PRICING

METHODS
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 A. COST-BASED PRICING

Under cost based pricing the marketer primarily looks

at production costs as the key factor in determining the
initial price.

This method offers the advantage of being easy to

implement as long as costs are known. But one major
disadvantage is that it does not take into consideration
the target market’s demand for the product.

This could present major problems if the product is

operating in a highly competitive market where
competitors frequently alter their prices.

18-2
 MARKUP ON COST

Using this method price is determined by simply

multiplying the cost of each item by a predetermined
percentage then adding the result to the cost.

A major general retailer, may apply a set percentage

for each product category (e.g., women’s clothing,
automotive, garden supplies, etc.) making the pricing
consistent for all like-products. Alternatively, the
predetermined percentage may be a number that is
identified with the marketing objectives (e.g., required
20% ROI). The calculation for markup on cost is:

Item Cost + (Item Cost x Markup Percentage) = Price

50 + (50 x .30) = Rs 65
18-3
(II) COST-PLUS PRICING

Cost-plus pricing also adds to the cost by using a fixed

monetary amount rather than percentage.

For instance, a contractor hired to renovate a office

owner’s office will estimate the cost of doing the job by
adding their total labor cost to the cost of the materials
used in the renovation. The homeowner’s selection of
carpet to be used in is likely to have little effect on the
labor needed to install it whether it is a low-end, low
priced tile or a high-end, premium priced carpet.
Assuming most material in the office project are
standard sizes and configuration, any change in the
total price for the renovation is a result of changes in
material costs while labor costs are constant.
18-4
(III) BREAKEVEN PRICING

Breakeven pricing is associated with breakeven analysis,

which is a forecasting tool used by marketers to determine
how many products must be sold before the company starts
realizing a profit.

The formula for determining breakeven takes into

consideration both variable and fixed costs as well as price,
and is calculated as follows:

Fixed Cost = Number of Units to Breakeven

Price – Variable Cost
Per Unit

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18-6
 For example, assume a company operates a
single-product manufacturing plant that has a
total fixed cost per year of Rs. 3,000,000 and
the variable cost (e.g., raw materials, labor,
electricity, etc.) is Rs. 45.00 per unit. If the
company sells the product directly to customers
for Rs.120, it will require the company to sell
40,000 units to breakeven.

 3,000,000 = 40,000 units

120 - 45

18-7
 B. TARGET RETURN PRICING

 In this method marketer sets price to achieve a

target return-on-investment (ROI). For
example, let's assume that marketer have
invested Rs.10,000 in the company. Expected
sales volume is 1,000 units in the first year.
Marketer want to earn all his investment in the
first year, so he need to make Rs.10,000 profit
on 1,000 units, or Rs. 10 profit per unit, giving
a price of Rs. 60 per unit.

18-8
 C. VALUE-BASED PRICING

 Companies price their product based on the value it

creates for the customer. This is usually the most
profitable form of pricing, if one can achieve it.

 In this method it is the buyers perception of value and

not the sellers cost which is the key to the product
pricing.

 Let's say that a tube light manufactured by Mahamaya

Electric Devices saves the typical customer Rs.1,000 a
year in, say, energy costs. In that case, price tag of
Rs.60 seems too cheap. If the product reliably produced
that kind of cost savings, company could easily charge
Rs.150, Rs.200 or more for it, and customers would
gladly pay it, since they would get their money back in
a matter of months.
18-9
Value Example:
ITL Tractor is Rs 100,000 vs.
Market Rs. 90,000
Rs. 90,000 if equal
7,000 extra durable
6,000 reliability
5,000 service
2,000 warranty
Rs. 110,000 in benefits -
Rs. 10,000 discount!

18-10
18-11
 D. PSYCHOLOGICAL PRICING

This method takes into consideration the consumer's

perception of price.
 Odd-Even Pricing: a product priced at Rs. 299.95 may
be perceived as offering more value than a product
priced at Rs. 300.00.
 Prestige Pricing: The higher the price the more likely
customers are to perceive it has being higher quality
compared to a lower priced product. marketers,
looking to present an image of high quality, may choose
to price products at even levels (e.g., Rs. 100 rather
than Rs.99.99).

18-12
 E. MARKET PRICING

 Under the market pricing

method cost is not the main
factor driving price
decisions; rather initial
price is based on analysis of
market research in which
customer expectations are
measured.

 The main goal is to learn

what customers in an
organization’s target
market are likely to
perceive as an acceptable
price.

18-13
 F. COMPETITION BASED PRICING

When setting price it makes sense to look at the price of

competitive offerings. For some, competitor’s price serves as an
important reference point from which they set their price.

 Below Competition Pricing: A marketer attempting to reach

objectives that require high sales levels (e.g., market share
objective) may monitor the market to insure their price
remains below competitors.

 Above Competition Pricing: Marketers using this approach

are likely to be perceived as market leaders in terms of
product features, brand image or other characteristics that
support a price that is higher than what competitors offer.

 Parity Pricing: A simple method for setting the initial price

is to price the product at the same level competitors price
their product.
18-14
A successful pricing strategy must be
driven by the "Three C's" of pricing
strategy:
Customers, Competitors, and Costs.

