PRICE

A “P”WHICH EARNS REVENUE

NATURE AND IMPORTANCE OF PRICE

• Price paid for education-?

• Haircut -?
• Airline travel -?
• Physician -?
• Paid for using a credit card-?
WHAT IS PRICE

• Price is the money or other considerations (including goods and services )

exchanged for the ownership or use of goods or services.
PRICE EQUATION

• 1.New car bought by an individual

• List price –Rebate/cash discount /old car trade-in financing charges.
• 2.Term in college bought by a student
• =Tuition fee-Special activity fee-Scholarship or other financial aid discounts.
• 3.Merchandise bought from a wholesaler
• List price-Discount(quantity/cash /seasonal/functional or trade discount.
PRICE AS AN INDICATOR OF VALUE

• Influences consumers perception of the quality

• Customer feels that price indicates value when price is compared with
benefits of the product.
PRICE IN THE MARKETING MIX

• Price is a critical decision made by a marketer because price directly effects

firms profit .
• Profit =Total revenue-total cost
GENERAL PRICING APPROACHES

• Demand oriented approach

• Cost oriented approaches
• Profit Oriented approaches
• Competition oriented approaches
DEMAND ORIENTED APPROACHED
• 1.Skimming-A firm introducing a new product sets the initial price high to recover the
R&D cost and take advantage of no competition and attracts customer who are
really desiring the product
• 2.Penetration – Setting low price to beat completion in a competitive market
• 3.Odd Pricing-setting price odd like 99 or 199 etc to attract price conscious buyers
• 4. Prestige –if consumer are using price as a measure of quality or status a company
runs the risk of appearing a low quality product if it sets the price below a certain
point. Prestige pricing involves setting a price high so that quality or status conscious
customers can be attracted
• 5.Bundle Pricing –Marketing of two or more products in a single package
pricing
• 6.Yield Management pricing-Charging of different prices to maximize the
revenue like in airlines .
COST ORIENTED APPROACHES

• Standard mark up pricing –Adding fixed percentage to the cost.

• Cost plus pricing – Price often used in services where the price is based on the
cost incurred to provide the service and some agreed profit on it.
PROFIT ORIENTED APPROACHES

• Target profit pricing- The firm sets a specific target volume of profit called a s target
profit pricing
• Example –Business is photoframe
• Demand -1000 units next year calculated on the basis of previous year demand.
• Cost components-Raw material Rs 220
• Over head expenses 5,20,000
• Target profit Rs 200000
• Calculate Price
• Target return or sales pricing-Firms such as super markets often use target
return on sales pricing to set prices that will give them a profit that is specified
percentage say-1 Percent on the sales volume. This price method is often used
because of the bench mark of sales or investment to show much effort is
needed to achieve the target
• Target return on investment pricing-Setting prices to achieve a return on
investment .Used by business organization which have high fixed cost
 PROMOTIONAL PRICING

• Loss leader pricing-For a special promotion retail stores deliberately sell a

product below its customary price to attract attention to it.The purpose of loss
leader pricing is not to increase sales but to increase footfall to the retail
stores.
• Special event Pricing –Special prices in certain seasons or occasions to attract
customers
• Special Customer pricing –Special prices to certain customers.
• Cash Rebates –Offer cash discounts to encourage purchase
• Low interest financing-Stretch loans over longer periods
• Longer payment terms –stretch loans over longer period
• Warranties and service contracts-companies can promote sales by adding
free or no cost extended warranty
• Psychological discounting-This strategy sets an initial substantially high price
and than offers the product at discount
DIFFERENTIATED PRICING
• Customer segment Pricing-Different customer groups pay different price for
the same product or service.
• Product form pricing-Different versions of products are priced differently but
not proportion to their cost.
• Image pricing –Price based on the brand image of the product
• Location pricing-the same product is priced differently at different locations
even though the cost of offering at each location is the same. Example is the
price of seats in the theater which varies as per location
DIFFERENTIATED PRICING -CONTD

• Time Pricing –prices are varied as per season day and hr.
PROCESS OF SETTING A PRICE
• 1 Setting pricing objective –
• Survival
• Maximum current profit
• Maximum market share
• Maximum market skimming
• Product quality leadership
• Social and non profit objective
• 2. Determining demand-
• Each price will lead to a different level of demand and have a different impact on a
company’s marketing objectives
• Price sensitivity –the demand curve shows the markets probable purchase quantity at
alternative prices. It sums the reaction of many customers with various price sensitivities.
• Estimating demand curves –Surveys ,Price experiments ,Statistical analysis.
• Price elasticity of demand-Marketers need to know how responsive or elastic demand is to
change in price.
Highly elastic demand
Highly inelastic demand
Step 3: Estimating Costs

