unit 6 pricing decision.pptx
TRANSCRIPT
Unit 6: Pricing
Dibakar Bashistha
Concept of Price and Pricing
• It is very important marketing mix. Price is what customers pay for what they get. It is the amount of money that customer pay for the product. It is the value of what is exchanged.
• According to William Stanton “ Price is the amount of money and or what items with utility needed to acquire a product”.
• It is one of the major elements that the marketing manger must consider for generating the return on capital invested in a business organization. It is what customer pay for what they get. It is the amount of money that customer pay for the product. It is consider as the exchange value of a good, a services, or idea. It is amount of money sacrificed to obtain a particular product or service. Goods, services, ideas, advice, right, etc. are exchanged and their value measured by their price.
• So pricing means the determination of appropriate value to a particular goods or services. Price has various names like interest, rent, commission, fee, salary and wages, taxes etc. It can also be a combination of money and other items of value.
Price has various names: Interest: Price paid for a bank loanRent: Price paid for hiring physical assets.Fare: Price paid for using transportation serviceFee: Price paid for professional’s service.Salary and wages: Paid for services of workers.Taxes: Paid for the privilege of making money.
• Importance: Pricing activity is performed by all types of organization. It is very important variable in the economy. Price affects both demand and savings. It is one of the major activities of the government in an underdeveloped economy. The importance of prices is given below.
• 1. Importance to the economy: • * Price influences factors of production• * Price determine supply and demand• * Price is a tool for economic management• 2. Importance to the organization or firm• * Price determine profitability• * Price determine market share• * Price influence no price competition• 3. Importance to customers• * Price influences customer's choice of the products• * Price influences perception of the product.• * Price influences customer value in terms of potential benefits.
• Objectives of pricing1. Profit oriented pricing a. Target return (Achieve target return on investment or net sales) b. Satisfactory profit (Maximize profit) 2. Sales oriented pricing a. Increase sales volume (Fulfill this objectives through product
or services at concessional prices or some time at loss) b. Increase market share 3. Status- que oriented Pricing ( Maintain good will ) a. Stabilization of price b. Meeting competition c. Survival4. Quality oriented Pricing a. Quality leadership b. Quality imitation
Internal and external factors affecting pricing
• Price determination is affected by several internal and external factors internal price factors are controllable while external factors are mostly independent.
Internal price factors• Pricing objectives (target return objectives/sales oriented objective) • Marketing mix ( product/distribution/ promotion ) affect the price
determination for the products. • Structure for pricing ( type of pricing/ image / product positioning ) • Costs ( production and distribution cost) a. Costs of product (expenses incurred in the manufacture and packaging of the
product like labor, material, factory overhead etc) b. Selling cost ( physical distribution, sales force management, and incentive paid
to channel members) c. Promotion costs( Advertising/ sales promotion and publicity )
External price factors • Market demand ( Market demand are different in different
life cycle / Depression / prosperity, recovery )• Prevailing market price ( most of the similar or
undifferentiated products are sold at the prevailing market prices)
• Competition ( the type of competition the organization face in the market determines the price of the product)
• Government control (government control on the price level and legislation regarding price regulations are important variable in the pricing milieu)
• Market intermediaries interests(Resellers expect a fair share from the price as markups, commissions and incentives)
• Social concerns (voice of consumer associations but in Nepal they are motivated by political parties )
Pricing Methods
Cost OrientedCost-Plus
Target returnBreak-even
Competition Oriented
Meet competitionBelow competitionAbove competition
Sealed-bid
Demand OrientedValue
Perceived value
Methods or Approaches of Price determination: 1. Cost oriented method: Cost oriented pricing methods are based on the notion that the price
should cover all types of costs and be able to give the organization a fair amount of profit. These methods include:
a. Cost-Plus / Mark-up pricing: This is the simplest method of pricing which involves a
calculation of the fixed and variable costs per unit and adding the desired profit margin on the total cost.
For example: • Direct cost (labor and materials ..........Rs, 10,000/• Fixed overhead ...........Rs, 5,000/• Total cost ...........Rs, 15,000/• Average cost per unit 15000/1000 .......Rs, 15/• Mark-up profit per unit ....Rs, 5/• Price per unit ...... Rs 20/
• b. Target return on investmentThis method is popular among manufacturing organizations that need to recover a fixed target return or profit on their investment from the price. The desired return on investment is added to the total cost to arrive at the price.
