Models and general approaches to set price of product and service
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1 Models and General Approaches to set Price of a Product or Service Anjali Shitole [email protected] +917588592042 November 22, 2013
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I studied and used all types of pricing strategies. If any one is interesting in these methods, he/she is free to send mail. I ll try to reply.
Transcript of Models and general approaches to set price of product and service
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Models and General Approaches to set
Price of a Product or Service
Anjali [email protected]
+917588592042
November 22, 2013
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What is Price?
The amount of money charged for a product or
service, or the sum of the values that consumers
exchange for the benefits of having or using the
product or service.
Company’s View
• price reflects the revenue
generated for each
product sold
• Determine the profit
Customer’s View
• Benefits by accessing a
goods and services
• Willing to pay
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What is Price?
Price may be –• Fee
• Rent
• Premium
• Salary
• Toll
• Wage
• Interest
• Tax
• Rate
• Commission …
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Common Mistakes by company while
setting a Price
Cost ProfitPrice
Case 1: Company decided price based on cost to get maximum
profit in result company lose some customers
Case 2: Company decided to reduce the price to get quickly sales
this resulted fall in the performance standards.
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Factors to be Considered While Setting
Price
Internal Factors
Marketing objectives • Market positioning influences pricing
strategy
• Other pricing objectives:
• Survival
• Current profit maximization
• Market share
• Product quality
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Factors to be Considered While Setting
Price
Internal Factors
Marketing mix strategies• Pricing must be carefully coordinated with
the other marketing mix elements
• Target costing is often used to support
product positioning strategies based on
price
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Factors to be Considered While Setting
Price
Internal Factors
Cost• Types of costs:
– Variable
– Fixed
– Total costs
• How costs vary at different production
levels will influence price setting
• Experience (learning) curve affects price
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Factors to be Considered While Setting
Price
Internal Factors
Who Set the Price?• Who sets the price?
– Small companies: CEO or top management
– Large companies: Divisional or product line
managers
• Price negotiation is common in industrial
settings where pricing departments may be
created
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Factors to be Considered While Setting
Price
External Factors
Nature of market and demand• Types of markets
– Pure competition
– Monopolistic competition
– Oligopolistic competition
– Pure monopoly
• Consumer perceptions of price and value
• Price-demand relationship
– Demand curve
– Price elasticity of demand
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Factors to be Considered While Setting
Price
External Factors
Competitors’ costs, prices, and offers• Consider competitors’ costs, prices, and possible
reactions
• Pricing strategy influences the nature of
competition
– Low-price low-margin strategies inhibit
competition
– High-price high-margin strategies attract
competition
• Benchmarking costs against the competition is
recommended
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Factors to be Considered While Setting
Price
External Factors
Other environmental elements• Economic conditions
– Affect production costs
– Affect buyer perceptions of price and
value
• Reseller reactions to prices must be
considered
• Government may restrict or limit pricing
options
• Social considerations may be taken into
account
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The Product Life Cycle
Introduction
Growth
Maturity
Decline
Successful goods and services, like people, pass through a
series of stages from their initial appearance to death; this
progression is known as the product life cycle.
The product life cycle concept is a useful tool in
designing a marketing strategy that is flexible enough to
match the varying marketplace characteristics at different
life cycle stages.
Four Stages of Product life cycle-
Introduction, Growth, Maturity and Decline.
Introduction The early stages of the product life cycle - the firm attempts to
promote demand for its new market offering.
Neither consumers nor distributors may
be aware of the product.
Marketers must use promotional programs to inform the
market of the item's availability and explain its
features, uses, and benefits.
Expensive and commonly lead to losses in the first stage of
the product life cycle.
These expenditures are necessary if the firm is to profit later.
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The Product Life Cycle
Introduction
Growth
Maturity
Decline
Successful goods and services, like people, pass through a
series of stages from their initial appearance to death; this
progression is known as the product life cycle.
The product life cycle concept is a useful tool in
designing a marketing strategy that is flexible enough to
match the varying marketplace characteristics at different
life cycle stages.
Four Stages of Product life cycle- Introduction, Growth,
Maturity and Decline.
Growth Sales go upwards quickly during the product's growth stage
as new customers join the early users who are now
repurchasing the item.
Person-to-person referrals and continued advertising by the
firm induce others to make trial purchases.
But this encourages competitors to enter the field with similar
offerings.
But this encourages competitors to enter the field with similar
offerings.
To gain a larger share of a growing market, firms may develop
different versions of a product to target specific segments.
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The Product Life Cycle
Introduction
Growth
Maturity
Decline
Successful goods and services, like people, pass through a
series of stages from their initial appearance to death; this
progression is known as the product life cycle.
The product life cycle concept is a useful tool in designing
a marketing strategy that is flexible enough to match the
varying marketplace characteristics at different life cycle
stages.
Four Stages of Product life cycle-
Introduction, Growth, Maturity and Decline.
Maturity Total industry profits peak in the Maturity stage.
Reach to saturation level - further expansion is difficult.
Competition also intensifies, increasing the availability of
the product.
Firms concentrate on capturing competitors'
customers, often dropping prices to further their appeal.
