Pricing

What is Price?
Why it is Important
 Definition
• It is defined as establishing and
communicating the value of Products
and services to prospective customers.
• Exchange value of goods and services.
• Value is the ratio of perceived benefits
of the product to its price.
 Importance of Pricing
• It is a vital component of business’s
image
• It generates revenue all the other
element of marketing mix incurs cost
• It reflects the subjective image of
benefits offered by products or services.
• Major determinant of buyer’s choice
Changing Pricing Environment
• Small Segment of affluent customers
• Large segment of aspiring customers
• Larger segment of strugglers and survivors
⮚ Instant Price Comparision
⮚ Name the product and have
it(priceline.com)
⮚ Get product free(open
source,Android,Microsoft)
The Three C’s Model for Price Setting
Types of Pricing
 How companies Price?
• Consumer psychology
• Price ending
• References pricing
⮚ Fair Price, quality Pricing, Last price
paid, Expected future Price.
▪ Price Quality inferences(Image Pricing,
Snob value)
 Setting the Price

Step 1-Selecting the price objective

Step 2-Demand determination

Step 3 Cost estimation

Step 4-Analysis of Competitors cost ,prices, offers

Step 5 -Selecting a Pricing Method

Step 6-Selecting the final Price

Step -1 Selecting the pricing objective

• Survival
• Maximum current Profit
• Maximum Market share (Penetrating)
• Maximum Market skimming
• Product quality leadership
 What is Penetration Pricing?

• Penetration pricing is a pricing strategy

that is used to quickly gain market
Share.
• This pricing strategy is generally used
by a new entrant.
• An extreme form of penetration pricing
is called predatory pricing.Example(jio)
 Why Penetration Pricing?
• Capture market share
• Create brand loyalty
• Switch customers from competitors
• Generate significant demand
• Drive competitors out of the market
 What is Market skimming pricing?
• It is a pricing strategy in which a firm charges a
high initial price and then gradually lowers the
price to attract more price-sensitive customers.
• The pricing strategy is usually used by a First
Mover Advantage .
• Price skimming is not a viable long-term pricing
strategy, as competitors eventually launch rival
products and put pricing pressure on the first
company
 Why Market skimming price?
• Price skimming is used to maximize
profits when a new product or service is
deployed.

• In such a strategy, the goal is to

generate the maximum profit in the
shortest time possible, rather than to
generate maximum sales.
Step 2-Demand Determination
• Price Sensitivity. Elastic and Inelastic demand
⮚ Price elasticity of demand identifies the
relationship between price, demand and
how it reacts when price changes.
⮚ It measures how consumers react to change
in price.
⮚ It is calculated by dividing the percentage
change in quantity demanded by the
percentage change in price.
Types of price elasticity of demand
• Elastic demand
• Inelastic demand(less than 1))
• elastic demand( Greater than 1)
• Perfectly Inelastic demand (=0)
• Perfectly elastic demand (infinity)
• Unitary elastic demand ( =1 unitary)
 Factors affecting inelastic demand
▪ It is less price sensitive
▪ Largely Unreactive to change in price
⮚ Product is distinctive
⮚ Lack of substitutes
⮚ Less cost
⮚ Prestige
⮚ Example-Petrol,salt,Monopoly
product,Rail tickets
 Factors affecting elastic demand
• Customers are more price sensitive
• Customers are reactive to change in Price
⮚ Homogenous Product
⮚ Many Substitute
⮚ Low switching cost
Example-Airline tickets,Newspapers,
Convenience goods
 Estimation of demand curve
• Surveys
• Price experiments
• Statistical Analysis
 Price elasticity of demand
▪ Average Price elasticity across all product,
Markets and time periods was -2.62.
(1 percent decrease in price led to 2.62
percent increase in sales.)
Price elasticity magnitudes were higher for
durable goods than other goods, higher
for product in introduction stage
Inflation increases price elasticity
 Step-3 Cost Estimation
• Types of cost
• Fixed cost
• Variable cost
• Total cost
• Average cost(cost per unit at that level
of production)
• A.C=cost/production
 Step 4 Analysing competitors
• Competitors cost
• Pricing strategy
• offers
Step-5 Selecting a Pricing Methods

