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markeingTRANSCRIPT
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Setting the right price
The real issue is value, not price !
Price is determined by what the consumer is willing to pay,
not the cost to manufacture, distribute, and
promotepromote.
Setting the right price
The buying situation or context as well as the core dimension of the product determine what a consumer is willing to pay.
For example:
• Consumers are willing to pay much more for a cup of coffee in ‘Barista’ than in an Udipi restaurant
• They are willing to pay more for clothing they buy at ‘Westside’ than for clothing they buy at ‘Globus’ or ‘Reliance Trends’.
• They pay more for items like the latest cell phones than they should…
• They want to purchase expensive perfume for gifts rather than cheap perfume even though the cost of manufacturing is not much different.
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• Price is like a thermometer in that the higher we can push the price, the better jobwe have done with uncovering consumer needs and designing the marketing mix.
• It doesn’t take any marketing skill to sell a product at a low price. Marketers earntheir keep by getting a premium price for products and services.
Setting the right price
p y g g p p p
• Reference price is an important concept in pricing strategy. There is an externalreference price—what everyone else is paying for the product—and an internalreference price—what you think you should pay given your past experience andthe buying situation.
• There are four basic pricing approaches—cost plus, value-in-use, penetration, andki i b t lti t l i d d th b fit f th d t thskimming, but ultimately price depends on the core benefit of the product, the
context, and how well you’ve done the rest of your marketing.
• Price is the most abstract of any of the four marketing mix elements. It is a signalof product quality and status. It is inherently subjective and tied to consumerperceptions rather than objective reality.
Price and Perceived Value
The Economic Perspective
ObjectivePrice
Perceptionof Price
PerceivedCosts
PerceivedBenefits
Willingnessto Buy
PerceivedValue
Costs
So, according to the economic perspective, consumers will purchase wheneverPerceived Value > 0
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Price and Perceived Value
The Economic Perspective
Objective Value
Perceived Value
MarketingEfforts
Price ofSubstitutes
Consumer’s Incentive to Purchase= [Perceived Value – Price]
Product Price
Rs. 0
Cost of Goods Sold
Firm’s Incentive to Sell= [Price – COGS]
The Economic Perspective
Price and Perceived Value
Adding a Behavioral or Psychological Component
This perspective captures “how fair a deal” one is getting.
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Behavioral Updates to Economic Perspective
Consumer Willingnessto Buy
Economic Utilityof the Transaction
Fairness of theTransaction= +
P i d V l A t l P i
1. Relative Incentives
Perceived Value – Actual PriceActual Price
2. Reference PricesActual Price – Reference Price
Perceived Value – Actual Price3. Cost of Goods Sold
Actual Price – COGS
4. Nature of the productdiscretionary vs. necessaryluxury vs. utilitarian
Setting the right price
Therefore to price correctly, you must understand the buying situation and the heart of the consumer.
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Effect of Price on Profit
% Improvement in operating profits
10%
2%
12%
Purchase Price
Fixed Costs
Marketing Investments
4%
14%
0% 2% 4% 6% 8% 10% 12% 14% 16%
Sales Quantity
Sales Price
Consider the following six-step procedure for setting a price.Stage 1: Selecting the Pricing Objective.
Consider various types of pricing objectives.
Setting Pricing Policy
Consider various types of pricing objectives.Stage 2: Determining Demand.
Estimate demand curves and the magnitude of consumers’ sensitivities to demand.
Stage 3: Estimating Costs.Estimate types of costs and identify experience curve.
Stage 4: Analyzing Competitors’ Costs, Prices, and Offers.Consider competitors’ values.
Stage 5: Selecting a Pricing Method.Consider various types of pricing methods .
Stage 6: Selecting the Final Price.Consider the impacts of other marketing activities.
