation Villas (highest price),Marriott Marquis (high price), Marriott (high-medium price), Renaissance (medium-high price),Courtyard (medium price), Towne Place Suites (medium-low price), Fairfield Inn (low price ).The firm has to consider many factors in setting its pricing policy. We will d escribe a six-stepprocedure:Selecting the pricing objective;Determining demand; Pricing StrategySourabh Kumar SahaCalcutta Business School PGDM-2008 Page 13Est imating costs;Analyzing competitors' costs, prices, and offers;Selecting a prici ng method; andSelecting the final price.Fig : Setting Pricing PolicyPrice Segmen tation Big opportunity: Computer allows finer discrimination Customers want cho ice but not confusion Pricing StrategySourabh Kumar SahaCalcutta Business School PGDM-2008 Page 14Seg mentsPricing Over Product Life Cycle : Step 1: Selecting the Pricing ObjectiveT he company first decides where it wants to position its market offering. The cle arer a firm'sobjectives, the easier it is to set price. A company can pursue any of five major objectivesConsumer type : age sex income Education geography, etc.Use of product sports information, financial reports , information, etc.Service level Sp eed , quality, 7/24/365 , options / contentUrgency of need immediate, soon , overnight Volume of Use Emergency Only , Limited Usage, Quantity Discount , Unlimited UsageTim e of use Off-peak, Normal workinghours , unrestrictedLength of Contract 1, 2, 3 year slidingscaleLongevity of customer special extras forlongevity Pricing StrategySourabh Kumar SahaCalcutta Business School PGDM-2008 Page 15thr ough pricing: survival, maximum current profit, maximum market share, maximum ma rketskimming, or product-quality leadership.SURVIVAL Companies pursuesurvivalas their major objective if they are plagued withovercapacity, intense competition, or changing consumer wants. As long as prices cover variablecosts and some fixe d costs, the company stays in business. Survival is a short-run objective; inthe long run, the firm must learn how to add value or face extinction.MAXIMUM CURRE NT PROFIT Many companies try to set a price that willmaximizecurrent profits.The y estimate the demand and costs associated with alternative prices and choosethe price that produces maximum current profit, cash flow, or rate of return on inv estment. Thisstrategy assumes that the firm has knowledge of its demand and cost functions; in reality, theseare difficult to estimate. In emphasizing current p erformance, the company may sacrifice long-run performance by ignoring the effec ts of other marketing-mix variables, competitors' reactions,and legal restraints on price.MAXIMUM MARKET SHARE Some companies want tomaximize their market share .They believe that a higher sales volume will lead to lower unit costs and highe r long-run profit.They set the lowest price, assuming the market is price sensit

ive. Texas Instruments (TI) haspracticed this market-penetration pricing. TI wou ld build a large plant, set its price as low aspossible, win a large market shar e, experience falling costs, and cut its price further as costs fall.The followi ng conditions favor setting a low price:The market is highly price sensitive, an d a low price stimulates market growth;Production and distribution costs fall wi th accumulated production experience; andA low price discourages actual and pote ntial competition.Penetration: Starts at lowest possible pricePROS: penetrates m arket quickly , keeps out competitionCONS: creates low reference price , misses full profit potentialMAXIMUM MARKET SKIMMING Companies unveiling a new technolog y favorsetting high prices tomaximize market skimming.Sony is a frequent practit ioner of market-skimming pricing, where prices start high and are slowly lowered over time. When Sonyintroduced the world's first high-definition television (HD TV) to the Japanese market in 1990, itwas priced at $43,000. So that Sony could "skim" the maximum amount of revenue from thevarious segments of the market, the price dropped steadily through the years a 28-inch HDTVcost just over $6,000 in 1993 and a 42-inch HDTV cost about $1,200 in 2004.Market skimming makes sense u nder the following conditions:A sufficient number of buyers have a high current demand;The unit costs of producing a small volume are not so high that they canc el the advantageof charging what the traffic will bear;The high initial price do es not attract more competitors to the market;The high price communicates the im age of a superior product.Skimming: Adjusts prices down over time:PROS: skims of f maximum profit for each segment & establishes high reference priceCONS: attrac ts competition, difficult to administerPRODUCT -QUALITY LEADERSHIP A company mig ht aim to be the product-quality leader in the market. Many brands strive to be "affordable luxuries" products orservices characterized by high levels of percei ved quality, taste, and status with a price just high Pricing StrategySourabh Kumar SahaCalcutta Business School PGDM-2008 Page 16eno ugh not to be out of consumers' reach. Brands such as Starbucks coffee, Aveda sh ampoo,Victoria's Secret lingerie, BMW cars, and Viking ranges have been able to position themselvesas quality leaders in their categories, combining quality, lu xury, and premium prices with anintensely loyal customer base.OTHER OBJECTIVES N onprofit and public organizations may have other pricingobjectives. A university aims for partial cost recovery,knowing that it must rely on private giftsand pu blic grants to cover the remaining costs. A nonprofit hospital may aim for full costrecovery in its pricing. A nonprofit theater company may price its productio ns to fill themaximum number of theater seats. A social service agency may set a service price geared toclient income. Whatever the specific objective, business es that use price as a strategic tool willprofit more than those who simply let costs or the market determine their pricing.Step 2: Determining DemandEach price will lead to a different level of demand and therefore have a different impact on acompany's marketing objectives. The relation between alternative prices and the resulting currentdemand is captured in a demand curve. In the normal case, d emand and price are inverselyrelated: The higher the price, the lower the demand . In the case of prestige goods, the demandcurve sometimes slopes upward. A perf ume company raised its price and sold more perfumerather than less! Some consume rs take the higher price to signify a better product. However, if the price is t oo high, the level of demand may fall.PRICE SENSITIVITY The demand curve shows t he market's probable purchase quantity at alternative prices. Itsums the reactio ns of many individuals who have different price sensitivities. The first step in estimating demand is to understand what affects price sensitivity. Generally spe aking, customersare most price sensitive to products that cost a lot or are boug ht frequently. They are less pricesensitive to low-cost items or items they buy infrequently. They are also less price sensitivewhen price is only a small part of the total cost of obtaining, operating, and servicing the productover its lif etime. A seller can charge a higher price than competitors and still get the bus iness if the company can convince the customer that it offers the lowesttotal co st of ownership(TCO).Although the Internet increases the opportunity for price-s ensitive buyers to find andfavor lower-price sites, many buyers may not be that price sensitive. McKinsey conducted astudy and found that 89 percent of a sample of Internet customers visited only one book site, 84percent visited only one to

