How Do You Know When the Price is Right

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How Do You Know When the Price is Right

• Eight Steps to Better Pricing
• Assess what value your customers place on a
  product or service - Surveys show that for most
  companies, the dominant factor in pricing is
  product cost. Determine the cost, apply the
  desired markup, and thats the price. Before any
  price is determined, pricing managers most think
  about how customers will value the product.

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• Look for variation in the way customers value the
  product - By customizing prices, a company can
  earn much greater profits than it could expect
  with a single product/single price policy, yet
  many managers fail to recognize the benefits of
  customizing products and prices for different
  customer segment.
• Assess customers price sensitivity - Price
  elasticity, a key concept in economics, is
  defined as the percent change in quantity sold
  given a 1 change in price. If a company raises
  its price on a given product or service by 1,
  how will the quantity of sales be affected? On
  average, the answer is that the quantity will
  drop by about 2, but an on average answer is
  not very useful for managers trying to set price.

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• Identify an optimal pricing structure -
  Determining whether the company should price the
  individual components of a product or service, or
  some bundle is critical. Should an amusement
  park operator charge admission to the park, a fee
  for each ride or both? Should an entertainment
  service HBO charge by what it makes available or
  by how much viewers consume? Answering these
  questions incorrectly can be very costly.
• Consider competitors reactions - Pricing is
  more like chess than like checkers. A seemingly
  brilliant pricing move can turn into a foolish
  one when competitor have had their chance to
  respond.

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• Monitor prices realized at the transaction level
  - The total set of pricing terms and conditions
  company offers its various customers can be quite
  elaborate.
• Assess customers emotional response - When
  managers analyze how customer respond to a
  products price they most consider the long-term
  effects of the customers emotional relation as
  well as the short-term, economic outcome.
• Analyze whether the returns are worth the cost to
  serve -

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INDUSTRIAL MARKETING

• PRICING
• Price charged will depend on the customers
  budget
• Degree of competition
• Higher price can be demanded where
  specifications
• and performance are ultimate criteria
• While multisourcing the price pressures from
  non-
• sources (potential sources)

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• The Essential Ingredients of Industrial Pricing
• Product Benefits
• Undifferentiated product disadvantage
  whereas unique product has an advantaged.
• More significant the degree of product
  differentiation the less will it be necessary to
  provide extra non-product benefits(extra frills)

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• . VALUE ADDED
• There are seven areas of providing added value
• Area of product-associated benefits
• Financial benefits
• Reputation gained over no. of years
• 4. Offering consultancy services/problem solving
  (consultative selling technique)
• 5. Training
• 6. Reliable schedule for delivery
• 7. Companys perceived reputation for efficient
  servicing, availability of spares and case of
  upgration

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• The Relevant Cost
• Cost based pricing
• Standard cost pricing
• Cost plus pricing
• The Customer
• OEMs and VARs
• Volume sales
• Multiple sales

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• Competition

Going rate pricing Plateau pricing Competitive
tendering Price/benefits analysis

• The Sellers Marketing Strategy

Market penetration price Marketing
skimming Optimum selling price
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Factors That Determine a Competitors Ability to
React to a Price reduction
Costs A major factor affecting competitive
reaction to a reduction in price is cost.
Where costs are relatively high in comparison to
price, lowering price may eliminate profit.
Thus, a competitor may respond with aggressive
promotional effort rather than a price reduction
to maintain market share. In the short run, if
variable costs can be covered, price reductions
may be met. Knowledge of competitors costs
therefore, is extremely important. Estimating
competitors cost structures is important not
only in gauging their willingness to respond to
price reductions or increases, but also in
predicting where prices might go in the
future. Time to react The speed with which
competitors can react to a price change
influences their ability to respond. In
general, competitors can react immediately. Howe
ver, when a price reduction is made possible by a
change in production techniques or product
design, competitors may need time to bring
about similar changes. When this is true, the
short-run impact on the price cutters sales
volume may be substantial.
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Existing Commitments Existing commitments to
other groups or classes or products may
prevent competitors from meeting price changes,
particularly when such a move might bring the
product in question into competition with
similar products in the line. For instance, a
price reduction on a quality item may
cause it to replace a standard item. The
existence of a substantial unsold inventory
will also slow down a competitors
response. Relative sales volume A small
supplier may able to reduce price without its
larger competitor meeting the price change.
The absolute loss in total revenue to the
large firm could outweigh the value of the
small amount of business to be retained by
meeting the price change. Such instances are
not unusual in industrial marketing. Existing
operating capacity When firms are operating at
full capacity or have substantial back orders
to keep them operating for an extended period,
they have little to gain in meeting price
reductions. In fact, when market demand taxes
existing capacity, firms are more
often inclined to increase price.
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FACTORS INFLUENCINGPRICING STRATEGY

• CUSTOMER DEMAND
• NATURE OF DERIVED DEMAND
• COMPETITION
• COST/PROFIT RELATIONSHIP
• MARKETS REACTION/PERCEPTION OF PRICE

