PRICING

PRICING CONSIDERATIONS AND APPROACHES

PRICE
The amount of money charged for a product or service, or the sum
of the value that consumers exchange for the benefits of having or
using the product or service.

Fixed price - one price for all buyers

Because of large scale retailing

Dynamic pricing – charging different prices depending on individual

customers and situation.

Because of internet, “Compare.Net, PriceScan”

PRICE WAR
FACTORS TO CONSIDER WHEN SETTING PRICES

Internal Factors
Marketing Objectives
Marketing Mix Strategy
Costs
Organizational Considerations

External Factors
Market and Demand
Competition
Economy
Resellers .

Government Policy.
 Internal factors
MARKETING OBJECTIVES
1: Survival -- over capacity, heavy competition, changing consumer wants
2: Maximizing Current Profits -- demand and cost – short term gain
3: Maximizing Market Share – hi share, lowest cost – long term gain
4: Product quality leadership - hi quality, hi cost, hi price to reinvest in R&D

MARKETING MIX STRATEGY

Price is a crucial product-positioning factor that defines the
product design, distribution and promotion decisions.

Target Costing: Pricing that starts with an ideal selling price, then
targets costs that will ensure that the price is met.

COSTS? : Set base for price (FC+VC+OH+Mark up+Taxes)

Fixed costs : that do not vary with production or sales level.
Variable costs: vary directly with the level of production.
Total cost : Sum of FC and VC at any level of production.

Cost at different level of production Experience Curve

ORGANIZATIONAL CONSIDERATIONS

Who sets the prices?

a: Top management

b: Sales People - propose – approval by top management

c: Pricing Department

d: Marketing Managers, Finance Managers, Production Managers and

accountant also influence the pricing.
External Factors

DIFFERENT TYPE OF MARKETS

1: Pure Competition
2: Monopolistic competition
3: Oligopolistic Competition
4: Pure Monopoly

CONSUMER PERCEPTION OF PRICE AND VALUE

In the end the consumer decides whether the price is right or not.
Price the consumer pays and value he gets – consumer perception

DEMAND CURVE (Price demand relationship)

The curve that shows the number of units the market will buy in a given time
period at different prices that might be changed.
 Price DEMAND CURVE

Rs. 10

Rs. 8

Demand 1000 units 1800 units

ELASTIC DEMAND
 DEMAND CURVE
Price

Rs. 10

Rs. 8

Demand 1000 units 1200 units

INELASTIC DEMAND
External Factors -- contd.

COMPETITORS’ COSTS, PRICES AND OFFERS

ECONOMIC CONDITION OF THE COUNTRY

Boom, recession, inflation and interest rate

RESELLERS
Mark up, marketing support
 GENERAL PRICING APPROACHES

Product cost = Price floor

Consumer perception of the product’s value = Price Ceiling

Three approaches
Cost-based approach
Buyer based approach
Competition based approach

COST BASED APPROACHES

COST PLUS – Mark up pricing

Variable Cost + Fixed Cost = Unit cost
Unit Cost + Mark up = Manufacturer’s price for dealer
Then dealer adds his mark up and so on….
BREAK-EVEN PRICING (Target Profit Pricing)

Setting price to break even on the costs of making and marketing

a product or setting price to make a target profit.

Fixed Cost Rs. 300,000

Break-even volume = ----------------------------------- = ------------------ = 30,000
Price - Variable Cost Rs. 20 - 10

By selling 30,000 units the company will “break-even” – no profit no loss

Company invested Rs. one million and target is to earn 20% or Rs. 200,000/=.

Company must sell 50,000 units to earn the target profit.

Because of marketing conditions this may not be possible to achieve,
so find out the best possible price and volume
 BREAK-EVEN VOLUME AND PROFITS AT DIFFERENT PRICES

Unit Demand Expected Unit

Needed to Demand at Total Total
Price Break-even Given Price Revenue Cost Profit
Rs. No. No. Rs. Rs. Rs.

14 75,000 71,000 994,000 1,010,000 -16,000

16 50,000 67,000 1,072,000 970,000 102,000
18 37,500 60,000 1,080,000 900,000 180,000
20 30,000 42,000 840,000 720,000 120,000
22 25,000 23,000 506,000 530,000 - 24,000

Rs. 18 per unit is the best price generating Rs. 180,000 as profit

For target profit of Rs. 200,000 reduce fixed or variable cost thus
lowering break even volume.
VALUE BASED PRICING
Setting prices based on buyers’ perceptions of value rather
than on the seller’s cost

VALUE PRICING – offering just the right combination of quality and

good service at a fair price.

“Right combination of quality and good service”

Value meals
Budget hotels
Redesigning of existing brands in order to offer more quality
for a given price or the same quality for less
COMPETITION BASED PRICING

Going rate pricing

Market leader is followed

Seal bid pricing – to win a contract

 QUIZZ --- 29th June 2004

True or False?

1: Idea screening is done before the idea generation.

2: Introduction of new product into the market is known as commercialization

3: At growth stage the sales start climbing quickly but profit decreases

4: Testing new product concepts with a group of target consumers to

find out if the concepts have strong consumer appeal is known as
concept testing

5: New product concept has to be developed before testing.