Module 2 - Pricing Consideration and Strategies

AMITY GLOBAL
BUSINESS SCHOOL Noida
Module II
Pricing Consideration and
Strategies
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BUSINESS SCHOOL Chapter Objectives Noida
• How do consumers process and evaluate

prices?
• How should a company set prices initially for
products or services?
• How should a company adapt prices to meet
varying circumstances and opportunities?
• When should a company initiate a price change?
• How should a company respond to a
competitor’s price challenge?
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BUSINESS SCHOOL Price Noida
• The amount of money charged for a good

or service, or the sum of the values that
customers exchange for the benefits of
having or using the product of service.
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• Price is not just a number on a tag. It comes in

many forms and performs many functions.
• Rent • Special assessment
• Tuition • Bribe
• Fee • Dues
• Fare • Salary
• Rate • Commission
• Toll • Wage
• Premium • Tax
• Honorarium
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• Factors to consider when setting prices:
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• Value Based Pricing:

– It uses buyers’ perception of value, not the
seller’s cost, as the key to pricing.
– It means that the marketer cannot design a
product and marketing program and then set
the price. Price is considered before the
marketing program is set.
– https://www.youtube.com/watch?v=cnXapYkb
oRQ
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• Cost based pricing:

– It involves setting prices based on the costs
for producing, distributing, and selling the
product plus a fair rate of return for its effort
and risk.
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• Value based pricing vs Cost based pricing:
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• Common Pricing Mistakes:

– Determine costs and take traditional industry
margins
– Failure to revise price to capitalize on market
changes
– Setting price independently of the rest of the
marketing mix
– Failure to vary price by product item, market
segment, distribution channels, and purchase
occasion
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• Consumer Psychology
and Pricing
– Reference prices
– Price-quality inferences
– Price endings
– Price cues
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• Possible Consumer Reference Prices:

– “Fair price” – Lower-bound price
– Typical price – Competitor prices
– Last price paid – Expected future
– Upper-bound price price
– Usual discounted
price
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• Pricing Tiers: Most markets have three to five price points or tiers.
Marriott Hotels is good at developing different brands or variations
of brands for different price points: Marriott Vacation Club—
Vacation Villas (highest price), Marriott Marquis (high price),
Marriott (high-medium price), Renaissance (medium-high price),
Courtyard (medium price), TownePlace Suites (medium-low price),
and Fairfield Inn (low price). Firms devise their branding strategies
to help convey the price-quality tiers of their products or services to
consumers
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BUSINESS SCHOOL Pricing Tiers Noida
• https://www.youtube.com/watch?v=RMSx
9dEXMhg
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BUSINESS SCHOOL Pricing Strategies Noida
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• Pricing Strategies (For New products)

– Market Skimming Pricing
– Marketing Penetration Pricing
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• Pricing Strategies (Product-Mix):

– Product Line Pricing
– Optional Product Pricing
– Captive Product Pricing
– By-product Pricing
– Product bundle pricing
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• Pricing Strategies (Price – Adjustment):

– Discount and Allowance Pricing
– Segmented pricing
– Psychological Pricing
– Promotional Pricing
– Geographical Pricing
– Dynamic Pricing
– International Pricing
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• Price Setting Process:

– Select the price objective
– Determine demand
– Estimate costs
– Analyze competitor price mix
– Select pricing method
– Select final price
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• Step 1: Selecting the Pricing Objective

– Survival
– Maximum current profit
– Maximum market share
– Maximum market skimming
– Product-quality leadership
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• Step 2: Determining Demand

– Price sensitivity
– Estimate demand curves
– Price elasticity of demand
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• Factors Leading to Less Price Sensitivity

– The product is more distinctive
– Buyers are less aware of substitutes
– Buyers cannot easily compare the quality of
substitutes
– Expenditure is a smaller part of buyer’s total income
– Expenditure is small compared to the total cost
– Part of the cost is paid by another party
– Product is used with previously purchased assets
– Product is assumed to have high quality and prestige
– Buyers cannot store the product
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• Step 3: Estimating Costs

– Types of costs
– Accumulated production
– Activity-based cost accounting
– Target costing
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• Cost Per Unit at Different Levels of

Production
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• Cost Terms and Production

– Fixed costs
– Variable costs
– Total costs
– Average cost
– Cost at different levels of production
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• Cost per Unit as a Function of

