MARKETING Pricing Methods & Strategies

Shanmukh Sagar K ABM: 507 Marketing Management School of Agribusiness Management

Overview
Definition of price Factors that influence the pricing decision Pricing objectives Three major pricing methods and their advantages and disadvantages Pricing strategies over the product life cycle Pricing Strategies

Price -- Definition
the amount of money charged for a product or service the sum of all the values that consumers exchange for the benefits of having or using the product or service
Examples of price? Tuition, rent, fare, retainer, toll, salary/wage, dues

Prices - Objectives
What objectives did the managers have in mind when they set their prices?

Factors in Setting Price

Pricing Objectives

Meet Business Objectives

Other Pricing Objectives
Status Quo Image Social & Ethical Considerations

Setting Pricing Policy

1. Selecting the pricing objective 2. Determining demand 3. Estimating costs 4. Analyzing competitors costs, prices, and offers

5. Selecting a pricing method 6. Selecting final price

Steps in Setting the Right Price

Establish Pricing Goals Estimate Demand, Costs, and Profits

Choose Strategy

Fine-Tune Base Price

Right $$$ $ Price $$$$

Legal and Ethical Issues in Pricing

Unfair Trade Practices

Key Legal and Ethical Issues Related to Price

Price Fixing

Price Discrimination

Predatory Pricing

Discounts, Allowances, and Rebates

Cash Discount Quantity Discount Functional Discount EDLP

Price Reductions

Seasonal Discounts Promotional Allowances

Trade Loading

Rebates

Geographic Pricing
FOB Origin

Uniform Delivered

Pricing Tactics Based on Geography

Zone Pricing

Freight-Absorption

Basing-Point

Price Strategies for New Products

Penetration Pricing
PRICE

Low price establish product in the market

Skimming Pricing

Skimming Penetration
PRICE

High price/Prestige pricing appeal to early adopters; recover high R&D costs Lower price over time Move inventory, stimulate D, extend product life

PRICE

Marketing Strategy Over the Product Life Cycle

INTRODUCTION
Marketing strategy emphasis
Market development

GROWTH
Increase market share

MATURITY
Defend market share

DECLINE
Maintain efficiency in exploiting product

Pricing strategy

High price/unique product / cover

Lower price over time

Price at or below competition

Set price to remain profitable production costs or reduce to liquidate

Reinforce loyal customers; reduce promotion costs

Promotion Strategy

Low price/gain market share

Mount sales promotion for product awareness

Appeal to mass market

Emphasize brand differences, benefits & loyalty

Place strategy

Distribute through selective outlets

Build intensive network of outlets

Enlarge distribution network

Be selective in distribution, trim unprofitable outlets

Determining Prices

PriceSetting Tools
EconomicSupply/Demand

Cost Determinants of Price

200

150 Dollars

MC ATC AVC

100

50 AFC 0 1 2 3 4 5 Quantity 6 7 8 9 10

Break-Even Analysis
Total Revenue

Break Even

Profits Total Costs

Price ($)

Fixed Costs Losses

Quantity (units)

Elasticity of Demand
measure of the sensitivity of demand to changes in prices

Inelastic Demand
Price Electricity

P2 P1

Q2 Q1 Quantity

Price

Elastic Demand
Fast food P2 P1 Q2 Q1 Quantity

not price sensitive - no real change in demand

price sensitive - changes in demand

Market-based Pricing
Pricing Existing Products/Services - 3 options

Pricing below market prices price wars

EX: airlines, store brand vs. manufacturers brand
Dumping

Pricing above prevailing market prices for similar products

EX: Sony higher price = higher quality?

Pricing at or near market prices

Pricing Tactics
Price Lining
Price points: Setting a limited number of prices for certain categories of products

Psychological Pricing
Odd-even

Discounting
Quantity discounts Cash discounts (2/10 net 30) Web programs: free!

Cost-based Pricing (Cost-Plus)

1. Cover costs
Material Labor Capital resources Marketing variable costs

fixed costs

2. Mark-up
Targeted return for shareholders

Costs + mark-up = Sales price

$1.00 + $0.50 = $1.50 (50% markup)

Types of Costs
Fixed Costs (Overhead) Variable Costs
Costs that do vary directly with the level of production. Raw materials

Costs that dont vary with sales or production levels. Executive Salaries Rent

Total Costs
Sum of the Fixed and Variable Costs for a Given Level of Production

Mark-up Calculation Exercise

1. Price per product 2. Less the cost per product (what you paid
the supplier, e.g. total cost paid / # of items purchased)

Dollar Mark Up % MARK UP Sales Price

Breakeven Analysis

TC = TR

Breakeven Point Formula

Fixed Costs BREAKEVEN QUANTITY Price/unit Variable cost/unit

(Contribution Margin)

Review
5 Factors that influence prices Pricing objectives Pricing strategies at different stages of the Product Life Cycle (advantages/disadvantages) Methods of Determining Prices
Elasticity of demand Mark-up Breakeven Analysis

