Pricing & Decisions

Marketing Managementpricing decisions

Deepak bhattacharya

Copyright Welingkars DHRM 2009 2


What is Price?

• The amount of money needed to purchase something

• Price is that which is given in an exchange to acquire goods or services.

• Price is the only revenue generating element amongst the 4ps, the rest being cost centers.


What is Pricing?

• The evaluation of something in terms of its price

• Pricing is one of the four Ps of the marketing mix. The other three aspects are product, promotion, and place.

• Pricing is an important strategic issue because it is related to product positioning.


How to Set a Price on aProduct or Service

Fine tune with pricing tacticsFine tune with pricing tactics

Choose a price strategyChoose a price strategy

Estimate demand, costs, and profitsEstimate demand, costs, and profits

Establish pricing goalsEstablish pricing goals

Results lead to the right price


Role of Pricing • Pricing affects other marketing mix elements such

as product features, channel decisions, and promotion.

• Price becomes a hub around which the System revolves.

• Price provides income. Price times the quantity sold results in the total income

from a commodity.• Price determines the quantity supplied and

consumed.• Price serves a signal• Price transfers ownership


Pricing Methods• Cost-plus pricing - set the price at the

production cost plus a certain profit margin.• Target return pricing - set the price to

achieve a target return-on-investment.• Value-based pricing - base the price on the

effective value to the customer relative to alternative products.

• Psychological pricing - base the price on factors such as signals of product quality, popular price points, and what the consumer perceives to be fair.


Pricing Objectives• Current profit maximization - seeks to maximize current profit, taking into account

revenue and costs. Current profit maximization may not be the best objective if it results in lower long-term profits.

• Current revenue maximization - seeks to maximize current revenue with no regard to profit margins. The underlying objective often is to maximize long-term profits by increasing market share and lowering costs.

• Maximize quantity - seeks to maximize the number of units sold or the number of customers served in order to decrease long-term costs as predicted by the experience curve.

• Maximize profit margin - attempts to maximize the unit profit margin, recognizing that quantities will be low.

• Quality leadership - use price to signal high quality in an attempt to position the product as the quality leader.

• Partial cost recovery - an organization that has other revenue sources may seek only partial cost recovery.

• Survival - in situations such as market decline and overcapacity, the goal may be to select a price that will cover costs and permit the firm to remain in the market. In this case, survival may take a priority over profits, so this objective is considered temporary.

• Status quo - the firm may seek price stabilization in order to avoid price wars and maintain a moderate but stable level of profit.


Pricing Objective (Slide 2)

• maximize long-run profit • maximize short-run profit • increase sales volume (quantity) • increase monetary sales • increase market share • obtain a target rate of return on investment (ROI) • obtain a target rate of return on sales • stabilize market or stabilize market price: an

objective to stabilize price means that the marketing manager



• attempts to keep prices stable in the marketplace and to compete on non-price considerations. Stabilization of margin is basically a cost-plus approach in which the manager attempts to maintain the same margin regardless of changes in cost.

• company growth • maintain price leadership • desensitize customers to price • discourage new entrants into the industry • match competitors prices • encourage the exit of marginal firms from the industry • survival • avoid government investigation or intervention



• obtain or maintain the loyalty and enthusiasm of distributors and other sales personnel

• enhance the image of the firm, brand, or product • be perceived as “fair” by customers and potential

customers • create interest and excitement about a product • discourage competitors from cutting prices • use price to make the product “visible" • build store traffic • help prepare for the sale of the business (harvesting) • social, ethical, or ideological objectives • get competitive advantage


Types of Pricing Objectives

• Profit Oriented Pricing Objectives

Example: Target Return on Investment or Firm Return on Total Assets

• Sales Oriented Pricing Objectives

• Stack Quo Pricing Objective


Steps to develop Pricing Strategy

• Develop marketing strategy - perform marketing analysis, segmentation, targeting, and positioning.

• Make marketing mix decisions - define the product, distribution, and promotional tactics.

• Estimate the demand curve - understand how quantity demanded varies with price.

• Calculate cost - include fixed and variable costs associated with the product.

• Understand environmental factors - evaluate likely competitor actions, understand legal constraints, etc.

• Set pricing objectives - for example, profit maximization, revenue maximization, or price stabilization (status quo).

• Determine pricing - using information collected in the above steps, select a pricing method, develop the pricing structure, and define discounts.

Note : These steps are interrelated and are not necessarily performed in the above order. Nonetheless, the above list serves to present a starting framework.


Price Discounts

• Quantity discount - offered to customers who purchase in large quantities.• Cumulative quantity discount - a discount that increases as the cumulative

quantity increases. Cumulative discounts may be offered to resellers who purchase large quantities over time but who do not wish to place large individual orders.

• Seasonal discount - based on the time that the purchase is made and designed to reduce seasonal variation in sales. For example, the travel industry offers much lower off-season rates. Such discounts do not have to be based on time of the year; they also can be based on day of the week or time of the day, such as pricing offered by long distance and wireless service providers.

• Cash discount - extended to customers who pay their bill before a specified date.

• Trade discount - a functional discount offered to channel members for performing their roles. For example, a trade discount may be offered to a small retailer who may not purchase in quantity but nonetheless performs the important retail function.

• Promotional discount - a short-term discounted price offered to stimulate sales.


4 c’s of pricing

• Customers – Demand Situations

• Company - Cost/Marketing Objectives

• Channels

• Competition


Demand and Supply

• The desire to purchase goods and services, It is the quantity of a product that will be sold in the Market at various prices for a specified period.

• Supply is the quantity of the product that will be offered to the market by suppliers at various prices for specified period.