Accumulated Production
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• Target Costing: Costs change with production scale and

experience. They can also change as a result of a
concentrated effort by designers, engineers, and
purchasing agents to reduce them through target
costing. Market research establishes a new product’s
desired functions and the price at which it will sell, given
its appeal and competitors’ prices. This price less
desired profit margin leaves the target cost the marketer
must achieve. The firm must examine each cost element
—design, engineering, manufacturing, sales—and bring
down costs so the final cost projections are in the target
range.
• Example: ConAgra Foods
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• Step4: Analyzing Competitor’s Costs

– It is important to analyze competitor’s cost
before setting your price as consumers will
always compare your price with your
competitors.
– Provide better value
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• The Three Cs Model for Price-Setting

– Given the customers’ demand schedule,
the cost function, and competitors’ prices,
the company is now ready to select a
price. The figure in the left summarizes the
three major considerations in price setting:
Costs set a floor to the price. Competitors’
prices and the price of substitutes provide
an orienting point. Customers’ assessment
of unique features establishes the price
ceiling.
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• Step 5: Selecting a Pricing Method

– Markup pricing
– Target-return pricing
– Perceived-value pricing
– Value pricing
– Going-rate pricing
– Auction-type pricing
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• Break-Even Chart for Determining Target-

Return Price and Break-Even Volume
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• Auction-Type Pricing
– English
– Dutch
– Sealed Bid
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• Step 6: Selecting the Final Price

– Impact of other marketing activities
– Company pricing policies
– Gain-and-risk sharing pricing
– Impact of price on other parties
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• Geographical Pricing:
– In geographical pricing, the company decides
how to price its products to different
customers in different locations and countries.
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• Price Discounts and Allowances

– Discount
– Quantity discount
– Functional discount
– Seasonal discount
– Allowance
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• Promotional Pricing Tactics

– Loss-leader pricing
– Special-event pricing
– Cash rebates
– Low-interest financing
– Longer payment terms
– Warranties and service contracts
– Psychological discounting
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• Differentiated Pricing
– Customer-segment pricing
– Product-form pricing
– Image pricing
– Channel pricing
– Location pricing
– Time pricing
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• Problems/ Traps in Price Cutting

Strategies
– Low-quality trap
– Fragile-market-share trap
– Shallow-pockets trap
– Price-war trap
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• Price Increasing:
– It can be worthwhile to raise prices. A
successful price increase can raise profits
considerably. The strategy of price increase
works well when the product has relatively
inelastic demand and less close substitutes
available in the market
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• Methods for Increasing Prices

– Delayed quotation pricing
– Escalator clauses
– Unbundling
– Reduction of discounts
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• Brand Leader Responses to Competitive

Price Cuts
– Maintain price
– Maintain price and add value
– Reduce price
– Increase price and improve quality
– Launch a low-price fighter line
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• Pricing in Different Markets:

– Pure Competition
– Oligopoly
– Monopoly
42

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AMITY GLOBAL

BUSINESS SCHOOL Noida

• How do consumers process and evaluate

• The amount of money charged for a good

• Price is not just a number on a tag. It comes in

• Factors to consider when setting prices:

• Value Based Pricing:

• Cost based pricing:

• Value based pricing vs Cost based pricing:

• Common Pricing Mistakes:

• Possible Consumer Reference Prices:

• Pricing Strategies (For New products)

• Pricing Strategies (Product-Mix):

• Pricing Strategies (Price – Adjustment):

• Price Setting Process:

• Step 1: Selecting the Pricing Objective

• Step 2: Determining Demand

• Factors Leading to Less Price Sensitivity

• Step 3: Estimating Costs

• Cost Per Unit at Different Levels of

• Cost Terms and Production

• Cost per Unit as a Function of

• Target Costing: Costs change with production scale and

• Step4: Analyzing Competitor’s Costs

• The Three Cs Model for Price-Setting

• Step 5: Selecting a Pricing Method

• Break-Even Chart for Determining Target-

• Step 6: Selecting the Final Price

• Price Discounts and Allowances

• Promotional Pricing Tactics

• Problems/ Traps in Price Cutting

• Methods for Increasing Prices

• Brand Leader Responses to Competitive

• Pricing in Different Markets:

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