y site, and 81 percent visited only one music site, which indicates thatthere is less price-comparison shopping taking place on the Internet than is possible.Co mpanies need to understand the price sensitivity of their customers and prospect s andthe trade-offs people are willing to make between price and product charact eristics. Targetingonly price-sensitive consumers may in fact be "leaving money on the table."(a) Inelastic Demand (b) Elastic Demand$15 $15 $15$10 $10100 105 5 0 150Quantity Demanded per Period Quantity Demanded per Period Pricing StrategySourabh Kumar SahaCalcutta Business School PGDM-2008 Page 17EST IMATING DEMAND CURVES Most companies make some attempt to measure their demand c urves using severaldifferent methods.Statistical analysis of past prices, quanti ties sold, and other factors can reveal theirrelationships. The data can be long itudinal (over time) or cross-sectional (different locations atthe same time). B uilding the appropriate model and fitting the data with the proper statisticalte chniques calls for considerable skill. Price experiments can be conducted. Benne tt and Wilkinson systematically varied theprices of several products sold in a d iscount store and observed the results. An alternativeapproach is to charge diff erent prices in similar territories to see how sales are affected. Stillanother approach is to use the Internet. An e-business could test the impact of a 5 perc ent priceincrease by quoting a higher price to every fortieth visitor to compare the purchase response.However, it must do this carefully and not alienate custo mers, as happened when Amazon price-tested discounts of 30 percent, 35 percent, and 40 percent for DVD buyers, only to find that thosereceiving the 30 percent d iscount were upset.Surveys can explore how many units consumers would buy at dif ferent proposed prices,although there is always the chance that they might under state their purchase intentions at higherprices to discourage the company from s etting higher prices.In measuring the price-demand relationship, the market rese archer must control forvarious factors that will influence demand. The competito r's response will make a difference.Also, if the company changes other marketing -mix factors besides price, the effect of the pricechange itself will be hard to isolate. Nagle presents an excellent summary of the various methodsfor estimati ng price sensitivity and demand. PRICE ELASTICITY OF DEMAND Marketers need to kn ow how responsive, or elastic, demand would be to a change inprice. Consider the two demand curves in Figure . With demand curve (a), a price increase from$10 t o $15 leads to a relatively small decline in demand from 105 to 100. With demand curve(b), the same price increase leads to a substantial drop in demand from 15 0 to 50. If demandhardly changes with a small change in price, we say the demand isinelastic.If demand changesconsiderably, demand iselastic.The higher the elas ticity, the greater the volume growthresulting from a 1 percent price reduction. Demand is likely to be less elastic under the following conditions:There are few or no substitutes or competitors;Buyers do not readily notice the higher price; Buyers are slow to change their buying habits;Buyers think the higher prices are justified.If demand is elastic, sellers will consider lowering the price. A low er price will produce moretotal revenue. This makes sense as long as the costs o f producing and selling more units do notincrease disproportionately.It is a mis take to not consider the price elasticity of customers and their needs indevelop ing marketing programs. In 1997, the Metropolitan Transit Authority in New York introduced a new purchase plan for subway riders that discounted fares after pas ses were used 47times in a month. Critics pointed out that the special fare did not benefit those customers whosedemand was most elastic, suburban off-peak ride rs who used the subway the least. Commuters'demand curve is perfectly inelastic; no matter what happens to the fare, these people must get towork and get back h ome. Pricing StrategySourabh Kumar SahaCalcutta Business School PGDM-2008 Page 18Pri ce elasticity depends on the magnitude and direction of the contemplated price c hange.It may be negligible with a small price change and substantial with a larg e price change. It maydiffer for a price cut versus a price increase, and there may be a price indifference band withinwhich price changes have little or no eff ect. A McKinsey pricing study estimated that the priceindifference band can rang e as large as 17 percent for mouthwash, 13 percent for batteries, 9percent for s mall appliances, and 2 percent for certificates of deposit.Finally, long-run pri

ce elasticity may differ from short-run elasticity. Buyers maycontinue to buy fr om a current supplier after a price increase, but they may eventually switchsupp liers. Here demand is more elastic in the long run than in the short run, or the reverse mayhappen: Buyers may drop a supplier after being notified of a price i ncrease but return later. Thedistinction between short-run and long-run elastici ty means that sellers will not know the totaleffect of a price change until time passes.Step 3: Estimating CostsDemand sets a ceiling on the price the company c an charge for its product. Costs set thefloor. The company wants to charge a pri ce that covers its cost of producing, distributing, andselling the product, incl uding a fair return for its effort and risk. Yet, when companies priceproducts t o cover full costs, the net result is not always profitability.TYPES OF COSTS AN D LEVELS OF PRODUCTIONA company's costs take two forms, fixed and variable. Fixe d costs (also known asoverhead) are costs that do not vary with production or sa les revenue. A company must pay billseach month for rent, heat, interest, salari es, and so on, regardless of output.Variable costs vary directly with the level of production. For example, each handcalculator produced by Texas Instruments in volves the cost of plastic, microprocessor chips,packaging, and the like. These costs tend to be constant per unit produced. They are calledvariable because the ir total varies with the number of units produced.Total costs consist of the sum of the fixed and variable costs for any given level of production. Average cost is the cost per unit at that level of production; it is equal to total costsdiv ided by production. Management wants to charge a price that will at least cover the totalproduction costs at a given level of production.To price intelligently, management needs to know how its costs vary with different levelsof production. Take the case in which a company such as TI has built a fixed-size plant toprod uce 1,000 hand calculators a day. The cost per unit is high if few units are pro duced per day.As production approaches 1,000 units per day, the average cost fal ls because the fixed costs arespread over more units. Short-run average cost inc reases after 1,000 units, because the plantbecomes inefficient: Workers have to line up for machines, machines break down more often,and workers get in each oth ers' way .ACCUMULATED PRODUCTION Suppose TI runs a plant that produces 3,000 han d calculators per day. As TI gainsexperience producing hand calculators, its met hods improve. Workers learn shortcuts, materialsflow more smoothly, and procurem ent costs fall. The result, as Figure 14.4 shows, is that averagecost falls with accumulated production experience. Thus the average cost of producing the first 100,000 hand calculators is $10 per calculator. When the company has produced th e first200,000 calculators, the average cost has fallen to $9. After its accumul ated productionexperience doubles again to 400,000, the average cost is $8. This decline in the average cost withaccumulated production experience is called the experience curve or learning curve. Pricing StrategySourabh Kumar SahaCalcutta Business School PGDM-2008 Page 19Now s uppose three firms compete in this industry, TI, A, and B. TI is the lowest-cost producer at $8, having produced 400,000 units in the past. If all three firms se ll the calculator for$10, TI makes $2 profit per unit, A makes $1 per unit, and B breaks even. The smart move for TIwould be to lower its price to $9. This will drive B out of the market, and even A may considerleaving. TI will pick up the business that would have gone to B (and possibly A). Furthermore,price-sensitive customers will enter the market at the lower price. As production increasesbeyo nd 400,000 units, TI's costs will drop still further and faster and more than re store its profits,even at a price of $9. TI has used this aggressive pricing str ategy repeatedly to gain market shareand drive others out of the industry. Exper ience-curve pricing,nevertheless, carries major risks. Aggressive pricing mightg ive the product a cheap image. The strategy also assumes that competitors are we ak followers.It leads the company into building more plants to meet demand, whil e a competitor innovates alower-cost technology. The market leader is now stuck with the old technology. Mostexperience-curve pricing has focused on manufacturi ng costs, but all costs can be improved on,including marketing costs. If three f irms are each investing a large sum of money intelemarketing, the firm that has used it the longest might achieve the lowest costs. This firm cancharge a little