18-15
 Product Line Pricing
Setting Price Steps Between Product Line Items
i.e. Rs. 299, Rs. 399
Optional-Product Pricing
Pricing Optional or Accessory Products
Sold With The Main Product
i.e. Car Accessory
Product Captive-Product Pricing
Pricing Products That Must Be Used
Mix With The Main Product
i.e. Razor Blades, Film, Software, telephone
Pricing
By-Product Pricing
Strategies Pricing Low-Value By-Products To Get Rid
of Them
i.e. Lumber Mills, Zoos
Product-Bundle Pricing
Pricing Bundles Of Products Sold Together
i.e. Season Tickets, Computer Makers

18-16
18-17
 Price Adjustment Strategies

Discount & Allowance

Reducing Prices to Reward Segmented
Customer Responses such as Adjusting Prices to Allow
Paying Early or Promoting for Differences in Customers,
the Product. Products, or Locations.

Cash Discount Customer

Quantity Discount Product Form

Functional Discount Location

Seasonal Discount Time

18-18
 • Adjusting Prices for Psychological
Psychological Pricing Effect.
•Price Used as a Quality Indicator.

• Temporarily Reducing Prices to

Promotional Pricing Increase Short-Run Sales.
• i.e. Loss Leaders, Special-Events

• Adjusting Prices to Account for the

Geographic Location of Customers.
Geographical Pricing • i.e. FOB-Origin, Uniform-Delivered,
Zone Pricing, Basing-Point, &
Freight-Absorption.

• Adjusting Prices for International

International Pricing Markets.
• Price Depends on Costs, Consumers,
Economic Conditions & Other Factors.

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18-20
18-21
Microsoft – has been accused of predatory pricing
strategies in offering ‘free’ software as part of their
operating system – Internet Explorer and Windows
Media Player - forcing competitors like Netscape
and Real Player out of the market.

Deliberate price cutting or offer of ‘free

gifts/products’ to force rivals (normally
smaller and weaker) out of business or
prevent new entrants- Destroyer/Predatory
Pricing

18-22
INITIATING AND RESPONDING TO PRICE
CHANGES

Competitor
Reactions
to Initiating
Price Price Cuts
Changes

Price
Changes
Buyer
Reactions Initiating
to Price
Price Increases
Changes

18-23
 Has Competitor Cut No
Price? Hold Current Price;
Continue to Monitor
Competitor’s Price.

Will Lower Price No

Negatively Affect Our
Market Share & Profits?
Reduce Price

No Raise Perceived
Quality
Can/ Should Effective
Action be Taken? Yes Improve Quality
& Increase Price

Launch Low-Price
“Fighting Brand”
18-24
 HOW TO SET PRICE?

 RESEARCH
 Monadic Design
In monadic design, each respondent is exposed to one, and
only one, price point for any given product.

 Comparative design
Comparative testing asks people to evaluate brand X first at
one price and then again at a second price. It is a more
sensitive testing.

 Declarative design
What do you, as a consumer, believe that this product is really
worth to you? In declarative design, each respondent is asked
to volunteer his or her own maximum and/or reasonable,
acceptable prices.
18-25
 A. PRICE SENSITIVITY METER

Introduced in the 1970s by a Dutch economist, Peter van

Westendorp.

The premise of the PSM is to ask respondents four price-

related questions and then evaluate the cumulative
distributions for each question. Specifically, respondents are
asked:
 At what price would you consider the product to be so expensive
that you would not consider buying it? (Too expensive)
 At what price would you consider the product to be priced so low
that you would feel the quality couldn’t be very good? (Too cheap)
 At what price would you consider the product starting to get
expensive, so that it is not out of the question, but you would have
to give some thought to buying it? (Expensive)
 At what price would you consider the product to be a bargain, a
great buy for the money? (Cheap)

The cumulative frequencies obtained are then plotted and the

four key intersections are interpreted.
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18-27
 The point at which an equal number of respondents
believe the test product is expensive as believe it is too
cheap is referred to as the point of marginal cheapness
(PMC). The point at which an equal number of
respondents believe the test product is too expensive as
believe it is cheap is referred to as the point of marginal
expensiveness (PME). The point at which an equal
number of respondents believe the test product is
expensive as believe it is cheap is referred to as the
indifference price point (IPP). The point at which an
equal number of respondents believe the test product is
too expensive as believe it is too cheap is referred to as
the optimal price point (OPP).

 In this method, the optimal price point for a product is

the point at which the same number of respondents
indicate that the price is too expensive as those who
indicate that the price is too cheap.
18-28
B. CONCEPT TEST/CONCEPT EVALUATION

After introducing the product concept the respondents are asked:

How likely, would you be to purchase this product in the next 12

months if it is priced Rs. 200? (Kindly Tick )

Definitely would purchase

Probably would purchase
Might or might not purchase
Probably would not purchase
Definitely would not purchase

18-29
 C. CONJOINT ANALYSIS

Which refrigerator would you prefer?

Ice within 15 minutes Ice within one-hour

Rs. 8000 Rs. 7000

Strongly Prefer
Strongly Prefer
Product on Left Product
on Right
1 2 3 4 5 6 7 8 9

18-30
 D. DISCRETE CHOICE

BRAND X BRAND Y BRAND Z NONE

75 Channels 250 Channels 150 Channels If these were

alternatives
Extremely clear Clear Somewhat fuzzy only
picture quality picture quality picture quality I would not
purchase
Rs. 10, 000 Rs. 9,000 Rs. 8,000 anything

18-31
THANKS
YOU
18-32