HEENA SHARMA

HEENA SHARMA
 pricing
• Pricing is the art of translating in to quantitative
terms
• Acc to professor k.c.kite “pricing is a managerial
task that involves establishing pricing objectives,
identifying the factors governing the price,
ascertaining their relevance and significance
determining the product value in monetary terms
and formulation of price policies and strategies ,
implementing and controlling them for the best
results.”

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 Nature of Industrial Sale

 A long and Complex Process

 Customized Product
 No Brand Impact
 Benefit or Solutions rather than
Product Feature
 Relationship Marketing
 Use of Nontangible Benefits
to Distinguish their Products

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 Industrial Pricing
Characteristics
 Cross Elasticity
 Competitive Bidding

 Project By Project Basis

 Negotiation

 Fairness
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 Costs
• Incremental Cost-
are those costs added by a given Project or Programme
• Sunk Costs-
All Funds that has already been spent in Product
Development, Projects or Programmes
• Opportunity Costs-
The Foregone Benefits Which Might Have Been
Realized
From the Next Best Alternative

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 Break - Even Pricing
B

AFC
D
X

COSTS C E
TFC
and
SALES

A F
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NO. OF UNITS PRODUCED
• Cost to the buying firm includes basic Price,
freight, transit insurance, installation, risks of
product failure, delayed delivery, etc,
• Some customers are “price buyers”. Marketers,
should follow transactional relationships & offer
“basic properties”.
• Some other buyers are “loyal buyers”, for whom
marketers should follow “relationship marketing”
with partnering / collaborative approach and
mutually acceptable prices.

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 F R A M E W O R K O F P R IC IN G D E C IS IO N S
B e fo re ta k in g p ric in g ( i) P ric in g o b je c tiv e s
d e c is io n s , a b u y in g firm m u s t ( ii) C u s to m e r a n a ly s is
fin d " p ric e d e te rm in a n ts " . ( iii) C o s t a n a ly s is
( i.e . f a c to r s th a t in f lu e n c e ( iv ) C o m p e tito r s ' a n a ly s is
p ric in g d e c is io n s ) (v ) G o v t. re g u la tio n / p o lic ie s

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 T w o ty p e s o f p ric in g d e c is io n s .

P r ic in g s tra te g ie s P r ic in g p o lic ie s
D is c o u n ts
G e o g ra p h ic a l
p r ic in g
S e ttin g a p ric e
(p ro d u c t / m a rk e t
s itu a tio n s )

In itia tin g a
p ric e c h a n g e

R e s p o n d i n g t o a c o m p e t i t o r 's
p ric e c h a n g e

HEENA SHARMAL e a s in g
 PRICE DETERMINANTS OR FACTORS
INFLUENCING PRICING DECISIONS
(i) Pricing objectives, (ii) customer analysis, (iii)
cost analysis, (iv) competitive analysis, (v) Govt.
policies.

1. Pricing Objectives
• Some of the pricing objectives are
• survival, maximum short – term profits,
maximum short – term sales, maximum sales
growth, product quality leadership, etc.
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 2.  Customer (Demand) analysis
It includes demand analysis & cost - Benefit analysis
(i) Demand analysis. Using experimental research, it measures
relationship between price and demand (or sales volume). It sums up
how sensitive customers are to the price changes. The formula is:

% c h a n g e in q u a n tity d e m a n d e d
=
% C h a n g e in p r ic e

If PED is > 1, demand is elastic, & customers are price sensitive

If PED is < 1, demand is inelastic, customers are less sensitive to prices. 

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3. Cost Analysis.
• A firm’s total cost of a product is the lowest point on the price
range. Hence, for pricing decisions, the marketer must know the
various types of costs like fixed, variable, total, direct, etc. for a
product / service.
• Costs vary based on production capacity (i.e. economies of
scale), and accumulated experience (i. e. learning curve) as
shown.
 

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C o st E c o n o m ie s o f S c a le
p er
U n it

Q u a n tity P r o d u c e d p e r y e a r

C o st E x p e r ie n c e /
p er L e a r n in g
U n it
C u rv e.
A v . C o s t R e d u c tio n
= 1 0 -3 0 %

A c c u m u la te d P r o d u c tio n
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 B r e a k - E v e n A n a ly s is is u s e fu l to c o n s id e r d iff e r e n t
p ric e s (P 1 , P 2 , P 3 ), a n d its e ffe c t o n s a le s re v e n u e a n d p ro fits .

S a le s R e v e n u e a t P 3
S a le s
&
C o s ts S a le s R e v e n u e a t P 2

S a le s R e v e n u e a t P 1
T o ta l C o s t
F ix e d C o s t

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4. Analyzing Competition
• Many marketers have “competitive level” Pricing as a
pricing objective.
• Marketers should get “Competitors’ prices, discounts,
costs, product quality, service, etc for cost/benefit analysis,
pricing and positioning strategy.
5. Government Regulation/Policies
• Govt. regulations are necessary to ensure fair play and to
protect consumers and small scale suppliers.
• Price-fixing / price discrimination (e.g. different discounts
to distributors/dealers), and predatory pricing (e.g.
dominant firm aiming to finish competitors) are not
permitted (illegal as per MRTP act, for example)

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 PRICING STRATEGIES
Pricing strategies vary as per product-market
situations such as (i) Competitive bidding in
competitive markets, (ii) New product pricing, (iii)
Pricing across product life-cycle.
 
