1. Pricing
M Sahni

2. Pricing Strategy Set Pricing Objective Estimate Demand Estimate Costs
Analyze Competitors’ Prices
Select Pricing Policy/Method
Set Final Price

3. Pricing Strategy Pricing Objectives survival profit maximization
cover fixed cost and some variable cost
very short-run….(avoid extinction)
profit maximization
requires accurate knowledge of demand, cost functions

4. Pricing Strategy Pricing Objectives (cont.) revenue maximization
costs hard to determine
assume increase in revenue leads to decrease in unit costs (…old BCG model)
…both production and distribution costs fall
works if market is price sensitive
low price may discourage competition
…market penetration strategy

5. Pricing Strategy Pricing Objectives (cont.) market skimming
highest price that market will bear
benefits are barely worthwhile for some customers to buy
…then work down the demand curve
works if no cost benefit of increasing volume
image is important
may or may not discourage competition

6. Pricing Strategy Estimate Demand (…curve) unique value
awareness of substitutes
difficult to compare alternatives
price relative to income
inventory effect
Can customer hold inventory?

7. Pricing Strategy Estimate Costs (supply curve)
cost structure at different levels of production
…old long run average cost curves
experience curves from BCG model
…profit is a function of market share.
penetration versus skimming
…How is supply curve affected?

8. Pricing Strategy Analyze Competitors’ Prices
What is the structure of the market?
oligopoly versus pure competition
Select Pricing Policy/Method
single or multiple prices
administered pricing
ceiling and floor prices versus the level of competition

9. Pricing Strategy Cost Based Pricing cost plus, markup pricing
easy, costs known, minimizes price competition
ignores demand elasticity, not profit maximizing
target return of investment
use breakeven analysis to find a price to yield a target ROI
…use sales volume to derive price…?

10. Pricing Strategy Demand Based Pricing perceived value
requires detailed knowledge of buyer behavior and demand elasticity
only true profit maximizing strategy
ignores costs and competitors

11. Pricing Strategy Demand Based Pricing (cont.) demand differential
price discrimination
yield maximization pricing
sell at multiple prices to multiple segments
not based on marginal costs of dealing with each
daily, weekly, or seasonal pricing
geographic, physical, or electronic barriers

12. Pricing Strategy Competition Based Pricing going rate pricing
used when costs difficult to measure
competitors lack differential advantage
sealed bid
forces competitors to lowest price

13. Pricing strategies Premium pricing Penetration pricing Economy pricing
Uses a high price, but gives a good product/service exchange e.g. Mercedes
Penetration pricing
offers low price to gain market share - then increases price
e.g. Reliance Telecom - to attract new clients
Economy pricing
placed at ‘no frills’, low price
e.g. Soups, biscuits - ‘economy’ brands

14. Psychological pricing
Price skimming
where prices are high - usually during introduction
e.g new albums or films on release
ultimately prices will reduce to the ‘parity’
Psychological pricing
to get a customer to respond on an emotional, rather than rational basis
.e.g 99p not Rs1 ‘price point perspective
Product line pricing
rationale of a product range
chocolates
Pricing variations
‘off-peak’ pricing, early booking discounts,etc

15. Optional product-pricing
e.g. optional extras - BMW famously under-equipped
Captive product pricing
products that complement others
e.g Gillette razors (low price) and blades (high price)
Product-bundle pricing
sellers combine several products at the same price
e.g software, books, CDs.
Promotional pricing
e.g. toothpaste, soups, etc

16. Pricing Strategies Select Final Price
psychological pricing, prestige pricing
know demand elasticity
start high, work toward costs
discounts
cash, trade, quantity, or seasonal
promotional pricing
loss leaders

17. Pricing Strategy Select Final Price (cont.) price lining odd pricing
perception

18. Pricing Strategy Price cuts
excess capacity leads to margin squeezes (aka price wars)
build market share not brand loyalty
low cost producer will always win

19. Price Quotations
List prices: Established prices normally quoted to potential buyers
Market price: Price that an intermediary or final consumer pays for a product after subtracting any discounts, rebates, or allowances from the list price

20. Reductions from List Price
Cash discount: price reduction offered to a consumer, industrial user, or marketing intermediary in return for prompt payment of a bill
2/10 net 30, a common cash discount notation, allows consumers to subtract 2 percent from the amount due if payment is made within 10 days

21. Trade Discounts: payment to a channel member or buyer for performing marketing functions; also known as a functional discount

22. Quantity discount: price reduction granted for a large-volume purchase
Justified on the grounds that large orders reduce selling expenses, storage, and transportation costs
Cumulative quantity discounts reduce prices in amounts determined by purchases over stated time periods
Non-cumulative quantity discounts provide one-time reductions in the list price

23. Allowances
Trade-in: credit allowance given for a used item when a new item is purchased
Promotional allowance: advertising or promotional funds provided by a manufacturer to other channel members in an attempt to integrate the promotional strategy within the channel
Rebates: refund for a portion of the purchase price, usually granted by the product’s manufacturer

24. Geographic Considerations
FOB (free on board) plant or FOB origin: Price quotation that does not include shipping charges. Buyer pays all freight charges to transport the product from the manufacturer
Freight absorption: system for handling transportation costs under which the buyer may deduct shipping expenses from the costs of goods

25. Uniform-delivered price: system for handling transportation costs under which all buyers are quoted with the same price, including transportation expenses
Zone pricing: system for handling transportation costs under which the market is divided into geographic regions and a different price is set in each region
Basing-point system: system for handling transportation costs in which the buyer’s costs included the factory price plus freight charges from the basing-point city nearest the buyer. Seeks to equalize competition between distant marketers.

26. Odd pricing: pricing policy based on the belief that a price ending with and odd number just below a round number is more appealing

27. Price-Quality Relationships
Without other cues, price serves as an important indicator of a product’s quality to buyers
Customers often view price as an indicator of a product’s overall quality and may be willing to pay a higher price