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Conditions Favoring Price Skimming
1. Product has a strong patent protection or
other barriers to market entry. 2. Genuine
product innovation that is likely to represent
substantial value to potential users. 3.
Buyers who are willing to pay a premium to enjoy
the products benefits. 4. A relatively short,
life span, so that a quick recovery of investment
is essential. 5. Potential competitors are
relatively weak or distant in time. 6.
Uncertainly concerning the markets price
sensitivity. Should the initial price prove
to be in error, the firm can always lower price,
whereas a low price may be difficult to
raise.
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Conditions Favorable to Penetration Pricing
1. The market appears to be highly price
sensitive. 2. Unit cost of production and
distribution fall with accumulated out put. 3.
Strong potential competitors exist who are
seeking new profitable ventures. 4. The firms
primary goal is significant market share rather
than maximized short-term profits. 5.
The product has hidden or subtle benefits that
will become obvious only after use. 6.
The sale of complementary products will also
increase.
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NINE MARKETING-MIX STRATEGY ON PRICE
Price
High Medium
Low
1. Premium Strategy
2. High-value Strategy
3. Superb-value Strategy
High
Product Quality
4. Overcharging Strategy
5. Average Strategy
6. Good-value Strategy
Medium
7. Rip-off Strategy
8. False economy Strategy
9. Economy Strategy
Low
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SELECTING THE PRICE OBJECTIVE

• Survival
• Maximum Current Profit
• Maximum Current Revenue
• Maximum Sales Growth
• Maximum Market Skimming
• Product-Qqality Leadership

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DETERMINING DEMAND

• 1. Unique value effect. Buyers are less
  price-sensitive when the product is more unique.
• 2. Substitute awareness effect. Buyers are less
  price-sensitive when they are less aware of
  substitutes.
• 3. Difficult comparison effect. Buyers are less
  price-sensitive when they cannot easily compare
  the quality of substitutes.
• 4. Total expenditure effect. Buyers are less
  price-sensitive the lower the expenditure is as a
  ratio to their income.
• 5. End-benefit effect. Buyers are less
  price-sensitive the less the expenditure is to
  the total cost of the end product.
• 6. Shared cost effect. Buyers are less
  price-sensitive when part of the cost is borne by
  another party.
• 7. Sunk investment effect. Buyers are less
  price-sensitive when the product is used in
  conjuction with assets previously bought.
• 8. Price-quality effect. Buyers are less
  price-sensitive when the product is assumed to
  have more quality, prestige, or exclusiveness.
• 9. Inventory effect. Buyers are less
  price-sensitive when they cannot store the
  product.

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Inelastic and Elastic Demand
P2
P2
Price
P1
P1
Q2
Q1
Q2
Q1
Quantity Demanded per Period
Quantity Demanded per Period (a)
Inelastic demand (b)
Elastic demand
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Estimating Costs
1
2
3
4
SRAC
SRAC
Cost per Unit
Cost per Unit
LRAC
1,000
1,000 2,000 3,000 4,000
Quantity Produced per Day Quantity
Produced per Day
(a) Cost behaviour in a fixed-size plant (b)
Cost behaviour over different

size plants
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Estimating Costs
Current Price
10 8
B
A
TI
Experience Cost Curve
C o s t p e r U n i t
6
4
2
100,000 200,000 400,000 800,000
Accumulated Production
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PRICING METHOD

• Markup Pricing
• 
  Unit Cost
• Markup Pricing ---------------------
  --------------
• (1 -
  Desired return on sales)
• Trarget Return Pricing
• 
  Desired return x Invested Capital
• Target return price Unit --------------------
  -------------------
• cost
  Unit Sales
• Perceived - Value Pricing
• Sealed-Bid Pricing

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PRICING METHOD
Low Price ------------- No possible profit
at this price
High Price ------------- No possible demand at
this price
Competitors prices
Unique Product and
product costs prices of substitutes
features
Major Considerations in Setting a
Price
1,200
Total revenue
Target Profit
1,000

Total Cost
800
D o l l o r s ( I n 0 0 0 )
600
400
Fixed Cost
200
0 10 20 30
40 50 (Sales Volume in unit
0000)
Break-even Chart for Determining Target Return
Price Break-Even Volums
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Promotional Pricing Discriminatory Pricing

• PROMOTIONAL PRICING
• Loss leader pricing
• Special event pricing
• Cash rebates
• Low-interest financing
• Psychological discounting

• DISCRIMINATORY PRICING
• Customer-segment pricing
• Product-form pricing
• Image pricing
• Location pricing
• Time pricing

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HOW TO ADD VALUE THROUGH DIFFERENTIATED PRICING
Set price well above highest price-point
Ensure matching value
Plan for premium pricing
Reinforce positioning through marketing
mix
Check whether extraordinary pricing is
possible
Convey price differential
Determine product benefits
Set price well below lowest price point
Ensure increase in customer value
Plan predatory pricing
Ensure matching benefits
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T H E L E S S O N S
THE STRATEGY BL invited comparisons with other
lifestyle products for its premium-priced
Ray-Bans .
THE LESSON DONT LIMIT COMPARISONS FOR PREMIUM
PRODUCTS WITHIN THE CATEGORY THE STRATEGY BPL
established a leaders position to justify the
premium pricing for its fridges
... THE LESSON
ESTABLISH A HIGH-VALUE AURA AROUND ONE PREMIUM
PRODUCT THE STRATEGY Videocon priced its
products below market levels without downgrading
technology
THE LESSON DONT ALLOW LOWER PRICE TO
CREATE AN IMPRESSION ON LOWER VALUE THE STRATEGY
ConsCoffee built expectations around its Tata
Café brand before unvelling a low
price
THE LESSION USE LOW PRICE AS A HIDDEN WEAPON
WHEN DIFFERENTIATING BRAND