Transcript Developing Pricing Strategies and Programs

DEVELOPING PRICING
STRATEGIES AND PROGRAMS
Ms.Kiran Sharma
CHAPTER QUESTIONS
 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?
GILLETTE COMMANDS A
PRICE PREMIUM
SYNONYMS FOR PRICE
Rent
 Tuition
 Fee
 Fare
 Rate
 Toll
 Premium
 Honorarium

Bribe
 Dues
 Salary
 Commission
 Wage
 Tax

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
CHANGING PRICING ENVIRONMENT

For Buyers
Get instant price comparisons from thousands of vendors –
(www.mySimon.com)
 Name their price and have it met – (www.priceline.com)
 Get products free


For Sellers
Monitor customer behavior and tailor offer to individuals
 Give certain customers access to special prices


Both Buyers and Sellers may

Negotiate prices in Online auctions and exchanges
CONSUMER PSYCHOLOGY AND PRICING
Reference Prices
Price-quality inferences
Price cues
POSSIBLE CONSUMER REFERENCE
PRICES
“Fair price”
 Last price paid
 Upper-bound price
 Lower-bound price

Competitor prices
 Expected future price
 Usual discounted price

CONSUMER PERCEPTIONS VS. REALITY
FOR CARS
Overvalued Brands
 Land Rover
 Kia
 Volkswagen
 Volvo
 Mercedes
Undervalued Brands
 Mercury
 Infiniti
 Buick
 Lincoln
 Chrysler
TIFFANY’S PRICE-QUALITY RELATIONSHIP
PRICE CUES
“Left
to right” pricing (Rs.2999 vs.
Rs.3000)
Odd number discount perceptions
Ending prices with 0 or 5
“Sale” written next to price
WHEN TO USE PRICE CUES
 Customers
purchase
item infrequently
 Customers are new
 Product designs vary
over time
 Prices vary seasonally
 Quality or sizes vary
across stores
STEPS IN SETTING PRICE
Select the price objective
Determine demand
Estimate costs
Analyze competitor price mix
Select pricing method
Select final price
STEP 1: SELECTING THE PRICING
OBJECTIVE
•
•
Survival (overcapacity,
intense competition,
changing consumer wants)
Maximum current
profit (can estimate the
demand and cost associated
with alternative prices)
•
•
•
Maximum market
share (market skimming)
Maximum market
skimming
Product-quality
leadership
STEP 2: DETERMINING DEMAND
Price Sensitivity
Estimating
Demand Curves
Price Elasticity
of Demand
FACTORS LEADING TO LESS PRICE
SENSITIVITY
The product is more distinctive, low cost items, or
items they buy infrequently.
 There are no or few substitutes or competitors
 Buyers cannot easily compare the quality of
substitutes
 Buyers are slow to change their buying habits.
 Buyer do not readily notice the higher price
 Part of the cost is paid by another party
 The product is used with previously purchased assets
 The product is assumed to have high quality and
prestige, hence feel higher price is justified.
 Buyers cannot store the product

ESTIMATING DEMAND CURVES
Surveys
Price
Experiments
Statistical
Analysis
• Explore how many units consumers would
buy at different proposed prices
• Vary the price of different products in a
store or charge different price for the same
product to see how change affects sales.
• Of past prices and quantities sold
• Data may be longitudinal or cross sectional
PRICE ELASTICITY OF DEMAND
INELASTIC AND ELASTIC DEMAND
STEP 3: ESTIMATING COSTS
Types of Costs
Accumulated
Production
Activity-Based
Cost Accounting
Target Costing
COST TERMS AND PRODUCTION
 Fixed
costs (rent, salaries)
 Variable costs (Raw material,
microprocessor chips, packaging
material)
 Total costs
 Average cost
 Cost at different levels of production
COST PER UNIT AS A FUNCTION OF
ACCUMULATED PRODUCTION
TARGET COSTING - TATA MOTORS
DEVELOPED ‘NANO’ ITS SMALL CAR WITH A
TARGET PRICE
STEP 4: ANALYZING COMPETITORS COSTS,
PRICES AND OFFERS

Analyze competitor in terms of financial
situation, recent sales, customer loyalty, product
efficacy.
STEP 5: SELECTING A PRICING METHOD
 Markup
pricing
 Target-return pricing
 Perceived-value pricing ( Buyer’s image,
warranty, product performance, supplier
reputation, trust)
 Value pricing (Higher volumes at lower prices)
 Going-rate pricing (competitor prices)
 Auction-type pricing
BREAK-EVEN CHART
AUCTION-TYPE PRICING
English auctions
Dutch auctions
Sealed-bid auctions
STEP 6: SELECTING THE FINAL PRICE
•
•
•
Impact of other marketing activities
Company pricing policies
Impact of price on other parties
PRICE-ADAPTATION STRATEGIES
Geographical Pricing
Discounts/Allowances
Promotional Pricing
Differentiated Pricing
PRICE-ADAPTATION STRATEGIES
Countertrade
 Barter
 Compensation deal
 Buyback arrangement
 Offset
Discounts/ Allowances
 Cash discount
 Quantity discount
 Functional discount
 Seasonal discount
GEOGRAPHICAL PRICING - BARTER
 The
least complex and oldest form of
bilateral, non-monetary counter-trade
 A direct exchange of goods or services
between two parties
Country X
Exporter/
Importer
Goods/Services
Country
Y
Exporter/
Importer
11-30
SWITCH TRADING
Country Y
Country X
Exporter
Exporter
Payment or
Goods/Services
C
11-31
Goods/ services
A
Country
Z
Switch trader
Goods/ Services
B
COUNTER PURCHASE
Goods/Services
Country Y
11-32
Country X
Payment
( Hard Currency)
Exporter
Goods/Services
Payment
( Hard Currency
Exporter
Country Y
Exporter
BUY BACK (COMPENSATION)
Country X
Country Y
11-33
Exporter
(capital
goods or
technology
or Licenser)
Capital goods or
technology
Payment
Output from
Capital goods/
technology
Payment
Importer
Or
Licensee
PROMOTIONAL PRICING TACTICS
Loss-leader pricing (drop
prices on well known
brand)
 Special-event pricing
 Cash rebates
 Low-interest financing
 Longer payment terms
 Warranties and service
contracts
 Psychological discounting
(was Rs 599 Now Rs 549)

DIFFERENTIATED PRICING
 Customer-segment
pricing
 Product-form
pricing
 Image pricing
 Channel pricing
 Location pricing
 Time pricing
PRICING FOR RURAL MARKETS
•
•
•
•
•
•
•
A large proportion have a low and seasonal income
Several approaches adopted by retailers and
companies to address this
Rural retailers often extend credit
Retailers also “break the bulk” and sell in loose
form, in small quantities
Companies use a similar strategy by introducing
“low-unit packing” or LUP
Companies also develop low-priced products with
a target price for rural markets
Companies might offer refill packs or recyclable
and reusable packs
INITIATING PRICE INCREASES
Delayed quotation pricing
Escalator clauses
Unbundling
Reduction of discounts
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
