UNIT - 3

PRICING DECISIONS

What Is Price?

Price is that which is given up in an

exchange to acquire a good or service.
The price paid is based on the satisfaction
of consumers expect to receive from a
product and not necessarily the
satisfaction they actually receive.
Kotler: Price is the only element in the
marketing mix that produces revenue, the
other elements produce costs.

Methods of Pricing

COST BASED
1) Cost plus pricing
2) Marginal or Incremental cost pricing
3) Target returned or Break even
pricing
COMPETITION
1) Going rate price
2) Sealed bid pricing
BUYER BASED
1) Value based pricing

COST BASED PRICING

The cost incurred to produce a

product is considered in pricing
1) Cost plus pricing:
Price = Unit total Cost + Desired
unit Profit
Cost = Fixed cost + Variable
Profit = Some % percentage on TC

Direct

Cost = Raw material cost

100
+ Direct labour

50

150
Overheads
(Factory exp)
50
Total cost 200
Percentage of Profit, say 20%
40
PRICE 240

Advantages of Cost based pricing

1) Simple
2) Provides floor price
3) Justifies to customers
4) Guaranteed recovery of costs

Disadvantages of Cost based pricing

Neglects market factors

2) Demand , competition, PLC ignored
1)

2) Marginal or Incremental
Pricing
Price

is equal to additional cost of

producing additional cost

3) Break even pricing

BEP
Costs
&
Reven

2000

2500

3000 units
Output & Sale

FC

= 10,000
SP = Rs 10
VC = Rs 5
BEP = ?
BEP = FC / Contribution margin per
unit
Conti per unit = SP VC

BEP = 10000 / ( 10 5)
= 2,000 units

II Competition based pricing

Competition prevailing in the
market provides an opportunity
to the customer to compare and
select the product.
1) Going rate Price: follow the
prevailing price
- of the market leader
- when a firm influence price

2) Sealed Bid pricing

It fixes price on the basis of
competitors perception price.
It is fixed between the firms
lowest limit and competitors
perceived limits

C) Buyer based
His

role dominates
Value based pricing: Price is based
on the perception of value of a
product by a customer
Customers Values Price Cost Product
Modern firms aim at giving More
and more for less and less

PRICING STRATEGIES
1) Skim the cream pricing
Fixing

a high price
To reap the price advantage by
selling the cream of customers
who are highly selective with
inelasticity to price
Initially the cream of customers
are identified and product sold
Cream is skimmed before
competitors join the race

2) Market penetration pricing

It

is to make an entry
In a high price elastic market
Principle is to get an entry,
Establish and beat competitors,
maintain lower prices,
expand market share and
capitalize on economies of scale
It is opposite to skim cream pricing

Cost-Based

Pricing: Cost-Plus

Pricing
Adding a standard markup to cost
Ignores demand and competition
Popular pricing technique because:
It simplifies the pricing process
Price competition may be minimized
It is perceived as more fair to both
buyers and sellers

Cost-Based Pricing Example

Variable costs: $20
Fixed costs: $ 500,000
Expected sales: 100,000 units Desired Sales
Markup: 20%
Variable Cost + Fixed Costs/Unit Sales = Unit Cost
$20 + $500,000/100,000 = $25 per unit
Unit Cost/(1 Desired Return on Sales) = Markup
Price
$25 / (1 - .20) = $31.25

Cost-Based

Pricing: Break-Even
Analysis and Target Profit Pricing
Break-even charts show total cost and
total revenues at different levels of unit
volume.
The intersection of the total revenue
and total cost curves is the break-even
point.
Companies wishing to make a profit
must exceed the break-even unit
volume.

Break-Even Analysis and Target

Profit Pricing
Revenues
1000
Thousands
of Dollars

Target Profit $200,000

800

Total Costs

Break-even
point

600
400

Fixed Costs

200
0

10

20

30

40

Sales Volume in Thousands of Units

Quantity To Be Sold To
Meet Target Profit

Value-Based

Pricing:

Uses buyers perceptions of value

rather than sellers costs to set price.
Measuring perceived value can be
difficult.
Consumer attitudes toward price and
quality have shifted during the last
decade.
Introduction of less expensive versions of
established brands has become common.