(i) Competitive Bidding
• In business markets, large volume of purchasing is
done through competitive bidding, using either
closed (or sealed) bidding or open (or negotiated)
bidding method.
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• In closed bidding, often used by the Govt. buyer,
sealed bids are invited through newspaper tender
notices. Sealed bids are opened in presences of
suppliers and orders are placed on the lowest
price bidder(s).
• In open bidding, after receiving bids (quotations),
the buyer negotiates technical and commercial
parts with suppliers, and then places orders. This
method is often followed by commercial
enterprises in private sector .

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 Strategy / Model Used for Competitive Bidding

One of the often used strategies is “Probabilistic

Bidding”, which makes two assumptions :
(i) Pricing objective is profit maximizations,
(ii) Lowest price bidder will get the order.
Equation used : E (A) = P (A) x T(A), where A=Bid
price, E(A) = Expected profit at bid price ‘A’, P(A) =
Probability of winning (or getting order ) at the bid
price ‘A’, T(A) = profit, if bid price ‘A’ is accepted.

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(ii) New Product Pricing Strategy
In the introduction stage of a new product, two
alternative pricing strategies are available
(i) Skimming (high initial price) strategy, and
(ii) Penetration (low initial price) strategy.
Skimming Strategy is appropriate for a new
product that is distinct, high–tech, or capital
intensive, and purchased by a market segment that
is not sensitive to the initial high price..
 

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 Penetration strategy is appropriate when (i) buyers are
highly price sensitive, (ii) strong threat exists from
potential competitors (due to low entry barrier). The
selling firm’s objective is to achieve long – term profits
through high market share. The firm can also achieve “cost
leadership” thru’ economies of scale and experience
curve, which gives “ competitive advantage”.
(iii) Pricing Across Product Life – Cycle (PLC)
Marketing and pricing strategies vary as the product moves
across 4 – stages of PLC.
(a) Introduction stage..
(b) Growth stage.

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 (c) Maturity stage.

(d) Decline stage.

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 Initiating price changes
• If a firm is a market leader and wants to change the price,
it must anticipate reactions from customers and
competitors.
• The firm must ‘study major competitors’ objectives,
financial situations, production capacity utilizations, sales,
costs, and profits. It must also understand competitors’
mind-set, by studying their business philosophy (or
concepts), culture, beliefs and past behaviors. Based on
above analysis the firm should predict competitor’s
response.
• The firm must also understand that customers generally
prefer small price increases several times, rather than one
sharp increase. Of course, customers would generally
welcome price cuts.
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 Responding to competitors’ price changes
A marketer should respond after answering the following
questions.
(i)  Why the competitor has changed the price?
(ii)  Is the price change temporary or permanent?
(iii) What will happen to the company’s sales and profits,
if it does not respond.
(iv) What would be the reactions of other competitors.
 
The responses can be in several ways:
(a) maintain price and value (benefits), (b) match
competitors price, (c) develop and launch low-price product
item, (d) maintain price. The right response depends on the
business situations faced by the firm.
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 PRICING POLICIES
Purpose. A firm evolves pricing policies to adjust basic
prices (or price list) for different types of customers (like
OEMs, users, and dealers) who buy various quantities and
are located at different locations..
Price list is a statement of basic prices of a product, having
various sizes/specifications.
Net price = price list (or list-price) less discount (or
allowances). Business buyers are more interested in net price
Types of discounts : Trade, quantity (or volume), and cash.
Trade discounts. It is offered to traders or intermediaries
(dealers / distributors / stockiest ) and it should be equal and
sufficient (as per industry norms or functions performed).

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Cash Discounts. The objective is to get prompt payments.
If a credit customer pays the bill before dispatch or
within 7-days of dispatch, the customer is given cash
discount on the gross amount of bill..
 
Geographical Pricing
 
It includes decisions on how to price the company’s
products to customers located in different geographic
areas. There are two alternatives :

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 (i)  Ex – Factory Pricing. It means prices quoted are
based on the prices at the factory gate, i.e. freight
( transportation costs) and transit insurance costs are to the
customer’s accounts. Hence, the landed price (or costs) to
customers vary depending on their geographic locations.
(ii) F.O.R. Destination Pricing. Here, the quoted prices
include freight costs. Transit insurance is a small amount
to be covered by the customer’s “open insurance policy”.
Hence, all customers get the product almost at the same
price, despite different geographic locations. Marketer
adds the average freight cost to the basic prices and then
prepares the price – list, or absorbs the freight cost, if
competition demands.

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 Taxes and Duties. Knowledge of
excise – duty, sales tax, octroi, entry –
tax, road – permits etc is essential for
sales and marketing persons, since they
have an impact on the landed price (or
costs) to business buyers.

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 ROLE OF LEASING.
Business buyers have options of either leasing or buying
capital items like machinery. The advantages for the
lessee (asset user) are : (i) conserving capital, (ii) gaining
tax advantages, (iii) getting the latest products. The lessor
(asset owner) often earns good income from buying firms
who can not afford outright purchase.
 
A lease is a contract (or an agreement) by which the asset
owner (lessor) gives the right to use the asset to another
party (lessee) in return for payment, over a specified
period.
 
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 Types of Leases :
(i) Financial (or full – payment) leases, and
(ii) operating (service or rental) leases
Financial leases. These are full – payment,
non - cancellable, long - term contracts and
fully amortized (sum of lease payments
purchase price of capital item) >

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 Operating Leases are service/rental leases,
that are cancellable, short-term contracts or
agreements, and are not fully amortised.
The rates are higher than those of financial
leases, because risk of obsolescence are of
the lessor

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 Other pricing policies
• Zone pricing
• Psychological pricing
• Bundle pricing
• Promotional Pricing
• Premium pricing
• Price discrimination
• Captive
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