ABM 507 Pricing Methods & Strategies

8/13/2019 ABM 507 Pricing Methods & Strategies

1/61

Shanmukh Sagar K

ABM: 507

Marketing Management

School of Agribusiness Management

MARKETING

Pricing Methods & Strategies


2/61


3/61

Price -- Definition

the amount of money charged for a product orservice

the sum of all the values that consumers

exchange for the benefits of having or usingthe product or service

Examples of price?

Tuition, rent, fare, retainer, toll, salary/wage, dues


4/61

Prices- Objectives

What objectives did the managers have in

mind when they set their prices?
http://academics.smcvt.edu/cbauer-ramazani/BU113/Websites/team_Web_sitesF08.htmhttp://academics.smcvt.edu/cbauer-ramazani/BU113/Websites/team_Web_sitesF08.htm


5/61

Factors in Setting Price


6/61

Pricing Objectives

MeetBusiness

Objectives

Other Pricing Objectives Status Quo Image Social & Ethical Considerations


7/61

Setting Pricing Policy

1. Selecting the pricingobjective

2. Determining demand

3. Estimating costs

4. Analyzing competitors

costs, prices, and offers

5. Selecting a pricingmethod

6. Selecting final price


8/61

Steps in Setting the Right Price

$ $ $ $ $ $ $ $

Fine-Tune Base Price

Choose Strategy

Estimate Demand, Costs,and Profits

Establish Pricing Goals

Right Price


9/61

Legal and Ethical Issues in Pricing

Unfair Trade Practices

Key Legal

and EthicalIssues

Related toPrice

Price Fixing

Price Discrimination

Predatory Pricing


10/61

CashDiscount

Quantity

Discount

FunctionalDiscount

Trade Loading

EDLP

Seasonal

Discounts

PromotionalAllowances

Rebates

Discounts, Allowances, and Rebates

PriceReductions


11/61

Geographic Pricing

Basing-Point

Freight-Absorption

Zone Pricing

Uniform Delivered

FOB Origin

PricingTacticsBased on

Geography


12/61

Price Strategies for New Products

PRICE

PRICE

PRICE

Skimming Penetration

Penetration Pricing

SkimmingPricing

Low priceestablish

product in the market

High price/Prestigepricing

appeal to early

adopters; recover high

R&D costsLower price over time

Move inventory, stimulate

D, extend product life


13/61

Marketing Strategy Over the Product Life Cycle

INTRODUCTION GROWTH MATURITY DECLINEMarketing strategy Market development Increase market Defend market Maintain efficiency inemphasis share share exploiting product

Promotion Mount sales Appeal to Emphasize Reinforce loyal

Strategy promotion for mass market brand differences, customers; reduceproduct awareness benefits & loyalty promotion costs

Place strategy Distribute through Build intensive Enlarge Be selective inselective outlets network of distribution distribution, trim

outlets network unprofitable outlets

Pricing High price/unique Lower price Price at or below Set price tostrategy product / cover over time competition remain profitable

production costs or reduce to

Low price/gain liquidatemarket share


14/61

Price-SettingTools

EconomicSupply/Demand

Determining Prices


15/61

Cost Determinants of Price

01 2 3 4 5 6 7 8 9 10

50

100

150

200

Dolla

rs

Quantity

MC

ATCAVC

AFC


16/61

Break-Even Analysis

Quantity (units)

Price($)

Fixed Costs

Total Revenue

Total Costs

Profits

Losses

Break Even


17/61

Elasticity of Demand

measure of the sensitivity of demand to changes in prices

not price sensitive - no real change in demand price sensitive - changes in demand

Inelastic Demand

Q2 Q1 Quantity

P1P2

ElectricityPrice

Elastic Demand

Q2Quantity

P1P2

Fast food

Q1

Price


18/61

Market-based Pricing

Pricing Existing Products/Services- 3 options

Pricingbelowmarket prices price wars

EX: airlines, store brand vs. manufacturers brand Dumping

Pricingaboveprevailing market prices for

similar products

EX: Sony higher price = higher quality?

Pricingat or nearmarket prices


19/61

Pricing Tactics

Price Lining

Price points: Setting a limited number of prices for

certain categories of products

Psychological Pricing Odd-even

Discounting

Quantity discounts Cash discounts (2/10 net 30)

Web programs: free!


20/61

Cost-based Pricing (Cost-Plus)

1. Cover costs Material

Labor

Capital resources Marketing

2. Mark-up

Targeted return for shareholders

Costs+ mark-up = Sales price

$1.00 + $0.50 = $1.50 (50% markup)

variable costs

fixed costs


21/61

Types of Costs

Total CostsSum of the Fixed and Variable Costs for a Given

Level of Production

Fixed Costs(Overhead)

Costs that dontvary with sales or

production levels.Executive Salaries

Rent

Variable Costs

Costs that do varydirectly with the

level of production.

Raw materials


22/61


23/61

Mark-up CalculationExercise

1. Price per product

2. Less the cost per product (what you paidthe supplier, e.g. total cost paid / # of items

purchased)

PriceSalesUpMarkDollarUPMARK%


24/61

Breakeven Analysis

TC = TR


25/61

Breakeven Point Formula

(Contribution Margin)

cost/unitVariable

Price/unit

CostsFixedQUANTITYBREAKEVEN


26/61

Review

5 Factors that influence prices

Pricing objectives

Pricing strategies at different stages of the

Product Life Cycle (advantages/disadvantages)

Methods of Determining Prices

Elasticity of demand

Mark-up

Breakeven Analysis


27/61

Pricing Strategies


28/61

Penetration Pricing


29/61

Penetration Pricing

Price set to penetrate the market

Low price to secure high volumes

Typical in mass market productschocolate bars,food stuffs, household goods, etc.

