• Pricing rests on Value: Capturing value is its purpose

• Process of creating, communicating, and delivering value

• Pricing, a complex task; There is Science side and an art side to it.

• Pricing to capture value/Customer based approach

• Customer value has to be key in the pricing – Pricing to value ensures two things: The customer

finds the price justifiable monetary worth the offer , and the firm finds the price apt for earning its due share of value from the market by the way of sales, income and profits

• Does pricing capture the due value? Or, are you competing away your resources?

• Pricing that benefits only the buyer and lands the company in red does not constitute value pricing. P&G was almost competing away the values of its offers.

• Firms struggle to get the price value balance right.

• Pricing objectives• Firms seek a mix of Objectives from pricing • Different permutations of objectives apply to

different firms

Setting the price

• Step 1 Selecting the pricing objectives• Survival• Maximum current profits• Maximum market share

• Pricing methods/Pricing strategies • Broad Categories of pricing methods– Cost based pricing

Under cost based category, the following methods/approaches are commonly used:

• Mark up pricing• Absorption cost pricing• Target rate of return pricing • Marginal cost pricing

• Demand Based Pricing– The following methods belong to the category of

demand/market based pricing• What the traffic can bear pricing • Skimming pricing• Penetration pricing

• Competition oriented pricing• Premium pricing• Discount pricing• Parity pricing/Going rate pricing

• Product line pricing• Tender pricing• Affordability based pricing• Differentiated pricing

• Value>price>costs (this is not what we seek)• Price>costs>value (this is not what we seek)• Price=value>cost (this is what we seek)• Pricing to value is the wining approach

• Setting the Price • Selecting pricing objectives– Survival– Maximum current Profit (Market skimming

strategy)– Maximum market Share• Market Penetration Pricing

– Product Quality Leadership– Other Objectives

• Determining Demand – Price Sensitivity – Estimating Demand Curves• Surveys• Price Experiments• Statistical Analysis

– Price elasticity of Demand

• Estimating Costs – Types of costs and levels of production • Variable costs• Total costs • Average Costs • Experience curve pricing

– Target Costing

• Analyzing Competitors’ cost, pricing and offers

• Selecting Pricing Method– Markup Pricing – Target Return pricing – Perceived Value Pricing : total of- value perceived

for each of the feature (tangible as well as intangible)of the product by the customers

– Going Rate Pricing– Auction Type Pricing

• Selecting The final price– Impact of other marketing activities

• Brands with average relative quality but high relative advertising budgets were able to charge premium prices. Consumers were willing to pay higher prices for known products rather than unknown ones

• Brands with high relative quality and high relative advertising obtained the highest prices. Conversely, brands with low relative quality and low advertising charged the lowest prices.

• The positive relationships btw high prices and high advertising held most strongly in the later stages of the product life cycle for the market leaders.

– Company Pricing Policies– Impact Of price on other Parties

• Adapting the Price – Geographical Pricing– Price Discounts & Allowances

• Quantity Discount• Functional Discount • Seasonal Discount• Allowance

– Promotional Pricing• Loss Leader Pricing• Special Event• Cash Rebates • Low interset Financing • Longer Paymnet terms• Warranties And Service Contracts • Psychological Discounting

• Differentiated Pricing• Price Discrimination– Customer Segment Pricing– Product Form pricing – Channel pricing - vending Machine– Location pricing - Theater – Time Pricing - Early Bird

• Initiating and Responding to Price Changes– Initiating Price Cuts• Low quality Trap • Fragile market Trap• Shallow Pocket Trap• Price War trap

– Initiating Price Increase • Cost Inflation• Over demand

• Generally consumers Prefer Small Price increases on a regular basis instead of sudden

• Several Techniques - Sense of fairness around any price increase • Making low visibility price moves such as eliminating discounts,

increasing minimum order size and curtailing production of low margin products.

– Shrinking amount of product – Substituting less expensive materials– Reducing product features – Reducing product services – Using less expensive packaging

• Responding to competitors price change