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Module 4

The document discusses pricing strategies and considerations. It outlines objectives of pricing like maximizing profits and surviving competition. Key factors that affect pricing are costs, demand, and competitors. The document also describes different pricing methods such as geographical pricing, promotional pricing, and discriminatory pricing. Finally, it outlines the pricing decision process and considerations for initiating or responding to price changes.

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Kiran Mamadapur
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24 views

Module 4

The document discusses pricing strategies and considerations. It outlines objectives of pricing like maximizing profits and surviving competition. Key factors that affect pricing are costs, demand, and competitors. The document also describes different pricing methods such as geographical pricing, promotional pricing, and discriminatory pricing. Finally, it outlines the pricing decision process and considerations for initiating or responding to price changes.

Uploaded by

Kiran Mamadapur
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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MODULE 4

Pricing
Pricing Meaning
 To a manufacturer, price represents the
quantity of money (or goods and services
in a barter system) received by the firm or
seller for its products. To a customer, it
represents a monetary sacrifice; hence his
perception of the value of the product.
Objectives
 Maximize current profits and return on
investment
 Exploit competitive position
 Survival in a competitive market
 Balance price over product line
Factors Affecting Pricing Decisions

 A number of different internal and external


factors affect pricing decisions and this
may pose some complexity.
 Competitive Structure
Different cost to be Considered
 Fixed costs
 Variable costs
 Total cost
 Marginal cost
Different Pricing Methods
 Geographical Pricing (Cash, Counter trade, Barter)
 Counter trade (Many buyers want to offer other
items in payment)
 Barter

 Compensation deal

 Buyback arrangement (the seller sells a plant,


equipment, or technology to another country and
agrees to accept as partial payment products
manufactured with the supplied equipment)
 Offset

 Price Discounts and Allowances


 Promotional Pricing
 Loss-leader pricing
 Special-event pricing
 Cash rebates
 Low-interest financing
 Longer payment terms
 Warranties and service contracts
 Psychological discounting
 Discriminatory Pricing
 Customer segment pricing
 Product-form pricing
 Image pricing
 Channel pricing
 Location pricing
 Time pricing
Yield pricing
Pricing Strategies
 Pricing is one of the most important elements of
the marketing mix, as it is the only mix, which
generates a turnover for the organisation. The
remaining 3p’s are the variable cost for the
organisation. It costs to produce and design a
product, it costs to distribute a product and costs
to promote it. Price must support these elements
of the mix. Pricing is difficult and must reflect
supply and demand relationship. Pricing a
product too high or too low could mean a loss of
sales for the organisation
Types of Pricing Strategies
 Penetration pricing: Where the organisation sets a low price to
increase sales and market share.

 Skimming pricing: The organisation sets an initial high price and


then slowly lowers the price to make the product available to a wider
market. The objective is to skim profits of the market layer by layer.

 Competition pricing: Setting a price in comparison with


competitors.

 Product Line Pricing: Pricing different products within the same


product range at different price points. An example would be a video
manufacturer offering different video recorders with different
features at different prices. The greater the features and the benefit
obtained the greater the consumer will pay. This form of price
discrimination assists the company in maximizing turnover and
profits.
 Bundle Pricing: The organisation bundles a group of products at a
reduced price.

 Psychological pricing: The seller here will consider the psychology


of price and the positioning of price within the market place. The
seller will therefore charge 99p instead £1 or $199 instead of $200

 Premium pricing: The price set is high to reflect the exclusiveness


of the product. An example of products using this strategy would be
Harrods, first class airline services, Porsche etc.

 Optional pricing: The organisation sells optional extras along with


the product to maximise its turnover. This strategy is used commonly
within the car industry.
Pricing Decision Process

 Step 1: Selecting the pricing objective


 Survival
 Maximize current profits
 Maximize their market share
 Market-penetration pricing
 Best when:
 Market is highly price-sensitive, and a low price stimulates market
growth,
 Production and distribution costs fall within accumulated production
experience, and
 Low price discourages actual and potential competition
 Step 2: Determining Demand
 Price sensitivity
 Total Cost of Ownership (TCO)
 Estimating Demand Curves
 Surveys
 Price Experiments

 Statistical analysis

 PriceElasticity of Demand
 Inelastic

 Elastic

 Price indifference band


 Step 3: Estimating Cost
 Types of Cost and Levels of Production
 Fixed costs (overhead)
 Variable cost
 Total cost
 Average cost
 Accumulated Production
 Experience curve (Learning curve)
 Step4: Analyzing competitors costs,
prices, and offers
 Step 5: Selecting a Pricing Method
 Markup Pricing
Unit Cost =
variable cost + (fixed cost/unit sales)

 Markup price
Markup price=
unit cost/ (1 – desired return on sales)

 Target-Return Pricing
Target-return price =
unit cost + (desired return X investment capital)/unit sales
 Break-even volume
Break-even volume = fixed cost / (price – variable cost)
 Perceived-Value Pricing
 Perceived value
 Price buyers
 Value buyers
 Loyal buyers
 Value-in-use price
 Value Pricing
 Everyday low pricing (EDLP)
 High-low pricing
 Going-Rate Pricing
 Auction-Type Pricing
 English auctions (ascending bids)
 Dutch auctions (descending bids)
 Sealed-bid auctions
 Group Pricing
 Step 6: Selecting the Final Price
 Psychological Pricing
 Reference price

 Gain-and-Risk-Sharing Pricing
 Influence of the Other Marketing Elements
 Brands with average relative quality but high relative
advertising budgets charged premium prices
 Brands with high relative quality and high relative advertising
budgets obtained the highest prices
 The positive relationship between high advertising budgets
and high prices held most strongly in the later stages of the
product life cycle for market leaders
Initiating and Responding to Price Changes

 Initiating Price Cuts


 Drive to dominate the market through lower
costs
 Low quality trap
 Fragile-market-share trap
 Shallow-pockets trap
 Initiating Price Increases
 Cost inflation
 Anticipatory pricing
 Overdemand
 Delayed quotation pricing
 Escalator clauses
 Unbundling
 Reduction of discounts
 Reactions to Price Changes
 Customer Reactions
 Competitor Reactions
 Responding to Competitors’ Price Changes
 Maintain price

 Maintain price and add value

 Reduce price

 Increase price and improve quality

 Launch a low-price fighter line

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