Sales volume fades late in the maturity stage, and some of
the weaker competitors leave the market.
Firms spend heavily on promoting mature products to
protect their market share and to distinguish their products
from those of competitors.
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The Product Life Cycle
Introduction
Growth
Maturity
Decline
Successful goods and services, like people, pass through a
series of stages from their initial appearance to death; this
progression is known as the product life cycle.
The product life cycle concept is a useful tool in
designing a marketing strategy that is flexible enough to
match the varying marketplace characteristics at different
life cycle stages.
Four Stages of Product life cycle- Introduction, Growth,
Maturity and Decline.
Decline Sales continue to fall in the decline stage of the product
life cycle.
Profits also decline and may become losses as further
price cutting occurs in the reduced market for the item.
The decline stage is usually caused by a product
innovation or a shift in consumer preferences.
The decline stage of an old product can also be the
growth stage for a new product.
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Identify the stages in the new-product
development process.
The new-product development process are
• New-product ideas
• Screening,
• Business analysis
• Product development
• Test marketing
• Commercialization.
At each stage, marketers face "go/no go"
decisions as to whether to continue to the next
stage, modify the new product, or discontinue the
development process.
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Pricing Objectives
• Profitability Objectives
Management knows that,
Profit = Revenue – Expences
and
Total Revenue = Price × Quantity Sold
Some firms try to maximize profits by increasing
their prices to the point where a disproportionate
decrease appears in the number of units sold.
Profit maximization is the basis of much of
economic theory.
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Pricing Objectives
• Volume Objectives
Sales maximization - Management sets an acceptable
minimum level of profitability and then tries to maximize
sales. Sales expansion is viewed as being more
important than short-run profits to the firm's long-term
competitive position.
Market share- the percentage of a market controlled by a
certain company, product, or service. One firm may seek
to achieve a 25 percent market share in a certain
industry. Another may want to maintain or expand its
market share for particular products or product lines.
Market share objectives have become popular because
of its easiness and increased sales may lead to lower
production costs and higher profits.
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Pricing Objectives
• Other Objectives
Objectives not related to profitability or sales volume.
Social and ethical considerations, status quo
objectives, and image goals which are often used in
pricing decisions.
The price of some goods and services is based on the
intended consumer's ability to pay.
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How prices are set in the marketplace?
Price Determination
• Usually pricing is regarded as a function of
marketing.
• The sales and cost data is necessary for good
decision making about pricing.
• It is essential for managers at all levels to
realize the importance of pricing and the
contribution that can be made to correct pricing
by various areas in the organization.
• Price determination can be viewed from two
perspectives.
• First is Economic Theory.
• Second is Cost-based Pricing
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Price Determination
Economic Theory• Assumes a profit
maximization objective.
• Market price will be set as
the point at which the
amount of a product
desired at a given price is
equal to the amount
suppliers will provide at
that equilibrium price.
• Equilibrium price is
determined by the point
where the amount
demanded and the amount
supplied are in equilibrium.
(shown in figure)
0
20
40
60
80
100
120
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Prices
Demand-Supply Curve
Demand Curve
Supply Curve
Equilibrium price is Rs 6.5
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Cost Based Pricing• Anticipating the amount of a product that will be bought at a
certain price is difficult, so businesses tend to adopt cost-based
pricing formulas.
• Simpler and easier to use
• Marketers begin the process of cost-based pricing by totaling all
costs associated with offering an item in the market, including
production, transportation, distribution, and marketing expenses.
• The price becomes by adding an amount to cover profit and
expenses not previously considered.
• There are actually two calculations for cost-based pricing; mark-
up and profit margin.
• Mark-up pricing is based on the cost of the item and Profit
margin is based on the sales price.
Cont…
Price Determination
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Cost Based Pricing
Price Determination
)%(%100price Sales
upmark
Cost
Price Sale
Cost) - Price (Sale margin Profit
Cont…
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Cost Based Pricing
Advantages-Disadvantages Discussion• Markup pricing is easy to apply, and it is used by many businesses
(mostly retailers and wholesalers). . However, it has two major flaws.
• The first is the difficulty of determining an effective markup percentage.
If this percentage is too high, the product may be overpriced for its
market; then too few units may be sold to return the total cost of
producing and marketing the product. On the other hand, if the markup
percentage is too low, the seller is "giving away" profit that it could have
earned simply by assigning a higher price. In other words, the markup
percentage needs to be set to account for the workings of the
market, and that is very difficult to do.
• The second problem with markup pricing is that it separates pricing from
other business functions. The product is priced after production
quantities are decided on, after costs are incurred, and almost without
regard for the market or the marketing mix. To be most effective, the
various business functions should be integrated. Each should have an
impact on all marketing decisions.
Price Determination
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Other Methodologies for Pricing
• Gabor Granger pricing methodology
• Linear pricing models such as Dedicated
team, Time and Material (t&M) and Fixed price
(FP).
• Non-linear pricing models such as hybrid
model, Managed services model Outcome based
model and Transaction based model.
• Continuous Research is ongoing to improve the
pricing strategies
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Models and General Approaches to set
Price of a Product or Service
Anjali [email protected]
+917588592042
November 22, 2013