• Target return price: Total cost + desired ROI / Unit sales
c. Break-even point (Break-even analysis ) : It is a no profit no loss point where revenue equals costs. The
assumptions made for calculating BEP are:• Total fixed costs are constant.• Variable cost per unit remain constant• Sales price per unit remain constant • BEP = TFC / Selling price per unit * variable cost per unit • It is a good guide for setting price in the short run where cost
and demand structure are stable. BEP is the most popular used method of pricing. Actually it
doesn't help to establish price rather in this system price is already assumed. But it helps to know the relationship between cost and revenue and find out a point where revenue equals to the cost. Price is determined at that point where revenue equals total cost.
2. Competition oriented pricing: This method focuses on market price because a company sets its price on the basis of what its competitors are changing. Here costs and demand are not considered. But it is not necessary that the company should charge the same price as its competitors charge. Price may be determined below the market price depending upon the nature of competition, nature of product and market expectations etc.
• Meet competition method: Equal to competitor's Price.• Below competition method: Below than competitor’s Price.• Above competition method: Higher than competitor’s price.• Sealed-bid pricing method: Confidential Price.
3. Demand oriented pricing method Under this method price is determined on the basis of the consumer's
perceptions and demand intensity rather than on costs. Because the cost oriented method fail to take in to account the demand for the products at various prices. Under this method price is determined by two methods. – Perceived value pricing (Response to each product)
"Consumers wish to pay for company's product" Here demand and cost are not considered. Customer's perception of
product value is found through market research. New products are generally priced by this method. – Demand differential pricing:
(Value pricing) Pricing will be determined o the basis of customer's paying capacity
product form, placer and timer, quality etc. High value to customer and low value to product is exercised.
New product pricing • The new product pricing involve price setting during the
introduction stage of product life cycle. It is a major challenges for the innovator. Price is a indicator of product quality in most cases. There are four pricing options during the introduction stage.
1. Premium pricing strategy ( Price high , quality high ) 2. Good value pricing strategy: ( good quality product at lower
price ) 3. Overcharging pricing strategy ( firms over prices its new
products ) 4. Economy pricing strategy ( Low quality products in lower
prices for example china made mobile phone )
• Actually two more pricing strategies are very relevant during the introduction stage of the product life cycle.
A. Market-skimming strategy: It is implemented by many innovators who spend huge amount of money in the product development process. This involves keeping the high price during the introduction and growth period and less price during the maturity period of the product life cycle. Today the I-phone cost more than 50 thousand. And the next six months onwards its price will gradually decline.
B. Market- penetration strategy: It involves setting the low price for their new products and on the basis of low price the product quickly penetrate in to the market. Once the firm is able to achieve effective penetration and capture significant market share the price is gradually increased.
• Price Skimming: • *Setting high price for new product• * Assuming that customers pay high price for the new product. • * Charging the very high price during the introduction stage• *This strategy is suitable only for innovative product because research and
development costs are very high. • Price Penetration• It is adopted by organization an imitative or copy product.• It is viable only when the market for the product is price sensitive. • Setting low price for the new products.• Large sales volume and large market share.• Price competition• *It is related with new modified products• * Competitive price level• * Premium product value for consumers by offering the improved products
Pricing policy and strategy
• Pricing Policy: 1. Geographical ( high / low / uniform ) 2. Discount and allowances ( early payment, volume
purchase, off-seasons ) 3. Promotional ( set below the list price or even below
pricing the cost ) odd and even pricing4. Discriminatory ( living standard, age group, bargaining,
location etc ) visiting Zoo adults are charged higher prices and children low prices etc )
5. Product mix
• Strategy of Pricing:1. Market entry pricing: • Market Skimming: It involves setting high
price for a new product in the initial stage assuming that the consumers will pay high price for new products.
• Market Penetration: It involves setting low price for the new product in initial period with a view to penetrate the mass market immediately and thus obtain a large sales volume and larger market share.
2. Discount and allowances:• Discount of price, quantity, seasonal, 3. Geographical pricing• Point of purchase pricing ( point of production get
heavy discount than point of consumption ) • Uniform delivery pricing: The same delivery price
is quoted to all the buyers of a particular geographical region for example unofrm postage stamp price for the whole SAARC region.
• 4. Psychological or odd pricing etc and resell pricing strategy etc
4. International Pricing strategy
Product Mix Pricing /Pricing Policy
Product Mix Pricing• Concept: It is a set of product line and other items. In each products line different
pricing strategy may be required. We can analysis Six situation in this case:
1. Product line price Under the price lining the organization maintains four of five points at which the product items of a product line are priced. When cost or demand forces the organization to revise the price of an item, the marketers has to revise the prices of all items in the product line in maintaining the relationship(different process of mobile or track shoes etc.)
