Pricing

Price

• The money charged for a product or a service• Cost is incurred to the supplier/producer in

supplying/producing the product• Price is paid by the buyer to acquire the

product

Pricing Products

• The most common mistakes in setting prices are;– pricing that is too cost oriented– prices that are not revised often enough to reflect

market changes– pricing that does not take rest of marketing-mix

into account– prices that are not varied enough for different

products, market segments & purchase occasions

Factors influencing pricing decisions

• Costs of production• Competitive prices• Customer’s perception

of value• Customer demand• Target market

• Other marketing mix elements

• Stage in the product lifecycle

• State of the economy• Expectations of

distributors• State of competition in

the market

New Product Pricing Strategies

• Market skimming pricing:- High price to gain max. revenues- Fewer but more profitable sales- e.g. Sony HDTV

• Market penetration pricing:- Low price to attract a large no. of buyes

& a large market share- e.g. Dell & Wall mart, Tata Nano, Tata Indica

Blackberry Z10• From being a leader in the smartphone market at one time, BlackBerry's India market share has been reduced to

a dismal 0.2% as of December 2013 compared to 4.3% in December 2012, according to data from research firm IDC.

• Analysts feel that the company could have priced its devices much lower in India, a highly price-sensitive and competitive market, or could have come out with a larger portfolio of devices across different price points, after launching its flagship Z10 smartphone in February 2013. However, given the recent statements of the senior management on staying away from low-cost devices, any rebound in India looks a far cry.

• "The pricing strategy has gone horribly wrong," Mansi Yadav, an analyst at research firm IDC said, adding that theRs43,990-price tag for the Z10 was far higher than customer expectations. BlackBerry was forced to slash Z10's price to Rs29,990 in September 2013 under a special offer and then again on February 25 this year, Rs17,990, under a limited period offer.

• BlackBerry then had to replenish stocks as customers lapped up the Z10 at the attractive price. And it's not just Z10, last week, the company lowered the price of Z30 by 10% to Rs34,990 after launching it in October 2013 for Rs39,990. In January, BlackBerry cut Q10's price to Rs38,990 and Q5's to Rs19,990, under limited period offers, in an attempt to reach out to Qwerty keypad enthusiasts.

• BlackBerry refuted analysts' views, saying that the pricing of a product depended on multiple factors like its operating system, hardware quality, manufacturing costs, and currency exchange rates, and price reduction of a product is common for smartphones. It said that while the strengthening of the rupee against the US dollar had allowed the company to lower the costs of Z10 to Rs17,990, it admitted that higher levels of inventory of the model had also played a hand.

Product Mix Pricing Strategies

• Product line pricing:- Setting price steps between various products in a product line- Is based on the cost differences

between the products, customer evaluations

of different features & competitor’s prices- e.g. Rexona, Lifebuoy, Dove


• Optional product pricing:- Pricing of optional or accessory

products along with the main product

• Captive product pricing:- Setting price for products that must be used

with the main product.- e.g. HP printer and cartridges


• By product pricing:- Setting a price for by products in order to make the main products price competitive-

• Product bundle pricing:- Combining several products & offering the

bundle at a reduced price- e.g. Combo deals

Price Adjustment Strategies

• Discounts:- A straight reduction in price on purchases

during a stated period of time. - e.g. discounts of bulk purchasing

• Allowances:- Promotional money paid by

manufacturers to retailers in return for an agreement to feature the manufacturer’s products in some way.

Types of Discount • A quantity discount is a price reduction to buyers who buy large volumes. A typical

example might be “ $ 10 per unit for less than 100 units, $ 9 per unit for volume for 100 or more units.”

• A functional discount (also called a trade discount) is offered by the sellers to trade-

channel members who perform certain functions, such as selling, storing, record keeping. • A seasonal discount is a price reduction to buyers who buy merchandise or services out of

season. For example, lawn and garden equipment manufacturers offer seasonal discounts to retailers during the fall and winter months to encourage early ordering in anticipation of the heavy spring and summer selling seasons.


• Segmented pricing:- Selling a product or service at two or more

different prices where the difference is not based on the difference in cost.

Customer segment pricing: e.g. Airfare for children (uptil 12 years) and adults

Product form pricing: e.g. Nokia 1100 & N 72, N 73 Location pricing: e.g. multiplex and local movie halls


• Psychological pricing:- Sellers consider the psychology of pricing & not simply the economics-The price is used to say something about the product (quality)Reference pricing: Price carried in buyer’s mind &

referred to when the buyer looks at that product. Example: Bata shoes

Price Adjustment Strategies• High-Low Pricing.

Boomerang tracked the prices of many Amazon items for months. For example, Amazon listed a 32-inch smart TV for just under $400 in May of last year. The price consistently increased and decreased for six months, and on Black Friday, the huge shopping day right after Thanksgiving, the price plunged to $250.

