Issues in Pricing

1
Issues in Pricing
2
Useful Price terms
Gross Revenue Net Revenue Gross
Margin Contribution Break-Even Volume
3
Useful Price terms
FOB Free on Board FOR Free on Rail CIF
Cost Insurance Freight
4
Useful Price Concepts
Reservation Price Zone of agreement Customer
Surplus
5
Price Elasticity
Price Elasticity Formula
6
Useful Price Concepts
Administered Price Mechanism (APM)
explicit
implicit
7

• Administered Price Mechanisms (APM) regulation
  of price structure by the government
• (i) the price may be set by some government
  agency like the Bureau of Industrial Costs and
  prices (BICP) or the Tariff Commission and the
  firm has to abide by it - e.g. Rs.1 per kwh to
  SEBs by NTPC as set by power ministry
• (ii) the price may be set by a firm within the
  framework or on basis of a formula given by the
  government. e.g. set a tariff that allows 16
  rate of return
• (iii) the same efficiency produces apparently
  higher return on depreciated plants

• Implicit administered price mechanisms Tax
  concessions, amortisation of
• license fees, tax breaks for investments
  available for e.g. to the infrastructure
• industries such as telecom indirectly influence
  prices and competition.

8
Useful Price Concepts
Direct
Indirect
Price Discrimination
Temporal
9
Direct Price Discrimination - customer segment
pricing electricity residential and
industrial use - product form pricing Dettol
hard soap different from liquid soap
satchets vs bottle - image pricing Haute
couture products and ego sensitive products such
as perfumes and expensive cars priced
differently - location pricing Movie tickets
in PVR/INOX different from other
theatres Indirect Price Discrimination -
Quantity discounts - Block Pricing e.g. landline
telephone in bimonthly bills Temporal Price
Discrimination - telephones time of day - books
first hardcover, then paper back, then economy
editions price skimming
10
Useful Price Concepts
Bundling
Reservation Price Table
products
S e g m e n t s
B
A
12
Y
4
4
Z
12
11
Bundling
Two products A, B Two equal segments
Y,Z Variable cost of A lt 4, B lt 4 As other
forms of discrimination among Y,Z is
difficult P(A) 12 P(B) 12 Z do not buy A,
Y do not buy B Bundling Offer P(A) 12, P(B)
12, P(A,B) 16 All buy both A,B
12
Useful Price Concepts
Reference Price Cartels / Collusive pricing
13
Generic pricing strategies market
skimming market penetration value for
money
14
Industrial pricing methods published list
prices competitive bidding cost-plus pricing
15
Setting Pricing Policy

• 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
16
Selecting the Pricing Objective Survival
overcapacity, intense competition, changing
consumer wants, short term objective Maximiz
e current profit may sacrifice long run
performance Maximize Market share experience
curve falling cost, market penetration
pricing, consumer is price sensitive, low
price discourages competition Maximize Market
skimming high price does not attract new
entrants, high price indicates superior
product Product Quality leadership
Maytag Partial Cost Recovery Universities
with grants
17
Determine Demand Establish Demand Curve
statistics on past data, price experiments, buy
intention curve (ask)
18
Estimating Costs Variable Cost, Fixed Cost,
Total Cost, Average Cost ( Total cost / No of
units in Production) Learning Curve Decline in
average cost with accumulated production
experience is called experience curve or
learning curve Activity Based Costing (instead
of standard cost accounting) To find real
costs of serving each customer Target Costing
First Price is determined from its appeal and
competitor prices Next target cost is
obtained after deducting profit Achieve
target cost by examining design, engg, m/f,
sales If target cost is is not possible
then drop product
19
Analyzing Competitors Costs, Prices,
Offers Relative to competitors offering of
benefits and their prices what should our firm
offer given our benefits
20
Selecting a Pricing Method
Ceiling Price Unique Product Features
Orienting Point Competition and substitutes
Floor Price - Costs
Markup Pricing Target return Pricing Perceived
Value Pricing
21
Selecting a Pricing Method
Value Pricing Going Rate Pricing Auction type
Pricing Group Pricing
22
Markup Pricing Markup on sales Price Unit
Cost /(1- Desired Markup) Markup Pricing works
only if the marked up price brings in the
expected level of sales
Target Return Pricing Price Unit Cost
(desired return invested capital)/ (total sales
in units) One example is that it is used by
General Motors
23
Perceived Value Pricing (Offer more value than
competitor and demonstrate it) Perceived Value
Price F ( buyers image of product, channel
deliverables, warranty quality, customer
support, firm reputation, trustworthiness) Dupont
is a major practitioner
Price buyers stripped down product
Buyers
Value buyers keep innovating for these buyers
Loyal buyers relationship building and customer
initmacy
24
Value Pricing Low price for high quality
offering e.g. WalMart. It is as much a
philosophy as a method One pricing strategy
based on Value Pricing is EDLP
Going Rate Pricing Go by competitors
prices Charge same as, less than or more than
competitors prices Follow the leader pricing is
another example as in Commodity oligopolies such
as steel, paper, fertilizers
25
Auction Type Pricing One seller many buyers,
seller puts an item for sale and bidders raise
prices to top price e.g. real estate
Group Pricing Group together and buy at
discounts e.g. cooperatives
26
Selecting Final Price

• Factor to consider
• psychological pricing price-quality
  combination, reference price, odd number pricing
  (299/)
• Gain and risk sharing pricing -- Large IT
  orders the buyer may not realize gains in which
  case
• seller guarantees differences full or part
  of it
• Influence of other Marketing Mix elements such
  as advertising
• - Company pricing policies

27
Price Adaptations
-- Geographical -- Price Discounts and
Allowances - Cash discount, quantity discount,
functional discount (given to intermediaries if
they perform certain functions), seasonal
discount (off-peak buying), allowances (trade
allowance to resellers for participating in
trade-ins, promotion allowance given to resellers
for participating in advertisement and promotion
programs of the firm) -- Promotional pricing -
loss leader pricing, special event pricing (
Going to school program of Bata), Cash rebates
(as in jeweler shops) low interest financing
(0 for 12 months), longer payment
terms, warranties / service contracts,
psychological discounting (price high and then
discount) -- Price discrimination -- Product
Mix Pricing - Product line pricing, optional
feature pricing (power windows for car), captive
product pricing (razor is
low price and blade is high price), two part
pricing (telephones), bundling