less for its product and still earn the same return, all other costs being equa l.ACTIVITY-BASED COST ACCOUNTING Today's companies try to adapt their offers and terms to different buyers. A manufacturer,for example, will negotiate different terms with different retail chains. One retailer may wantdaily delivery (to kee p inventory lower) while another may accept twice-a-week delivery inorder to get a lower price. The manufacturer's costs will differ with each chain, and so wil l itsprofits. To estimate the real profitability of dealing with different retai lers, the manufacturerneeds to use activity-based cost (ABC) accounting instead of standard cost accounting.ABC accounting tries to identify the real costs asso ciated with serving each customer. Itallocates indirect costs like clerical cost s, office expenses, supplies, and so on, to the activitiesthat use them, rather than in some proportion to direct costs. Both variable and overhead costsare tag ged back to each customer. Companies that fail to measure their costs correctly are notmeasuring their profit correctly and are likely to misallocate their mark eting effort. The key toeffectively employing ABC is to define and judge "activi ties" properly. One proposed time-based solution calculates the cost of one minu te of overhead and then decides how much of thiscost each activity uses.TARGET C OSTING Costs change with production scale and experience. They can also change a s a result of aconcentrated effort by designers, engineers, and purchasing agent s to reduce them through targetcosting. Market research is used to establish a n ew product's desired functions and the price atwhich the product will sell, give n its appeal and competitors' prices. Deducting the desired profitmargin from th is price leaves the target cost that must be achieved. Each cost element design, engineering, manufacturing, sales must be examined, and different ways to bring down costsmust be considered. The objective is to bring the final cost projectio ns into the target cost range.If this is not possible, it may be necessary to st op developing the product because it could not sellfor the target price and make the target profit. To hit price and margin targets, marketers of 9Lives brand of cat food employed target costing to bring their price down to "four cans for ad ollar" via a reshaped package and redesigned manufacturing processes. Even with lower prices,profits for the brand doubled. Pricing StrategySourabh Kumar SahaCalcutta Business School PGDM-2008 Page 20Step 4: Analyzing Competitors' Costs, Prices, and OffersWithin the range of possible prices determined by market demand and company costs, the firmmust take competit ors' costs, prices, and possible price reactions into account. The firm shouldfi rst consider the nearest competitor's price. If the firm's offer contains featur es not offered by thenearest competitor, their worth to the customer should be e valuated and added to the competitor'sprice. If the competitor's offer contains some features not offered by the firm, their worth to thecustomer should be eval uated and subtracted from the firm's price. Now the firm can decidewhether it ca n charge more, the same, or less than the competitor. But competitors can alsoch ange their prices in reaction to the price set by the firm.Step 5: Selecting a P ricing MethodGiven the three Cs the customers' demand schedule, the cost functio n, and competitors'prices the company is now ready to select a price. The three major considerations in pricesetting : Costs set a floor to the price. Competito rs' prices and the price of substitutes provide anorienting point. Customers' as sessment of unique features establishes the price ceiling.Companies select a pri cing method that includes one or more of these three considerations. Wewill exam ine six price-setting methods: markup pricing, target-return pricing, perceivedvaluepricing, value pricing, going-rate pricing, and auction-type pricing.MARKUP PRICING The most elementary pricing method is to add a standard markup tothe pr oduct's cost. Construction companies submit job bids by estimating the total pro ject costand adding a standard markup for profit. Lawyers and accountants typica lly price by adding astandard markup on their time and costs.TARGET-RETURN PRICI NG In target-return pricing, the firm determines the price thatwould yield its t arget rate of return on investment (ROI). Target pricing is used by GeneralMotor s, which prices its automobiles to achieve a 15 to 20 percent ROI. This method i s also usedby public utilities, which need to make a fair return on investment.P ERCEIVED-VALUE PRICING An increasing number of companies now base theirprice on the customer's perceived value. They must deliver the value promised by their va

lueproposition, and the customer must perceive this value. They use the other ma rketing-mixelements, such as advertising and sales force, to communicate and enh ance perceived value inbuyers' minds. Perceived value is made up of several elem ents, such as the buyer's image of theproduct performance, the channel deliverab les, the warranty quality, customer support, and softerattributes such as the su pplier's reputation, trustworthiness, and esteem. Furthermore, eachpotential cus tomer places different weights on these different elements, with the result that somewill be price buyers, others will be value buyers, and still others will beloyal buyers.Companiesneed different strategies for thes e three groups. For price buyers, companies need to offerstripped-down products and reduced services. For value buyers, companies must keep innovatingnew value and aggressively reaffirming their value. For loyal buyers, companies must inves t inrelationship building and customer intimacy. Pricing StrategySourabh Kumar SahaCalcutta Business School PGDM-2008 Page 21VALUE PRICING In recent years, several companies have adopted value pricing: They win loyal customers by charging a fairly low price for a high-quality offering. Amon g the bestpractitioners of value pricing are IKEA and Southwest Airlines. In the early 1990s, Procter &Gamble created quite a stir when it reduced prices on sup ermarket staples such as Pampers andLuvs diapers, liquid Tide detergent, and Fol ger's coffee to value price them. In the past, a brand-loyal family had to pay w hat amounted to a $725 premium for a year's worth of P&G productsversus privatelabel or low-priced brands. To offer value prices, P&G underwent a majoroverhaul . It redesigned the way it developed, manufactured, distributed, priced, markete d, andsold products to deliver better value at every point in the supply chain.V alue pricing is not a matter of simply setting lower prices; it is a matter of r e-engineering thecompany's operations to become a low-cost producer without sacr ificing quality, and loweringprices significantly to attract a large number of v alue-conscious customers. An important type of value pricing is everyday low pri cing (EDLP), which takes place at the retail level. A retailerwho holds to an ED LP pricing policy charges a constant low price with little or no pricepromotions and special sales. These constant prices eliminate week-to-week price uncertain tyand can be contrasted to the "high-low" pricing of promotion-oriented competit ors. In high-lowpricing, the retailer charges higher prices on an everyday basis but then runs frequent promotionsin which prices are temporarily lowered below the EDLP level. The two different pricingstrategies have been shown to affect co nsumer price judgments deep discounts (EDLP) canlead to lower perceived prices b y consumers over time than frequent, shallow discounts (high-low), even if the a ctual averages are the same.In recent years, high-low pricing has given way to E DLP at such widely different venues asGeneral Motors' Saturn car dealerships and upscale department stores such as Nordstrom; but theking of EDLP is surely WalMart, which practically defined the term. Except for a few sale itemsevery month , Wal-Mart promises everyday low prices on major brands. "It's not a short-terms trategy," says one Wal-Mart executive. "You have to be willing to make a commitm ent to it,and you have to be able to operate with lower ratios of expense than e verybody else."Some retailers have even based their entire marketing strategy ar ound what could be calledextremeeveryday low pricing. Partly fueled by an econom ic downturn, once unfashionable"dollar stores" are gaining in popularity:The mos t important reason retailers adopt EDLP is that constant sales and promotions ar e costlyand have eroded consumer confidence in the credibility of everyday shelf prices. Consumers alsohave less time and patience for such time-honored traditi ons as watching for supermarketspecials and clipping coupons. Yet, there is no d enying that promotions create excitement anddraw shoppers. For this reason, EDLP is not a guarantee of success. As supermarkets faceheightened competition from their counterparts and from alternative channels, many find that thekey to drawi ng shoppers is using a combination of high-low and everyday low pricing strategi es,with increased advertising and promotions.GOING-RATE PRICING In going-rate pr icing, the firm bases its price largely oncompetitors' prices. The firm might ch