2. Optional feature price: Separate price is charged for optional features offered. (For example attached cassette player etc.) Most of the companies produce several items along with the main item. Restaurants offer food as the main item and cold drinks as the optional items. Some companies offer low prices to the main products and high prices to the optional items.
3. Product bundling price: Some companies produce interrelated products. Sellers don not like to sell them separately, they often sell this products in sets like spoon sets, dinner sets, and so on. Since most of the customers don't like to buy goods in sets. Sellers have to sufficiently reduce their price, sometimes during occasions they may offer even below the cost.
4.Ancillary product price or captive product price: Blade for razor, film for camera, (High price for ancillary product and low price for main products. Shaving machines are useless if there are no films. ) And low price for main products. It means Tuitions fee is high than books.
5. Two part price ( Higher uses and lower uses ) Some times customers have to pay two part prices for the same product or services. For example telephone user has to pay a minimum monthly fee as basic charge and plus charges for calls beyond the minimum number as extra charges.
• 6. By product pricing: Wastage of the industries are known as by products. Since disposition of these by products involves certain cost, the companies try to offer these products to those customers for whom these by products may be valuable of useful. Because any income earned from the by-products will make company easier to charge a lower price on its products.
Price adjustment strategies• Companies usually adjust their basic prices to account for
various customer differences andchanging situations. Fig summarizes six price-adjustment strategies:
• discount and allowance pricing, • segmented pricing, • psychological pricing, • promotional pricing, • geographical pricing, and • international pricing.
• Discount pricing policy: Discounts are financial incentives provided to the customers through price reduction.
o Cash discount /Quantity discount/ trade discount ( resellers like whole seller and retailers ) / Price-off/ seasonal discount.
Allowance pricing: Allowances are another type of reduction from the list price. For
example, trade-in allowances areprice reductions given for turning in an old item when buying a new one. Trade-in allowances aremost common in the automobile industry but are also given for other durable goods. Promotionalallowances are payments or price reductions to reward dealers for participating in advertising andsales support programs.
• Segmented pricing:Companies will often adjust their basic prices to allow for differences in customers, products, and locations. In segmented pricing, the company sells a product or service at two or more prices, even though the difference in prices is not based on differences in costs. Segmented pricing takes several forms. Under customer-segment pricing, different customers pay different prices for the same product or service. Museums, for example, will charge a lower admission for students and senior citizens. Under product-form pricing, different versions of the product are priced differently but not according to differences in their costs. Using locationpricing, a company charges different prices for different locations, even though the cost of offering at each location is the same. For instance, theaters vary their seat prices because of audience preferences for certain locations. Finally, using time pricing, a firm varies its price by the season,the month, the day, and even the hour. Public utilities vary their prices to commercial users by time of day and weekend versus weekday. The telephone company offers lower off-peak charges, andresorts give seasonal discounts.
• Psychological pricing• Price says something about the product. For example, many
consumers use price to judge quality. An Rs1000 bottle of perfume may contain only Rs300 worth of scent, but some people are willing to pay the Rs 1000 because this price indicates something special. In using psychological pricing, sellers consider the psychology of prices and not simply the economics. For example, one study of the relationship between price and quality perceptions of cars found that consumers perceive higher-priced cars as having higher quality. By the same token, higher-quality cars are perceived to be even higher priced than they actually are. When consumers can judge the quality of a product by examining it or by calling on past experience with it, they use price less to judge quality. When consumers cannot judge quality because they lack the information or skill, price becomes an important quality signal:
• It is a useful strategy for marketing of consumer goods. It encourages emotional buying.
• Prestige pricing: (Jeweler / watches / etc are suitable example, as well as fees of private college or schools.
• Odd-even pricing strategy• Psychological discounting• Customary pricing ( based on tradition ) • Promotional pricing
• Promotional pricing,• Companies will temporarily price their products below list price and
sometimes even below cost. Promotional pricing takes several forms. Supermarkets and department stores will price a few products as loss leaders to attract customers to the store in the hope that they will buy other item sat normal markups. Sellers will also use special-event pricing in certain seasons to draw more customers. Manufacturers will sometimes offer cash rebates to consumers who buy the product from dealers within a specified time; the manufacturer sends the rebate directly to the customer. Rebates have been popular with automakers and producers of durable goods and small appliances, but they are also used with consumer-packaged goods. Some manufacturers offer low-interest financing, longer warranties, or free maintenance to reduce the consumer's "price." This practice has recently become a favorite of the auto industry. Or, the seller may simply offer discounts fromnormal prices to increase sales and reduce inventories.
