pricing strategy
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Transcript of pricing strategy
Developing Pricing Strategies and Programs
Vineeta ahuja
Contents
• Understanding pricing
• Consumer psychology and pricing
• How companies price
• Adapting the price
• Responding to price changes
What is a price?• It quantifies value and determines profit
• It expresses the value of the exchange relationship
• It is the determining factor in a marketing exchange
• ‘Price’ can also be a fee, rent, fare, commission, etc
Price: the determining factor
Supplier Customer
Price
Product
Promotion & Place
Price: flexibility• Changes in price are more readily
implemented than the other 3P’s
• Product - major re-investment
• Place - find and convince new distributors
• Promotion - long time scales/involves outside agencies
Consumer Psychology and Pricing
Reference Prices
Price-quality inferences
Price cues
Possible Consumer Reference Prices
• “Fair price”• Last price paid• Upper-bound price
• Lower-bound price• Competitor prices• Expected future price• Usual discounted
price
The price…
Price Cues
• “Left to right” pricing (Rs 299 vs. Rs 300)
• Odd number discount perceptions
• Even number value perceptions
• Ending prices with 0 or 5
• “Sale” written next to price
Steps in Setting Price
Select the price objective
Determine demand
Estimate costs
Analyze competitor price mix
Select pricing method
Select final price
Step 1: Selecting the Pricing Objective
• Survival• Maximum current
profit • Maximum market
share• Maximum market
skimming - Nokia• Product-quality
leadership - Bugatti
Step 2: Determining Demand
Price Sensitivity
Estimating
Demand Curves
Inelastic and Elastic Demand
Factors Leading to Less Price Sensitivity
• The product is more distinctive• Buyers are less aware of substitutes• Buyers cannot easily compare the quality of substitutes• The expenditure is a smaller part of buyer’s total income• The expenditure is small compared to the total cost of
the end product• Part of the cost is paid by another party• The product is used with previously purchased assets• The product is assumed to have high quality and
prestige• Buyers cannot store the product
Step 3: Estimating Costs
Types of Costs
Target Costing
Accumulated
ProductionActivity-Based
Cost Accounting
Cost Terms and Production
• Fixed costs / overheads• Variable costs• Total costs• Average cost (total
cost/production)• Cost at different levels of
production• ABC
Cost per Unit as a Function of Accumulated Production
Selecting a Pricing Method
• Markup pricing– Unit cost= variable cost + fixed cost/unit sales– Markup price = unit cost/(1-desired return on
sales)
• Target-return pricing= unit cost + (desired return x invested
capital)/unit sales
• Perceived-value pricing• Value pricing – EDLP, high-low pricing• Going-rate pricing• Auction-type pricing
Break-Even Chart
Break-even volume = fixed cost / (price – variable cost)
Auction-Type Pricing
English auctions
Dutch auctions
Sealed-bid auctions
Step 6: Selecting the Final Price
• Impact of other marketing activities
• Company pricing policies
• Gain-and-risk sharing pricing
• Impact of price on other parties
Price-Adaptation Strategies
Geographical Pricing
Discounts/Allowances
Differentiated Pricing
Promotional Pricing
Price-Adaptation Strategies
GeographicalCountertrade• Barter• Compensation deal• Buyback arrangement• Offset
Discounts/ Allowances• Cash discount• Quantity discount• Functional discount –
trade channel members
• Seasonal discount - hotels
• Allowance -return on old items
Promotional Pricing Tactics
• Loss-leader pricing• Special-event pricing• Cash rebates• Low-interest financing• Longer payment terms• Warranties and service
contracts• Psychological
discounting
Differentiated Pricing
• Customer-segment pricing - museums
• Product-form pricing• Image pricing• Channel pricing –
vending machines• Location pricing - theatre• Time pricing- early bird• Yield pricing
Increasing Prices
Delayed quotation pricing
Escalator clauses
Unbundling
Reduction of discounts
Brand Leader Responses to Competitive Price Cuts
• Maintain price
• Maintain price and add value
• Reduce price
• Increase price and improve quality
• Launch a low-price fighter line