arge the same, more, or less than major competitor(s). Inoligopolistic industrie s that sell a commodity such as steel, paper, or fertilizer, firms normallycharg e the same price. The smaller firms "follow the leader," changing their prices w hen themarket leader's prices change rather than when their own demand or costs change. Some firmsmay charge a slight premium or slight discount, but they prese rve the amount of difference. Thus Pricing StrategySourabh Kumar SahaCalcutta Business School PGDM-2008 Page 22minor gasoline retailers usually charge a few cents less per gallon than the major oi l companies,without letting the difference increase or decrease.Going-rate prici ng is quite popular. Where costs are difficult to measure or competitive respons eis uncertain, firms feel that the going price is a good solution because it is thought to reflect theindustry's collective wisdom.AUCTION-TYPE PRICING Auctiontype pricing is growing more popular, especiallywith the growth of the Internet. There are over 2,000 electronic marketplaces selling everythingfrom pigs to use d vehicles to cargo to chemicals. One major purpose of auctions is to dispose of excess inventories or used goods. Companies need to be aware of the three major types of auctions and their separate pricing procedures. English auctions (asce nding bids).One seller and many buyers. On sites such as Yahoo! andeBay, the sel ler puts up an item and bidders raise the offer price until the top price is rea ched.English auctions are being used today for selling antiques, cattle, real es tate, and used equipmentand vehicles. After seeing ticket brokers and scalpers r eap millions by charging what the marketwould bear, Ticketmaster Corp. began auc tioning the best seats to concerts in late 2003 throughits Web site. Dutch aucti ons (descending bids).One seller and many buyers, or one buyer and many sellers. In the first kind, an auctioneer announces a high price for a product and then s lowly decreasesthe price until a bidder accepts the price. In the other, the buy er announces something that hewants to buy and then potential sellers compete to get the sale by offering the lowest price. Eachseller sees what the last bid is and decides whether to go lower. FreeMarkets.com helped RoyalMail Group pic, th e United Kingdom's public mail service company, save approximately 2.5million po unds in part via an auction where 25 airlines bid for its international freight business.Sealed-bid auctions.Would-be suppliers can submit only one bid and cann ot know the otherbids. The U.S. government often uses this method to procure sup plies. A supplier will not bidbelow its cost but cannot bid too high for fear of losing the job. The net effect of these two pullscan be described in terms of t he bid'sexpected profit.Using expected profit for setting pricemakes sense for t he seller that makes many bids. The seller who bids only occasionally or whoneed s a particular contract badly will not find it advantageous to use expected prof it. Thiscriterion does not distinguish between a $1,000 profit with a 0.10 proba bility and a $125 profitwith a 0.80 probability. Yet the firm that wants to keep production going would prefer the secondcontract to the first.Step 6: Selecting the Final PricePricing methods narrow the range from which the company must sel ect its final price. Inselecting that price, the company must consider additiona l factors, including the impact of othermarketing activities, company pricing po licies, gain-and-risk-sharing pricing, and the impact of price on other parties. IMPACT OF OTHER MARKETING ACTIVITIES The final price must take intoaccount the b rand's quality and advertising relative to the competition. In a classic study, Farrisand Reibstein examined the relationships among relative price, relative qu ality, and relativeadvertising for 227 consumer businesses, and found the follow ing: Pricing StrategySourabh Kumar SahaCalcutta Business School PGDM-2008 Page 23Brand s with average relative quality but high relative advertising budgets were able tocharge premium prices. Consumers apparently were willing to pay higher prices forknown products than for unknown products.Brands with high relative quality an d high relative advertising obtained the highestprices. Conversely, brands with low quality and low advertising charged the lowestprices.The positive relationsh ip between high prices and high advertising held most strongly inthe later stage s of the product life cycle for market leaders.These findings suggest that price is not as important as quality and other benefits in the marketoffering. One st udy asked consumers to rate the importance of price and other attributes in usin

gonline retailing. Only 19 percent cared about price; far more cared about custo mer support (65percent), on-time delivery (58 percent), and product shipping and handling (49 percent)COMPANY PRICING POLICIES The price must be consistent with company pricingpolicies. At the same time, companies are not averse to establis hing pricing penalties undercertain circumstances.Airlines charge $150 to those who change their reservations on discount tickets. Banks chargefees for too many withdrawals in a month or for early withdrawal of a certificate of deposit. Car rental companies charge $50 to $100 penalties for no-shows for specialty vehicle s. Althoughthese policies are often justifiable, they must be used judiciously s o as not to unnecessarilyalienate customers.Many companies set up a pricing depa rtment to develop policies and establish or approvedecisions. The aim is to ensu re that salespeople quote prices that are reasonable to customers andprofitable to the company. Dell Computer has developed innovative pricing techniques.GAIN-A ND-RISK-SHARING PRICING Buyers may resist accepting a seller'sproposal because o f a high perceived level of risk. The seller has the option of offering to absor bpart or all of the risk if it does not deliver the full promised value. Conside r the following.STEALTH PRICE INCREASESWith consumers stubbornly resisting highe r prices, companies are trying to figure out how toincrease revenue without real ly raising prices. Increasingly, the solution has been through theaddition of fe es for what had once been free features. Although some consumers abhor "nickel-a nd-dime" pricing strategies, small additional charges can add up to a substantia l source of revenue.The numbers can be staggering. Fees for consumers who pay bi lls online, bounce checks, or useautomated teller machines bring banks an estima ted $30 billion annually. Retailers Target andBest Buy charge a 15 percent "rest ocking fee" for returning electronic products. Credit card latepayments up by 11 percent in 2003 exceed $10 billion in total. The telecommunicationsindustry in general has been aggressive at adding fees for setup, change-of-service, service termination, directory assistance, regulatory assessment, number portability, an d cable hookupand equipment, costing consumers billions of dollars. By charging its long-distance customers anew 99-cent monthly "regulatory assessment fee," AT &T could bring in as much as $475million.This explosion of fees has a number of implications. Given that list prices stay fixed, they mayresult in inflation bei ng understated . They also make it harder for consumers to compare Pricing StrategySourabh Kumar SahaCalcutta Business School PGDM-2008 Page 24compe titive offerings. Although various citizen groups have been formed to pressure c ompaniesto roll back some of these fees, they don't always get a sympathetic ear from state and localgovernments who have been guilty of their own array of fees , fines, and penalties to raisenecessary revenue.Companies justify the extra fee s as the only fair and viable way to cover expenses without losingcustomers. Man y argue that it makes sense to charge a premium for added services that costmore to provide, rather than charge all customers the same amount regardless of whet her or notthey use the extra service. Breaking out charges and fees according to the services involved isseen as a way to keep the basic costs low. Companies al so use fees as a means to weed outunprofitable customers or change their behavio r. Some airlines now charge passengers $50 forpaper tickets and $25 for every ba g over 50 pounds.Ultimately, the viability of extra fees will be decided in the marketplace and by the willingnessof consumers to vote with their wallets and pa y the fees or vote with their feet and move on.IMPACT OF PRICE ON OTHER PARTIESM anagement must also consider the reactions of other parties to the contemplated price. How will distributors and dealers feel about it? If they donot make enoug h profit, they may not choose to bring the product to market. Will the sales for cebe willing to sell at that price? How will competitors react? Will suppliers r aise their prices whenthey see the company's price? Will the government interven e and prevent this price from beingcharged?While Wal-Mart's relentless drive to squeeze out costs and lower prices has benefited consumers,the downward price pr essure is taking a big toll on suppliers such as Vlasic.ADAPTING THE PRICECompan ies usually do not set a single price, but rather a pricing structure that refle cts variationsin geographical demand and costs, market-segment requirements, pur chase timing, order levels,delivery frequency, guarantees, service contracts, an d other factors. As a result of discounts,allowances, and promotional support, a