• Target costing
• Price less desired profit margin
 Step 3: Estimating Costs cont.
1. Types of costs and levels of production
• Fixed vs. variable costs
• Total costs
• Average cost
• 2. Accumulated Production –Experience curve or
learning curve (Cost efficiency over a longer period of
time.)
3. Target costing –Costs change with production scale and
experience they can also change as a result of
concentrated effort by designers engineers and
purchasing agents to reduce them through target costing
enabling the marketer to determine at what price the
product is decided to be sold
• Cost per unit at different levels of production
• Short run average cost curve
• Long run average cost curve
Step 3: Estimating Costs cont.
• Accumulated production
• Experience/learning curve
• Samsung runs a plant that produces 3000 tablets per day .As the company
gains experience producing tablets its methods improve workers learn shortcut
materials flow more smoothly and procurement costs fall . Figure in the
previous slide shows that average costs fall with accumulated production
experience
• Calculate Average cost
• A tailor in a popular market area has the following cost component
• 1. Rent for the shop – Rs 20000 /Month
• 3 Assistant tailors (Salary) – RS 10000/Month
• 3.One daily wage helper Rs 200 /Day
• Electricity bill per month - RS 700 /Month
• Other variables – Rs 500 /Month
• Total number of asst tailors -3
• Each tailor has capacity to product 3 shirts per day
• Overtime charges-100/hr
• They make 3 types of shirts A, B and C (Best Quality) C is the least
• Material Cost for Demand A B C
(units)
• A-Rs 1000 150 50 50 50
• B-Rs 800 200 70 70 60
250 90 90 70
• C- RS 600 300 100 100 100
320 110 110 100
330 110 110 110
350 120 120 110
• Cost for adding new facility-Same cost as the previous one.
• Decision ?
• 1. How many units is advisable for production ?
• 2. At what levels of production facility has to be stretched ?
• 3. When to add new facility?
Step 4: Analyzing Competitors’ Prices
• Firm must take competitors’ costs, prices, & reactions into account
• Value-priced competitors
Selecting a Pricing Method
• Given the customers demand schedule, the cost function ,competitors prices
company is now ready to select a price.
• Costs set a floor to the price
• Substitutes provide an orienting point
• Customers assessment of unique features establishes price ceiling
 Step 5: Selecting a Pricing Method
• Figure 16.4: three major considerations in price
• Costs = price floor
• Competitors’ prices = orienting point
• Customers’ assessment of unique features = price
ceiling
Step 5: Selecting a Pricing Method
• Markup pricing
• Add a standard markup to the product’s cost
• Variable cost per Bag – Rs 1300
• Fixed Cost 400000
• Expected units sales 12000/Annum
• Assume that the manufacturer wants to earn a 20% mark up on sales
• Calculate the Price?
• Fixed cost + variable cost=1300+34 =1334
• =1334/1-.20= Rs 1667
Step 5: Selecting a Pricing Method
• Target-return pricing
• Price that yields its target rate of return on investment
• Invested capital for the manufacturing unit-10,00,000
• Expected ROI 20%
• Calculate the Price
• 13
• 1334+(20%x 1000000)/12000
• =1334+16.66=1350
Figure 16.5
Break-Even for Target-Return Price
• The ,manufacturer will realize this 20% ROI provided its costs and estimated
sales turn out to be accurate .
• If the sales wont reach 12000 units …..?????
• Manufacturer can prepare a breakeven chart to learn what would happen at
other sales levels
• Break even volume = fixed cost = 400000
Price-Variable cost 1350-1300
=400000/50=8000
PERCEIVED VALUE PRICING
• An increasing number of companies now base their price on the customers perceived
value. Perceived value is made up of host of other factors and inputs such as
• Buyers Image
• Product Performance
• Channel deliverables
• Warranty
• Quality
• Customer support and other attributes such as suppliers reputation , trustworthiness
and esteem.
Components Price (Rs)
Price of the bag like as set equivalent to the 6000
competitor
Price premium because of the brand 2000
Superior quality 3000
Warranty against at problems arise with in a span 1000
of three years
Effective service quality 1000
Final price of the bag 13000
Discount of 10% 1300
Final Price 11700
VALUE PRICING
• Companies that adopt value pricing win loyal customers by charging a fairly
low price for a high quality offering .Value pricing is simply not pricing low in
fact its reengineering company's offerings to became a low cost producer
without sacrificing on quality
Step 5: Selecting a Pricing Method
• Perceived-value pricing
• Based on buyer’s image of product, channel deliverables,
warranty quality, customer support, and softer attributes (e.g.,
reputation)
Step 5: Selecting a Pricing Method
• Value pricing
• EDLP
• High-low pricing
• Going-rate pricing
Step 5: Selecting a Pricing Method
• Auction-type pricing

English (ascending)

Dutch (descending)

Sealed-bid
Step 6: Selecting the Final Price
• Additional factors to select final price:

 Impact of other marketing activities

 Company pricing policies
 Gain-and-risk-sharing pricing
 Impact of price on other parties
Adapting the Price
• Geographical pricing
• Barter
• Compensation deal
• Buyback arrangement
• Offset
Adapting the Price
• Price discounts and allowances
Adapting the Price
• Promotional pricing:

• Loss-leader pricing • Low-interest financing

• Special event pricing • Longer payment terms
• Special customer pricing • Warranties/service
• Cash rebates contracts
• Psychological discounting
Adapting the Price
• Price discrimination

Customer-
Product-form
segment
pricing
pricing

Time pricing Image pricing

Channel
Location pricing
pricing