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DEVELOPING

PRICING
STRATEGIES
AND
PROGRAMS
Ronak Khan
HOW COMPANIES PRICE
 In small companies, prices are often set by the
boss.
 In large companies, pricing is handled by division
and product-line managers.
 In industries where pricing is a key factor
(aerospace, railroads, oil companies),
companies will often establish a pricing
department which will report to Mktg dept,
Finance dept, or Top mngt.
 Others who exert an influence on pricing include
Sale Managers, Production Managers, Finance
Managers, and Accountants.
CONSUMER PSYCHOLOGY
AND PRICING
 Purchase decisions are based on how consumers
perceive prices and what they consider to be
the current actual price- NOT the marketer’s
stated price.
 They may have a lower price threshold below
which prices may signal inferior or
unacceptable quality, as well as an upper price
threshold above which prices are prohibitive
and seen as not worth the money.
CONTD….
STEPS IN SETTING THE PRICE
STEP1: SELECTING PRICING
OBJECTIVE
 SURVIVAL: companies pursue survival as their
major objective. As long as prices cover fixed
costs and some variable costs, the company
stays in business.
 MAXIMUM CURRENT PROFIT: companies
estimate the demand and costs associated with
alternative prices, and choose a price.
 MAXIMUM MARKET SHARE: here companies
use “market-penetration pricing” to achieve a
higher sales volumes, lowering CPU and higher
long term profits.

CONTD….
 MAXIMUM MARKET SKIMMING: companies
use this while unveiling a new technology
product. Here prices are high and are slowly
lowered over time.
 Eg: Sony is a firm practioner.
 PRODUCT-QUALITY LEADERSHIP: “affordable
luxuries” charaterised by high levels of
perceived quality, taste, status with a price just
high enough not be out of consumers’ reach.
Eg: Starbucks coffee, BMW cars.
 ANY OTHER OBJECTIVE
STEP 2: DETERMINING
DEMAND
 PRICE SENSITIVITY: customers are most price
sensitive to products that cost a lot or are
bought frequently. They are less price sensitive
to low-cost items or infrequently bought items.
 ESTIMATING DEMAND CURVES: through
methods like statistical analysis, test
marketing(price experiment) and surveys.
 PRICE ELASTICITY OF DEMAND: it refers to
the responsiveness of quantity demanded due
to change in the price of the product/service.
STEP 3: ESTIMATING
COSTS
The company will want to
charge a price that
covers its costs of
production, distribution,
selling the product
including a fair return for
its efforts and risk.
STEP 4: ANALYSING
COMPETITORS’ COSTS,
PRICES, AND OFFERS
 The company must first consider the nearest
competitor’s price.
 If the company’s offer contains features not
offered by the nearest competitor, their worth
to the customer should be evaluated and
added to the competitor’s price.
 Now the company can decide whether it can
charge more, the same, or less than the
competitor. But the competitors can change
their price in reaction to the price set by your
company.

STEP 5: SELECTING A
PRICING METHOD
 1. MARK-UP PRICING: to add a standard mark-
up to the product’s cost. Construction
companies submit job bids by estimating the
total project cost and adding a standard
markup for profit.
 2. TARGET-RETURN PRICING: a price that
would yield a company’s target ROI. It is used
by General Motors, public utilities.
 3. PERCEIVED VALUE PRICING: it includes
buyer’s image of the product performance,
channel deliverables, warranty quality,
customer support, trustworthiness and esteem.
CONTD….
 4. VALUE PRICING: winning loyal customers by
charging a fairly low price for a high quality
offering. Eg: IKEA, WALMART. The company re-
engineers its operations to become a low-cost
producer without sacrificing quality.
 5. GOING RATE PRICING: company might
charge less, same or more than major
competitors.
 6. AUCTION TYPE PRICING

STEP 6: SELECTING THE
FINAL PRICE
 The final price must take into account the
brand’s quality and advertising relative to the
competition.
 Consumers apparently are willing to pay higher
prices for known products rather than for
unknown products.
 Brands with low quality and low advertising
charge lower prices.
 Company must also consider what their
suppliers, dealers and distributors feel about
the contemplated price. Eg: Walmart, Big
Bazar.
PRICE ADAPTATION STRATEGY
INITIATING AND RESPONDING
TO PRICE CHANGES
1. INITIATING PRICE CUTS
 Companies sometimes initiate price cuts in a drive to
dominate the market through lower costs.
 Either the company starts with lower costs than its
competitors or it initiates price cuts in hope of
gaining market share and lower costs.
 A price cutting strategy involves possible traps:
 1. Low quality trap
 2. Fragile market share trap: a low price buys
market share but not market loyalty. Same
customers will shift to any lower priced company
that comes along.
 3. Shallow pockets trap: high priced competitors
slash prices due to deep pockets which small
companies cannot respond to.
2. INITIATING PRICE
INCREASES
 ANTICIPATORY PRICING DUE TO COST
INFLATION: companies often raise prices by
more than the cost increase in anticipation of
further inflation/govt price controls.
 DELAYED QUOTATION PRICING: final price is
not set until product is finished/delivered. Eg:
heavy equipment, industrial construction.
 ESCALATOR CLAUSES: customer pays today’s
price and all/part of any inflation increase that
takes place before delivery/finishing project eg:
aircraft making, bridge building.
 UNBUNDLING: company charges extra for
accessories eg: car industry, electronics
industry
 REDUCTION OF DISCOUNTS
3. REACTIONS TO PRICE
CHANGES
CUSTOMER REACTIONS
about theperceived
value/quality of
product/service.
COMPETITOR REACTIONS
eg: tata DoCoMo innovative
tariff plan.
4. RESPONDING TO
COMPETITOR’S PRICE
CHANGES
 MAINTAIN PRICE
 MAINTAIN PRICE AND ADD VALUE through
added benefits/features at same price.
 REDUCE PRICE
 INCREASE PRICE AND IMPROVE
QUALITY/NEW PRODUCTS
 LAUNCH A LOW-PRICE FIGHTER LINE eg: auto
companies on manufacturing low-cost cars in
responding to Tata’s Nano.
THANK YOU