company rarely realizes the same profit from each unit of a product that it sel ls. Here we will examine several price-adaptation strategies: geographicalpricin g, price discounts and allowances, promotional pricing, and differentiated prici ng.Geographical Pricing (Cash, Countertrade, Barter)In geographical pricing the company decides how to price its products to different customers indifferent loc ations and countries.Price Discounts and AllowancesMost companies will adjust th eir list price and give discounts and allowances for early payment,volume purcha ses, and off-season buying. Companies must do this carefully or find that theirp rofits are much less than planned.Discount pricing has become the modus operandi of a surprising number of companies offeringboth products and services. Some pr oduct categories tend to self-destruct by always being onsale. Salespeople, in p articular, are quick to give discounts in order to close a sale. But word canget around fast that the company's list price is "soft," and discounting becomes th e norm. Thediscounts undermine the value perceptions of the offerings.Some compa nies in an overcapacity situation are tempted to give discounts or even begin to supply a retailer with a store brand version of their product at a deep discount . Because the storebrand is priced lower, however, it may start making inroads o n the manufacturer's brand.Manufacturers should stop to consider the implication s of supplying products at a discount to Pricing StrategySourabh Kumar SahaCalc utta Business School PGDM-2008 Page 25retailers because they may end up losing l ong-run profits in an effort to meet short-run volumegoals. When automakers get rebate-happy, the market just sits back and waits for a deal. WhenFord was able to buck that trend, it achieved positive results. FORD In 2003, at a time when o ther American auto companies were emphasizing rebates and 0 percent loans, Ford Motor Company actually raised average prices through "smart pricing." Thecompany analyzed sales data from dealerships to predict which prices and incentives wou ld bethe most effective for different models in different markets. More marketin g funds were allocated to high-margin but slow-selling models, such as the F-150 truck, as well as to push lucrativeoptions and extras. Ford offered only a $1,0 00 rebate on the Escape, a small sport utility vehicle,but $3,000 on the slowerselling Explorer model. Ford actually increased market share duringthis time and estimated that smart pricing contributed one-third of its profit.Kevin Clancy, chairman of Copernicus, a major marketing research and consulting firm, found th at only between 15 and 35 percent of buyers in most categories are price sensiti ve. People withhigher incomes and higher product involvement willingly pay more for features, customer service, quality, added convenience, and the brand name. So it can be a mistake for a strong,distinctive brand to plunge into price disco unting to respond to low-price attacks. At the sametime, discounting can be a u seful tool if the company can gain concessions in return, such aswhen the custom er agrees to sign a three-year contract, is willing to order electronically, thu ssaving the company money, or agrees to buy in truck-load quantities.Sales manag ement needs to monitor the proportion of customers who are receiving discounts,t he average discount, and the particular salespeople who are over relying on disc ounting. Higher levels of management should conduct a net price analysis to arri ve at the "real price" of their offering. The real price is affected not only by discounts, but by many other expenses that reduce the realized price: Suppose t he company's list price is $3,000. The average discount is$300. The company's pr omotional spending averages $450 (15% of the list price). Co-opadvertising money of $150 is given to retailers to back the product. The company's net price is$2 ,100, not $3,000.Promotional PricingCompanies can use several pricing techniques to stimulate early purchase: Loss-leader pricing.Supermarkets and department st ores often drop the price on well-known brands to stimulate additional store tra ffic. This pays if the revenue on theadditional sales compensates for the lower margins on the loss-leader items.Manufacturers of loss-leader brands typically o bject because this practice can dilute thebrand image and bring complaints from retailers who charge the list price. Manufacturershave tried to restrain interme diaries from loss-leader pricing through lobbying for retail-price-maintenance l aws, but these laws have been revoked.Special-event pricing.Sellers will establi sh special prices in certain seasons to draw inmore customers. Every August, the re are back-to-school sales.Cash rebates.Auto companies and other consumer-goods

companies offer cash rebatesto encourage purchase of the manufacturers' product s within a specified time period.Rebates can help clear inventories without cutt ing the stated list price. Pricing StrategySourabh Kumar SahaCalcutta Business School PGDM-2008 Page 26 Lo w-interest financing.Instead of cutting its price, the company can offer custome rslow-interest financing. Automakers have even announced no-interest financing t o attractcustomers. Longer payment terms.Sellers, especially mortgage banks and auto companies, stretchloans over longer periods and thus lower the monthly paym ents. Consumers often worryless about the cost (i.e., the interest rate) of a lo an and more about whether they canafford the monthly payment.Warranties and serv ice contracts.Companies can promote sales by adding a free or low-cost warranty or service contract. Psychological discounting.This strategy involves setting an artificially high price andthen offering the product at substantial savings; fo r example, "Was $359, now $299."Illegitimate discount tactics are fought by the Federal Trade Commission and BetterBusiness Bureaus. Discounts from normal price s are a legitimate form of promotionalpricing.Promotional-pricing strategies are often a zero-sum game. If they work, competitors copy themand they lose their e ffectiveness. If they do not work, they waste money that could have been putinto other marketing tools, such as building up product quality and service or stren gtheningproduct image through advertising.Differentiated PricingCompanies often adjust their basic price to accommodate differences in customers, products,locat ions, and so on. Lands' End creates men's shirts in many different styles, weigh ts, and levelsof quality. A men's white button-down shirt may cost as little as $18.50 or as much as $48.00.Price discrimination occurs when a company sells a p roduct or service at two or more prices thatdo not reflect a proportional differ ence in costs. In first-degree price discrimination, the sellercharges a separat e price to each customer depending on the intensity of his or her demand. Inseco nd-degree price discrimination, the seller charges less to buyers who buy a larg er volume. Inthird-degree price discrimination, the seller charges different amo unts to different classes of buyers, as in the following cases:Customer-segment pricing.Different customer groups are charged different prices forthe same produ ct or service. For example, museums often charge a lower admission feeto student s and senior citizens. Product-form pricing.Different versions of the product ar e priced differently but notproportionately to their respective costs. Evian pri ces a 48-ounce bottle of its mineralwater at $2.00. It takes the same water and packages 1.7 ounces in a moisturizer spray for$6.00. Through product-form pricin g, Evian manages to charge $3.00 an ounce in oneform and about $.04 an ounce in another. Image pricing.Some companies price the same product at two different le vels based onimage differences. A perfume manufacturer can put the perfume in on e bottle, give it aname and image, and price it at $10 an ounce. It can put the same perfume in anotherbottle with a different name and image and price it at $3 0 an ounce.Channel pricing.Coca-Cola carries a different price depending on whet her it ispurchased in a fine restaurant, a fast-food restaurant, or a vending ma chine. Pricing StrategySourabh Kumar SahaCalcutta Business School PGDM-2008 Page 27 Lo cation pricing.The same product is priced differently at different locations eve nthough the cost of offering at each location is the same. A theater varies its seat pricesaccording to audience preferences for different locations.Time pricin g.Prices are varied by season, day, or hour. Public utilities vary energy ratest o commercial users by time of day and weekend versus weekday. Restaurants charge less to "early bird" customers. Hotels charge less on weekends.The airline and h ospitality industries use yield management systems and yield pricing, by whichth ey offer discounted but limited early purchases, higher-priced late purchases, a nd the lowestrates on unsold inventory just before it expires. Airlines charge d ifferent fares to passengers onthe same flight, depending on the seating class; the time of day (morning or night coach); the dayof the week (workday or weekend ); the season; the person's company, past business, or status(youth, military, s enior citizen); and so on.That's why on a flight from New York City to Miami you might have paid S200 and be sittingacross from someone who has paid $1,290. Tak e Continental Airlines: It launches 2,000 flights aday and each flight has betwe

