SESSION – 1 & 2

Introduction to the Course

& Basic Pricing Methods

SESSION – 1 & 2

Introduction to the Course

& Basic Pricing Methods

By

Dr. Nripendra Singh

Jaypee Business School, Noida

By

Dr. Nripendra Singh

Jaypee Business School, Noida

Agenda

•Introduction to the Course

• Assessment Process

• Relevance of Pricing Strategy

•Basic Pricing Methods

Agenda

•Introduction to the Course

• Assessment Process

• Relevance of Pricing Strategy

•Basic Pricing Methods

Pricing Strategy : 12MEMM23 (Marketing Elective-Advance Marketing)

MBA PROGRAM – Batch 2012-14

Term-IVJuly to September - 2013

Learning Facilitator: Dr. Nripendra SinghFaculty Office: Arya Bhatt Bhawan II, Fourth FloorWalk-in Hours: Between 4:00 PM to 5:00 PMPhone: 0120 – 2400974 Extn - 481Email ID: nripendra.singh@jiit.ac.in

LEARNING OBJECTIVES

• To provide students with an understanding of the important role price structuring has in organization’s profitability.

• To provide an exposure to key concepts, theories and research findings in pricing and to illustrate their applicability in tackling the challenges in business

• To highlight the major types of pricing decisions and to suggest analytical frameworks and approaches that will aid decision making

• By the end of the course the student is expected to learn how to develop pricing strategy, estimate economic value, price sensitivity and price, and should be able to design price structure for a company.

Assessment Process

(refer COURSE OUTLINE)

The major components of evaluation process will include:

Project 15%Assignment 15%Mid-Term Exam 30%End-Term Exam 40%

List of Books

Text Book: Thomas T. Nagle and John E. Hogan (2009) The Strategy and Tactics of Pricing – A guide to growing more profitably, 4th Ed. Pearson Education

Supplementary Books:• Andrew Gregson (2009) Pricing Strategies. Jaico Publishing• Dolan, Robert, J and Herbert Simon. (1996) Power Pricing. New York: Free Press• Marlene Jensen. (2004) The Tao of Pricing. Amazon.com• Marlene Jensen. (2004) Pricing Psychology Report. Amazon.com• Marlene Jensen. (2005) 46 Ways to Raise Prices -- Without Losing Sales.• Marn, Roegner and Zawada. (2004) The Price Advantage. Amazon.com• Philip Kotler and Kevin L. Keller (2005) Marketing Management. PHI

Project Work & Assignment

Students will work in groups on specific sector on one of the pricing issues of their choice. Each group would give a short presentation of its project/case. Grades would be based on how well students demonstrated knowledge of the issues, as well as the clarity andgeneral strength of the presentation.Each group will have 10 members, divided into 2 sub-groups of 5 each. Both the subgroup under each group will select separate companies from the same Industry. Each student in the sub-group will work on one of the following issues:a. Price Structureb.Economic Value Estimation (EVE).c. Identifying and developing price metrics and fences.d.Price Levels or Price Sensitivity – Segment-wise.e. Pricing in Distribution Channel

Project Work & Assignment Level-I submission: (Individual-Assignment) – after the completion of 4 sessionsWrite down the outline of your project work – based on the topics of study that you choose. Outline

should have (i) proposed title of your project/assignment (should be same for sub-group members), (ii) description of the issue, in detail. It should be hand written and should not be less than 2 and more than 3 pages.

Level-II submission: (Individual-Assignment) – after the completion of 7 sessionsYour understanding of the company’s pricing policy, along with one of the competitor. It should have

a focus on the issue selected by you. All this should be hand written, in two to three pages.Level-III submission: (Project-Sub-Group) – after the completion of 10 sessionsThe Final report should be submitted in sub-groups. It should be written as a small case on the

company you have selected, focusing on the complete pricing strategy of that company. The report should contain company profile, its customer segment, markets served, and general description of all the 5 issues related to pricing strategy. At last your own views covering the pricing strategy as compared to its competitors. It should be typed and not more than 8-10 pages.

Level-IV Presentation: (Project-Group) – after the completion of 15 sessionsThe presentation should be made group-wise. The purpose is to analyze and compare the pricing

strategies of the two companies studied under each group. The focus of the presentation should be on bringing out the differences and unique points if any. It should not be more than 6-7 slides.

What do you perceive from this?• Do you see any substantial price difference

between the different brands of 1.5 ton window ACs in the market today? – LG, – Whirlpool, – Samsung, – Voltas, – Hitachi...

Why?

CASE: Whirlpool - DuetIntroduced in 2001 at $2,300, when the avg. Price of comparative

models was $500-600.

It was a front loading washer dryer combo that was priced 4 times high.

It charged this premium because of the superior performance and efficiency without compromise.

Its distinctive competencies were:

- Huge capacity.

- Less consumption of water and electricity..

- Wide range of clothes that can be cleaned.

- Benefit realized for customer were more freedom and time to do other things.

