Pricing
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Transcript of Pricing
• Pricing rests on Value: Capturing value is its purpose
• Process of creating, communicating, and delivering value
• Pricing, a complex task; There is Science side and an art side to it.
• Pricing to capture value/Customer based approach
• Customer value has to be key in the pricing – Pricing to value ensures two things: The customer
finds the price justifiable monetary worth the offer , and the firm finds the price apt for earning its due share of value from the market by the way of sales, income and profits
• Does pricing capture the due value? Or, are you competing away your resources?
• Pricing that benefits only the buyer and lands the company in red does not constitute value pricing. P&G was almost competing away the values of its offers.
• Firms struggle to get the price value balance right.
• Pricing objectives• Firms seek a mix of Objectives from pricing • Different permutations of objectives apply to
different firms
Setting the price
• Step 1 Selecting the pricing objectives• Survival• Maximum current profits• Maximum market share
• Pricing methods/Pricing strategies • Broad Categories of pricing methods– Cost based pricing
Under cost based category, the following methods/approaches are commonly used:
• Mark up pricing• Absorption cost pricing• Target rate of return pricing • Marginal cost pricing
• Demand Based Pricing– The following methods belong to the category of
demand/market based pricing• What the traffic can bear pricing • Skimming pricing• Penetration pricing
• Competition oriented pricing• Premium pricing• Discount pricing• Parity pricing/Going rate pricing
• Product line pricing• Tender pricing• Affordability based pricing• Differentiated pricing
• Value>price>costs (this is not what we seek)• Price>costs>value (this is not what we seek)• Price=value>cost (this is what we seek)• Pricing to value is the wining approach
• Setting the Price • Selecting pricing objectives– Survival– Maximum current Profit (Market skimming
strategy)– Maximum market Share• Market Penetration Pricing
– Product Quality Leadership– Other Objectives
• Determining Demand – Price Sensitivity – Estimating Demand Curves• Surveys• Price Experiments• Statistical Analysis
– Price elasticity of Demand
• Estimating Costs – Types of costs and levels of production • Variable costs• Total costs • Average Costs • Experience curve pricing
– Target Costing
• Analyzing Competitors’ cost, pricing and offers
• Selecting Pricing Method– Markup Pricing – Target Return pricing – Perceived Value Pricing : total of- value perceived
for each of the feature (tangible as well as intangible)of the product by the customers
– Going Rate Pricing– Auction Type Pricing
• Selecting The final price– Impact of other marketing activities
• Brands with average relative quality but high relative advertising budgets were able to charge premium prices. Consumers were willing to pay higher prices for known products rather than unknown ones
• Brands with high relative quality and high relative advertising obtained the highest prices. Conversely, brands with low relative quality and low advertising charged the lowest prices.
• The positive relationships btw high prices and high advertising held most strongly in the later stages of the product life cycle for the market leaders.
– Company Pricing Policies– Impact Of price on other Parties
• Adapting the Price – Geographical Pricing– Price Discounts & Allowances
• Quantity Discount• Functional Discount • Seasonal Discount• Allowance
– Promotional Pricing• Loss Leader Pricing• Special Event• Cash Rebates • Low interset Financing • Longer Paymnet terms• Warranties And Service Contracts • Psychological Discounting
• Differentiated Pricing• Price Discrimination– Customer Segment Pricing– Product Form pricing – Channel pricing - vending Machine– Location pricing - Theater – Time Pricing - Early Bird
• Initiating and Responding to Price Changes– Initiating Price Cuts• Low quality Trap • Fragile market Trap• Shallow Pocket Trap• Price War trap
– Initiating Price Increase • Cost Inflation• Over demand
• Generally consumers Prefer Small Price increases on a regular basis instead of sudden
• Several Techniques - Sense of fairness around any price increase • Making low visibility price moves such as eliminating discounts,
increasing minimum order size and curtailing production of low margin products.
– Shrinking amount of product – Substituting less expensive materials– Reducing product features – Reducing product services – Using less expensive packaging
• Responding to competitors price change