PRICING DECISIONSPRICING DECISIONS

Session Coverage-Pricing Decisions

Importance of PricingImportance of PricingExternal and Internal Factors Affecting pricing decisionspricing decisionsPricing ObjectivesPricing Approaches

Cost Based PricingBuyer Based PricingCompetition Based Pricingp g

Session Coverage-Pricing Decisions

New Product Pricing StrategiesNew Product Pricing StrategiesProduct-mix Pricing StrategiesP i Adj t t St t iPrice Adjustment StrategiesPrice Changes

PRICEPRICE

Price is amount of money and/or other it ith tilit d d t iitems with utility needed to acquire a product.

The Importance of Price to Marketers

• Pricing only element that producesPricing only element that produces Revenue ; Other elements produce costscosts

• Prices are the easiest marketing – mix element to adjustelement to adjust

• Price communicates to the market the company's intended value positioning ofcompany's intended value positioning of its product or brand

Purpose of PricingPurpose of Pricing

The purpose of price is not to recover costs but to capture the perceived valuecosts, but to capture the perceived value of the product in the minds of the customercustomer.

(Nimer)( )

Is this all?

Current Pricing Trends in Indian Markets

You are getting less for your money

Product Price(Rs) Then Now LessWeight (Grams)

You are getting less for your money

( )1 Lays Chips 20 68 61 72 Good Day Biscuits 10 100 84.5 15.53 Dairy Milk Chocolate 20 50 38 124 Britannia Bread 12 400 375 255 Maggi 10 100 80 206 Haldiram Snacks 10 52 48 47 L S 10 75 65 107 Lux Soap 10 75 65 10

Times of India-November 20, 2011

CUSTOMER’S MIND• Some customers interested in low prices,

while other segment interested inwhile other segment interested in service, quality, value and brand image.R h id tifi d 4 t f• Research identified 4 segment of shoppers

Brand loyal: relatively uninterested in priceSystem beaters: prefer certain brands but y p

buy them at reduced price.Deal shoppers: Driven by low pricesDeal shoppers: Driven by low prices

CUSTOMER’S MIND

•Uninvolved: Not motivated by either aUninvolved: Not motivated by either a brand or low price.

Study had differentiation in demographics.So, psychographic factors responsible for different degree of price sensitivity. Value is also very important

Importance of Pricing-McKinsey ResearchResearch

Pricing is extremely important, smallPricing is extremely important, smallchanges in price can translate into hugeimprovements in profitability.p p y

A study of 1000 companies:A study of 1000 companies: McKinsey found that a 1% increase in price would improve profits byin price would improve profits by 7% assuming no change in sales volume.

Factors Affecting Pricing Decisions

• Two Types of Factors:• Two Types of Factors:

1. Internal Factors 2. External Factors

INTERNAL FACTORSINTERNAL FACTORS

Aim is to recover cost of manufacturing andAim is to recover cost of manufacturing and marketing through price.

1. Corporate & Marketing objective of firm2 Image sought by firm through Pricing2. Image sought by firm through Pricing3. Characteristics of Product4 P i l ti it f d d4. Price elasticity of demand5. Stage of product in its life cycle

INTERNAL FACTORSINTERNAL FACTORS

6 Cost of manufacturing and marketing6. Cost of manufacturing and marketing7. Extent of differentiation practiced8 C iti f d t li f d t8. Composition of product line of products9. Other elements of market mix of firm and

their interaction with pricing.

EXTERNAL FACTORSEXTERNAL FACTORS

1 Market Characteristic (Demand1. Market Characteristic (Demand, Customer and Competition)

2 Buyer behavior with respect to product2. Buyer behavior with respect to product3. Bargaining power of major customers4. Bargaining power of major suppliers5. Competitors pricing policyp p g p y6. Government control/regulation on pricing7 Other relevant legal aspects7. Other relevant legal aspects

EXTERNAL FACTORSEXTERNAL FACTORS

8 Societal (Social) Considerations8. Societal (Social) Considerations9. Understanding reached if any with price

cartelscartels.

Where does the money go?Where does the money go?

Why do textbooks cost so much???Why do textbooks cost so much???Authors + Publishers = 75%R t il 25%Retailers = 25%Suppose price of book is Rs 50 (37.50

&12.5)Author gets 10-15% of wholesale priceg p

Author’s Share = Rs 3 75 6 63Author s Share = Rs 3.75-6.63 Publisher’s Share= Rs 31.87-33.75

Where does the money go?Where does the money go?

Author: Takes 3 long years to develop book.Author: Takes 3 long years to develop book.Revised Editions- takes 1-1.5 yearsPublishers share looks more (Rs 32-33) theyPublishers share looks more (Rs 32-33), they

cover cost of MR, Art, Design, Production, Distribution, Salaries of sales force, distribution , ,of promotional material AND

OVERHEAD Costs-Office, Computers etcSpend 15-20 lakh upfront.