Product Quality Leadership

Four Seasons starts with very high-quality service—”we await you with the perfect sanctuary.”

It then charges a price to match.

Importance of pricing• McKinsey conducted a research on 2,400 cos. in 1992-

- 1% improvement in price contributes to 11.1% profit.

- 1% improvement in VC contributes to 7.8% profit.

- 1% improvement in Volume contributes to 3.3% profit.

- 1% improvement in FC contributes to 2.3% profit.

This breaks the myth or conventional thinking that saving on costs or increasing volume contributes to Profitability.

• GE lighting gets 55,000 pricing requests a year and in order to tackle that company has evaluate 300 factors that go into price quote. This has led to reduction of processing time from 30 days to 6 hours.

Broad Pricing Strategies

• Cost based Pricing• Demand based pricing• Competition oriented pricing

Pricing Strategies

Broad Pricing Strategies

• Cost based Pricing– Mark-up Pricing (Cost plus Pricing): Traders/ Non-

manufacturers use it. Mark up may vary depending on place and movement, etc.

– Absorption cost Pricing (Full cost Pricing): Manuf. use it. Mark-up is fixed.

– Target rate of return Pricing: It is rational approach to fulfil ROI expectation of the firm.

– Marginal Cost Pricing: Flexibility of not to recover fixed cost, depending on market situation.

Broad Pricing Ste (contd.)

• Demand based pricing– What the traffic can bear pricing: when the

demand of a product is inelastic to price ( monopoly and oligopoly)

– Skimming Pricing– Penetration Pricing

Broad Pricing Ste (contd.)

• Competition oriented pricing– Premium Pricing: Above competitor– Discount Pricing: Below Competitor– Parity Pricing/Going Rate Pricing– Matching Competitor

Penetration Pricing

New-Product Pricing Strategies

Market PenetrationMarket Penetration

Set a low initial price in Set a low initial price in order to “penetrate” the order to “penetrate” the market quickly and market quickly and deeply.deeply.

Can attract a large Can attract a large number of buyers quickly number of buyers quickly and win a large market and win a large market share.share.

• When to use:– Market must be highly price

sensitive so a low price produces more market growth.

– Production and distribution costs must fall as sales volume increases.

– Must keep out competition and maintain low price or effects are only temporary.

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

New-Product Pricing Strategies

Market-SkimmingMarket-Skimming

Set a high price for a new Set a high price for a new product to “skim” product to “skim” revenues layer by layer revenues layer by layer from the market.from the market.

Company makes fewer, Company makes fewer, but more profitable sales.but more profitable sales.

• When to use:– Product’s quality and image

must support its higher price.– Costs of smaller volume

cannot be so high they cancel the advantage of charging more.

– Competitors should not be able to enter market easily and undercut the high price.

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.

Plasma screens: Currently athigh prices but for how long?

Title: Thin-shaped television. Copyright: Getty Images, available from Education Image Gallery

Value Pricing

Value-Based Pricing

• Uses buyers’ perceptions of value, not the seller’s cost, as the key to pricing.

Perceived Value

A less expensive piano might play well, but would it take you places you have never been before?

Value Pricing• Price set in accordance with

customer perceptions about the value of the product/service

• For Perceived Value Pricing, examples include status products/exclusive products

Companies may be able to set prices according to perceived value.

Title: BMW At The Frankfurt Auto Show. Copyright: Getty Images, available from Education Image Gallery

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. Example, ‘Free’ mobile phone when taking on contract package

Psychological Pricing

Psychological Pricing

• Used to play on consumer perceptions• Classic example - £9.99 instead of £10.99!• Links with value pricing – high value goods

priced according to what consumers THINK should be the price

Psychological Pricing

• Considers the psychology of Considers the psychology of prices and not simply the prices and not simply the economics.economics.

• Consumers usually perceive Consumers usually perceive higher-priced products as higher-priced products as having higher quality.having higher quality.

• Consumers use price Consumers use price lessless when when they can judge quality of a they can judge quality of a product.product.

Going Rate (Price Leadership)

Competition-Based Pricing

• Going-Rate Pricing:– Firm bases its price largely on competitors’ prices,

with less attention paid to its own costs or to demand.

• Sealed-Bid Pricing:– Firm bases its price on how it thinks competitors

will price rather than on its own costs or on demand.

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

A European consortium led by Airbus recently won a contract to supply refuelling services to the RAF – priced at £13 billion!Title: Air refuelling. Copyright: Getty Images, available from Education Image Gallery

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

Title: Inter-City 125. Copyright: Getty Images, available from Education Image Gallery

Segment Pricing

• Selling a product or service at two or more prices, where the difference in prices is not based on differences in costs.

• Types:1. Customer-segment (Retired, Differently abled,

School Kids)2. Product-form (Refrigerated Vs Non-refr. Drinks)3. Location pricing (Daman Vs Delhi)4. Time pricing (Full, Half, Night Charge)

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

Microsoft – have been accused of predatory pricing strategies in offering ‘free’ software as part of their operating system – Internet Explorer and Windows Media Player - forcing competitors like Netscape and Real Player out of the market.

