UTILITY, VALUE, PRICING AND PRICE

Utility : is the want satisfying capacity of an item or the attribute of an item that makes it capable of want satisfaction. Value : is the quantitative measure of the worth of a product. Pricing : is the art of translating into monetary terms the value of the product to the consumers at a particular time. Price : is the amount of money that is needed to acquire some combination of a product and its accompanying services.

IMPORTANCE OF PRICING

(1) FOR THE ECONOMY : Price is the basic regulation of the economic system because it influences the allocation of the factors of production. In other words the price of the product is influenced by the price of the factors of production.
LAND LABOUR CAPITAL ENTREPRENEURSHIP

Rent

Wages

Interest

Profits

IMPORTANCE OF PRICING

(2) FOR AN INDIVIDUAL PRODUCT : Price is a major determinant of the products demand ( elastic / inelastic ).
P1 PRICE P2 D1 D2

Q1 Q2 QUANTITY

IMPORTANCE OF PRICING

(3) FOR THE FIRM : Price affects a firms competitive position and its share of the market. Price of a product also affects a firms marketing programme. Whether the market will accept a higher price to have more improved products.

NINE PRICE QUALITY STRATEGIES

High

P R I C E Medium

Low

Q 1.Premium 3.Super-value 2.High-value High U Strategy Strategy Strategy A Medium 4.Overcharging 5.Medium-value 6.Good-value L Strategy Strategy Strategy I 7.Rip-off 8.False economy 9.Economy Low Strategy T Strategy Strategy Y ( Contd.. )

NINE PRICE QUALITY STRATEGIES

The firm must decide where to position its product on quality and price ( placing the product in value-map ). There can be competition between price-quality segments ( nine strategies are possible ). In the figure (9 Strategies), the strategies 1,5&9 can all coexist in the same market (products fall on value equivalence line of the value-map). Strategies 2,3&6 are ways to attack the diagonal positions (products fall in value advantaged area).Positioning strategies 4,7&8 amount to overpricing the product in relation to its quality (positioned in value disadvantaged area).

SETTING PRICING POLICY ( FACTORS TO BE CONSIDERED )

(1) Selecting the pricing objective

(2) Determining demand (3) Estimating costs (4) Analyzing competitors costs, prices, and offers

(5) Selecting a pricing method

(6) Selecting the final price

STRATEGIC PRICING PROCESS

(2) Study

Consumer Behav.

(4) Integrate Pricing with M.Mix

(1) Select Target Market

(3) Identify Competition
(4) Relate cost & Demand

(6) Determine Strategic Price

PRICING OBJECTIVES

The company first decides where it wants to position its market offering. The clearer a firms objectives, the easier it is to set price. A company can pursue any of five major objectives through pricing : Survival Maximum current profit Maximum market share (market penetration) Maximum market skimming Product-quality leadership

FACTORS AFFECTING PRICING DECISIONS

Internal Conditions : ( Product differentiation, Marketing Mix, Orgn. Factors/Costs, Orgn. Objectives and goals.

External Conditions : ( Govt. Regulations, Economic Conditions, Demand Position, Buyers Attitude and Behaviour, Competition, Substitutes, Suppliers, Cost of Factors of Production )

SELECTION OF PRICING METHOD

Before selecting a price, the company should study the three Cs : - the customers demand schedule - the cost function - the competitors prices Costs set a floor to the price and Market Demand sets the upper ceiling. Competitors prices and the prices of substitutes provide an orienting point.

SELECTION OF PRICING METHOD

The final price of the product or service will be set somewhere between the two i.e. Price that is too low to produce a profit and the price that is too high to produce any demand.
LOW PRICE HIGH PRICE
Competitors prices and prices of substitutes Customers (No possible assessment of unique at this price) product features

(No possible profit demand at this price)

Costs

PRICE SETTING METHOD

(1) MARKUP PRICING (FULL COST PRICING) : The most elementary pricing method is to add a standard markup to the products cost. Fixed Cost Unit Cost = Variable Cost + --------------

Unit Sales
Markup Price = Unit Cost

-----------( 1- desired return on sales )

PRICE SETTING METHOD

(1) MARKUP PRICING ( Contd. )

Example : Suppose a product manufacturer has the following costs and sales expectations : Variable Cost per Unit = Rs. 10.00 Fixed Cost = Rs. 3,00,000 Expected Unit Sales = 50,000 Unit Cost = 10.00 + 3,00,000 / 50,000 = Rs. 16.00 Manufacturer wants to earn 20 % markup on sales Markup Price = 16 / ( 1-0.2 ) = Rs.20.00