Items that are popular on Amazon and that get good reviews from customers tend to be cheaper than on competitor sites, while other less-popular items might be more expensive. Boomerang found that a popular router, for instance, was listed for $144 at Walmart and $120 at Amazon. However, the price of a different router that had received poor reviews from buyers turned out to be more expensive, at $56 on Amazon and $40 via Walmart.


• Promotional pricing:- Temporarily pricing the product

below the list price & sometimes even below cost to increase sales in the short run.

Special event pricing Cash rebates – free services,

longer warranties

Geographical pricingUniform-delivered pricing: A geographical pricing strategy in which the company charges

same price plus freight to all customers, regardless of their locations. Zone Pricing: A geographical pricing strategy in which the company sets up two or more

zones. All customers within a zone pay the same total price; the more distance the zone, the higher the price.

Basing-point pricing: A geographical pricing strategy in which the seller designates some

city as basing point and charges all customers the freight cost from that city to customer.

Freight- absorption pricing: A geographical pricing strategy in which the seller absorbs all

or part of the freight charges in order to get the desired business.

Setting Price and Value-in-use Pricing

Mark-up pricing

Manufacturer’s unit cost = variable cost + (fixed cost/unit sales)

•Mark up on Cost= Item Cost + (Item Cost x Mark-up Percentage) = Price

•Mark-up price on Sales= Unit cost ÷ (1-desired return on sales)

• A computer software retailer used a markup rate of 40%. Find the selling price of a computer game that cost the retailer $25.

• A golf shop pays its wholesaler $40 for a certain club, and then sells it to a golfer for$75. What is the markup rate?

• A shoe store uses a 40% markup on cost. Find the cost of a pair of shoes that sells for$63.

• An item originally priced at $55 is marked 25% off. What is the sale price?

• An item that regularly sells for $425 is marked down to $318.75. What is the discount rate?

• An item is marked down 15%; the sale price is $127.46. What was the original price?

Calculate answers for the following scenarios if retailer markups are based on their selling price: a. A retailer sells a set of measuring cups for $2.50 after adding $0.50 to the original cost. What

is the markup percentage? b. The cost of a food blender for the retailer is $40 and the retailer applies a markup of $60.

What is the retail markup percentage? c. A retailer marks up all products by 20 percent. If a set of glasses costs the retailer $10, what

will be the final selling price? d. A retailer marks up all products by 75 percent. If the selling price of a set of plastic bowls is

$4, what was the cost to the retailer?

Target –return pricing

Target return price=

unit cost + {(desired return× invested capital) ÷unit sales}


• Calculate the price of the product when:

Unit cost of production= 10,000

Initial capital investment= Rs 40,00,000

Expected unit sales= 1000 units

Desired ROI is 20%


• Calculate the price of the product when:

Variable cost of per unit production= 5,000

Fixed cost = 30,0000

Initial capital investment= Rs 40,00,000

Expected unit sales= 1000 units

Desired ROI is 30%

Break-even volume

Break-even volume =

fixed cost÷ (price-variable cost)

• Regency, Inc. makes disposable cap and gown sets for graduations. Each cap and gown set sells for $15. The average variable cost for manufacturing ten cap and gown sets is $100. Total fixed costs for the year equal $65,000. Calculate the break-even point in units.

Ceylon Express sells bottled pasteurized tea to retailers. It has the following revenues and costs: Sales price per bottle: $0.50 Average variable costs per bottle: $0.30 Total fixed costs (annual): $50,000.00 Tax rate: 20 percent What is the annual break-even point in units for the company?

• . If total fixed costs of Tesla Motors are $23,400,000 and the average variable cost is $50,500, how many Roadsters must Tesla sell to break even? The price of the car is $75000.

What is a break-even point? The Catera Company makes and sells cotton candy machines. What is the break-even volume for Catera machines in units?

Catera Machines Financial Information Salesperson salary $ 40,000 Advertising 100,000 Research and development 20,000 Production equipment 20,000 Overhead allocation 20,000 Catera’s selling price $600 Average variable cost $350

Perceived Value Pricing

• Competitors price = x• Price premium for durability =y• Price premium for reliability = z• Price premium for warranty =m• Price premium for after sales service= n• Price premium for brand equity= r• Price premium for any other factor= s• Perceived value of the product= x+y+z+m+n+s+r

Perceived value pricing

• Competitors price = Rs 2000• Price premium for durability =Rs. 20• Price premium for reliability = Rs. 55• Price premium for warranty = Rs. 70• Price premium for after sales service= Rs. 300• Price premium for brand equity= Rs. 600• Price premium for any other factor= Rs. 200• Perceived value of the product= ?