Title: Bill Gates speaks at UNIX convention. Copyright: Getty Images, available from Education Image Gallery

• What would you think if Mercedes suddenly lowered its prices on its cars?

• What would you think if Mercedes suddenly raised its prices on its cars?

• Why?

Discussion Question

More Pricing Strategies

By-Product Pricing:Setting a price for by-products in order to make the mainproduct’s price more competitive (e.g., Printer & cartridges)

Product Bundle Pricing:Combining several products and offering the bundleat a reduced price (e.g., computer with software and Internet access).

Optional- and Captive-Product Pricing

• Optional-Product– Pricing optional or accessory products sold with

the main product (e.g., ice maker with the refrigerator).

• Captive-Product– Pricing products that must be used with the main

product (e.g., replacement cartridges for Gillette razors).

Product Bundle PricingCityPASS bundles tickets to many attractions at a low combined price.

Promotional PricingCompanies offer promotional prices to create buying excitement and urgency.

Geographical Pricing

• FOB-origin pricing• Uniform-delivered

pricing• Zone pricing• Basing-point pricing• Freight-absorption

pricing

International Pricing

• Price depends on many factors, including:– Economic conditions– Competitive situations– Laws and regulations– Development of the

wholesaling and retailing system

– Costs

International Pricing

Companies must decide what prices to charge in different countries.

Setting the price• Most markets have three to five points or tiers. E.g. :

Marriot Hotels develop different brands for different price points. – Vacation Villas (Highest price)

– Marriot Marques (High Price)

– Marriot (High –medium price)

– Renaissance (Medium – high price)

– Courtyard (medium price)

– Towne Place Suites (medium low price)

– Fairfield Inn (Low price)

Setting the PriceThere are 6 steps:

STEP 1: Selecting the price objective: 5 major objectives are-• Survival

• Maximum Current Profit: Assumption that firm has knowledge of its demand and cost function. .

• Maximum Market Share: Assumption that market is price sensitive, therefore, penetration pricing. E.g. Reliance Mobile.

• Maximum Market Skimming: Example Sony HDTV initially launched at 43,000 dollars in 1990. in 1993 it cost 6,000 dollars and 1,200 dollars in 2004.

• Product Quality Leadership: Many brands strives for affordable luxuries like Starbucks coffee, BMW cars etc.

Setting the price

STEP 2: Determining Demand: Each price will lead to different level of demand. So it is imp to know reasons of Price Sensitivity.

- Normal Case: Demand is inversely related to price.

- Prestige Goods: Demand is directly related to price.

- Internet increases price sensitivity bcoz customer can compare the prices online. But, Mckinsey study suggests that 89% of a sample of internet customers visited only one book site, 84% visited only one toy site, 81% visited only one music site.

STEP 3: Estimating Costs: Demand sets the ceiling on the price and costs set

the floor.Types of Costs and Levels of Production• Fixed Costs: Overheads; Rent, Interest, salaries.• Variable Costs: It is with level of production. Raw material, packaging, etc.• Total Cost: Fixed cost and Variable Cost.Three myths about Pricing strategy• Pricing our products to cover full costs will make us profitable• Pricing our products to grow market share will make us profitable• Pricing our products to meet customer demands will make us profitable

Setting the price

STEP 4: Analyzing Competitors Costs, Prices and Offers

Range of possible prices determined market demand and company costs; The firm must take company cost, prices and reaction into account.

STEP 5: Selecting the pricing Method:

• Mark-up pricing

• Target return pricing

• Perceived Value pricing

• Value Pricing

• Going Rate pricing

• Auction type pricing

Setting the price

STEP 6: Selecting the final price: Impact of other Marketing Activities –

Relationship among relative prices, relative quality and relative advertising.

Consumers pay high price for known products as compared to unknown

Consumers pay highest to branded and maximum advertised products and vice-versa.

Price is not as important as quality and other benefits in the offer.

Positive relationship between high price and high advertising in later stage of PLC for market leader.

Setting the price

Case: DELL

• Case- DELL: Example of flexibility pricing.• On any day, the same computer might sell at different price

depending on whether the purchaser is a government, small business, or home PC buyer.

• “Cost- forecasting”

Adapting the price

Companies do not set a single price but a pricing structure that reflects variation in -Geographical demand and costs, Market segment requirements, Purchase timing, Order levels, Delivery frequency, Guarantee, Service Contracts

• Case- DELL: Example of flexibility pricing. On any day, the same computer might sell at different price depending on whether the purchaser is a government, small business, or home PC buyer.

• Case- Procter and Gamble: 2/3 of China’s population earns less than $ 25 per month. It started tiered pricing- 320 gm of Tide (clean white) for 23 cents and 350 gm for 33 cents (Tide triple action).

THANKSTHANKS