PRICING

Pricing objectives

• Profit– Target returns– Maximising profits

• Sales– Volume – Share

• Competitive reaction

Estimating demand

• Past statistics• Surveys• Price experimentation

Elasticity of demand

• Search – compare before buy• Experience – compare after buy• Credence – difficult to compare

Costs

• Fixed and variable costs• B-E analysis (volumes & capacity utilisation)• Marginal analysis

Market skimming

• Usually for high tech and low availability goods

• New product has distinctive features strongly desired by consumers

• Demand is inelastic• Protection to product in form of patents etc

Market penetration

• A large market exists for the product• Demand is elastic• Economies of scale possible• Fierce competitive scenario

Discounts

• Quantity• Trade discounts• Cash• Functional• Seasonal• Allowance

Pricing strategies

• Price lining• Odd pricing• Leader pricing• High-low• Everyday low pricing

Product line pricing

• Determine low price• Determine high price• Set price differentials for intermediate

products

PLP principles

• Noticeable differences should correspond to perceived value differences

• Highest and lowest should be priced to mould consumer perception

• Price differences should get wider as price increases.

Price Bundling

• Package rates, etc• In mixed bundling, products can be bought

individually or as a package• Products must be in growth stage• Captures different WTP to maximise revenues• Demand elastic• Objectives?

Differential pricing

• Geographical• Segment pricing• Product form• Image / channel• Seasonal

Eg• WTP customer 1 = Rs.5• WTP customer 2 = Rs.3• Cost of making 2 units = Rs.7

Advance Selling

• Improves profits by selling in advance when the customer has uncertainty

• Advance selling is generally more profitable than spot selling as long as customers are uncertain about their future consumption states

• Customer uncertainty is high in most service markets

Enabling technology

• Internet • Electronic tickets– Physical – Paperless

• Smartcards

Benefits of technology

Less arbitrage• Hides value and validity• Records identity

Lower transaction cost• Managing customer information• Cost of reaching customer

Benefits of technology

• More complex product packages• More information about buyers• Information on demand

Yield Management

• Yield management is a method to help the firm sell the right inventory unit to the right customer at the right time

• It guides the allocation of undifferentiated units of limited capacity

Conditions for yield management

• Binding capacity constraints• Low marginal cost of serving additional

customers• Inverse relationship between customer price

sensitivity and customer booking time

Restrictions

• Book a certain length ahead of time• Stay for a minimum time• Use service in a particular period• Have a higher change or cancellation penalty• Non-refundable reservation

• The firm should try to balance the restriction and the benefit

• Customers accept yield management in some industries like airlines because they are used to it, not because they think it fair

Acceptable practices

• Information of different pricing options to be made available

• A substantial discount to be given for cancellation restrictions

• Reasonable restrictions imposed in exchange for discounted rate

• Different prices for products perceived to be different

Unacceptable practices

• Offering insufficient benefits in exchange for restrictions

• Offering severe restrictions on discounts• Not informing customers of change in

reference prices, etc

Some examples

• 486SX was the 486DX with the coprocessor disabled

• FedEx offers morning and afternoon delivery. Afternoon packages are not sent out in the morning even if they have arrived in time

• IBM laser printer E series prints 5 ppm. Chips were introduced in the high cost printer to slow it down from 10 to 5 ppm.

How to increase prices

• Increase reference price• Attach additional services• Package deals• Attach restrictions to lower prices

Perceived Fairness

• Customers feel that raising prices to maintain profits is fair

• Customers feel that raising prices to increase profits is unfair

• If costs decrease, customers believe that it is fair for the company to maintain prices

• Not so, if a macro-economic factor has lead to cost decrease