Pricing Strategies

Penetration Pricing

Penetration Pricing
Price set to penetrate the market Low price to secure high volumes Typical in mass market products chocolate bars, food stuffs, household goods, etc. Suitable for products with long anticipated life cycles May be useful if launching into a new market

Market Skimming

Market Skimming
High price, Low volumes Skim the profit from the market Suitable for products that have short life cycles or which will face competition at some point in the future (e.g. after a patent runs out) Examples include: Playstation, jewellery, digital technology, new DVDs, etc.
Many are predicting a firesale in laptops as supply exceeds demand.
Copyright: iStock.com

Value Pricing

Value Pricing
Price set in accordance with customer perceptions about the value of the product/service Examples include status products/exclusive products
Companies may be able to set prices according to perceived value.
Copyright: iStock.com

Loss Leader

Loss Leader
Goods/services deliberately sold below cost to encourage sales elsewhere Typical in supermarkets, e.g. at Christmas, selling bottles of gin at 3 in the hope that people will be attracted to the store and buy other things Purchases of other items more than covers loss on item sold e.g. Free mobile phone when taking on contract package

Psychological Pricing

Psychological Pricing
Used to play on consumer perceptions Classic example Rs. 999.99 instead of Rs.1000! Links with value pricing high value goods priced according to what consumers THINK should be the price

Going Rate (Price Leadership)

Going Rate (Price Leadership)

In case of price leader, rivals have difficulty in competing on price too high and they lose market share, too low and the price leader would match price and force smaller rival out of market May follow pricing leads of rivals especially where those rivals have a clear dominance of market share Where competition is limited, going rate pricing may be applicable banks, petrol, supermarkets, electrical goods find very similar prices in all outlets

Tender Pricing

Tender Pricing
Many contracts awarded on a tender basis Firm (or firms) submit their price for carrying out the work Purchaser then chooses which represents best value Mostly done in secret

Price Discrimination

Price Discrimination
Charging a different price for the same good/service in different markets Requires each market to be impenetrable Requires different price elasticity of demand in each market
Prices for rail travel differ for the same journey at different times of the day
Copyright: iStock.com

Destroyer Pricing/Predatory Pricing

Destroyer/Predatory Pricing
Deliberate price cutting or offer of free gifts/products to force rivals (normally smaller and weaker) out of business or prevent new entrants Anti-competitive and illegal if it can be proved

Absorption/Full Cost Pricing

Absorption/Full Cost Pricing

Full Cost Pricing attempting to set price to cover both fixed and variable costs Absorption Cost Pricing Price set to absorb some of the fixed costs of production

Marginal Cost Pricing

Marginal Cost Pricing

Marginal cost the cost of producing ONE extra or ONE fewer item of production MC pricing allows flexibility Particularly relevant in transport where fixed costs may be relatively high Allows variable pricing structure e.g. on a flight from London to New York providing the cost of the extra passenger is covered, the price could be varied a good deal to attract customers and fill the aircraft

Marginal Cost Pricing

Example:

Aircraft flying from Bristol to Edinburgh Total Cost (including normal profit) = 15,000 of which 13,000 is fixed cost* Number of seats = 160, average price = 93.75 MC of each passenger = 2000/160 = 12.50 If flight not full, better to offer passengers chance of flying at 12.50 and fill the seat than not fill it at all!
*All figures are estimates only

Contribution Pricing

Contribution Pricing
Contribution = Selling Price Variable (direct costs)

Prices set to ensure coverage of variable costs and a contribution to the fixed costs Similar in principle to marginal cost pricing Break-even analysis might be useful in such circumstances

Target Pricing

Target Pricing
Setting price to target a specified profit level Estimates of the cost and potential revenue at different prices, and thus the break-even have to be made, to determine the mark-up Mark-up = Profit/Cost x 100

Cost-Plus Pricing

Cost-Plus Pricing
Calculation of the average cost (AC) plus a mark up AC = Total Cost/Output

Influence of Elasticity

Influence of Elasticity
Any pricing decision must be mindful of the impact of price elasticity The degree of price elasticity impacts on the level of sales and hence revenue Elasticity focuses on proportionate (percentage) changes PED = % Change in Quantity demanded/% Change in Price

Influence of Elasticity
Price Inelastic: % change in Q < % change in P e.g. a 5% increase in price would be met by a fall in sales of something less than 5% Revenue would rise A 7% reduction in price would lead to a rise in sales of something less than 7% Revenue would fall

Influence of Elasticity
Price Elastic: % change in quantity demanded > % change in price e.g. A 4% rise in price would lead to sales falling by something more than 4% Revenue would fall A 9% fall in price would lead to a rise in sales of something more than 9% Revenue would rise

Special Pricing Tactics

Two-Part Pricing

Single Price

Flexible Pricing

Bundle Pricing

Common Special Pricing Tactics

Professional Services

Odd-Even Pricing

Price Lining

Bait Pricing

Leader Pricing