Pricing

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Pricing

• M Sahni

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Pricing Strategy

• Set Pricing Objective
• Estimate Demand
• Estimate Costs
• Analyze Competitors Prices
• Select Pricing Policy/Method
• Set Final Price

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Pricing Strategy

• Pricing Objectives
• survival
• cover fixed cost and some variable cost
• very short-run.(avoid extinction)
• profit maximization
• requires accurate knowledge of demand, cost
  functions

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Pricing Strategy

• Pricing Objectives (cont.)
• revenue maximization
• costs hard to determine
• assume increase in revenue leads to decrease in
  unit costs (old BCG model)
• both production and distribution costs fall
• works if market is price sensitive
• low price may discourage competition
• market penetration strategy

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Pricing Strategy

• Pricing Objectives (cont.)
• market skimming
• highest price that market will bear
• benefits are barely worthwhile for some customers
  to buy
• then work down the demand curve
• works if no cost benefit of increasing volume
• image is important
• may or may not discourage competition

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Pricing Strategy

• Estimate Demand (curve)
• unique value
• awareness of substitutes
• difficult to compare alternatives
• price relative to income
• inventory effect
• Can customer hold inventory?

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Pricing Strategy

• Estimate Costs (supply curve)
• cost structure at different levels of production
• old long run average cost curves
• experience curves from BCG model
• profit is a function of market share.
• penetration versus skimming
• How is supply curve affected?

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Pricing Strategy

• Analyze Competitors Prices
• What is the structure of the market?
• oligopoly versus pure competition
• Select Pricing Policy/Method
• single or multiple prices
• administered pricing
• ceiling and floor prices versus the level of
  competition

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Pricing Strategy

• Cost Based Pricing
• cost plus, markup pricing
• easy, costs known, minimizes price competition
• ignores demand elasticity, not profit maximizing
• target return of investment
• use breakeven analysis to find a price to yield a
  target ROI
• use sales volume to derive price?

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Pricing Strategy

• Demand Based Pricing
• perceived value
• requires detailed knowledge of buyer behavior and
  demand elasticity
• only true profit maximizing strategy
• ignores costs and competitors

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Pricing Strategy

• Demand Based Pricing (cont.)
• demand differential
• price discrimination
• yield maximization pricing
• sell at multiple prices to multiple segments
• not based on marginal costs of dealing with each
• daily, weekly, or seasonal pricing
• geographic, physical, or electronic barriers

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Pricing Strategy

• Competition Based Pricing
• going rate pricing
• used when costs difficult to measure
• competitors lack differential advantage
• sealed bid
• forces competitors to lowest price

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Pricing strategies

• Premium pricing
• Uses a high price, but gives a good
  product/service exchange e.g. Mercedes
• Penetration pricing
• offers low price to gain market share - then
  increases price
• e.g. Reliance Telecom - to attract new clients
• Economy pricing
• placed at no frills, low price
• e.g. Soups, biscuits - economy brands

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• Price skimming
• where prices are high - usually during
  introduction
• e.g new albums or films on release
• ultimately prices will reduce to the parity
• Psychological pricing
• to get a customer to respond on an emotional,
  rather than rational basis
• .e.g 99p not Rs1 price point perspective
• Product line pricing
• rationale of a product range
• chocolates
• Pricing variations
• off-peak pricing, early booking discounts,etc

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• Optional product-pricing
• e.g. optional extras - BMW famously
  under-equipped
• Captive product pricing
• products that complement others
• e.g Gillette razors (low price) and blades (high
  price)
• Product-bundle pricing
• sellers combine several products at the same
  price
• e.g software, books, CDs.
• Promotional pricing
• e.g. toothpaste, soups, etc

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Pricing Strategies

• Select Final Price
• psychological pricing, prestige pricing
• know demand elasticity
• start high, work toward costs
• discounts
• cash, trade, quantity, or seasonal
• promotional pricing
• loss leaders

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Pricing Strategy

• Select Final Price (cont.)
• price lining
• odd pricing
• perception

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Pricing Strategy

• Price cuts
• excess capacity leads to margin squeezes (aka
  price wars)
• build market share not brand loyalty
• low cost producer will always win

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Price Quotations

• List prices Established prices normally quoted
  to potential buyers
• Market price Price that an intermediary or
  final consumer pays for a product after
  subtracting any discounts, rebates, or allowances
  from the list price

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• Reductions from List Price
• Cash discount price reduction offered to a
  consumer, industrial user, or marketing
  intermediary in return for prompt payment of a
  bill
• 2/10 net 30, a common cash discount notation,
  allows consumers to subtract 2 percent from the
  amount due if payment is made within 10 days

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• Trade Discounts payment to a channel member or
  buyer for performing marketing functions also
  known as a functional discount

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• Quantity discount price reduction granted for a
  large-volume purchase
• Justified on the grounds that large orders reduce
  selling expenses, storage, and transportation
  costs
• Cumulative quantity discounts reduce prices in
  amounts determined by purchases over stated time
  periods
• Non-cumulative quantity discounts provide
  one-time reductions in the list price

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• Allowances
• Trade-in credit allowance given for a used item
  when a new item is purchased
• Promotional allowance advertising or
  promotional funds provided by a manufacturer to
  other channel members in an attempt to integrate
  the promotional strategy within the channel
• Rebates refund for a portion of the purchase
  price, usually granted by the products
  manufacturer

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• Geographic Considerations
• FOB (free on board) plant or FOB origin Price
  quotation that does not include shipping charges.
  Buyer pays all freight charges to transport the
  product from the manufacturer
• Freight absorption system for handling
  transportation costs under which the buyer may
  deduct shipping expenses from the costs of goods

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• Uniform-delivered price system for handling
  transportation costs under which all buyers are
  quoted with the same price, including
  transportation expenses
• Zone pricing system for handling transportation
  costs under which the market is divided into
  geographic regions and a different price is set
  in each region
• Basing-point system system for handling
  transportation costs in which the buyers costs
  included the factory price plus freight charges
  from the basing-point city nearest the buyer.
  Seeks to equalize competition between distant
  marketers.

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• Odd pricing pricing policy based on the belief
  that a price ending with and odd number just
  below a round number is more appealing

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• Price-Quality Relationships
• Without other cues, price serves as an important
  indicator of a products quality to buyers
• Customers often view price as an indicator of a
  products overall quality and may be willing to
  pay a higher price