Suitable for products with long anticipated lifecycles

May be useful if launching into a new market


30/61

Market Skimming


31/61

Market Skimming

High price, Low volumes

Skim the profit from the market

Suitable for products that haveshort life cycles or which willface competition at some pointin the future (e.g. after a patentruns out)

Examples include: Playstation,jewellery, digital technology,

new DVDs, etc.Many are predicting a firesale in laptops

as supply exceeds demand.

Copyright: iStock.com


32/61

Value Pricing


33/61

Value Pricing

Price set in accordance

with customer perceptions

about the value of the

product/service

Examples include status

products/exclusive

products

Companies may be able to set prices according to

perceived value.



34/61

Loss Leader


35/61

Loss Leader

Goods/services deliberately sold below cost toencourage sales elsewhere

Typical in supermarkets, e.g. at Christmas, sellingbottles of gin at 3 in the hope that people will beattracted to the store and buy other things

Purchases of other items more than covers losson item sold

e.g. Free mobile phone when taking on contractpackage


36/61

Psychological Pricing


37/61

Psychological Pricing

Used to play on consumer perceptions

Classic exampleRs. 999.99 instead of

Rs.1000! Links with value pricinghigh value goods

priced according to what consumers THINKshould be the price


38/61

Going Rate (Price Leadership)


39/61

Going Rate (Price Leadership)

In case of price leader, rivals have difficulty in competingon pricetoo high and they lose market share, too low andthe price leader would match price and force smaller rival

out of market May follow pricing leads of rivals especially where those

rivals have a clear dominance of market share

Where competition is limited, going rate pricing may beapplicablebanks, petrol, supermarkets, electrical goods

find very similar prices in all outlets


40/61

Tender Pricing


41/61

Tender Pricing

Many contracts awarded on a tender basis

Firm (or firms) submit their price for carrying out thework

Purchaser then chooses which represents best value

Mostly done in secret


42/61



43/61


Charging a different pricefor the same good/servicein different markets

Requires each market tobe impenetrable

Requires different priceelasticity of demand ineach market

Prices for rail travel differ for the same journey atdifferent times of the day



44/61

Destroyer Pricing/Predatory Pricing


45/61

Destroyer/Predatory Pricing

Deliberate price cutting or offer of free

gifts/products to force rivals (normally smaller

and weaker) out of business or prevent newentrants

Anti-competitive and illegal if it can be proved


46/61

Absorption/Full Cost Pricing


47/61

Absorption/Full Cost Pricing

Full Cost Pricingattempting to set price to

cover both fixed and variable costs

Absorption Cost PricingPrice set toabsorb some of the fixed costs of

production


48/61

Marginal Cost Pricing


49/61


Marginal costthe cost of producing ONE extra or ONE

fewer item of production

MC pricingallows flexibility

Particularly relevant in transport where fixed costs may be

relatively high

Allows variable pricing structuree.g. on a flight from

London to New Yorkproviding the cost of the extra

passenger is covered, the price could be varied a good dealto attract customers and fill the aircraft


50/61


Example:

Aircraft flying from Bristol to EdinburghTotal Cost (including normal profit) =

15,000 of which 13,000 is fixed cost*

Number of seats = 160, average price = 93.75

MC of each passenger = 2000/160 = 12.50

If flight not full, better to offer passengers chance of flying at 12.50 and fill the

seat than not fill it at all!

*All figures are estimates only


51/61

Contribution Pricing


52/61

Contribution Pricing

Contribution = Selling PriceVariable (direct costs)

Prices set to ensure coverage of variable costs and

a contribution to the fixed costs Similar in principle to marginal cost pricing

Break-even analysis might be useful in such

circumstances


53/61

Target Pricing


54/61

Target Pricing

Setting price to target a specified profit

level

Estimates of the cost and potential revenueat different prices, and thus the break-even

have to be made, to determine the mark-up

Mark-up = Profit/Cost x 100


55/61

Cost-Plus Pricing


56/61

I fl f El i i


57/61

Influence of Elasticity


58/61


Any pricing decision must be mindful of the

impact of price elasticity

The degree of price elasticity impacts on the levelof sales and hence revenue

Elasticity focuses on proportionate (percentage)

changes

PED = % Change in Quantity demanded/%

Change in Price


59/61


Price Inelastic:

% change in Q < % change in P

e.g.a 5% increase in price would be met by a fallin sales of something less than 5%

Revenue would rise

A 7% reduction in price would lead to a rise in

sales of something less than 7% Revenue would fall


60/61


Price Elastic:

% change in quantity demanded > % change inprice

e.g.A 4% rise in price would lead to sales fallingby something more than 4%

Revenue would fall

A 9% fall in price would lead to a rise in sales of

something more than 9%

Revenue would rise

Special Pricing Tactics


61/61

Special Pricing Tactics

Odd-EvenPricing

Two-PartPricing

BundlePricing

BaitPricing

PriceLining

FlexiblePricing

ProfessionalServices

LeaderPricing

SinglePrice

Common

Special Pricing

Tactics

Documents

ABM 507 Pricing Methods & Strategies