PRICE SETTING METHOD

(2) TARGET-RETURN PRICING : the firm determines the price that would yield its target rate of return on investment (ROI). The target-return price is given by the following formula:

Unit cost + desired return x invested capital Target-return price= ------------------------------------------------------------Unit Sales ( Contd. )

PRICE SETTING METHOD

(2) TARGET-RETURN PRICING(Contd): in the above example , if total investment is Rs. 10,00,000/- and company wants to earn a 10 % ROI then
Target-return price = 16.00 + .10 x 10,00,000 = Rs. 18.00 -----------------50,000 Break-even volume = Fixed cost / Price - Variable Cost = 3,00,000 / 18 - 10 = 37,500 units

PRICE SETTING METHOD

(3) PERCEIVED-VALUE PRICING : Companies see the buyers perception of value, as the key to pricing. They use non-

price variables of the marketing mix to

build up perceived value in buyers

minds. It helps in product positioning.

PRICE SETTING METHOD

(4) VALUE PRICING : In recent years, several companies have adopted value pricing, in which they charge a fairly low price for a high-quality offering. Value pricing says that the price should represent a high-value offer to consumers.

PRICE SETTING METHOD

(5) GOING-RATE PRICING : The firm

bases its price largely on competitors prices. The firm might charge the same, more or less than major competitor(s). Going-rate pricing is quite popular, where costs are difficult to measure or competitive response is uncertain, firms feel that the going price represents a good solution

PRICE SETTING METHOD

(6) SEALED-BID PRICING : Competitiveoriented pricing is common where firms submit sealed bids for jobs. The firm bases its price on expectations of how competitors will price rather than on a rigid relation to the firms costs or demand. The firm wants to win the contract, and winning normally requires submitting a lower price bid. At the same time, the firm can not set its price below cost.

SELECTING THE FINAL PRICE

Pricing methods narrow the range from which the company must select its final price. In selecting that price, the company must consider following additional factors : - Psychological Pricing ( Image Pricing, Odd-ending Pricing ) - The influence of other Marketing-Mix Elements ( the brands quality and advertising relative to competition ) - Company Pricing Policies (reasonable to customers and profitable to the company ) - Impact of Price on Other Parties

PRICE ADAPTATION STRATEGIES ( PRICING TACTICS & TECHNIQUES )

Companies usually do not set a single price but rather a pricing structure that reflects variations in geographical demand and costs, market segment requirements, purchase timing, order levels, delivery frequency, guarantees, service contracts, and other factors. As a result of discounts, allowances, and promotional support, a company rarely realizes the same profit from each unit of product that it sells.

PRICE ADAPTATION STRATEGIES ( PRICING TACTICS & TECHNIQUES )

Following are the several price-adaptation strategies : (1) Geographical Pricing : involves the company in deciding how to price its products to different customers in different locations and countries. Another issue is how to get paid.
( Contd. )

PRICE ADAPTATION STRATEGIES ( PRICING TACTICS & TECHNIQUES )

Geographical Pricing ( Contd. ) 5 Major Approaches : FOB Origin Pricing Uniform Delivery Pricing ( Postage Stamp Pricing ) Zone Pricing ( Falls between the above two ) Base Point Pricing Freight Absorption Pricing

PRICE ADAPTATION STRATEGIES ( PRICING TACTICS & TECHNIQUES )

(2) Price Discounts and Allowances : Cash Discount ( e.g. 2/10,net 30 ) Quantity Discount Functional Discount Seasonal Discount Allowances ( Trade-in allowances, Promotional Allowances )

PRICE ADAPTATION STRATEGIES ( PRICING TACTICS & TECHNIQUES )

(3) Promotional Pricing : Loss-leader pricing Special-event pricing Cash rebates Low-interest financing Longer payment terms Warranties and service contracts Psychological discounting

PRICE ADAPTATION STRATEGIES ( PRICING TACTICS & TECHNIQUES )

(4) Product-Mix Pricing : Product-Line Pricing Optional-Product Pricing Captive-Product Pricing Two-Part Pricing By-Product Pricing Product-Bundling Pricing

PRICE ADAPTATION STRATEGIES ( PRICING TACTICS & TECHNIQUES )

(5) Discriminatory / Differential Pricing :

Customer-segment pricing Product-form pricing

Image pricing
Location pricing Time pricing