PRICINGPRICINGPRICING AND SALES VOLUME DECIDE THE PRICING AND SALES VOLUME DECIDE THE REVENUE FOR ANY BUSINESSREVENUE FOR ANY BUSINESS

THE PROCESS OF PRICING INVOLVESTHE PROCESS OF PRICING INVOLVES

--Setting Price Objectives--Setting Price Objectives

--Determining The demand--Determining The demand

--Estimating the cost of production--Estimating the cost of production

--Analyzing competition--Analyzing competition

--Selecting a suitable method of pricing--Selecting a suitable method of pricing

-- Deciding the final price-- Deciding the final price

----

Setting the Price ObjectiveSetting the Price Objective

--Survival--Survival

-- Profit-- Profit

--Return on investment--Return on investment

--Market Share--Market Share

--Cash Flow--Cash Flow

--Status Quo--Status Quo

--Product quality--Product quality

DEMAND ESTIMATIONDEMAND ESTIMATION PRICE SENSTIVITYPRICE SENSTIVITY--Unique Value EffectUnique Value Effect

-Substitute Effect-Substitute Effect

-Comparison Difficult-Comparison Difficult

-Total Expenditure Effect-Total Expenditure Effect

-End Benefit Effect-End Benefit Effect--Shared Cost EffectShared Cost Effect--Sunk InvestmentSunk Investment--High QualityHigh Quality--Cannot be inventoriedCannot be inventoried

DEMAND ESTIMATION Contd/-DEMAND ESTIMATION Contd/-

--Demand CurvesDemand Curves

-- Demand can be estimated-- Demand can be estimated by analysis of past sales and by analysis of past sales and pricesprices

--Using different prices in similar regions to gauge sales--Using different prices in similar regions to gauge sales

--Ask the buyers of their likely demand at various prices--Ask the buyers of their likely demand at various prices

DEMAND ESTIMATION Contd/-DEMAND ESTIMATION Contd/-

PRICE ELASTICITY Of DEMANDPRICE ELASTICITY Of DEMAND Change in demand as a response to change in priceChange in demand as a response to change in price

Calculated by dividing the percentage change in demand Calculated by dividing the percentage change in demand by percentage change in pricesby percentage change in prices

If very little change in demand due to price, the demand is If very little change in demand due to price, the demand is inelasticinelastic

If considerable change in demand due to price change, it is If considerable change in demand due to price change, it is called called elasticelastic

DEMAND ESTIMATION Contd/-DEMAND ESTIMATION Contd/- Demand elasticity is likely to be low whenDemand elasticity is likely to be low when

--Very few substitutes or competitors--Very few substitutes or competitors

--Buyers do not notice the price change--Buyers do not notice the price change

--Consumer reaction is likely to be slow to price change--Consumer reaction is likely to be slow to price change

--Consumers attribute price rise to external factors like --Consumers attribute price rise to external factors like inflation, scarcity etcinflation, scarcity etc

ACCUMALATED PRODUCTIONACCUMALATED PRODUCTION

ACCUMALATED PRODUCTIONACCUMALATED PRODUCTION Average costs decline with accumulated experience.Average costs decline with accumulated experience.

STANDARD COSTINGSTANDARD COSTING ACTIVITY BASED COSTINGACTIVITY BASED COSTING TARGET COSTINGTARGET COSTING

ANALYSING COMPETITIONANALYSING COMPETITION A CHANGE IN YOUR PRICING MAY A CHANGE IN YOUR PRICING MAY

SHIFT THE CONSUMERS TO SHIFT THE CONSUMERS TO COMPETITIONCOMPETITION

MARGINAL ANALYSISMARGINAL ANALYSIS --Fixed Costs- Costs that do not change with volume--Fixed Costs- Costs that do not change with volume -- Variable costs- Costs that vary with volume-- Variable costs- Costs that vary with volume Avg cost=Avg fxd costs+Avg variable costAvg cost=Avg fxd costs+Avg variable cost Marginal cost is the cost incurred in producing an extra unitMarginal cost is the cost incurred in producing an extra unit Avg total cost decreases if marginal cost<avg costAvg total cost decreases if marginal cost<avg cost Avg total cost increases if marginal cost>avg costAvg total cost increases if marginal cost>avg cost Marginal revenue therefore must be>than avg revenueMarginal revenue therefore must be>than avg revenue

ANALYSING COMPETITION ANALYSING COMPETITION Contd/-Contd/-

--Break even analysis--Break even analysis Break-even is that volume of sales where the co does not Break-even is that volume of sales where the co does not

make any profit or lossesmake any profit or losses

--The co must determine the breakeven volumes for different --The co must determine the breakeven volumes for different levels of pricinglevels of pricing

The major assumption in break even analysis is that demand The major assumption in break even analysis is that demand is usually fixed and the major objective is to recover costsis usually fixed and the major objective is to recover costs

Pricing decisions are made keeping in mind competitive Pricing decisions are made keeping in mind competitive situationssituations

PRICE COMPETITIONPRICE COMPETITION A co must be a low cost seller of productsA co must be a low cost seller of products

Low cost producers usually market standard goodsLow cost producers usually market standard goods

They frequently change their prices in response to mkt They frequently change their prices in response to mkt conditionsconditions

Face danger of undercutting by competitorsFace danger of undercutting by competitors