Value-Based

Pricing:

Business-to-business firms seek to

retain pricing power
Value-added strategies can help

Value pricing at the retail level

Everyday low pricing (EDLP) vs. high-low
pricing

Competition-Based

Pricing:

Also called going-rate pricing

May price at the same level, above,
or below the competition
Bidding for jobs is another variation
of competition-based pricing
Sealed bid pricing

New

Product Pricing Strategies

Marketing Skimming Pricing

Market Penetration Pricing

Steps in Setting the Right Price

Selecting
Selecting the
the pricing
pricing objective
objective
Determining Demand
Estimating
Estimating Cost
Cost
Analyzing competitors costs,prices,and offers

Selecting A pricing method

Selecting the Right Price

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Steps in Setting the Right Price

Step 1: Selecting the pricing objective

Survival
Maximize current profits
Maximize their market share: To maximize
market share they may set Market
penetrating pricing.

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Steps in Setting the Right Price

Market penetrating pricing is suitable when,,
oThe market is highly price sensitive
oProduction and distribution costs fall with
accumulated production experience
oLow price discourages actual and potential
competition

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Steps in Setting the Right Price

Step 2: Determining Demand

Price sensitivity
Total Cost of Ownership (TCO)

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Steps in Setting the Right Price

Tom Nagle offers this list of factors associated
with lower 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 the buyers total income
The expenditure is small compared to the total cost of the 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, prestige, or
exclusiveness
Buyers cannot store the product

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Steps in Setting the Right Price

Estimating Demand Curves:

Companies can measure their demand curves by using following
methods:
Statistical Analysis
Price experiments
Surveys

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Steps in Setting the Right Price

Price Elasticity of Demand

Consumers responsiveness or sensitivity to changes
in price.
Inelastic
Elastic
Price indifference band

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Steps in Setting the Right Price

Step 3: Estimating Cost

Types of Cost and Levels of Production
Fixed costs (overhead)
Variable cost
Total cost
Average cost: Cost per unit at that level of output.
Average cost=Total cost/ Production
Management needs to know how its costs vary with
different levels of production.
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Steps in Setting the Right Price

Accumulated Production
Experience curve (Learning curve)
Activity-based cost (ABC) accounting

Target costing

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Steps in Setting the Right Price

Step 4: Analyzing Competitors Cost, Prices, and Offers

Firm should consider nearest competitors price. It should also
collect information regarding competitors costs, offers etc.
Then it can evaluate these offers and can decide whether it can
charge more or less etc.

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Steps in Setting the Right Price

Step 5: Selecting a Pricing Method

o 3 CS I.e. Customers demand schedule, Cost function and
Competitors price
o Now firm can set different pricing methods.
o Different pricing methods are :

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Steps in Setting the Right Price

Markup Pricing
Unit Cost = variable cost + (fixed cost/unit sales)

Markup price
Markup price= unit cost/ (1 desired return on sales)

Target-Return Pricing
Target-return price =
unit cost + (desired return X investment capital)/unit sales

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Steps in Setting the Right Price

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

Perceived-Value Pricing

Perceived value
Price buyers
Value buyers
Loyal buyers
Value-in-use price

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Steps in Setting the Right Price

Value Pricing:
Charging lower price for high quality offerings.
Everyday low pricing (EDLP)
High-low pricing

Going-Rate Pricing
Price is based on competitors pricing strategy.Firm
might charge high, low or same as competitor is
charging.

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Steps in Setting the Right Price

Auction-Type Pricing
English auctions (ascending bids) :
one seller and many buyers.The seller puts up an item
and bidders raise the offer price until the top price is
reached.
Dutch auctions (descending bids):
One seller and many buyers or one buyer and many
sellers.
An auctioneer announces a high price for a product and
then slowly decreases the price until a bidder accepts
the price.

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Steps in Setting the Right Price

The buyer announces something that he wants to buy and
then potential sellers compete to get sales by bidding lower
price.
Sealed-bid auctions:
Would-be suppliers can submit only one bid and cannot
know the other b id.

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Steps in Setting the Right Price

Step 6: Selecting the Final Price

Psychological Pricing
Gain-and-Risk-Sharing Pricing:
Buyers may resist accepting sellers proposal because of
a high perceived level of risk.The seller has the option
of offering to absorb part or all of the risk.

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Steps in Setting the Right Price

Influence of the Other Marketing Elements

Brands with average relative quality but high relative
advertising budgets charged premium prices
Brands with high relative quality and high relative
advertising budgets obtained the highest prices
The positive relationship between high advertising
budgets and high prices held most strongly in the later
stages of the product life cycle for market leaders

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Steps in Setting the Right Price

Brands with average relative quality but high relative
advertising budgets charged premium prices
Brands with high relative quality and high relative
advertising budgets obtained the highest prices
The positive relationship between high advertising
budgets and high prices held most strongly in the
later stages of the product life cycle for market
leaders

Company Pricing Policies

Impact of Price on Other Parties

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Steps in Setting the Right Price

Nine Price-Quality Strategies

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