Mktg2007 Egm Pclass101112second

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1 Issues in Pricing

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Transcript of Mktg2007 Egm Pclass101112second

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Issues in Pricing

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Useful Price terms

Gross Revenue

Net Revenue

Gross Margin

Contribution

Break-Even Volume

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Useful Price terms

FOB : Free on Board

FOR : Free on Rail

CIF : Cost Insurance Freight

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Useful Price Concepts

Reservation Price

Zone of agreement

Customer Surplus

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dQ Q dP P/ / /

Price Elasticity Formula

Price Elasticity

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Useful Price Concepts

Administered Price Mechanism (APM)

explicit implicit

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Administered Price Mechanisms (APM) : regulation of price structure by the government

(i) the price may be set by some government agency like the Bureau of Industrial Costs and prices (BICP) or the Tariff Commission and the firm has to abide by it - e.g. Rs.1 per kwh to SEBs by NTPC as set by power ministry

(ii) the price may be set by a firm within the framework or on basis of a formula given by the government. e.g. set a tariff that allows 16% rate of return

(iii) the same efficiency produces apparently higher return on depreciated plants

Implicit administered price mechanisms : Tax concessions, amortisation oflicense fees, tax breaks for investments available for e.g. to the infrastructureindustries such as telecom indirectly influence prices and competition.

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Useful Price Concepts

Price Discrimination

Direct

Indirect

Temporal

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Direct Price Discrimination- customer segment pricing – electricity – residential and industrial use- product form pricing – Dettol hard soap different from liquid soap; satchets vs bottle- image pricing – Haute couture products and ego sensitive products such as

perfumes and expensive cars priced differently- location pricing – Movie tickets in PVR/INOX different from other theatres

Indirect Price Discrimination- Quantity discounts- Block Pricing e.g. landline telephone in bimonthly bills

Temporal Price Discrimination- telephones time of day- books – first hardcover, then paper back, then economy editions – price skimming

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Useful Price ConceptsBundling

Y

Z

A B

products

Segments

12 4

4 12

Reservation Price Table

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Bundling

Two products A, B; Two equal segments – Y,Z

Variable cost of A < 4, B < 4

As other forms of discrimination among Y,Z is difficult

P(A) = 12; P(B) = 12; Z do not buy A, Y do not buy B

Bundling Offer – P(A) = 12, P(B) = 12, P(A,B) = 16

All buy both A,B

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Useful Price Concepts

Reference Price

Cartels / Collusive pricing

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Generic pricing strategies

market skimming

market penetration

value for money

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Industrial pricing methods

published list prices

competitive bidding

cost-plus pricing

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Setting Pricing Policy

1. Selecting the pricing objective

2. Determining demand

3. Estimating Costs

4. Analyzing Competitors’ costs, prices, and offers

5. Selecting a pricing Method

6. Selecting the final price

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Selecting the Pricing Objective

Survival – overcapacity, intense competition, changing consumer wants, short term objective

Maximize current profit – may sacrifice long run performance

Maximize Market share – experience curve – falling cost, market penetration pricing, consumer is price sensitive,low price discourages competition

Maximize Market skimming – high price does not attract new entrants, high price indicates superior product

Product Quality leadership – Maytag

Partial Cost Recovery – Universities with grants

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Determine Demand

Establish Demand Curve – statistics on past data, price experiments, buy intention curve (ask)

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Estimating Costs

Variable Cost, Fixed Cost, Total Cost, Average Cost (= Total cost / No of units in Production)

Learning Curve: Decline in average cost with accumulated production experience is called experience curve or learning curve

Activity Based Costing (instead of standard cost accounting) : To find real costs of serving each customer

Target Costing – First Price is determined from its appeal and competitor prices Next target cost is obtained after deducting profit Achieve target cost by examining design, engg, m/f, sales If target cost is is not possible then drop product

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Analyzing Competitor’s Costs, Prices, Offers

Relative to competitors offering of benefits and their prices what should our firm offer given our benefits

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Selecting a Pricing Method

Markup Pricing

Target return Pricing

Perceived Value Pricing

Ceiling Price – Unique Product Features; Orienting Point – Competition and substitutes; Floor Price - Costs

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Value Pricing

Going Rate Pricing

Auction type Pricing

Group Pricing

Selecting a Pricing Method

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Markup Pricing = Markup on sales

Price = Unit Cost /(1- Desired Markup)

Markup Pricing works only if the marked up price brings in the expected level of sales

Target Return Pricing

Price = Unit Cost + (desired return * invested capital)/ (total sales in units)

One example is that it is used by General Motors

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Perceived Value Pricing (Offer more value than competitor and demonstrate it)

Perceived Value Price = F ( buyer’s image of product, channel deliverables, warranty quality,customer support, firm reputation, trustworthiness)

Dupont is a major practitioner

Buyers

Price buyers – stripped down product

Value buyers – keep innovating for these buyers

Loyal buyers – relationship building and customer initmacy

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Value Pricing

Low price for high quality offering e.g. WalMart.

It is as much a philosophy as a method

One pricing strategy based on Value Pricing is EDLP

Going Rate Pricing

Go by competitor’s prices

Charge same as, less than or more than competitor’s prices

Follow the leader pricing is another example as in Commodity oligopolies such as steel, paper, fertilizers

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Auction Type Pricing

One seller – many buyers, seller puts an item for sale and bidders raise prices to top pricee.g. real estate

Group Pricing

Group together and buy at discounts e.g. cooperatives

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Selecting Final Price

Factor to consider

-psychological pricing – price-quality combination, reference price, odd number pricing ($299/)

- Gain and risk sharing pricing -- Large IT orders the buyer may not realize gains; in which caseseller guarantees differences – full or part of it

-Influence of other Marketing Mix elements – such as advertising

- Company pricing policies

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Price Adaptations

-- Geographical

-- Price Discounts and Allowances- Cash discount, quantity discount, functional discount (given to intermediaries if they perform

certain functions), seasonal discount (off-peak buying), allowances (trade allowance to resellers for participating in trade-ins, promotion allowance given to resellers forparticipating in advertisement and promotion programs of the firm)

-- Promotional pricing - loss leader pricing, special event pricing ( Going to school program of Bata), Cash rebates (as in

jeweler shops) low interest financing (0% for 12 months), longer payment terms,warranties / service contracts, psychological discounting (price high and then discount)

-- Price discrimination

-- Product Mix Pricing - Product line pricing, optional feature pricing (power windows for car), captive product pricing (razor is low price and blade is high price), two part pricing (telephones), bundling