en 10 and 20 prices. Continental starts booking flights 330 days inadvance, and every flying day is different from every other flying day. At any given moment t hemarket has more than 7 million prices. And in a system that tracks the differe nce in prices andthe price of competitors' offerings, airlines collectively chan ge 75,000 prices a day! It's a systemdesigned to punish procrastinators by charg ing them the highest possible prices.The phenomenon of offering different pricin g schedules to different consumers and dynamicallyadjusting prices is exploding. Most consumers are probably not even aware of the degree towhich they are the t argets of discriminatory pricing. For instance, catalog retailers like Victoria' sSecret routinely send out catalogs that sell identical goods except at differen t prices. Consumerswho live in a more free-spending zip code may see only the hi gher prices. Office productsuperstore Staples also sends out office supply catal ogs with different prices.Some forms of price discrimination (in which sellers o ffer different price terms to differentpeople within the same trade group) are i llegal. However, price discrimination is legal if theseller can prove that its c osts are different when selling different volumes or different qualities of the same product to different retailers. Predatory pricing selling below cost with t he intentionof destroying competition is unlawful. Even if legal, some different iated pricing may meet witha hostile reaction. Coca-Cola considered raising its vending machine soda prices on hot daysusing wireless technology, and lowering t he price on cold days. Customers so disliked the ideathat Coke abandoned it.For price discrimination to work, certain conditions must exist. First, the market m ust besegmentable and the segments must show different intensities of demand. Se cond, members inthe lower-price segment must not be able to resell the product t o the higher-price segment. Third,competitors must not be able to undersell the firm in the higher-price segment. Fourth, the cost of segmenting and policing th e market must not exceed the extra revenue derived from pricediscrimination. Fif th, the practice must not breed customer resentment and ill will. Sixth, thepart icular form of price discrimination must not be illegal . Pricing StrategySourabh Kumar SahaCalcutta Business School PGDM-2008 Page 28Ini tiating and Responding to Price ChangesCompanies often face situations where the y may need to cut or raise prices.INITIATING PRICE CUTSSeveral circumstances mig ht lead a firm to cut prices. One is excess plant capacity: The firmneeds additi onal business and cannot generate it through increased sales effort, productimpr ovement, or other measures. It may resort to aggressive pricing, but in initiati ng a price cut,the company may trigger a price war.Companies sometimes initiate price cuts in adrive to dominate the market through lower costs.Either the compa ny starts with lower costs than its competitors or it initiates price cuts in th ehope of gaining market share and lower costs. A price-cutting strategy involves possible traps: Low-quality trap.Consumers will assume that the quality is low. Fragile-market-share trap.A low price buys market share but not market loyalty. Thesame customers will shift to any lower-priced firm that comes along.Shallow-p ockets trap.The higher-priced competitors may cut their prices and may havelonge r staying power because of deeper cash reserves. Initiating Price Increases :A s uccessful price increase can raise profits considerably. For example, if the com pany's profitmargin is 3 percent of sales, a 1 percent price increase will incre ase profits by 33 percent if salesvolume is unaffected. This situation is illust rated in Table 14.5. The assumption is that acompany charged S10 and sold 100 un its and had costs of $970, leaving a profit of $30, or 3percent on sales. By rai sing its price by 10 cents (1 percent price increase), it boosted its profitsby 33 percent, assuming the same sales volume.A major circumstance provoking price increases iscost inflation.Rising costs unmatched byproductivity gains squeeze p rofit margins and lead companies to regular rounds of priceincreases. Companies often raise their prices by more than the cost increase, in anticipation of furt her inflation or government price controls, in a practice calledanticipatory pri cing.Anotherfactor leading to price increases isover demand.When a company canno t supply all of itscustomers, it can raise its prices, ration supplies to custom ers, or both. The price can be increasedin the following ways. Each has a differ ent impact on buyers. Delayed quotation pricing: The company does not set a fina l price until the product is finishedor delivered. This pricing is prevalent in

industries with long production lead times, such asindustrial construction and h eavy equipment. Escalator clauses.The company requires the customer to pay today 's price and all or partof any inflation increase that takes place before delive ry. An escalator clause bases priceincreases on some specified price index. Esca lator clauses are found in contracts formajor industrial projects, like aircraft construction and bridge building.Unbundling.The company maintains its price but removes or prices separately one ormore elements that were part of the former o ffer, such as free delivery or installation. Carcompanies sometimes add antilock brakes and passenger-side airbags as supplementaryextras to their vehicles. Red uction of discounts.The company instructs its sales force not to offer its norma l cashand quantity discounts. Pricing StrategySourabh Kumar SahaCalcutta Business School PGDM-2008 Page 29A c ompany needs to decide whether to raise its price sharply on a one-time basis or to raise it bysmall amounts several times. Generally, consumers prefer small pr ice increases on a regularbasis to sudden, sharp increases. In passing price inc reases on to customers, the company mustavoid looking like a price gouger. Compa nies also need to think of who will bear the brunt of increased prices. Customer memories are long, and they can turn against companies theyperceive as price go ugers. A vivid illustration of such reactions was the experience of Marlboro,Phi lip Morris's leading cigarette brand.SMART PRICING TAKES OFFStelios Haji-loannou has made a fortune with easyJet, the eight-year-old airline that offersdynamica lly priced discount fares. In a nutshell, passengers pay less for a seat the ear lier theybuy. Stelios, as he's universally known, has applied the same yield man agement formula withvarying degrees of success to car rentals, credit cards, and even Internet cafes. Now he's takingthe concept to the movies. In 2003 he launc hed easyCinema, a 2,000-seat, 10-screen complexoutside London. It is founded on the premise that 80 percent of cinema seats never see a bottom. At easyCinema ti ckets start at about 30 cents and rise with demand, rewarding patrons who book i n advance or enjoy off-peak screenings. But the same system that netted a fortun e for easyJet is facing hurdles: Britain's big movie distributors don't like get ting a lump sum from Stelios rather than creaming off a high percentage of box o ffice revenue in the first weeks of a film's run (theleast revenue-producing for Stelios). Still, Stelios isn't giving up, and under the umbrella of easyGroup, the entrepreneur also plans to launch a cruise ship (easyCruise), a hotel chain( easyDorm), and even fast food (easyPizza)!Stelios's easyGroup leads the field in what has been alternately called revenue management or yield management pric ing a perishable resource in accordance with demand from multiplecustomer segmen ts to maximize revenue or profit. Prices are adjusted dynamically as a functiono f inventory level and time left in the selling season. Yet, "dynamic pricing" (o r "smart pricing")is not only the province of those with perishable inventory, s uch as the airline and hospitalityindustries. With the advent of Internet techno logy, there has been an explosion of informationabout customers and their prefer ences. Combine this capacity with businesses' pressing needsand you can see why we are entering a new era of pricing. In a sluggish economy, companieshaven't be en able to raise prices for years. Like easyGroup, they are taking a page from t heairlines, which have been using revenue management techniques for 25 years.The new dynamic pricing systems, produced by SAP and start-ups like DemandTec and P rofilogic Inc., sift through massive databases available on a corporate intranet . Thesedatabases include up-to-date information about orders, promotions, produc t revenue, and stock levels in warehouses. Early adopters using Web-based pricin g tools include Saks, Best Buy, Ford Motor Co., The Home Depot, JC Penney, Safe way, and General Electric.Factors Leading to Less Price Sensitivity:The product is more distinctive.Buyers are less aware of substitutes.Buyers cannot easily co mpare the quality of substitutes.The expenditure is a smaller part of the buyer' s total income.The expenditure is small compared to the total cost of the end pr oduct.Part of the cost is borne by another party.The product is used in conjunct ion with assets previously bought. Pricing StrategySourabh Kumar SahaCalcutta Business School PGDM-2008 Page 30The product is assumed to have more quality, prestige, or exclusiveness.Buyers cann ot store the product.MARKETING STRATEGIES TO AVOID RAISING PRICESGiven strong co