Where does the money go?Where does the money go?

Retailers:Retailers:Personal and Operation Cost=50 %Marketing Cost =13-15%Taxes = 10-15% Income:Author = 7 5 %Author = 7.5 %Publisher = 7.5%

%Retailer = 5%

PRICING SURVEY RESEARCHPRICING SURVEY RESEARCH

9 % Companies GUESS about Price9 % Companies GUESS about Price

37% C i t h h t37% Companies match what COMPETITORS Charge for similar offerings

52% Companies choose price that cover p pcosts and provide fair profit.

Setting Pricing PolicySetting Pricing Policy

1 PRICING OBJECTIVES1. PRICING OBJECTIVES

1 Profit maximization in short term1. Profit maximization in short term2. Profit optimization (to make something

d it b ) i l tas good as it can be) in long term.3. Achieving a particular market share g4. Deeper penetration in the market5 Entering new markets5. Entering new markets6. Keeping parity with competition

PRICING OBJECTIVESPRICING OBJECTIVES

7 Providing commodities at prices affordable by7.Providing commodities at prices affordable by weaker sections.8 Providing commodities at a price that8.Providing commodities at a price that stimulate economic development.These 2 objectives are relevant only toThese 2 objectives are relevant only to providers of essential commodities and public utility servicesutility services.Firms seek to meet basket of returns through pricing policies NO FIRM IS SATISFIED WITHpricing policies. NO FIRM IS SATISFIED WITH SINGLE OBJECTIVE

Firms use pricing for Variety of Obj i AP BA d LGObjectives-AP, BA and LG

• Asian Paints (Uses Price to Protect MS)Asian Paints (Uses Price to Protect MS)• M.Leader, 33% Share, but industry highly competitive.

Has reduced prices of all items to protect MS.• British Airways (Enhance Profitability)• Started focusing of Business/Executive & Economy

Class Have reduced no of seats in EconomyClass. Have reduced no of seats in Economy.• LG (MS to Profitability)-Came in 2001-Objective was

volume/MS.Profits came down to 2% of sales in 2005.volume/MS.Profits came down to 2% of sales in 2005. Now objective is Profitability.

• Have increased the prices and working on differentiation

Setting the Price2. Determining Demande e g e a d

– Price sensitivity– Total Cost of Ownership– Total Cost of Ownership – Estimating Demand Curves

Price Elasticity of Demand– Price Elasticity of Demand• Inelastic• ElasticElastic

Setting the Price3. Estimating Costg

– Types of Cost and Levels of ProductionTypes of Cost and Levels of Production• Fixed costs• Variable cost• Total cost• Total cost• Average cost

• Fixed cost:– Does not change with productionDoes not change with production

• Examples: Rent, Overhead, Salaries– Variable Cost

Changes with productionCan be eliminated in the short runCan be eliminated in the short runExamples: Cost of materials that go directly into the product, wages

Average Cost (= Total cost / No of units in Production)

Setting the Price

Selecting a Pricing MethodSelecting a Pricing Method

PRICING METHODS/STRATEGIESPRICING METHODS/STRATEGIES1. Cost based pricing2 D d B d P i i2. Demand Based Pricing3. Competition Based pricing4. Value Pricing5 Product line oriented pricing5. Product line oriented pricing6. Tender Pricing7 Diff ti t d P i i7. Differentiated Pricing

COST BASED PRICING-2

Following methods are commonly used:Following methods are commonly used:1. Mark-up Pricing/Cost plus pricing2 Ab ti t i i /f ll t i i2. Absorption cost pricing/full cost pricing3. Target rate of return pricing

COST BASED PRICING-3

Mark-up Pricing/Cost plus pricing:Mark-up Pricing/Cost plus pricing:Selling price of product is fixed by adding margin to its cost pricemargin to its cost price.

•Slower the turnaround, larger mark-up•Used by companies, who do not have y p ,manufacturing of their own.

Mark-up or Cost Plus Pricing-4

• TO SET PRICE:TO SET PRICE:• 1) Estimate Total Cost Per Unit• 2) Apply the “Formula”2) Apply the Formula

– e.g., TOTAL COST + 30-50% or anything%

• Problem– IGNORES demand

• Advantage– SIMPLE

COST BASED PRICING-5

2. Absorption cost pricing (Full Cost Pricing)2. Absorption cost pricing (Full Cost Pricing)

COST BASED PRICING-6

1. Target rate of return pricing

Estimated Unit Cost = Rs12 50Estimated Unit Cost Rs12.50b. Estimated Sales Volume = 80,000 units

TOTAL COST R 10 00 0 00c. TOTAL COST = Rs 10,00,0,00d. Target ROI = 20%.20 x Rs10,000,00 =Rs 2,000,00 Needed

Profit

COST BASED PRICING-7COST BASED PRICING 7

Needed (Target) Revenue =Needed (Target) Revenue =Total Cost + Profit

R 10 000 00 R 2 000 00= Rs10,000,00 + Rs 2,000,00 = Rs12,000,00

Unit Price = REVENUE / VOLUME= Rs12,000,00 / 80,000=Rs15 00 / Unit Price=Rs15.00 / Unit Price

Break-Even ChartBreak Even Chart

Break-EvenBreak Even

• Cost Volume Price and ProfitsCost, Volume, Price and Profits interrelated

• A particular volume level and its• A particular volume level and its associated cost level generates a particular profit levelparticular profit level.

