Developing Pricing Strategies and Programs

Vineeta ahuja

Contents

• Understanding pricing

• Consumer psychology and pricing

• How companies price

• Adapting the price

• Responding to price changes

What is a price?• It quantifies value and determines profit

• It expresses the value of the exchange relationship

• It is the determining factor in a marketing exchange

• ‘Price’ can also be a fee, rent, fare, commission, etc

Price: the determining factor

Supplier Customer

Price

Product

Promotion & Place

Price: flexibility• Changes in price are more readily

implemented than the other 3P’s

• Product - major re-investment

• Place - find and convince new distributors

• Promotion - long time scales/involves outside agencies

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

The price…

Price Cues

• “Left to right” pricing (Rs 299 vs. Rs 300)

• Odd number discount perceptions

• Even number value perceptions

• Ending prices with 0 or 5

• “Sale” written next to price

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• Maximum current

profit • Maximum market

share• Maximum market

skimming - Nokia• Product-quality

leadership - Bugatti

Step 2: Determining Demand

Price Sensitivity

Estimating

Demand Curves

Inelastic and Elastic Demand

Factors Leading to Less Price Sensitivity

• The product is more distinctive• Buyers are less aware of substitutes• Buyers cannot easily compare the quality of substitutes• The expenditure is a smaller part of buyer’s total income• The expenditure is small compared to the total cost of

the end product• 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• Buyers cannot store the product

Step 3: Estimating Costs

Types of Costs

Target Costing

Accumulated

ProductionActivity-Based

Cost Accounting

Cost Terms and Production

• Fixed costs / overheads• Variable costs• Total costs• Average cost (total

cost/production)• Cost at different levels of

production• ABC

Cost per Unit as a Function of Accumulated Production

Selecting a Pricing Method

• Markup pricing– Unit cost= variable cost + fixed cost/unit sales– Markup price = unit cost/(1-desired return on

sales)

• Target-return pricing= unit cost + (desired return x invested

capital)/unit sales

• Perceived-value pricing• Value pricing – EDLP, high-low pricing• Going-rate pricing• Auction-type pricing

Break-Even Chart

Break-even volume = fixed cost / (price – variable cost)

Auction-Type Pricing

English auctions

Dutch auctions

Sealed-bid auctions

Step 6: Selecting the Final Price

• Impact of other marketing activities

• Company pricing policies

• Gain-and-risk sharing pricing

• Impact of price on other parties

Price-Adaptation Strategies

Geographical Pricing

Discounts/Allowances

Differentiated Pricing

Promotional Pricing

Price-Adaptation Strategies

GeographicalCountertrade• Barter• Compensation deal• Buyback arrangement• Offset

Discounts/ Allowances• Cash discount• Quantity discount• Functional discount –

trade channel members

• Seasonal discount - hotels

• Allowance -return on old items

Promotional Pricing Tactics

• Loss-leader pricing• Special-event pricing• Cash rebates• Low-interest financing• Longer payment terms• Warranties and service

contracts• Psychological

discounting

Differentiated Pricing

• Customer-segment pricing - museums

• Product-form pricing• Image pricing• Channel pricing –

vending machines• Location pricing - theatre• Time pricing- early bird• Yield pricing

Increasing Prices

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