23178441 Pricing Methods

8/6/2019 23178441 Pricing Methods

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PRICINGMETHODS



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A. COST-BASED PRICING

UnderUnder costcost basedbased pricingpricing thethe marketermarketer primarilyprimarily lookslooksatat productionproduction costscosts asas thethe keykey factorfactor inin determiningdetermining thetheinitialinitial priceprice..

ThisThis methodmethod offersoffers thethe advantageadvantage of of beingbeing easyeasy totoimplementimplement asas longlong asas costscosts areare knownknown.. ButBut oneone majormajordisadvantagedisadvantage isis thatthat itit doesdoes notnot taketake intointo considerationconsiderationthethe targettarget market¶smarket¶s demanddemand forfor thethe productproduct..

ThisThis couldcould presentpresent majormajor problemsproblems if if thethe productproduct isisoperatingoperating inin aa highlyhighly competitivecompetitive marketmarket wherewherecompetitorscompetitors frequentlyfrequently alteralter theirtheir pricesprices..



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(I)(I) MARK UPMARK UP ONON COSTCOST

UsingUsing thisthis methodmethod priceprice isis determineddetermined byby simplysimplymultiplyingmultiplying thethe costcost of of eacheach itemitem byby aa predeterminedpredeterminedpercentagepercentage thenthen addingadding thethe resultresult toto thethe costcost..

AA majormajor generalgeneral retailer,retailer, maymay applyapply aa setset percentagepercentageforfor eacheach productproduct categorycategory (e(e..gg..,, women¶swomen¶s clothing,clothing,automotive,automotive, gardengarden supplies,supplies, etcetc..)) makingmaking thethe pricingpricingconsistentconsistent forfor allall likelike--productsproducts.. Alternatively,Alternatively, thethepredeterminedpredetermined percentagepercentage maymay bebe aa numbernumber thatthat isis

identifiedidentified withwith thethe marketingmarketing objectivesobjectives (e(e..gg..,, requiredrequired2020%% R OI)R OI).. TheThe calculationcalculation forfor markupmarkup onon costcost isis::

ItemItem CostCost ++ (Item(Item CostCost xx MarkupMarkup Percentage)Percentage) == PricePrice5050 ++ ((5050 xx ..3030)) == R sR s 6565



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(II)(II) COSTCOST--PLUSPLUS PRICINGPRICING

CostCost--plusplus pricingpricing alsoalso addsadds toto thethe costcost byby usingusing aa fixedfixedmonetarymonetary amountamount ratherrather thanthan percentagepercentage..

ForFor instance,instance, aa contractorcontractor hiredhired toto renovaterenovate aa officeoffice

owner¶sowner¶s officeoffice willwill estimateestimate thethe costcost of of doingdoing thethe job job bybyaddingadding theirtheir totaltotal laborlabor costcost toto thethe costcost of of thethe materialsmaterialsusedused inin thethe renovationrenovation.. TheThe homeowner¶shomeowner¶s selectionselection of of carpetcarpet toto bebe usedused inin isis likelylikely toto havehave littlelittle effecteffect onon thethelaborlabor neededneeded toto installinstall itit whetherwhether itit isis aa lowlow--end,end, lowlow

pricedpriced tiletile oror aa highhigh--end,end, premiumpremium pricedpricedcarpetcarpet.. AssumingAssuming mostmost materialmaterial inin thethe officeoffice projectprojectareare standardstandard sizessizes andand configuration,configuration, anyany changechange inin thethetotaltotal priceprice forfor thethe renovationrenovation isis aa resultresult of of changeschanges ininmaterialmaterial costscosts whilewhile laborlabor costscosts areare constantconstant..



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(III)(III) BREAKEVENBREAKEVEN PRICINGPRICING

BreakevenBreakeven pricingpricing isis associatedassociated withwith breakevenbreakevenanalysis,analysis, whichwhich isis aa forecastingforecasting tooltool usedused byby marketersmarketerstoto determinedetermine howhow manymany productsproducts mustmust bebe soldsold beforebeforethethe companycompany startsstarts realizingrealizing aa profitprofit..

TheThe formulaformula forfor determiningdetermining breakevenbreakeven takestakes intointoconsiderationconsideration bothboth variablevariable andand fixedfixed costscosts asas wellwell asasprice,price, andand isis calculatedcalculated asas followsfollows::

Fixed CostFixed Cost = Number of Units to Breakeven= Number of Units to Breakeven

PricePrice ± ± Variable CostVariable Cost

Per UnitPer Unit



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ForFor example,example, assumeassume aa companycompany operatesoperates aasinglesingle--productproduct manufacturingmanufacturing plantplant thatthat hashas aatotaltotal fixedfixed costcost perper yearyear of of R sR s.. 33,,000000,,000000 andandthethe variablevariable costcost (e(e..gg..,, rawraw materials,materials, labor,labor,electricity,electricity, etcetc..)) isis R sR s.. 4545..0000 perper unitunit.. If If thethe

companycompany sellssells thethe productproduct directlydirectly toto customerscustomersforfor R sR s..120120,, itit willwill requirerequire thethe companycompany toto sellsell4040,,000000 unitsunits toto breakevenbreakeven..