Elasticity of Demand

• Price elasticity of demand (PED) is defined as the responsiveness of the quantity demanded of a good to a change in its price.

• Elasticity of Demand is defined as the percentage change in the quantity demanded of a product divided by the percentage change in the price of the product.

• Elasticity Measure Consumer sensitivity to changes in the price.


Factors affecting Elasticity

• The availability of Substitute goods and services.

• The Prices relative to a consumer’s Purchasing Power.

• Product Durability.

• The Existence of other Product uses.


Types of Costs

Types of Costs

Variable Costs Fixed Costs


Price Determinants

• Stages of a Product Life Cycle

• Competition

• Distribution Strategy

• Promotion Strategy

• Perceived Quality


Pricing Limits

• Price Too High

• Little or No Demand

• Study Price Ceiling and Price Floor

• Range of Possible Prices

• Product Costs

• Boundaries of a product

• Price too Low or No profits


Pricing Methods

• Cost Oriented Pricing

• Markup Pricing

• Break Even Pricing

• Target Return Pricing

• Profit Maximization Pricing

• Key-stoning


Why is Cost Oriented Pricing important

• Consumer Access to Services

• Efficient Network Access for Competitors and Service Providers

• Sustainable Market Expansion

• Efficient Allocation of Economic Resources


Mark Up Pricing

• Mark-up pricing is an aspect of average cost pricing in which firms calculate the average cost of a product and add on a mark-up, or profit.

• Developed by Polish economist Michal Kalecki (1899-1970)


Profit Maximization

• Profit is the difference between a firm's total revenue and its total opportunity cost.

• Total revenue is the amount of income earned by selling products

• A Method of setting prices that occur when Marginal revenue equals Marginal Cost.

• Marginal Revenue is the change in total revenue resulting from a one unit change in sales.

• Marginal Cost is additional cost associated with producing one more unit of output.


Break Even Pricing

• A cost pricing method used to set a product’s initial price that is used in association with Breakeven Analysis and the determination of minimum sales levels needed at different pricing points in order for a company to cover fixed costs.

• Breakeven Analysis : A forecasting tool used by marketers that considers product price, fixed cost and variable costs in order to determine the minimum sales volume required before a company realizes a profit.

• Breakeven Point: The volume point of sales at which revenues and costs are equal; a combination of sales and costs that will yield a no profit/no loss operation.


Target Return Pricing

• A pricing method in which a formula is used to calculate the price to be set for a product to return a desired profit or rate of return on investment assuming that a particular quantity of the product is sold

OR• A method of pricing that attempts to cover

all costs and achieve a target return.


Key-Stoning

• A pricing method of marking merchandise for resell to an amount that is double the wholesale price.


Demand Oriented Pricing approach

Evaluating The Customer’s Price Sensitivity

• Q:1 Are there Substitute Ways of Meeting a need?• Q:2 Is it Easy to compare Prices?• Q:3 Who Pays the Bill?• Q:4 How Great is the total expenditure?• Q:5 How Significant is the End Benefit• Q:6 Is there already a sunk investment related to

purchase ?


Value in use Pricing and Reference Price

• Value in pricing focuses on how much will the customer save.

• Reference Prices are the price the consumer expects to pay and customers may have a reference price.


Bait Pricing and Leader Pricing

• Bait Pricing, a Deceptive and illegal Practice, tries to get customer into a store through false or misleading price advertising and then uses high pressure sales tactics to persuade customers to buy more expensive merchandise.

• Leader Pricing or Loss Leader Pricing is an attempt to attract customer by selling a product near cost or even below, Hoping customers will buy other products while in the store.


Psychological Pricing

• Psychological Pricing means setting prices that have special target to appeal to target customers.

• Price Lining: A pricing technique in which a store to offer all merchandise in a given category at certain prices, such as 100 INR and 200 INR.

• Odd Even pricing: A form of psychological pricing that suggests buyers are more sensitive to certain ending digits.

• Prestige Pricing: Setting a high price on a product to attract quality- or status-conscious consumers


Bid Pricing and Negotiated Pricing and

Demand Backward Pricing• Bid pricing Offers a specific price for each

possible job rather than setting a price that applies for all customers.

• Negotiated price is a price that is set based on bargaining between the buyers and sellers.

• Demand Backward pricing setting an acceptable final consumer price and working backward to what a producer can change.


PRICE Strategy

Basic Strategies for Setting Price

Price Skimming Penetration Pricing Status Quo Pricing


Choose a Price Strategy

Status Quo Pricing

Status Quo Pricing

Price Skimming

Price Skimming

Penetration Pricing

Penetration Pricing

Charging a price identical to or very close to the competition’s price.Charging a price identical to or very close to the competition’s price.

A firm charges a high introductory price, often coupled with heavy promotion.

A firm charges a high introductory price, often coupled with heavy promotion.

A firm charges a relatively low price for a product initially as a way to reach the mass market.

A firm charges a relatively low price for a product initially as a way to reach the mass market.


Price Skimming

SituationsWhenPrice

SkimmingIs

Successful

SituationsWhenPrice

SkimmingIs

Successful

Unique Advantages/Superior

Legal Protection of Product

Blocked Entry to Competitors

Technological Breakthrough

Inelastic Demand


Penetration Pricing

AdvantagesAdvantages DisadvantagesDisadvantages

Discourages or blocks competition from market entry

Boosts sales and provides large profit increases

Can justify production expansion

Requires gear up for mass production

Selling large volumes at low prices

Strategy to gain market share may fail


Status Quo Pricing

AdvantagesAdvantages DisadvantagesDisadvantages

Simplicity

Safest route to long-term survival for small firms

Strategy may ignore demand and/or cost

Pricing & Decisions

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