Developing

Pricing Strategie

s

2of 5

How should a company set

prices initially?

For setting the price a firm must

follow the following 6 steps

Step 1: Selecting the Price Objective

Survival

Maximum

Current Profit

Maximum Market Share

Maximum Market

Skimming

Starting at high prices and slowly dropping it over time

Product Quality

Leadership

Setting price high enough to establish itself as quality leader

Other objectives

May include

anything from

public service to service by

public

Step 2: Determining

Demand

Each price will lead to a different demand

Normally price and demand have an inverse relationship.

However for prestige goods sometimes the relation is direct.

More the price more the demand

Price Sensitivity

Generally consumers are less sensitive

to low cost items

Other

factors

leading to less price sensitivity

The product is more distinctive.

Buyers are less aware of substitutes or cannot easily compare them

Expenditure is smaller part of buyer’s income

Expenditure is small compared to total cost of end product

Part of the cost is borne by another party

The product is used in conjunction with assets previously bought

The product is assumed to have more quality or prestige

Estimating Demand Curves

@Surveys

Companies

explore how

much

consumers

would buy at

different pric

es

@Price

Experiment

s

Vary price geographicallyVary prices on different products in a storeUse the internet.

@Statistical

Analysis

Price Elasticity of

Demand

Step 3: Estimating Costs

Types of costs

• Fixed cost• Variable Costs• Total Costs – Sum of Fixed and Variable• Average Cost – Cost per unit

Accumulated Production – The Experience Curve

As workers become more experienced the average cost decreases

Target CostingMarketers research a new

product’s desired functions and the price it will sell.The firm must examine all its cost elements and bring down costs in the target range.

Step 4: Analyzing Competitors' Costs, Prices and Offers

If the firm’s offer contains features not offered by its nearest competitor, it should its worth add that to the competitor’s price.

If the competitor’s offer contains features not offered by the firm then it should subtract their value from its own price

Step 5: Selecting a Pricing Method

Unit cost = Variable Cost +

Fixed CostUnit Sales

Markup Pricing =

Unit Cost(1-desired

return on sales)

Target Return = Pricing

Unit cost +

(Desired return) X (invested capital)

Unit Sales

Perceived Value Pricing

500 for the Tee

500 for the Tee1000

for the

Value Pricing

Setting low prices without sacrificing quality to attract large no of customers

Going Rate

Pricing

Follow the leader

Auction type Pricing

Auction type Pricing

English Auctions (ascending bids)

Dutch Auctions (descending bids)

Sealed-bid Auctions

Step 6: Setting the Final price

Impact on other marketing activitiesPrice must not

have a negative impact on company’s

image

Company

Pricing Policies

Must be consistent with company policies

Gain-and-Risk-

sharing Pricing

Impact of price on

other partiesDealers

DistributersSales Team

Created by Ronak Jain, NIT Surat, during an internship by Prof. Sameer Mathur,

IIM Lucknow.

www.IIMInternship.com