nsumer resistance to price hikes, marketers go to great lengths to find alternat iveapproaches that will allow them to avoid increasing prices when they otherwis e would have doneso. Here are a few popular ones.Shrinking the amount of product instead of raising the price. (Hershey Foods maintainedits candy bar price but trimmed its size. Nestle maintained its size but raised the price.)Substituting less expensive materials or ingredients. (Many candy bar companiessubstituted sy nthetic chocolate for real chocolate to fight price increases in cocoa.)Reducing or removing product features. (Sears engineered down a number of itsappliances so they could be priced competitively with those sold in discount stores.)Removi ng or reducing product services, such as installation or free delivery.Using les s expensive packaging material or larger package sizes.Reducing the number of si zes and models offered.Creating new economy brands. (Jewel food stores introduce d 170 generic items selling at10 percent to 30 percent less than national brands .)Several techniques help consumers avoid sticker shock and a hostile reaction w hen prices rise:One is that a sense of fairness must surround any price increase , and customers must be givenadvance notice so they can do forward buying or sho p around. Sharp price increases need to beexplained in understandable terms. Mak ing low-visibility price moves first is also a goodtechnique: Eliminating discou nts, increasing minimum order sizes, and curtailing production of low-margin pro ducts are some examples; and contracts or bids for long-term projects shouldcont ain escalator clauses based on such factors as increases in recognized national price indexes. "Marketing Memo: Marketing Strategies to Avoid Raising Prices" de scribes other means bywhich companies can respond to higher costs or over demand without raising prices.REACTIONS TO PRICE CHANGESAny price change can provoke a response from customers, competitors, distributors, suppliers,and even governme nt.CUSTOMER REACTIONSCustomers often question the motivation behind price change s. Aprice cut can be interpreted in different ways: The item is about to be repl aced by a new model;the item is faulty and is not selling well; the firm is in f inancial trouble; the price will come downeven further; the quality has been red uced. A price increase, which would normally deter sales,may carry some positive meanings to customers: The item is "hot" and represents an unusuallygood value. COMPETITOR REACTIONSCompetitors are most likely to react when the number of firm sare few, the product is homogeneous, and buyers are highly informed. Competitor reactions canbe a special problem when they have a strong value proposition.How can a firm anticipate a competitor's reactions? One way is to assume that the c ompetitorreacts in a set way to price changes. The other is to assume that the c ompetitor treats each pricechange as a fresh challenge and reacts according to s elf-interest at the time. Now the companywill need to research the competitor's current financial situation, recent sales, customer loyalty,and corporate object ives. If the competitor has a market share objective, it is likely to match the Pricing StrategySourabh Kumar SahaCalcutta Business School PGDM-2008 Page 31pri ce change. If it has a profit-maximization objective, it may react by increasing the advertisingbudget or improving product quality.The problem is complicated b ecause the competitor can putdifferent interpretations on a price cut: that the company is trying to steal the market, that the company isdoing poorly and tryin g to boost its sales, or that the company wants the whole industry to reduce pri cesto stimulate total demand.Responding to Competitors' Price ChangesHow should a firm respond to a price cut initiated by a competitor? In markets characterize d byhigh product homogeneity, the firm should search for ways to enhance its aug mented product. If it cannot find any, it will have to meet the price reduction. If the competitor raises its price in ahomogeneous product market, other firms might not match it unless the increase will benefit theindustry as a whole. Then the leader will have to roll back the increase.In nonhomogeneous product market s, a firm has more latitude. It needs to consider the followingissues:Why did th e competitor change the price? To steal the market, to utilize excess capacity,t o meet changing cost conditions, or to lead an industry-wide price change?Does t he competitor plan to make the price change temporary or permanent?What will hap pen to the company's market share and profits if it does not respond? Areother c ompanies going to respond?What are the competitors' and other firms' responses l ikely to be to each possiblereaction?Market leaders frequently face aggressive p

rice-cutting by smaller firms trying to build marketshare. Using price, Fuji att acks Kodak, Schick attacks Gillette, and AMD attacks Intel. Brandleaders also fa ce lower-priced private-store brands. The brand leader can respond in severalway s: Maintain price.The leader might maintain its price and profit margin, believi ng thatIt would lose too much profit if it reduced its price,It would not lose m uch market share, andIt could regain market share when necessary.However, the ar gument against price maintenance is that the attacker gets more confident,the le ader's sales force gets demoralized, and the leader loses more share than expect ed. Theleader panics, lowers price to regain share, and finds that regaining its market position ismore difficult than expected. Maintain price and add value.Th e leader could improve its product, services, andcommunications. The firm may fi nd it cheaper to maintain price and spend money to improveperceived quality than to cut price and operate at a lower margin. Reduce price.The leader might drop its price to match the competitor's price. It might do sobecauseIts costs fall w ith volume,It would lose market share because the market is price sensitive, and It would be hard to rebuild market share once it is lost. This action will cut p rofits in theshort run. Increase price and improve quality.The leader might rais e its price and introduce newbrands to bracket the attacking brand. Launch a low -price fighter line.It might add lower-priced items to the line or create asepar ate, lower-priced brand. Pricing StrategySourabh Kumar SahaCalcutta Business School PGDM-2008 Page 32The best response varies with the situation. The company has to consider the produc t's stage inthe life cycle, its importance in the company's portfolio, the compe titor's intentions andresources, the market's price and quality sensitivity, the behavior of costs with volume, and thecompany's alternative opportunities.An ex tended analysis of alternatives may not be feasible when the attack occurs. The companymay have to react decisively within hours or days. It would make better s ense to anticipatepossible competitors' price changes and to prepare contingent responses. The figure shows a price-reaction programto be used if a competitor c uts prices. Reaction programs for meetingprice changes find their greatest appli cation in industries where price changes occur with somefrequency and where it i s important to react quickly for example, in the meatpacking, lumber,and oil ind ustries. Pricing StrategySourabh Kumar SahaCalcutta Business School PGDM-2008 Page 33Cas e study: Virgin Entering crowded U.S. market Targeting young consumer Poor credit Inconsistent usage Open to new things Downloading info, text messaging, ring tones Profit: Cost to serve customer $30/month Average cell phone bill $52/month Dist ribution Target, Sam Goody, Best Buy Packaged in clamshell Point-of-sale disp lays Program Music, games and other content from MTV MTV-branded accessories an Ce d phones Text messaging No call detail (privacy from parents) rescue rings lebrity wake-up calls Customized ring tone Audio clips: news, jokes, gossip, s ports, etc. Vote on top ten hit songs Info on movies & advance ticketsPricing Option #1 Clone industry Contracts, buckets, volume discounts Price competitive ly MTV applications Superior customer service Better off-peak hours Fewer hi dden fees Easy to explain: better value at same costPricing Option #2 Similar pric ing structure to industry Contracts, buckets, volume discounts Price per minut ebelowindustry for certain key buckets Better off-peak hours? Fewer hidden fees? Si mple message: cheaperPricing Option # 3 Shorten or eliminate contracts? Under 18 , cant enter contracts Pre-paid Pricing StrategySourabh Kumar SahaCalcutta Business School PGDM-2008 Page 34 9 2% currently post-paid Pre-paid between 35 and 75 /minute Low image / low usage / high churn Mechanism to add minutes easily Change subsidy on handsets (Higher? Lower?) Bundle all taxes, etc. into fee Change off-peak? Pricing StrategySourabh Kumar SahaCalcutta Business School PGDM-2008 Page 35CON CLUSION :1. Despite the increased role of nonprice factors in modern marketing, price remains a criticalelement of the marketing mix. Price is the only element that produces revenue; the othersproduce costs.2. In setting pricing policy, a c ompany follows a six-step procedure. It selects its pricingobjective. It estimat es the demand curve, the probable quantities it will sell at each possibleprice. It estimates how its costs vary at different levels of output, at different lev