3,000,0003,000,000 = 40,000 units= 40,000 units120120 -- 4545



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B. TARGET RETURN PRICING

InIn thisthis methodmethod marketermarketer setssets priceprice toto achieveachieve aa

targettarget returnreturn--onon--investmentinvestment (R OI)(R OI).. ForFor

example,example, let'slet's assumeassume thatthat marketermarketer havehave

investedinvested R sR s..1010,,000000 inin thethe companycompany.. ExpectedExpected

salessales volumevolume isis 11,,000000 unitsunits inin thethe firstfirst yearyear..

MarketerMarketer wantwant toto earnearn allall hishis investmentinvestment inin thethe

firstfirst year,year, soso hehe needneed toto makemake R sR s..1010,,000000 profitprofit

onon 11,,000000 units,units, oror R sR s.. 1010 profitprofit perper unit,unit, givinggiving

aa priceprice of of R sR s.. 6060 perper unitunit..



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C. VALUE-BASED PRICING

CompaniesCompanies priceprice theirtheir productproduct basedbased onon thethe valuevalue ititcreatescreates forfor thethe customercustomer.. ThisThis isis usuallyusually thethe mostmostprofitableprofitable formform of of pricing,pricing, if if oneone cancan achieveachieve itit..

InIn thisthis methodmethod itit isis thethe buyersbuyers perceptionperception of of valuevalue andandnotnot thethe sellerssellers costcost whichwhich isis thethe keykey toto thethe productproductpricingpricing..

Let'sLet's saysay thatthat aa tubetube lightlight manufacturedmanufactured byby MahamayaMahamayaElectricElectric DevicesDevices savessaves thethe typicaltypical customercustomer R sR s..11,,000000 aa

yearyear in,in, say,say, energyenergy costscosts.. InIn thatthat case,case, priceprice tagtag of of R sR s..6060 seemsseems tootoo cheapcheap.. If If thethe productproduct reliablyreliably producedproducedthatthat kindkind of of costcost savings,savings, companycompany couldcould easilyeasily chargechargeR sR s..150150,, R sR s..200200 oror moremore forfor it,it, andand customerscustomers wouldwouldgladlygladly paypay it,it, sincesince theythey wouldwould getget theirtheir moneymoney back back ininaa mattermatter of of monthsmonths..



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Value ExampleValue Example::

ITL Tractor is R s 100,000ITL Tractor is R s 100,000

vs. Market R s. 90,000vs. Market R s. 90,000

R s. 90,000 if equalR s. 90,000 if equal

7,000 extra durable7,000 extra durable

6,000 reliability6,000 reliability

5,000 service5,000 service

2,0002,000 warrantywarranty

R s. 110,000 in benefitsR s. 110,000 in benefits --

R s. 10,000R s. 10,000 discount!discount!



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D. PSYCHOLOGICAL PRICING

ThisThis methodmethod takestakes intointo considerationconsideration thethe consumer'sconsumer'sperceptionperception of of priceprice..

Odd Odd--Even Even Pricing Pricing :: aa productproduct pricedpriced atat R sR s.. 299299..9595 maymaybebe perceivedperceived asas offeringoffering moremore valuevalue thanthan aa productproductpricedpriced atat R sR s.. 300300..0000..

Prestige Prestige Pricing Pricing :: TheThe higherhigher thethe priceprice thethe moremore likelylikelycustomerscustomers areare toto perceiveperceive itit hashas beingbeing higherhigher qualityqualitycomparedcompared toto aa lowerlower pricedpriced productproduct.. marketers,marketers,lookinglooking toto presentpresent anan imageimage of of highhigh quality,quality, maymay choosechoosetoto priceprice productsproducts atat eveneven levelslevels (e(e..gg..,, R sR s.. 100100 ratherratherthanthan R sR s..9999..9999))..



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E. MARKET PRICING

UnderUnder thethe marketmarket pricingpricingmethodmethod costcost isis notnot thethe mainmainfactorfactor drivingdriving pricepricedecisionsdecisions;; ratherrather initialinitialpriceprice isis basedbased onon analysisanalysis of of

marketmarket researchresearch inin whichwhichcustomercustomer expectationsexpectations arearemeasuredmeasured..

TheThe mainmain goalgoal isis toto learnlearn

whatwhat customerscustomers inin ananorganization¶sorganization¶s targettargetmarketmarket areare likelylikely totoperceiveperceive asas anan acceptableacceptablepriceprice..



