DEVELOPING PRICING STRATEGIES AND PROGRAMS

Presentation by Srujan Dasari

HOW SHOULD A COMPANY SET PRICES

INITIALLY FOR PRODUCTS

OR SERVICES ?

SETTING A PRICE OBJECTIVE :

A Company first decides where it wants to position its market offering

Five major objectives are:

Survival, Maximum Current Profit,Maximum Market Share, Maximum Market Skimming andProduct quality Leadership

SurvivalShort run Objective

Major Objective if Intense Competition, Over-Capacity

Maximum Current ProfitMay Sacrifice Long-run performance

Maximum Market ShareMarket-Penetration Pricing:Low Price Large Shares Decreased

Costs

Lower price

Maximum Market Skimming

can be FATAL

Favorable Conditions:

1. High Current Demand

2. Unit cost of producing in small are high enough

3. High initial price do not attract competition

4. High price communicates IMAGE of a superior product

Maximum Market Share

Product-Quality Leadership

Quality Leaders

Premium Prices

Other Objectives

Non-Profit and Public organizations

Some Strategies:1. Partial cost recovery2. Full cost recovery3. Price geared to client’s income

Determining Demand

Demand Curve

Normally, INVERSE RELATION exists between PRICE and DEMAND

Price SensitivitySeller can charge higher price convincing the product offers low Total cost of Ownership(TCO)

Factors for low sensitivity:

Product is more distinctive

Buyers are less aware of substitutes

Buyers cannot easily compare the quality of substitutes

Expenditure is smaller part of buyers income

Expenditure is small compared to total cost of the end product

Part of cost is borne by another party

The product is used in conjunction with assets previously bought

Product is assumed to have more quality, prestige or exclusiveness

Buyers cannot store the product

Companies prefer low sensitive customers

Estimating Demand Curves

Price Experiments

Surveys

Elastic Demand Inelastic Demand

Higher Elasticity – Greater volume growth

Price Elasticity

Long-run elasticity may not be equal to Short-run elasticity

Price Ineffective band: band within which price change has little or no effect

Fixed Cost

Variable Cost

𝑇𝑜𝑡𝑎𝑙𝐶𝑜𝑠𝑡=𝐹𝑖𝑥𝑒𝑑𝐶𝑜𝑠𝑡+𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒𝐶𝑜𝑠𝑡

𝐴𝑣𝑒𝑟𝑎𝑔𝑒𝐶𝑜𝑠𝑡=𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡

𝑈𝑛𝑖𝑡𝑠𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑varies with the level of Production

(Overhead)don't vary with production

Accumulated Production

Experience curve

Experience-curve pricing has risks:

- Aggressive pricing gives cheap image- May stuck with low technology

Average cost decreases with increase in Experience.

Target Costing

Firm should examine each cost element and bring down costs

Target range for cost is assigned to designers, engineers

Analyzing Competitors’ Costs, Prices and Offers

Competitor’s Possible price reactions, Prices and Costs should be taken into account

Selecting a Pricing Method

Markup Pricing,

Target-return Pricing

Perceived-value pricing

Value pricing

Going-rate Pricing

Auction-type pricing

Markup pricing:

ELEMENTARY pricing method

Add a standard markup to product’s cost

Target-return Pricing:

Price that yields Target RATE OF RETURN

𝑇𝑎𝑟𝑔𝑒𝑡 𝑟𝑒𝑡𝑢𝑟𝑛𝑝𝑟𝑖𝑐𝑒=𝑑𝑒𝑠𝑖𝑟𝑒𝑑𝑟𝑒𝑡𝑢𝑟𝑛∗𝑖𝑛𝑣𝑒𝑠𝑡𝑒𝑑𝑐𝑎𝑝𝑖𝑡𝑎𝑙

𝑢𝑛𝑖𝑡 𝑠𝑎𝑙𝑒𝑠+𝑢𝑛𝑖𝑡𝑐𝑜𝑠𝑡

𝐵𝑟𝑒𝑎𝑘−𝑒𝑣𝑒𝑛𝑣𝑜𝑙𝑢𝑚𝑒=𝑓𝑖𝑥𝑒𝑑𝑐𝑜𝑠𝑡

𝑝𝑟𝑖𝑐𝑒−𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒𝑐𝑜𝑠𝑡

Perceived-value Pricing:Depends on :

Buyer’s image of product performance,Channel deliverables,Supplier’s reputation,Customer support,Trustworthiness etc.,

Deliver more unique value than the competitor.

Advertisements, Internet can enhance perceived value

Value Pricing:Win loyal customers by charging fairly low price

for a HIGH-Quality offering.

Everyday low pricing (EDLP): charge constant low price with little promotion

High-low pricing: charge higher price on daily basis & temporarily lower than EDLP level

Going-rate Pricing:

Bases price on competitor’s price

Smaller firms follow the Leader

Auction-type Pricing:

• English Auctions (ascending bids)• Dutch Auctions (descending bids)• Sealed-bid auctions

Selecting the……Final Price

Impact of Other Marketing Activities:• Brands with Avg. relative quality and high

advertisement budgets can charge premium prices.

• High relative quality and high relative advertisements obtain HIGHER prices.

• +ve relationship between high prices and high advertisements

Company pricing policies:Price must be consistent with company pricing policies

Selecting the……Final Price

Gain and risk sharing Pricing:• Buyers may resist because of high perceived

level of risk.• Seller can offer to absorb all or part of risk if

promised value isn’t delivered

Impact of Price on other Parties:Price must be consistent with company pricing policies

DISCLAIMER

Created by Srujan Dasari, IIT Kharagpur,

during an internship by

Prof. Sameer Mathur, IIM Lucknow.

www.IIMInternship.com