• Competitors price = Rs 1000• Price premium for durability =Rs. 50• Price premium for reliability = Rs. 40• Price premium for warranty = Rs. 60• Price premium for after sales service= Rs. 100

• Price premium for brand equity= ???

• Price premium for any other factor= Rs. 150• Perceived value of the product= 1600

Value Pricing• Everyday low pricing

• High –low pricing

• Special value pricing

• Bundling

• Value in use pricing

Value in use pricingBy detecting a market place opportunity in the basic facewash market Himalaya is one of the leading player in the mid-range market. A price of a single pack of Himalaya facewash is say $ 65 per 100 ml.

They have developed a new moisturizer facewash TULI to meet the need of this segment. To boost up performance of THE TULI two times than its standard Application, they have created a lotion called as TULI LT. TULI LT unit price will have 20% margin.The question is what should be the appropriate pricing method for TULI+TULI LT??

Data sheet• Labour cost per unit =$30

• Electricity cost per unit = $10

• Cost of patent = $ 2, 00,000

• Cost of materials per unit = $10

• Cost of developing TULI LT = $ 1,00,000

• Expected company sales volume= 10,0000 units• Assumed attachment rate : 40%• Assumed value sharing by the company = 40%

Data sheetWith the previous data sheet assume efficiency increases to 3 times.•Labour cost per unit =$30

•Electricity cost per unit = $10

•Cost of patent = $ 2, 00,000

•Cost of materials per unit = $10

•Cost of developing TULI LT = $ 1,00,000

•Expected company sales volume= 10,0000 units•Assumed attachment rate : 40%•Assumed value sharing by the company = 40%

Data SheetWith the previous data sheet assume efficiency increases to 4 times.•Labour cost per unit =$30

•Electricity cost per unit = $10

•Cost of patent = $ 2, 00,000

•Cost of materials per unit = $10

•Cost of developing TULI LT = $ 1,00,000

•Expected company sales volume= 10,0000 units•Assumed attachment rate : 40%•Assumed value sharing by the company = 40%

Data sheet• Labour cost per unit =$30

• Electricity cost per unit = $10

• Cost of patent = $ 1, 00,000

• Cost of materials per unit = $10

• Cost of developing TULI LT = $ 2,00,000

• Expected company sales volume= 10,000 units• Assumed attachment rate : 50%• Assumed value sharing by the company = 50%

AB toothpasteThe original price of AB tooth-paste is Rs. 40. It added micro granules in it which has increased its efficiency by two times. Given the following data sheet what should be the value in use price for AB-improved?

Cost of production: Rs. 10 per unitOverhead cost: Rs. 5 per unitCost of sales : Rs. 5 per unit.Cost of developing microgranules= Rs. 1,00,000Expected margin on micro granules per unit 20%Expected sales of AB improved is 20,000 unit Assumed value sharing by the company is 40%.

• THE EFFICIENCY HAS INCREASED DOUBLY. THIS MEANS THE CUSTOMER NOW CAN SAVE WORTH OF 1 UNIT OF AB TOOTHPASTE.

SO TOTAL SAVINGS = (COST OF PRODUCTION + OVERHEAD COST + COST OF SALES) = RS. (10+5+5) = RS. 20

OUT OF THIS SAVINGS, THE COMPANY WILL SHARE 40%. HENCE, THEY WILL CHARGE 60 % OF THE ADDITIONAL VALUE ALONG WITH THE ORIGINAL PRICE.

HENCE, VALUE IN USE PRICE = RS [40 + (20*0.60)= RS. 52.

Suman detergent • Suman detergent is now sold with a foil of glowy liquid with enhances the glow of

the washed cloth even when you use 33.33% less detergent for each wash. The name of the new detergent is Suman Glow ( one SKU of Suman detergent with one foil of glowy) Given the data sheet calculate the value-in-use price.

Initial price of Suman Detergent= Rs. 50 per SKUCost of production: Rs. 10 per SKUOverhead cost: Rs. 5 per SKUCost of sales : Rs. 5 per SKUTotal cost of developing glowy liquid= Rs. 1,00,000Expected margin on glowy per unit 30%Attachment rate is 50%Expected sales of Suman detergent for the year 2013-14 is 20,000 unit Assumed value sharing by the company is 50%.

CONCLUSIONvalue in use pricing strategy can be utilized in

both consumer and industrial market but is more beneficial at industrial segment.

Value in use pricing is used across many of the industries. In software industry ,value in use pricing strategy is ubiquitous.

value in use pricing leads to higher profit margins in software than in other industry.

Thus it can be said that value in use pricing is true in business to business environment where ROI calculations are frequently included in sales.

Other Pricing Strategies

• Going-rate pricing

• Auction-type pricing strategy

Pricing

Economy & Finance

Transcript of Pricing