How should a company set prices initially for products and services?

By,

Anurag Kar

B.Tech. Student

Department of E and ECE

IIT Kharagpur

Based on Chapter 3: Developing Pricing

Strategies and Programs

Of

Marketing Management: A South Asian

Perspective

By Kotler, Keller, Koshy and Jha

Firms must set a price

when they develop a new product.

There are

for firms to follow

in setting up their pricing policy.

Selecting the Pricing Objective

There are

5

MAJOR OBJECTIVES

5 M a j o r

O b j e c t i v e s

SURVIVAL

Maximum

Profit

Maximum

Market ShareMaximum

Market Skimming

Product Quality

Leadership

1. Partial Cost Recovery (universities)

2. Full Cose Recovery (non-profit hospitals)

3. Fill Maximum Seats (non-profit theatres)

Other Obje ct i v es

Determining Demand

Demand Curves

Demand Curves show the

market’s probable purchase

quantity at different prices.

Price Sensitivity is how quickly

the demand decreases with an

increase in price.

Ideally companies want low price

sensitivity.

Price Elast i c i ty

is how responsive

the demand is to a change

in price.

In both the graphs, the price reduction is $5 but…

Graph (a) has an increased demand of 5 units.

Graph (b) has an increased demand of 100 units.

W a y s t o E s t i m a t e

D e m a n d C u r v e s

Surveys

Price

ExperimentsStatistical

Analysis

Estimating Costs

T y p e s o f C o s t s

Overhead

Costs

Costs that do not vary

with production levels.

T y p e s o f C o s t s Variable

Costs

Costs that vary

directly with

production levels.

T y p e s o f C o s t s

Total

Costs

Sum of the fixed and

variable costs.

T y p e s o f C o s t sAverage

Costs

Cost per unit at a

particular level of

production.

T y p e s o f C o s t s

Overhead

Costs

Variable

Costs

Total

Costs

Average

Costs

A c c u m u l a t e d P r o d u c t i o n

is the phenomenon of decreasing

cost per unit with increasing

production experience.

As the accumulated production (and hence

production experience) increases, the cost

per unit decreases.

Analysing Competitors’ Costs, Prices and Offers

A c c u m u l a t e d P r o d u c t i o nFirms have to take competitors’…

A c c u m u l a t e d P r o d u c t i o nFirms have to take competitors’…

Prices

CostsPossible

Price Reactions

A c c u m u l a t e d P r o d u c t i o nFirms have to take competitors’…

Prices

CostsPossible

Price Reactions

Into account

And formulate

their pricing policies

accordingly…

Selecting a Pricing Method

T y p e s o f P r i c i n g M e t h o d s

Target Return

PricingPerceived Value

PricingMarkup

Pricing

Going Rate

Pricing

Value PricingAuction Pricing

M a r k u p P r i c i n g

A standard markup is added to the

product’s cost and the price is decided.

Most elementary form of pricing.

T a r g e t R e t u r n P r i c i n g

The firm determines the price

that yields it’s target rate of

return on investment.

P e r c e i v e d V a l u e P r i c i n g

Prices based on

customers’ perceived

value of the product.

Perceived value depends upon

buyer’s image of performance of

the product, the channel

deliverables, the warranty quality,

customer support, supplier’s

reputation, trustworthiness and

esteem.

V a l u e P r i c i n g

Winning loyal customers by

charging a fairly low price for a

high quality offering.

G o i n g R a t e P r i c i n g

Prices based on competitors’

prices.

A u c t i o n T y p e P r i c i n g

3 Types

English Auctions

(ascending bids)Dutch Auctions

(descending bids)

Sealed bid

Auctions

Selecting the Final Price

Impact of other

Marketing Activities

Company Pricing

Policies

Gain and Risk

Sharing Policies

Impact of Price on

other parties

Before setting the final

price

Certain additional factors

have to be considered.

The Company is now ready to set

its prices!

Recap

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Based on “Marketing Management: A South Asian Perspective”

By Kohler, Kelter, Koshy and Jha

Credits