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F. COMPETITION BASED PRICING

WhenWhen settingsetting priceprice itit makesmakes sensesense toto look look atat thethe priceprice of of competitivecompetitive offeringsofferings.. ForFor some,some, competitor¶scompetitor¶s priceprice servesserves asas ananimportantimportant referencereference pointpoint fromfrom whichwhich theythey setset theirtheir priceprice..

BelowBelow CompetitionCompetition PricingPricing:: AA marketermarketer attemptingattempting toto reachreachobjectivesobjectives thatthat requirerequire highhigh salessales levelslevels (e(e..gg..,, marketmarket shareshare

objective)objective) maymay monitormonitor thethe marketmarket toto insureinsure theirtheir pricepriceremainsremains belowbelow competitorscompetitors..

AboveAbove CompetitionCompetition PricingPricing:: MarketersMarketers usingusing thisthis approachapproachareare likelylikely toto bebe perceivedperceived asas marketmarket leadersleaders inin termsterms of of productproduct features,features, brandbrand imageimage oror otherother characteristicscharacteristics thatthatsupportsupport aa priceprice thatthat isis higherhigher thanthan whatwhat competitorscompetitors offeroffer..

ParityParity PricingPricing:: AA simplesimple methodmethod forfor settingsetting thethe initialinitial pricepriceisis toto priceprice thethe productproduct atat thethe samesame levellevel competitorscompetitors pricepricetheirtheir productproduct..



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A successful pricing strategy must beA successful pricing strategy must be

driven by the "Three C's" of pricingdriven by the "Three C's" of pricing

strategy:strategy:

Customers, Competitors, and Costs.Customers, Competitors, and Costs.



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ProductMix

Pricing

Strategies

Product Line PricingProduct Line Pricing

Setting Price Steps Between Product Line Items

i.e. Rs. 299, Rs. 399

OptionalOptional--Product PricingProduct Pricing

Pricing Optional or Accessory Products

Sold With The Main Product

i.e. Car Accessory

CaptiveCaptive--Product PricingProduct PricingPricing Products That Must Be Used

With The Main Product

i.e. Razor Blades, Film, Software, telephone

ByBy--Product PricingProduct Pricing

Pricing Low-Value By-Products To Get Rid

of Them

i.e. Lumber Mills, Zoos

ProductProduct--Bundle PricingBundle Pricing

Pricing Bundles Of Products Sold Together

i.e. Season Tickets, Computer Makers



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Price Adjustment Strategies

Discount & AllowanceReducing Prices to Reward

Customer Responses such asPaying Early or Promoting

the Product.

Segmented

Adjusting Prices to Allowfor Differences in Customers,

Products, or Locations.

Cash Discount

Quantity Discount

F

unctional Discount

Seasonal Discount

Customer

Product Form

Location

Time



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� Adjusting Prices for PsychologicalEffect.

�Price Used as a Quality Indicator.

� Temporarily Reducing Prices toIncrease Short-Run Sales.

� i.e. Loss Leaders, Special-Events

� Adjusting Prices to Account for theGeographic Location of Customers.� i.e. FOB-Origin, Uniform-Delivered,Zone Pricing, Basing-Point, &Freight-Absorption.

� Adjusting Prices for InternationalMarkets.� Price Depends on Costs, Consumers,Economic Conditions & Other Factors.

Psychological Pricing

Promotional Pricing

Geographical Pricing

International Pricing



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DeliberateDeliberate priceprice cuttingcutting oror offeroffer of of µfreeµfreegifts/products¶gifts/products¶ toto forceforce rivalsrivals (normally(normallysmallersmaller andand weaker)weaker) outout of of businessbusiness ororpreventprevent newnew entrantsentrants-- Destroyer/PredatoryDestroyer/Predatory

PricingPricing

Microsoft ± has been accused of predatory pricing

strategies in offering µfree¶ software as part of their

operating system ± Internet Explorer and Windows

Media Player - forcing competitors like Netscape

and Real Player out of the market.



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INITIATING AND RESPONDING TO PRICE

CHANGES

InitiatingPrice

Increases

Competitor Reactions

toPrice

Changes

InitiatingPrice Cuts

Buyer Reactions

toPrice

Changes

PriceChanges



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Hold Current Price;

Continue to Monitor Competitor¶s Price.

Reduce Price

Raise PerceivedQuality

Improve Quality& Increase Price

Launch Low-Price³Fighting Brand´

Has Competitor Cut

Price?

Will Lower PriceNegativelyAffect Our

Market Share & Profits?

Can/ Should EffectiveAction be Taken?

Yes

No

No

No



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HOW TO SET PRICE?

RESEAR CHRESEAR CH

Monadic DesignMonadic Design

In monadic design, each respondent is exposed to one, and onlyIn monadic design, each respondent is exposed to one, and onlyone, price point for any given product.one, price point for any given product.

