STRATEGIC MARKETING

DEVELOPING PRICING STRATEGIES CONTD.

SMK PGDM BATCH 28 RETAIL & HR TUTORIAL 12
 PRICE SETTING METHODS
• Seven price-setting methods:
1. Markup pricing
2. Target-return pricing
3. Perceived-value pricing
4. Value pricing
5. EDLP
6. Going-rate pricing
7. Auction-type pricing
 1. MARKUP PRICING
The most elementary pricing method to add a standard markup to the product’s cost
 2. TARGET- RETURN PRICING
• In Target-Return Pricing the firm determines the price that yields its
target rate of return on investment. Public utilities which need to make a
fair return on investment often uses this method.
• Suppose the toaster manufacturer has invested $ 1 million in the
business and wants to set a price to earn a 20 percent ROI, specifically $
200,000. The target-return price is given by the following formula:
BREAK-EVEN
• The manufacturer will realize this 20 percent ROI provided its
costs and estimated sales turn out to be accurate. But what if sales
don’t reach 50,000 units?
• Prepare a break-even chart to learn what would happen at other
sales levels Fixed costs are $ 300,000 regardless of sales volume.
Variable costs, rise with volume. Total costs equal the sum of fixed
and variable costs. The total revenue curve starts at zero and rises
with each unit sold. The total revenue and total cost curves cross at
30,000 units. This is the break-even volume. Verify this by the
following formula:
 3. PERCEIVED-VALUE PRICING

Many companies base their prices on the customers’

perceived value. Pursued value takes into account buyers’
image of the product performance, the channel deliverables,
the warranty quality, customer support, and other softer
attributes such as the suppliers’ reputation, trustworthiness,
and esteem.
Meru Cabs, one of the first companies to launch metered ‘radio cabs’ in India. With
head quarters in Mumbai, Meru services are available in Mumbai, Delhi, Hyderabad,
and Bengaluru. Meru uses GPS/GPRS-enabled technology to deliver a reliable taxi
service by concentrating on each touch point with its customers. Customers benefit
from a relaxed commute in a well-equipped air-conditioned cab, which is readily
available 24/7.
• Caterpillar uses perceived value to set prices on its construction equipment. It might price
its tractor at $ 100,000, though a similar competitor’s tractor might be priced at $ 90,000.
When a prospective customer asks a Caterpillar dealer why he should pay $ 10,000 more
for the Caterpillar tractor, the dealer answers:
 4. VALUE PRICING
Companies try to win loyal customers by charging a fairly
low price for high quality offering. Value pricing is not a
matter of simply setting lower prices; it is a matter of
reengineering the company’s operations to become a low-cost
producer without sacrificing quality to attract a large number
of value-conscious customers. Best examples are IKEA,
Target, Southwest Airlines
 5. EVERY DAY LOW PRICING (EDLP)

