Fundamentals of Pricing

NEN Advanced Course: Getting to Market- Commercializing your Idea

Where to Begin?

• Define the range of acceptable prices for the product/service

• Identify minimum and maximum price that can be charged by the firm

Price Ceiling

• Maximum price is determined by customer value and sensitivity to pricing:– Reference value: cost to the customer of the next best

alternative– Differentiation value: value to the customer of

differences between the firm’s product and the next best alternative

• This value is not always positive – the maximum price may be lesser than the alternative

Price Floor

• Determined by variable costs of producing the product

• Often the price ceiling and price floor are wide apart

Sensitivity to Pricing• Product category factors – sensitivity is lower in low cost

product categories• Who pays?• Price/ Quality Relationships• Competitive factors:

a) Sensitivity is higher• When significant differences between alternate

products are not perceived• Due to presence of more knowledge about alternate

productsb) Sensitivity is dampened when products or prices are not easily comparable

Narrowing the Range of Prices

Two more set of factors determine the appropriate price:1. Risk and Uncertainty 2. Reference prices – competitor’s price, current or

last paid price, perceived fair price (cost + margin), what others are paying, expected price

Narrowing the Range of Prices

• Other Internal factors:1. Is the price consistent with the

– Product’s positioning– Prices of other relevant products in the portfolio– Firm’s desired image?

2. Does the firm have enough capacity to satisfy customer demand at proposed price?

3. How will the target segment feel about the proposed price?

Prof. S.Garimella, IMI, New Delhi

Break-Even Chart

Assessing a Product’s Value to Customers

• Judgments based on an understanding of the buyer’s cost structure

True Economic Value (TEV) = Cost of the Alternative + Value of Performance Differential

• Customer Surveys

Customizing Price to Value Delivered

• Product line sorting• Controlled availability• Price based on buyer characteristics• Price based on transaction characteristics

Integrating Price with other Mix Elements

• A key to effective pricing is to have pricing’s value extraction “in synch’ with the value creation process of the other elements in the Marketing Mix

• Marketing Effort/spend matrix:

No Unit Sales Feasible

Feasible No unit Contribution

High

Low

Low High

Price

Pricing Mistakes

• Determine costs and take traditional industry margins

• Failure to revise price to capitalize on market changes

• Setting price independently of the rest of the marketing mix

• Failure to vary price by product item, market segment, distribution channels, and purchase occasion

Price Cues

• “Left to right” pricing (Rs.299 versus 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• Product-quality

leadership

Price Sensitivity

Step 2: Determining Demand

Estimating

Demand Curves

Price Elasticity of Demand

Inelastic and Elastic Demand

Step 3: Estimating Costs

Types of Costs

Target Costing

Accumulated Production

Activity-Based Cost Accounting

Cost Terms and Production

• Fixed costs• Variable costs• Total costs• Average cost• Cost at different levels of

production

Step 4: Compare and react to Competitor’s Pricing

Prof. S.Garimella, IMI, New Delhi

Step 5: Selecting a Pricing Method

• Markup pricing• Target-return pricing• Perceived-value pricing• Value pricing• Going-rate pricing• Auction-type pricing

Pricing Strategies

Prof. S.Garimella, IMI, New Delhi

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

References

• Fundamentals of Pricing, Darden Business Publishing, University of Virginia

• Chapter 26, Pricing: A Value- based Approach, Marketing Management , Text and Cases, Rajiv Lal, John Quelch and Kasturi Rangan, Tata McGraw Hill Publication