PRICING

Pricing
What is price? > The term price denotes money value of a product. > It is the amt. of money charged by a seller from a buyer for combined assortment of a product and its accompanying services.

Importance of Pricing
Price is the base for exchange of goods and services and helps in transfer of ownership. Pricing method or price has a bearing on the firms revenue and profits. It affects the firms competitive position. Also helps in determining the quantum of production. To consumers, it determines his purchasing power and standard of living.

Pricing Objectives
Management should decide on its pricing objective before determining the price itself.
Profit-oriented objectives: Achieve a target return pricing product to achieve a specified percentage return on sales or investment. Maximize profits followed by the most companies. Sales oriented goals: Increase sales volume. Maintain or increase market share. Status goals: Stabilize prices. Meet competition.

Objectives of pricing
To maximize profits To achieve stability in exchange value of products To achieve target rate of return on investments . To meet or prevent competition- Attain price leadership or price parity with competitors. To survive in the marketplace To build public image Make entry into new markets

Factors influencing pricing decisions

Internal factors: Objectives of the firm Role of top management Marketing Mix Product differentiation and customization Cost of product

 External factors Demand Competitors pricing strategy Govt. interference Target buyers paying capacity Suppliers Economic/market conditions.

Pricing Strategies
Topic Outline

New-Product Pricing Strategies Product Mix Pricing Strategies Price Adjustment Strategies Price Changes

NEW PRODUCT PRICING POLICY

1. Market skimming pricing: Setting a high price for a new product to skim maximum revenue layer by layer from the segments willing to pay the high price, the company makes fewer but more profitable sales. High price, Low volumes Skim the profit from the market Suitable for products that have short life cycles or which will face competition at some point in the future (e.g. after a patent runs out) Examples include: Jewellery, digital technology, new DVDs, etc.

New product pricing cont.

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. Price set to penetrate the market Low price to secure high volumes Typical in mass market products chocolate bars, food stuffs, household goods, etc. Suitable for products with long anticipated life cycles May be useful if launching into a new market

Product mix pricing strategies

STRATEGY
Product line pricing

DESCRIPTION
Setting price steps between product line items

Optional product pricing Pricing optional or accessory products sold with the main product Captive product pricing Pricing products that must be used with the main product Pricing low-value by-products to get rid of them Pricing bundles of products sold together

By- product pricing Product bundle pricing

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 price. 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 a film for a camera. 4. By-product pricing: Setting a price for by- products in order to make the main products price more competitive. 5. Product bundle pricing: Combining several products and offering the bundle at a reduced price.

 Price adjustment strategies

STRATEGY
Discount and allowance pricing Segmented pricing Psychological pricing Promotional pricing Geographic pricing

DESCRIPTION
Reducing prices to reward customer response. Adjusting prices to allow for differences in customers, products, or location Adjusting prices for psychological effect

Dynamic pricing

Temporarily reducing prices to increase short run sales Adjusting prices to account for the geographic location of customer Adjusting prices continually to meet the characteristics and needs of individual customer and situation Adjusting prices for international markets

International pricing

Price adjustment strategies cont

1. Discount and allowance pricing: Discount- a straight reduction in price on purchase during a stated period of time. Allowance- promotional money paid by manufacturers to retailers in return for an agreement to feature the manufacturers products in some way. Segmented price: Selling a product or service at two or more prices, where the difference in price is not based on different in cost. Psychological pricing: A pricing approach that considers the psychology of prices and not simply the economics; the price is used to say something about the product. Promotional pricing: Temporarily pricing products below the list price and sometimes even below cost, to increase short run sales. Geographical pricing: Setting prices for customers located in different parts of the country or world. Dynamic pricing: Adjusting prices continually to meet the characteristics and needs of individual customer and situation. International pricing: Companies that market their products internationally must decide what prices to charge in different countries in which they operate.

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SETTING THE PRICE

Factors in Setting Price

Pricing methods/strategies

 COST-BASED PRICING
Cost + Fixed profit percentage = Selling price involves the determination of all fixed and variable costs associated with a product or service The goal of this approach is to cover all costs incurred and to achieve a targeted level of profit. this method is simple and straightforward and does not involve examining the market or considering the competition defend its prices based on costs, and demonstrate that its prices cover costs plus a markup for profit

 VALUE-BASED PRICING
Value pricers adhere to the thinking that selling price is a reflection of a product or service's perceived value by customers The value of a product or service is derived from customer needs, preferences, expectations as well as from competitors' offerings Value pricing involves setting prices to increase profitability by tapping into more of a product or service's value attributes This approach depends on strong advertising for new products or services, to communicate the value of products or services to customers and to motivate them to pay more if necessary for the value provided by these products

 DEMAND-BASED PRICING
Demand-oriented pricing focuses on the level of demand for a product or service, not on the cost of materials, labor, and so forth Instead, they concentrate on the behavior and characteristics of customers and the quality and characteristics of their products or services The prices are determined by considering the cost estimates at different sales levels and expected revenues from sales volumes associated with projected prices. The success of this strategy depends on the reliability of demand estimates

 COMPETITION-BASED PRICING
a company sets its prices by determining what other companies competing in the market charge

the response of competitors-is an important part of competition-based pricing, especially in markets with only a few competitors. In such a market, if one competitor lowers its price, the others will most likely lower theirs as well
this pricing policy enables companies to select from a variety of different pricing strategies to achieve their strategic goals

companies can choose to mark their prices above, below, or on par with their competitors' prices and thereby influence customer perceptions of their products

 if a Company A sets its prices above those of its competitors, the higher price could suggest that Company A's products or services are superior in quality For example Harley Davidson used this with great success Harley's high prices combined with its customer loyalty and mystique help overcome buyer resistance to higher prices

SETTING THE PRICE

SELECTING THE PRICING OBJECTIVE - Survival - Maximize current profit - Maximize market share 2 . DETERMINING THE DEMAND - Price Sensitivity 3. ESTIMATING COST 4. ESTIMATING COMPETITORS COST, PRICE & OFFERS

CONT..
5. SELECTING THE PRICING METHOD 6. FIXING THE PRICE