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Setting Pricing Policy
1. Selecting the pricingobjective
2. Determining demand
3. Estimating costs
4. Analyzing competitors’4. Analyzing competitorscosts, prices, and offers
5. Selecting a pricingmethod
6. Selecting final price
Setting Pricing Policy1. Selecting the pricing
objective
• Survival
M i i l• Maximize sales revenue
• Maximize profits
• Maximize growth (unit sales)– market penetration– experience curve
• Market skimming• Market skimmingInelastic DemandUnique and patented productUncertain production and marketing costsCapacity constraints in productionHigh perceived value
• Product Quality Leadership
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Maximize Sales RevenueAssume:
P250
Q = 1000 – 4PSales = P x QSales = P(1000-4P)
Sales = 1000P – 4P2
ds = 1000 – 8P
Selecting the Pricing Objectives
Q10000
dp= 1000 – 8P
0 = 1000 – 8P8P = 1000
P = 125
60000
80000
-80000
-60000
-40000
-20000
0
20000
40000
60000
25 50 75 100 125 150 175 200 225 250 275 300
Maximize ProfitP
250 Q = 1000 – 4P Profit = P(1000 – 4P) – [50 (1000-4P) + 6000]
Profit = Sales - CostProfit = (P x Q) – [(VC x Q) + FC]
Profit = 1000P – 4P2 – 50,000 + 200P - 6000
Selecting the Pricing Objectives
Q10000
CostC 6000 + 50Q
0 = 1200 – 8P
8P = 1200P = 150
dprofitdp = 1200 – 8P
80000
Q
6000
C = 6000 + 50Q
-80000
-60000
-40000
-20000
0
20000
40000
60000
25 50 75 100 125 150 175 200 225 250 275 300
RevenueCostProfit
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Price Skimming and Penetration
PricePenetration Pricing
Price
Skimming Pricing
Sell at highprice beforereducing to
Selecting the Pricing Objectives
Wholemarket price
reducing tonext price leveland repeatInitial
Price
SecondPrice
Final
QuantityQuantity
Price
Experience Curve• Each time the cumulative production doubles, the cost in realamount will decline by a fixed percentage.
• This pattern of cost decline is a result of:
Selecting the Pricing Objectives
s patte o cost dec e s a esu t o :– learning to perform tasks more efficiently– technological improvements
– product redesigns
– economies of scale
• Example: 85% experience curve• Example: 85% experience curve– Each time total accumulated production doubles, cost will be
reduced to 85% of its previous level.
Implication: A firm can gain an advantage by accumulating experiencefaster than competitors.
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Experience CurveFormulaCn = Cs (Qn/Qs)b
Where Cn = Cost now Assume:
Selecting the Pricing Objectives
nCs = Cost startingQn = Quantity nowQs = Quantity startingb = Experience coefficient
Cn = 85Cs = 100Qn = 4000Qs = 2000
Solving for b:100
120
85 = 100 (4000/2000)b
85 = 100 (2)b
85/100 = 2b
ln 0.85 = b ln 2-0.163 = b (0.693)
-0.235 = b
0
20
40
60
80
0 2000 4000 6000 8000 10000 12000 14000
Cumulative Production
Cos
t
PriceHigh Medium Low
Price - Quality StrategiesSelecting the Pricing Objectives
High
duct
Qua
lity
Med
Premium Value
Medium ValueOvercharging
High Value
SuperValue
Good-Value
Low
Prod
EconomyRip-Off FalseEconomy
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Setting Pricing Policy
1. Selecting the pricingobjective
2. Determining demand
• Each price the company might charge will lead to a different demand and will therefore have a different impact on its marketing objectives.
• The relation between price and demand is captured in the familiar demand schedule.schedule.
• The demand curve shows the number of units the market will buy in a given time period at alternative prices.
• In the normal case, demand and price are inversely related, that is, the higher the price, the lower the demand.
Pure CompetitionPure CompetitionMany Buyers and Sellers WhoHave Little Affect on the Price.
Monopolistic CompetitionMonopolistic CompetitionMany Buyers and Sellers Trading
Over a Range of Prices.
Determining Demand
g
Different Types of Markets
Oligopolistic CompetitionFew Sellers Each Sensitive to Other’s
Pricing/ Marketing Strategies
Pure MonopolySingle Seller
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ice
A. Inelastic Demand -Demand hardly changes witha small change in Price.
P2
Determining Demand
Pri
Quantity Demanded per Period
P1
Q1Q2
B. Elastic Demand -Demand changes greatly with
ll h i P i
Pric
e
Quantity Demanded per Period
P’2
P’1
Q1Q2
a small change in Price.
Factors affecting price sensitivity• unique value• substitute awareness
Determining Demand
substitute awareness• difficult comparison• total expenditure• end benefit• shared cost• sunk investment• product quality• inventory
Methods of estimating demand• lab test• field test (in store)• natural experiment
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Setting Pricing Policy1. Selecting the pricing
objective
2 D t i i d d2. Determining demand
3. Estimating costs
Demand sets the ceiling for the price and Costs set the floor.
