Pricing Decision and Strategies

Content
Price Definition The Importance of Price to Marketers Factors affecting Pricing decision Steps in Setting the Right Price Sri Lankan context in pricing

Price Definition
The amount of money charged for a product or service The sum of all the values that consumers exchange for the benefits of having or using the product or service Examples of price Tuition, rent, fare, salary, dues, interest

The Importance of Price to Marketers

Price is the only thing marketer can change quickly to respond changes in demand and actions of competitors Key element in the marketing mix because it relates directly to the generate of total revenue. Profit = Total Revenue Total Costs Profit = (Price x Quantity sold) Total Costs

Factors affecting Pricing decision

Steps in Setting the Right Price

Develop pricing objectives Assess of target markets ability to purchase Estimate demand, cost and profit relationship Selection of a basis for pricing Select pricing strategy & tactics Decide on price

Develop pricing objectives

Pricing objectives & typical actions Objective Possible action

Survival Adjust price levels so the firm can increase sales volume to match organizational expenses Identify price and cost levels that allow the firm to maximize profit Identify price levels that enable the firm to yield targeted ROI Adjust price levels so the firm can maintain or increase sales relative to competitors sales Set price levels to encourage rapid sales Identify price levels that help stabilize demand and sales

Profit Return on investment Market share

Cash flow Status quo

Product qualitySet prices to recover research and

Assess of target markets ability to purchase

Assess of the target market

To understand
The importance of a product to customers Their expectation about quality & value

Estimate Demand, Cost and Profit Relationship

Estimate Demand, Cost and Profit Relationship

Measure the sensitivity of demand Inelastic Demand
Price
Gasoline

Price

Elastic Demand
Recreational Vehicles

P2 P1 Q2 Q1 Quantity

P2 P1 Q2

Q1

Quantity

Analyze cost and profit relationship TC = FC + VC Profit = TR-TC

Selection of a basis for pricing

Selection of a basis for pricing

Cost Base Pricing
fixed sum or a percentage of the total cost is added to the cost of the product to arrive at its selling price

Two common forms

Cost-plus Pricing Mark-up pricing

Cost-plus Pricing

Selection of a basis for pricing (Cont..)

Manufacturers & service organizations Examines costs then adds standard markup Products & services are all considered individually

Mark-up pricing
Wholesalers & retailers Adds a predetermined percentage to cost of products Same markup applied to all products carried by the business

Selection of a basis for pricing (Cont..)

1. Estimating the per-unit cost of production Capital (K): land, building, equipment = fixed cost (FC) Labor (L): workers wages = variable cost (VC) EX: Rs.700 + Rs.250 = Rs.1000 (production cost) 1. Adding a mark-up Desired profit per item: Rs.250 1. Sales price = cost of production + mark-up Rs. 1000 + Rs.250 = Rs. 1250 25% markup

Selection of a basis for pricing (Cont..)

Selection of a basis for pricing (Cont..)

Demand Base Pricing
Customer pay higher price when demand is strong Customer pay lower price when demand is weak
Eg. Peak & Off-peak chargers in telecommunication industry

Competition Base Pricing

A method of determining the price at which a particular product is sold based on the prices of competing products
Eg. Telecommunication industry

Select Pricing Strategy & Tactics

Select pricing strategy & tactics

Four Issues:
New Product Pricing Product Mix Pricing Price Adjustment Strategies Price Changes

New Product Pricing

Market-Skimming
Marketer sets a relatively high price for a product or service at first, then lowers the price over time
Eg. Dialog/Nokia

Market Penetration
Low initial price in order to maximize penetration into the market
Eg. Airtel

Examples.
Nokia launches a new video phone
- Skimming

Holiday Inns try to fill hotels during new year season

- Penetration

Product Mix Pricing

Taking the entire product mix into account when setting product prices Price lining
Pricing a product at different levels in order to appeal to different segments of the market.

Captive (Complementary) Products

Pricing in conjunction with main product (Eg. Desktop printers and Toners )

Bundling Products
Sale of bundles of products at reduced prices to stimulate interest,

(Ex. software package)

Price Adjustment Strategies

Discount and allowance pricing
Setting prices to reward customer responses such as paying early or promoting the product
Ex. Cash Discount, Quantity (Volume) Discount, Trade Discount , Seasonal Discount , Allowances

Segmented pricing
Adjusting prices for differences in time, customers, products, or locations

Psychological pricing
Adjusting prices for psychological effect

Price Adjustment Strategies

Value pricing Adjusting prices to offer the right combination of quality and service at a fair price Geographical pricing
Adjusting prices to account for the geographic location of customers

International pricing Adjusting prices for international markets Promotional pricing Temporarily reducing prices to increase shortrun sales

Price Changes
Initiating Price Changes:
Price cuts to sell off excess capacity (price wars) Price increases to offset inflation or resource cost increases Consumer Response: Quality perception, cyclical waiting for sales Competitor Reaction: Need to anticipate if they will follow or hold

Reacting to competitor price changes

Hold & focus on quality or follow - based on PLC, market share, costs

Sri Lankan context in pricing

Are Sri Lankans very price sensitive, in their purchases? Sri Lankans in a majority of instances do not compare the product volume purchased. (Eg. Liters, grammage)

Pricing in Sri Lankan context (Cont..)

KFC and McDonalds in Sri Lanka
KFC and McDonalds are giving their primary concern to the price they charge from Sri Lankans since people in Sri Lanka are more conscious about the prices of product than the quality. Even the displays they use to show their products, specifically display the price of each product. This proves that these are amending their marketing strategies regarding price to suit Sri Lankan market.

Pricing in Sri Lankan context (Cont..)

Non Effective Pricing for Marketing Success
A lack of understanding, of the true strategic value of sound pricing strategy. The over reliance on finance personnel, to independently formulate pricing policy and strategy. The lack of financial/costing knowledge on the part marketers.

Thank You!!!