⮚ Cost Based Pricing-

▪ Mark Up pricing
▪ Target rate of return
▪ Marginal cost Pricing
 Mark Up Pricing
⮚ Selling price of the product is fixed by adding
a particular Margin or mark up to its cost.
⮚ Mark up may vary depending on the
product.
Advantages:
⮚ Cost estimation is easier than demand
⮚ Since price trend is similar and hence price
competition is minimized.
 Mark up pricing Example

• Mark up pricing=Unit cost/(1-desired return

on sales)
• Unit cost=variable cost +(Fixed cost/unit sales)
• Example- Variable cost per unit-Rs.10
• Desired rate of return =20% (0.2)
• Fixed Cost-Rs.300000
• Expected Unit sales -Rs.50000
• Find Mark up pricing
 Solution:
Unit Cost= Variable cost +(Fixed cost/unit sales)
10 + (300000/50000)
=10+6
= 16
Markup Price = Unit cost/(1-desired return on sales)
= 16/(1-20%)
=16/(1-0.2)
=16/0.8
= 20
Rs .20 Ans
 Target return pricing
⮚ It is a method where in the firm
determines the price on the basis of a
target rate of return on the investment
⮚ The firm calculate the amount invested
in the business activities and then
determine the return they expect.
 Target-Return Pricing through an
example:
Suppose the Car manufacturer has invested 2 million
in his venture and he expects to earn 20% as an ROI.
Therefore, he will set the price accordingly. The cost
and sales expectation are:
• Unit cost: 20
Expected sales: 50,000 units
• The Target-Return Pricing is given by:
• Target-Return Pricing = unit cost + (desired return x
invested capital) /unit sales
• Thus, Target-Return Pricing = 20 + (0.20 x 2,000,000) /
50,000 = Rs 28
Example -Target pricing return
• Target pricing=unit cost+desired
return*invested capital/unit sales
Calculate the Target price
• Example Unit cost-16
• Desired return 20% (.20)
• Invested capital-1,000,000
• Unit sales-50000
 Demand based Pricing
• Skimming price
• Penetrating Price
 Market-Oriented Pricing Method-

• Under this category, the is determined

on the base of market research
• Perceived-Value.
• Going-Rate Pricing-
• Auction Type Pricing-.
• Differential Pricing-
Market-Oriented Pricing Method-
• Perceived-Value Pricing- In this method,
the producer establish the cost taking
into consideration the customer’s
approach towards the goods and
services, including other elements such
as product quality, advertisement,
promotion, distribution, etc. that
impacts the customer’s point of view.
 Market-Oriented Pricing Method-
• Value pricing- Here, the company produces
a product that is high in quality but low in
price.
• Going-Rate Pricing- In this method, the
company reviews the competitor’s rate
as a foundation in deciding the rate of
their product. Usually, the cost of the
product will be more or less the same
as the competitors.
Market-Oriented Pricing Method-
• Auction Type Pricing- With more
usage of internet, this contemporary
pricing method is blooming day by
day. Many online platforms like OLX,
Quickr, eBay, etc. use online sites to
buy and sell the product to the
customer.
Market-Oriented Pricing Method-
• Differential Pricing- This method is
applied when the pricing has to be
different for different groups or
customers. Here, the pricing might
differ according to the region, area,
product, time etc.
Step 6 Selecting the final price
• Impact of other Marketing activities
⮚ Paul Farris and David Reibstein examined the
Relationship among relative price, relative
quality and relative advertisement for 227
consumer business and found the following:
▪ Brand with average quality but high relative
advertising budget can charge
premium(customer want to pay more for
known product)
 Continued...
• Brand with high quality and high advertising
budget can charge highest prices.
• Converse of this is also true means brand
with low quality and low advertising
charged the lowest prices.
• For Market leader positive relationship
between high price and high advertisement
in the later stages of product life cycle.