Costs Competitors’prices andprices ofsubstitutes
Customers’assessmentof uniqueproductfeatures
Low Price
No possibleprofit atthis price
High Price
No possibledemand atthis price
Setting Pricing Policy1. Selecting the pricing
objective
2. Determining demandg
3. Estimating costs
4. Analyzing competitors’costs, prices, and offers
Costs Competitors’prices andprices ofsubstitutes
Customers’assessmentof uniqueproductfeatures
Low Price
No possibleprofit atthis price
High Price
No possibledemand atthis price
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Price-Reaction Program for Meeting a Competitor’s Price Cut
Has competitorcut his price?
NoNoHold our priceat present level;
continue to watch
Analyzing Competitors’ Costs, Prices & Offers
cut his price? continue to watchcompetitor’s
price
Is the pricelikely to
significantlyhurt our sales?
YesYes
Is it likely to bea permanent
price cut?YesYesHow much hashis price been
cut?YesYes
NoNo NoNo
By more than 4%
Drop price tocompetitor’s
price
By 2-4%
Drop price byhalf of the
competitor’sprice cut
By less than 2%
Include acents-off coupon
for the nextpurchase
Setting Pricing Policy
1. Selecting the pricingobjective
2. Determining demand
3. Estimating costs
4. Analyzing competitors’4. Analyzing competitorscosts, prices, and offers
5. Selecting a pricingmethod
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What kinds of pricing methods can be considered?
Cost-Based Pricing:
Selecting a Pricing Method
– Markup pricing– Break-even or target-return (target-profit) pricing.
Value-Based Pricing:– Perceived-value pricing.– Value pricing
Competition-Based Pricing:– Going-rate pricing– Going-rate pricing.
Dynamic Pricing:– Bid-based or auction-type pricing.
Cost-Based MethodsPrice = Average Costs + Mark Up
Pricing Methods
PricingStrategies
Competitor-Based MethodsPrice = Following Rival Prices
Market-Based MethodsPrice = Following Market ConditionsInteraction Demand & Supply
Mkt. Skimming Price Mkt. Penetration Price
Discount Pricing and Segmented Pricing Strategies
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Mark-up or Cost-plus PricingTo set price based on a desired mark-up (also called Cost-Plus . .Cost + some %) Mark-up = % profit based on cost
Selling Price - CostSelling Price CostCost
Cost = Rs. 25; Desired mark-up = 20% i.e. Rs. 25 x 1.20 = Rs. 30
Cost-Plus Pricing delusion……..At Unit Variable Cost = Rs. 5 and Fixed Cost = Rs. 2,000Demand =100 units ; Total Unit Cost = Rs 25 ; Selling Price = Rs 30Demand =100 units ; Total Unit Cost = Rs. 25 ; Selling Price = Rs.30 Demand =200 units ; Total Unit Cost = Rs. 15; Selling Price = Rs. 18Demand =400 units ; Total Unit Cost = Rs. 10; Selling Price = Rs. 12
Adding a Standard Markup to the Cost of the Product
Mark-up or Cost-plus Pricing
MinimizesPrice
Competition
P i d
Sellers Are MoreCertain About
Costs Than Demand
PerceivedFairness to
Both Buyersand Sellers
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A toy manufacturer invested Rs.10,00,000; wants 20% ROI; Fixed cost = Rs. 300,000; variable cost = Rs.10/unitEstimate = 50,000 unit sales (therefore, fixed cost/unit = Rs. 6).
Target Return Pricing
What is the price?
Target-return price = unit cost + (invested capital x desired return) / unit sales
Target-return price = (10+6)+ (10,00,000 x 20% )/50,000 = Rs. 20
Tries to determine the Price at which a Firm will Break Even or make a Target Profit
Target Return (Profit) Pricing
200400600800
1,0001,200 Total Revenue
Total Cost
Fixed Cost
Target Profit(Rs. 200,000)
Cos
t in
Rs.
(tho
usan
ds)
10 20 30 40 50
Sales Volume in Units (thousands)
C
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Product CustomerCost-Based Pricing Value-Based Pricing
Value-Based Pricing
Cost
Price
Value
Price
Value
Customers
Cost
Product
Perceived Value-Based Pricing
Perceived value the value of the benefits from theproduct/service in consumers’ mind.
It include both product actual value and emotional value gainfrom using the product/service.
The perceived value of a product/service differs fromThe perceived value of a product/service differs fromconsumer to consumer.
