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Setting The Price
Ankeita MallS.G.S.I.T.S.
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How should companies set prices initially for products or services?
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6 Steps in Setting a Pricing Policy
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1. Selecting the Principle Objective
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The clearer a Firm’s Objectives, the easier it is to set Price
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Survival
Maximum Current Profit
Maximum Market Share
Maximum Market Skimming
Product Quality Leadership
5 Major Objectives
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2. Determining Demand
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Each Price leads to different level of demand
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Factors leading to Less Price Sensitivity
•More Distinctive Product • Buyers are less aware of substitutes• Expenditure is smaller part of Buyer’s income
• Product is used in conjunctive with assets previously brought
• Product is assumed to have more quality, prestige and exclusiveness
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Internet increases Price Sensitivity to a Great
Extent
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Estimating Demand Curve
1. Surveys 2. Price Experiments of
products3. Statistical Analysis of past
prices, quantities sold, etc.
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3. Estimating Costs
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Companies want to charge a Price that includes
• Cost of Production • Cost of Distributing and Selling the Product• A fair return for its risks
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Types of Costs Fixed cost- Cost that do not vary with production.
Like the bills, rent, salaries etc
Variable Cost- Varies with level of Production
Total Cost- Sum of Fixed Cost and Variable Cost for
any level of Production
Average Cost- Cost Per Unit
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4. Analyzing Competitor’s Costs, Prices and Offers
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Setting Prices and Offers by taking into account Competitor’s Cost, Prices and Offers.
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5. Selecting aPricing Method
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Price Setting Methods
Markup Pricing- Method to Add a Standard Markup
(Profit) to the product’s cost.
Target Return-Pricing
The Firm determines the price that yields its target rate of return on investment. Public utilities often use this method
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Perceived Value Pricing-
It is made up of hosts of inputs, such as buyer’s image of product performance, the channel deliverables, the warranty quality, customer support, supplier’s reputation and trustworthiness.
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Value Pricing-It is a matter of reengineering the company’s operations to become a low cost producer without sacrificing quality.
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Going Rate-Pricing
In this the Firm bases its price largely on competition prices. Smaller Firms follow the leader. In steel, paper and fertilizer industries
Auction Type-Pricing
Auction for buying and selling products and is mainly of three types• English auction(Ascending bids)• Ditch auction(Descending bids)• Sealed Auction
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6. Selecting the Final Price
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Following factors should be kept in mind before selecting the Final
Price
• Impact of other marketing activities• Company Pricing Policies• Gain and Risk Sharing Pricing• Impact of Pricing on other Parties
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RECAP
• Ways to set the price• Selecting the Pricing Objective• Determining Demand• Estimating Cost• Analyzing Competitor’s Costs, Prices and Offers• Selecting a Pricing Method• Selecting the Final Price
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Created by ANKEITA MALL, S.G.S.I.T.S. , during an internship by Prof. Sameer Mathur, IIM Lucknow. www.IIMInternship.com