• A retailer uses an important type of value pricing called everyday

low pricing(EDLP) who charges a constant low price with little or no
price promotion and special sales.
• Constant prices eliminate week-to-week price uncertainty and the
High-Low pricing of promotion-oriented competitors.
• In High-Low pricing, the retailer charges higher prices on an everyday
basis but runs frequent promotions with prices temporarily lower than
the EDLP level.
• These two strategies have been shown to affect consumer price
judgments— deep discounts (EDLP) can lead customers to perceive
lower prices over time than frequent, shallow discounts (high-low),
even if the price actually averages to the same level.
• The king of EDLP is surely Walmart, which practically defined the
term. Except for a few sale items every month, Walmart promises
everyday low prices on major brands.
 6. GOING-RATE PRICING
• By this method, firms base prices largely on competitors’ prices. In
oligopolistic industries like fuel, steel, paper, cement, or fertilizer,
companies charge the same prices. Smaller firms ‘follow the leader’,
changing their prices when the prices of market leader changes rather than
when their own demand or costs change.
• Some may charge a small premium or discount, but they preserve the
difference. In the US, minor gasoline retailers may charge a few cents less
per gallon than the major oil companies. Going-rate pricing is -where costs
are difficult to measure or competitive response is uncertain, firms feel it is
fair to follow industry’s collective wisdom
 7. AUCTION-TYPE PRICING
• Auction type pricing is gaining popularity with growing number of electronic
market places selling pigs to used cars as firms dispose of excess inventories or
used goods. Three major types of auctions:
• English auctions(ascending bids) have one seller and many buyers. eBay and
Amazon.com puts up an item for sales and bidders raise the prices. Highest
bidder gets the product.
• English auctions are used today for selling antiques, cattle, real estate, and used
equipment and vehicles. IPL teams buy Cricketers this way.
• Dutch auctions (descending bids) featuring one seller and many buyers
or one buyer and many sellers
• In the first kind, the auctioneer announces a high price and prices are
slowly decreased until the lowest price is arrived at. An ongoing
business like textile shop is offered for sale
• In the other case, one intended buyer announces the need for a product
or service and the potential sellers compete to offer the lowest price –
FreeMarkets.com helped UK’s public mail service company (Royal Mail
Group plc.)to save almost $ 4 million through auction which involved
25 airlines bidding for its international freight business
• Sealed-bid auctions allow would be buyers submit only one bid – they cannot know the other
bids. Government departments and large public and private enterprises use this method to
procure supplies, build plants, bridges, roads, airports, ports, etc. Normally the lowest bid is
accepted.
• A supplier will not bid below its cost but cannot bid too high for fear of losing the job. The net
effect of these two pulls is the bid’s expected profit.
• A variant of this method is a two-bid system where technical bids are first evaluated and based
on pre-qualification/short listing on technical grounds, commercial bids are considered.
 STEP 6: SELECTING THE FINAL PRICE

• Pricing methods narrow the range from which the firm must select its price.
While selecting that price, the company must consider additional factors,
including:
1) The impact of other marketing activities
2) Company pricing policies
3) Gain-and-risk sharing pricing
4) Impact of prices on other parties.
 IMPACT OF OTHER MARKETING ACTIVITIES

• The final price must take into account the brand’s quality and advertising relative
to the competition:
• Brands with average relative quality but high relative advertising budgets could
charge premium prices. Consumers were willing to pay higher prices for known
rather than for unknown products
• Brands with high relative quality and high relative advertising obtained the
highest prices. Conversely, brands with low quality and low advertising charged
the lowest prices
• For market leaders, the positive relationship between high prices and high
advertising held most strongly in the later stages of the product life cycle
 COMPANY PRICING POLICIES
• The price must be consistent with company pricing policies. Some companies do
adopt pricing penalties under certain circumstances:
• Airlines charge those who change reservations of discount tickets
• Banks charge for too many withdrawals in a month/or for not keeping minimum
balances or early retirement of a fixed deposit
• Dentists, Hotels and other service providers charge penalties for no-shows by
missing appointments or reservations - On some occasions these penalties may be
justifiable but firms should use them judiciously to avoid alienation of customers
 GAIN-AND-RISK SHARING PRICING
• Buyers may resist accepting seller’s proposal because of a high perceived level of
risk such as in a big computer hardware purchase or a company health plan.
• The seller has then the option to offering to absorb part or all of if it does not deliver
the full promised value.
• Indigo uses a six-year sale and lease back model on its aircraft,
which has boosted its profits even at a time when other leading
airlines have been registering losses
 IMPACT OF PRICES ON OTHER PARTIES
• How would the distributors and dealers look at the increase/decrease
in prices? If the prices are too high they may not be able to push the
sale of products; if the prices are not high enough they may not be
happy with the margins they get.
• If the product prices are boosted, the suppliers to the manufactures
may expect higher prices for their supplies that go into the making of
the products
• Will the government step in and prevent the price rise?