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Perceived Value-Based Pricing
Perceived value A
Fixed costs
Variable costs
Perceived value APrice
Profit
Am
ount
Rs.
Perceived Value-based PricingAttributes Sai Sagar BaristaCoffee Flavours 1 7Coffee Aroma 1 7H i i C diti 3 7Hygienic Conditions 3 7Quantity of Coffee 3 6Crockery & Cutlery 2 7Ambient Temperature 2 7Music Played 1 7Television/Video 1 7Seating Arrangement 2 7Time Restrictions? 2 7Attitude of Servers 3 6Average Score 1.91 6.82
If Sai Sagar Coffee is Rs. 12.00 then Perceived Value of Barista Coffeewill be Rs.12 x (6.82/1.91) = Rs. 43
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Setting Prices
Competition-Based Pricing
Going-Rate Company sets Prices based on what
Competitors are charging.
Sealed-BidCompany sets Prices based on what they think Competitors
will charge.
Selecting the Final Price
Types of pricing strategies that are popular
Fi d P i i St t i• Fixed Pricing Strategies:– Setting one price for all buyers.– Examples: Price leadership strategy and promotional strategy, etc.
• Segmented Pricing Strategies:– Charging different prices for different customers.– Examples: Segmented pricing such as geographic and value pricing, etc.
• Dynamic or Negotiated Pricing Strategies:– Charging different prices for individual customers.– Examples: online auctions, name your own price, etc.
• Pricing Strategies for Information Goods:– Considering the cost structure of information goods.
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Pricing Strategies for Information Goods
• First-Degree Price Discrimination– The firm sells different units of the product for different prices and these
prices may differ from consumer to consumer. – It is known as perfect price discrimination.
• Second-Degree Price Discrimination– The firm sells different units of a product for different prices, but every
individual who buys the same amount of the product pays the same price. – One example is quantity discount.
• Third-Degree Price Discrimination– The firm sells the product to different people for different prices, but p p p p ,
every unit of product sold to a given individual sells for the same price. – Examples are senior citizen’s discount, student discount.
Product Line PricingProduct Line PricingSetting price steps between product line items
i.e. Rs. 299, Rs. 399
OptionalOptional--Product PricingProduct PricingP i i ti l d t
Examples of Pricing Strategies
Pricing optional or accessory productssold with the main product
i.e. Car OptionsCaptiveCaptive--Product PricingProduct PricingPricing products that must be used
with the main producti.e. Razor Blades, Film, Software, Printer Cartridges
ByBy--Product PricingProduct Pricing
TraditionalPricing
Strategies
Pricing low-value by-products to get rid of themi.e. Cut-pieces from a fabric length
ProductProduct--Bundle PricingBundle PricingPricing bundles of products sold together
i.e. Soaps, Shirts, Dresses
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Examples of Pricing Strategies
• Adjusting prices for psychological effect.•Price used as a Quality indicator.i.e. Sony Bravia LCD TV vs Samsung or LG
Psychological Pricingi.e. Sony Bravia LCD TV vs Samsung or LG
• Temporarily reducing prices to increaseshort-run sales.i.e. Loss Leaders, Special-Events
• Adjusting Prices to account for thegeographic location of customers.i.e. FOB-Origin, Uniform-Delivered, Zone Pricing & Freight-Absorption.
Promotional Pricing
Geographical Pricing
• Adjusting prices for International markets.i.e. Price depends on Costs, Consumers,Economic Conditions & Other Factors.
International Pricing
Examples of Pricing Strategies
Traditional Pricing Strategies
Discount & AllowanceReducing Prices to Reward SegmentedReducing Prices to Reward
Customer Responses such asPaying Early or Promoting
the Product.
gAdjusting Prices to Allow
for Differences in Customers,Products, or Locations.
Cash Discount
Quantity Discount
Customer
Product Form
Functional Discount
Seasonal Discount
Location
Time
Trade-In Allowance
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VersioningVersioningA form of second-degree price discrimination
i.e. Premium and Economy Pricing
BundlingBundlingMany information goods are sold in large bundles
i.e. Music files in an album, MS Office
FixedFixed--Fee PricingFee PricingGiving customers unlimited usage for a flat fee
i.e. Unlimited Internet usage By MTNL
Other Pricing StrategiesOther Pricing Strategies
PricingStrategies
for Information
GoodsUsing first-degree price discrimination
i.e. Online auctions at eBay
Other Pricing StrategiesOther Pricing StrategiesUsing third-degree price discrimination
i.e. Group pricing for software