• When we consider different price level, we h diff t fit l lhave different profit levels.

• Firm can accordingly project profits at different price levels and chose the one that suits them the most.

Review Break EvenReview Break Even

Break Even Point FCBreak Even Point FC(in Units) = (SP-VC)

50000005000000(15.00-6.25)

5,71,428 units, ,

Review Break EvenReview Break Even

Break Even Point FCBreak Even Point FC(in Rupees) = 1-(VC/SP)

5 000 0005,000,0001-(6.25/15)

Rs 85 71 429Rs 85,71,429

2. DEMAND BASED PRICING-1

1 “What the traffic can bear?”1. What the traffic can bear?2. Skimming Pricing3 P t ti P i i3. Penetration Pricing

DEMAND BASED PRICING-2

1 “What the traffic can bear?”1. What the traffic can bear?

M i i th t t• Maximum price that a customer can pay.• Safe when demand is inelastic. • Buyer opposition or new firms will create

difficulty.y

DEMAND BASED PRICING-3

2 Skimming Pricing2. Skimming PricingHigh Price+High profits at early stages, later

settles down at low pricessettles down at low prices.

For example: I-Pod, Mobile Phones

2.DEMAND BASED PRICING-4

3 Penetration Pricing:3.Penetration Pricing:Penetration through low prices when new product is not a luxury productproduct is not a luxury product.

3. COMPETITION ORIENTED PRICING 1PRICING-1

Three policy options available:Three policy options available:• Premium-Up

Di t D• Discount-Down• Parity or going rate pricing-Matching

prices of competitors

Perceived Value Pricing (Offer more value than competitor and demonstrate it)

Perceived Value Price = F ( buyer’s image of product, channel deliverables, warranty quality,customer support, firm reputation, trustworthiness)

Value PricingLow price for high quality offering e.g. WalMart.

It is as much a philosophy as a method

One pricing strategy based on Value Pricing is EDLPOne pricing strategy based on Value Pricing is EDLP

Going Rate PricingGo by competitor’s pricesGo by competitor s prices

Charge same as, less than or more than competitor’s prices

F ll h l d i i i h l i C di li li hFollow the leader pricing is another example as in Commodity oligopolies such as steel, paper, fertilizers

Value Pricing-Essence

Value>Price>Costs (Loss to Seller)Value>Price>Costs (Loss to Seller)Price>Value>Costs (Loss of Market Share)P i C t V l (Bi L )Price>Cost>Value (Big Looser)Price=Value>Cost (Good)

PRICE ADJUSTMENTPRICE ADJUSTMENT

• Geographical PricingGeographical Pricing• Promotional Pricing

Di i i t P i i• Discriminatory Pricing• Discounts and Allowances• Product Mix Pricing

– Product Line PricingProduct Line Pricing

Setting the PriceSelecting the Final Priceg

– Psychological Pricing• Reference pricep• Brands with average relative quality but high relative

advertising budgets charge premium pricesBrands with high relative quality and high relative• Brands with high relative quality and high relativeadvertising 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

– Company Pricing Policies– Impact of Price on Other Parties

Geographical Pricing– Geographical Pricing– Discriminatory Pricing

Adapting the PriceAdapting the Price

• Promotional Pricing• Promotional Pricing– Loss-leader pricing

Special event pricing– Special-event pricing– Cash rebates

L i t t fi i– Low-interest financing– Longer payment terms

W ti d i t t– Warranties and service contracts– Psychological discounting

Price AdaptationsPrice Adaptations

-- Promotional pricing-- Promotional pricing - loss leader pricing, special event pricing ( Going to school program of Bata), Cash rebates (as in

jeweler shops) low interest financing (0% for 12 months), longer payment terms,warranties / service contracts, psychological discounting (price high and then discount)

-- Geographical Pricing

-- Price Discounts and Allowances- Cash discount quantity discount functional discount (given to intermediaries if they perform- Cash discount, quantity discount, functional discount (given to intermediaries if they perform

certain functions), seasonal discount (off-peak buying), allowances (trade allowance to resellers for participating in trade-ins, promotion allowance given to resellers forparticipating in advertisement and promotion programs of the firm)

-- Price discrimination

-- Product Mix Pricing - Product line pricing optional feature pricing (power windows for car) captive product pricing (razorProduct line pricing, optional feature pricing (power windows for car), captive product pricing (razor

is low price and blade is high price), two part pricing (Mobile Phones)