Can result in chronic price warsCan result in chronic price wars

NON PRICE COMPETITIONNON PRICE COMPETITION A non price producer competes on other attributes eg A non price producer competes on other attributes eg

quality, service, packaging, brand equityquality, service, packaging, brand equity

Attempts to build loyalty Attempts to build loyalty

The buyers should not only see the difference but consider The buyers should not only see the difference but consider it significantit significant

The distinguishing and differentiating features should be The distinguishing and differentiating features should be difficult for competition for competition to copydifficult for competition for competition to copy

The co promotes and highlights the differentiating featuresThe co promotes and highlights the differentiating features

PRICING MEHTODSPRICING MEHTODS The major price setting methods are The major price setting methods are

--Mark Up pricing--Mark Up pricing

--Target return pricing--Target return pricing

--Perceived value pricing--Perceived value pricing

-- Value pricing-- Value pricing

--Going rate pricing--Going rate pricing

--Sealed bid pricing--Sealed bid pricing

PRICING METHODSPRICING METHODS MARK UP PRICINGMARK UP PRICING A mark up is given to the total costA mark up is given to the total cost Generally, higher for seasonal products, in-elastic products, Generally, higher for seasonal products, in-elastic products,

slow moving itemsslow moving items

TARGET RETURN PRICINGTARGET RETURN PRICING This method is used when a pre-determined rate of return This method is used when a pre-determined rate of return

is desired and thr price is set accordingly.is desired and thr price is set accordingly.

PERCEIVED VALUE PRICINGPERCEIVED VALUE PRICING Price is based on the buyers perception of the value of the Price is based on the buyers perception of the value of the

product which is built up by the cos thru promotions, advt product which is built up by the cos thru promotions, advt etcetc

PRICING METHODS Contd/-PRICING METHODS Contd/-

VALUE PRICINGVALUE PRICING The manufacturer charges fairly low prices for high quality product The manufacturer charges fairly low prices for high quality product

or servicesor services

The price should represent a high value to the customerThe price should represent a high value to the customer

Does not mean that prices are just lowered; rather, the entire Does not mean that prices are just lowered; rather, the entire process is re-engineered to give a better product at a lower price.process is re-engineered to give a better product at a lower price.

GOING RATE PRICESGOING RATE PRICES

The cos set the prices on the basis of prevailing rate. Generally The cos set the prices on the basis of prevailing rate. Generally used in oligpolistic situationsused in oligpolistic situations

PRICE ADAPTATIONPRICE ADAPTATION

GOODS CAN OFTEN HAVE DIFFERENT PRICES DEPENDING GOODS CAN OFTEN HAVE DIFFERENT PRICES DEPENDING ON A HOST OF FACTORSON A HOST OF FACTORS

The pricing structure has to reflect and account for factor like The pricing structure has to reflect and account for factor like geographical spread, purchase timings, segment geographical spread, purchase timings, segment requirement, service contract, order level ,frequency of requirement, service contract, order level ,frequency of purchase, delivery schedule etcpurchase, delivery schedule etc

DISCOUNTS DISCOUNTS &ALLOWANCES&ALLOWANCES

TRADE DISCOUNTTRADE DISCOUNT

QUANTITY DISCOUNTQUANTITY DISCOUNT

CASH DISCOUNTCASH DISCOUNT

SEASONAL DISCOUNTSEASONAL DISCOUNT

ALLOWANCESALLOWANCES

PROMOTIONAL PRICINGPROMOTIONAL PRICING

LOSS LEADER PRICINGLOSS LEADER PRICING

SPECIAL EVENT PRICINGSPECIAL EVENT PRICING

PSYCHOLOGICAL DISCOUNTINGPSYCHOLOGICAL DISCOUNTING

CASH REBATECASH REBATE

LOW INTEREST FINANCINGLOW INTEREST FINANCING

LONGER PAYMENT TERMSLONGER PAYMENT TERMS

WARRANTIES AND SERVICE CONDITIONSWARRANTIES AND SERVICE CONDITIONS

EXPERIENCE CURVE EXPERIENCE CURVE PRICINGPRICING

A company ,by virtue of experience, gains the required level of A company ,by virtue of experience, gains the required level of skills higher than prevalent in the industry. This enhances their skills higher than prevalent in the industry. This enhances their productivity and thus it acquires a competitive edge.productivity and thus it acquires a competitive edge.

The co must, however, acquire a leading market share during the The co must, however, acquire a leading market share during the early stages of the product life cycle to be in a position to take early stages of the product life cycle to be in a position to take advantage of experience curve pricing advantage of experience curve pricing

DISCRIMATORY PRICINGDISCRIMATORY PRICING

CUSTOMER SEGMENT PRICINGCUSTOMER SEGMENT PRICING

PRODUCT FORM PRICINGPRODUCT FORM PRICING

IMAGE PRICINGIMAGE PRICING

LOCATION PRICINGLOCATION PRICING

TIME PRICINGTIME PRICING

PRODUCT MIX PRICINGPRODUCT MIX PRICING

PRODUCT LINE PRICINGPRODUCT LINE PRICING

OPTIONAL FEATURE PRICINGOPTIONAL FEATURE PRICING

CAPTIVE PRODUCT PRICINGCAPTIVE PRODUCT PRICING

TWO PART PRICINGTWO PART PRICING

BY-PRODUCT PRICINGBY-PRODUCT PRICING

PRODUCT BUNDLING PRICINGPRODUCT BUNDLING PRICING