Comparative designComparative design

Comparative testing asks people to evaluate brand X first atComparative testing asks people to evaluate brand X first atone price and then again at a second price. It is a moreone price and then again at a second price. It is a moresensitive testing.sensitive testing.

Declarative designDeclarative design

WhatWhat dodo you,you, asas aa consumer,consumer, believebelieve thatthat thisthis productproduct isis reallyreallyworthworth toto you?you? InIn declarativedeclarative design,design, eacheach respondentrespondent isis askedaskedtoto volunteervolunteer hishis oror herher ownown maximummaximum and/orand/or reasonable,reasonable,acceptableacceptable pricesprices..



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A. PRICE SENSITIVITY METER

Introduced in the 1970s by a Dutch economist, Peter vanWestendorp.Introduced in the 1970s by a Dutch economist, Peter vanWestendorp.

The premise of the PSM is to ask respondents four priceThe premise of the PSM is to ask respondents four price--relatedrelatedquestions and then evaluate the cumulative distributions forquestions and then evaluate the cumulative distributions foreach question. Specifically, respondents are asked:each question. Specifically, respondents are asked:

At what price would you consider the product to be so expensiveAt what price would you consider the product to be so expensivethat you would not consider buying it? (Too expensive)that you would not consider buying it? (Too expensive)

At what price would you consider the product to be priced so lowAt what price would you consider the product to be priced so lowthat you would feel the quality couldn¶t be very good? (Too cheap)that you would feel the quality couldn¶t be very good? (Too cheap)

At what price would you consider the product starting to getAt what price would you consider the product starting to getexpensive, so that it is not out of the question, but you would haveexpensive, so that it is not out of the question, but you would haveto give some thought to buying it? (Expensive)to give some thought to buying it? (Expensive)

At what price would you consider the product to be a bargain, aAt what price would you consider the product to be a bargain, agreat buy for the money? (Cheap)great buy for the money? (Cheap)

The cumulative frequencies obtained are then plotted and theThe cumulative frequencies obtained are then plotted and thefour key intersections are interpreted.four key intersections are interpreted.



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TheThe pointpoint atat whichwhich anan equalequal numbernumber of of respondentsrespondentsbelievebelieve thethe testtest productproduct isis expensiveexpensive asas believebelieve itit isis tootoo

cheapcheap isis referredreferred toto asas thethe point point of of marginal marginal cheapnesscheapness(PMC)(PMC).. TheThe pointpoint atat whichwhich anan equalequal numbernumber of of respondentsrespondents believebelieve thethe testtest productproduct isis tootoo expensiveexpensive asasbelievebelieve itit isis cheapcheap isis referredreferred toto asas thethe point point of of marginal marginal ex pensivenessex pensiveness (PME)(PME).. TheThe pointpoint atat whichwhich anan equalequalnumbernumber of of respondentsrespondents believebelieve thethe testtest productproduct isisexpensiveexpensive asas believebelieve itit isis cheapcheap isis referredreferred toto asas thetheindi ff erenceindi ff erence price price point point (IPP)(IPP).. TheThe pointpoint atat whichwhich ananequalequal numbernumber of of respondentsrespondents believebelieve thethe testtest productproduct isistootoo expensiveexpensive asas believebelieve itit isis tootoo cheapcheap isis referredreferred toto asasthethe opti mal opti mal price price point point (OPP)(OPP)..

InIn thisthis method,method, thethe optimaloptimal priceprice pointpoint forfor aa productproduct isisthethe pointpoint atat whichwhich thethe samesame numbernumber of of respondentsrespondentsindicateindicate thatthat thethe priceprice isis tootoo expensiveexpensive asas thosethose whowhoindicateindicate thatthat thethe priceprice isis tootoo cheapcheap..



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After introducing the product concept the respondents are asked:

How likely, would you be to purchase this product in the next 12

months if it is priced Rs. 200? (Kindly Tick )

Definitely would purchase ²

Probably would purchase ²

Might or might not purchase ²

Probably would not purchase²

Definitely would not purchase ²

B. CONCEPT TEST/CONCEPT EVALUATION



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C. CONJOINT ANAL YSIS

Ice within 15 minutes

Rs. 8000

Ice within one-hour

Rs. 7000

Which refrigerator would you prefer?

Strongly Prefer

Strongly Prefer

Product on Left Product

on Right1 2 3 4 5 6 7 8 9



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D. DISCRETE CHOICE

BRAND X

75 C hannel s

Extremely clear

picture quality

Rs. 10, 000

BRAND Y

250 C hannel s

C lear

picture quality

Rs. 9,000

BRAND Z

150 Channels

Somewhat fuzzy

picture quality

Rs. 8,000

NONE

If t hese were

alternatives

only

I would not

purchase

anyt hing



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THANKS

YOU

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23178441 Pricing Methods