• Geographical pricing, Pricing a product on the basis of location. High price are charged to distant customers because of high transportation charge and low price to the customer of nearest locations.
• FOB Pricing (Free on board): Here doesn't include any of the freight costs. Nepalese exporters set FOB price to their exports cargoes for up to the Calcutta port.
• Zone delivered price: Petrol or cement are sold at different geographical areas of Nepal.
• Basing point price: It involves pricing set differently for the customers willing to purchase goods at different territories.
• uniform delivered price : The same delivery prices quoted to all buyers of a particular geographical regions.
• International Pricing:
• Companies that market their products internationally must decide what prices to charge in the different countries in which they operate. In some cases, a company can set a uniform worldwide price. The price that a company should charge in a specific country depends on many factors, including economic conditions, competitive situations, laws and regulations, and development of the wholesaling and retailing system. Consumer perceptions and preferences also may vary from country to country, calling for different prices. Or the company may have different marketing objectives in various world markets, which require changes in pricing strategy. Costs play an important role in setting international prices. Travelers abroad are often surprised to find that goods that are relatively inexpensive at home may carry outrageously higher price tags in other countries. In some cases, such price escalation may result from differences in selling strategies or market conditions. In most instances, however, it is simply a result of the higher costs of selling in foreign markets the additional costs of modifying the product, higher shipping and insurance costs, import tariffs and taxes, costs associated with exchange-rate fluctuations, and higher channel and physical distribution costs.
Price changes: Initiating and responding to price changes.• Price is charged on the basis of environmental changes that may be
price increase, decreases and maintain. A. Initiating price changes: Firms needs to initiate price change on
the basis of changing environment. ( price increase and decrease )i. Price increase: most price increases are the result of inflation
that causes the organization’s costs to increase. / Govt. introduce new taxes and raise current taxes and increase the price of any factor of production.
ii. Price Decrease: Excess capacity, extra sells, capture larger market share, low quality, fragile market trap (here price sensitive customers wait for further price cuts or search for cheaper products ) etc.
B. Responding to price changes: • * Competition (to meet the competition)• * Do nothing (silent nature, for utilize excess capacity in the short run
no response is needed) • * Non price competition. (Through product differentiation aggressive
promotion and effective distribution) The leader organization may take one or more of the strategic options
for respond to with and meet the competitor’s strategies. I. Increase customers perceived value of the products by increasign
promotional levelII. Increase the price complemented by and improvement in quality
and features of the product. III. Add a new lower price brand to the current product line and
position it directly with the attacker’s brand.IV. As a last option, reduce the price to off-set the negative effects of
their price attack.
• Pricing Scenario in Nepal• Most of the Nepalese organizations adopt profit oriented pricing
rather than competition oriented and demand oriented pricing. Some organization set their prices and changes the prices of the product in different market situations also give more emphasis in profit rather than capturing the market or satisfying the customers. Most government organizations and big organization follow one price policy.
• Competitive• Cost based• Value based• Don't care with demand base• Price discrimination policy.• Psychological pricing is practiced• Global organizations have emerged in Nepal , WTO
• Most Nepalese products are imitation of Indian and Chinese products. • Profit oriented pricing and sales oriented pricing,• Costs and promotion are most important factors in price determination.• Nepalese products are generally poor in quality.• Cross border smuggling also affects pricing• Low volume of market demand also affect on price• Government control also affect pricing like electricity, fuels, water, etc. • Competition oriented and sealed bid pricing method is dominant in
Nepal.• Cost-Plus method is generally used. BEP is poorly practiced.• Flexible pricing policy is widely used. Price discrimination is done
according to customer, place and time. • Allowances and discounts are also used in practiced. • Price response strategy are common in Nepal to meet the competition.
Important Questions• Define the term pricing and price. Explain it’s importance.• Explain the internal and external factors affecting price of
a product.• What are the difference between cost-based and value
based pricing? Discuss• As a marketing manager, how you will implement various
pricing approaches for better pricing of your products. Discuss.
• Explain the different pricing objectives. And Write and explanatory note on pricing in Nepal.