els of accumulated production experience, and for differentiated marketing offer s. It examinescompetitors' costs, prices, and offers. It selects a pricing metho d. It selects the final price.3. Companies do not usually set a single price, bu t rather a pricing structure that reflectsvariations in geographical demand and costs, market-segment requirements, purchase timing,order levels, and other fact ors. Several price-adaptation strategies are available: (1) geographicalpricing; (2) price discounts and allowances; (3) promotional pricing; and (4) discrimina torypricing.4. After developing pricing strategies, firms often face situations in which they need to changeprices. A price decrease might be brought about by e xcess plant capacity, declining market share,a desire to dominate the market thr ough lower costs, or economic recession. A price increasemight be brought about by cost inflation or overdemand. Companies must carefully managecustomer percept ions in raising prices.5. Companies must anticipate competitor price changes and prepare contingent response. Anumber of responses are possible in terms of main taining or changing price or quality.6. The firm facing a competitor's price cha nge must try to understand the competitor's intent andthe likely duration of the change. Strategy often depends on whether a firm is producinghomogeneous or non homogeneous products. Market leaders attacked by lower-pricedcompetitors can cho ose to maintain price, raise the perceived quality of their product, reduceprice , increase price and improve quality, or launch a low-priced fighter line. Thank You Pricing StrategySourabh Kumar SahaCalcutta Business School PGDM-2008 Page 36REF ERENCES: Marketing Management by Kotler and Keller Marketing Management Planning , Implementation and Control www.Google.com www.wikipedia.org of 36 Leave a Comment Comment must not be empty. You must be logged in to leave a comment.SubmitCharacters: 400. Subha Gothami Abayarathne This seem to be very useful in constructing some areas of my misalignment on pri cing policy could you please email a copy of this to subha.gothami@gmail.com Tha nk you reply05 / 05 / 2012. .Hardik Shah plz mail me shahhardik27@gmail.com reply04 / 23 / 2012. .Krishna Prasad good useful reply04 / 17 / 2012. .deleted_fbuser_1321880830 this material is useful for my academic purpose . pls mail to oops_4277@live.com reply11 / 14 / 2011. .taru88 tanu reply08 / 18 / 2010. .snehal1189 even i would love to have a copy of this report. if possible can u plz mail to s nehalagrawal1189@gmail.com reply07 / 08 / 2010. .snehal1189 Thanks for sharing. this report is of great help.

reply07 / 08 / 2010. .Divyanshu Garg hey buddy can u plzz send me a copy of ur report plzz mail me mail_divyanshu@yah oo.com reply06 / 16 / 2010. .Show More Comment must not be empty.You must be logged in to leave a comment.SubmitCharact ers: .....Pricing Strategy project final pricing in marketing , pricing strategy - Project by Sourabh Kumar Saha - Calcut ta Business School , PGDM 2008-2010 . Email : souravsaha86@gmail.com 24,873 ReadsInfo and Rating Category: Uncategorized. Rating: (4 Ratings) Upload Date: 05/04/2009 Copyright: Attribution Non-commercial Tags: Fictionpricing strategymba projectpricing in marketingFictionpricing strat egymba projectpricing in marketing(fewer). Flag document for inapproriate content This is a private document. Uploaded by souravsaha86 Follow.Download Embed Doc Copy Link Add To Collection Comments Readcast Share .Share on Scribd: ReadcastSearchTIP Press Ctrl-F F to quickly search anywhere in th e document. SearchSearch History: Searching...Result 00 of 0000 results for result for p. More from This UserRelated DocumentsMore From This User 8 p.Strategic Planning at UPS . 15 p.Apple . 21 p.Xerox Case .Next 24 p.Packaging and Labeling.22 p.RoI Jayant Nikhil Rohit Sourav.10 p.Report ERP in Indian Mid Companies Jayant Nikhil Rohit Sourav.Prev Next 6 p.Erp Cost Benefit Analysis Jayant Nikhil Rohit Sourav.6 p.Sales Force Automat ion.121 p.Information Technology Implementation on Marketing.Prev Next 52 p.TATA Steel full report.28 p.Role of Banks in Indian Economy Report.36 p.Pri cing Strategy project final.Prev Related19 p.Understanding PricingFrom vanshitaahuja.50 p.Project Report(2)From S ankalp Khatri.20 p.19074760 Pricing StratergyFrom Ion Prometeo.Next20 p.Rev 12Fr om Nguyen_Hong_Ph_7892.20 p.Pricing StratergyFrom arnada_bikash.24 p.Pricing Str atgey and ProgramsGROUP MEMBERS: FAIZAN AMJAD & SHAHZADO WAQAR TABLE OF CONTENTS TOPICS PAGES... From SheerazAnwerSaeed.Prev Next24 p.Pricing StrategyGROUP MEMBERS: FAIZAN AMJAD & SHAHZADO WAQAR TABLE OF CONTENTS TOPICS PAGES... From SheerazAnwerSaeed.24 p.Pricing Strategy and ProgramsSubject:Marketing Manag ement From nuplin.zain.24 p.23271513 Pricing StrategyFrom Amrita Dhanjal.Prev Next24 p. pricing stratgey and programsFrom api_user_11797_VIRTUAL UNIVERSITY E-LIBRARY.24 p.pricing strategy From api_user_11797_VIRTUAL UNIVERSITY E-LIBRARY.24 p.Pricin

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