PRICING

PRICINGPricingis the process of determining what a company will receive in exchange for its product or service. Pricing factors aremanufacturing cost, market place, competition, market condition,brand, and quality of product.4/4/20151

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PRICINGDeciding what to charge from customers4/4/20152

Process of PricingSelecting the pricing objectiveDetermining DemandEstimating CostAnalyzing Competitors Cost, Prices, and OffersSelecting the Pricing methodSelecting the Final price4/4/20153

1.Selecting the pricing objectiveSurvivalMaximize current profitsMaximize their market shareQuality leadershipOther Objective

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2.Determining the demand

Price sensitivityEstimating demand curvesPrice elasticity of demand

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3.Estimating CostTypes of Cost and Levels of ProductionFixed costs (overhead)Variable costTotal costAverage cost4/4/20156

4.Analyzing Competitors Cost, Prices, and OffersWithin the range of possible prices determine by market demand and company costs, the firm must take competitors cost, prices and possible price reactions into account.4/4/20157

5.Selecting a Pricing MethodMarkup PricingTarget-Return PricingPerceived value pricingGoing rate pricing Bid pricingSealed bid pricing4/4/20158

6.Selecting the final pricePsychological PricingReference priceGain-and-Risk-Sharing PricingInfluence of the Other Marketing ElementsCompany Pricing PoliciesImpact of Price on Other Parties

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Market and demand factors affecting pricing decisions4/4/201510

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Pricing Strategies

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Penetration Pricing

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Penetration PricingPrice set to penetrate the marketLow price to secure high volumesTypical in mass market products chocolate bars, food stuffs, household goods, etc.Suitable for products with long anticipated life cyclesMay be useful if launching into a new market

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Market Skimming

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Market SkimmingHigh price, Low volumesSkim the profit from the marketSuitable 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.

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Value Pricing

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Value PricingPrice set in accordance with customer perceptions about the value of the product/serviceExamples include status products/exclusive products

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

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Loss Leader

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Loss LeaderGoods/services deliberately sold below cost to encourage sales elsewhereTypical 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 thingsPurchases of other items more than covers loss on item solde.g. Free mobile phone when taking on contract package4/4/201520

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Psychological Pricing

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Psychological PricingUsed to play on consumer perceptionsClassic example - 9.99 instead of 10.99!Links with value pricing high value goods priced according to what consumers THINK should be the price4/4/201522

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Going Rate (Price Leadership)

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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 marketMay follow pricing leads of rivals especially where those rivals have a clear dominance of market shareWhere competition is limited, going rate pricing may be applicable banks, petrol, supermarkets, electrical goods find very similar prices in all outlets4/4/201524

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Tender Pricing

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Tender PricingMany contracts awarded on a tender basisFirm (or firms) submit their price for carrying out the workPurchaser then chooses which represents best valueMostly done in secret4/4/201526

Price Discrimination

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Price Discrimination

Charging a different price for the same good/service in different marketsRequires each market to be impenetrableRequires different price elasticity of demand in each marketPrices for rail travel differ for the same journey at different times of the day

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Destroyer Pricing/Predatory Pricing

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Destroyer/Predatory PricingDeliberate price cutting or offer of free gifts/products to force rivals (normally smaller and weaker) out of business or prevent new entrantsAnti-competitive and illegal if it can be proved4/4/201530

Absorption/Full Cost Pricing

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

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Marginal Cost Pricing

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Marginal Cost PricingMarginal cost the cost of producing ONE extra or ONE fewer item of productionMC pricing allows flexibility Particularly relevant in transport where fixed costs may be relatively highAllows 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 aircraft4/4/201534

Marginal Cost PricingExample: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 = 93.75MC of each passenger = 2000/160 = 12.50If 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

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Contribution Pricing

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Contribution PricingContribution = Selling Price Variable (direct costs)Prices set to ensure coverage of variable costs and a contribution to the fixed costsSimilar in principle to marginal cost pricingBreak-even analysis might be useful in such circumstances4/4/201537

Target Pricing

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

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Cost-Plus Pricing

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Cost-Plus PricingCalculation of the average cost (AC) plus a mark upAC = Total Cost/Output4/4/201541

Influence of Elasticity

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Influence of ElasticityAny pricing decision must be mindful of the impact of price elasticity The degree of price elasticity impacts on the level of sales and hence revenueElasticity focuses on proportionate (percentage) changesPED = % Change in Quantity demanded/% Change in Price4/4/201543

Influence of ElasticityPrice Inelastic:% change in Q < % change in Pe.g. a 5% increase in price would be met by a fall in sales of something less than 5% Revenue would riseA 7% reduction in price would lead to a rise in sales of something less than 7%Revenue would fall4/4/201544

Influence of ElasticityPrice Elastic:% change in quantity demanded > % change in pricee.g. A 4% rise in price would lead to sales falling by something more than 4%Revenue would fallA 9% fall in price would lead to a rise in sales of something more than 9%Revenue would rise4/4/201545

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