In Dust Rail Pricing

8/9/2019 In Dust Rail Pricing

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HEENA SHARMA


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HEENA SHARMA


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pricing Pricingis the art of translatingin toPricingis the art of translatingin to

quantitative termsquantitative terms

Acc to professorAcc to professork.c.kitek.c.kite pricingis apricingis a

managerial task that involves establishingmanagerial task that involves establishing

pricing objectives,identifying the factorspricing objectives,identifying the factors

governing the price, ascertaining theirgoverning the price, ascertaining their

relevance andsignificance determining therelevance andsignificance determining the

product value inmonetary terms andproduct value inmonetary terms and

formulation of price policies andstrategies,formulation of price policies andstrategies,

implementing andcontrolling them for theimplementing andcontrolling them for the

best results.best results.

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A long and Complex ProcessA long and Complex Process

Customized ProductCustomized Product

No Brand ImpactNo Brand Impact

Benefit or Solutions rather thanBenefit or Solutions rather thanProduct FeatureProduct Feature

Relationship MarketingRelationship Marketing

Use ofUse of NontangibleNontangible BenefitsBenefitsto Distinguish their Productsto Distinguish their Products

Nature of Industrial SaleNature of Industrial Sale

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Industrial Pricing

Characteristics Cross ElasticityCross Elasticity

Competitive BiddingCompetitive Bidding

Project By Project BasisProject By Project Basis

NegotiationNegotiation

FairnessFairness

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Costs Incremental CostIncremental Cost--

are those costs added by a givenProject orare those costs added by a givenProject orProgrammeProgramme

Sunk CostsSunk Costs--All Funds that has already beenspent inProductAll Funds that has already beenspent inProductDevelopment,Projects orDevelopment,Projects orProgrammesProgrammes

Opportunity CostsOpportunity Costs--

The Foregone Benefits Which Might Have BeenThe Foregone Benefits Which Might Have Been

RealizedRealizedFrom the Next Best AlternativeFrom the Next Best Alternative

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Break - Even Pricing

COSTSCOSTS

andand

SALESSALES

NO. OF UNITS PRODUCEDNO. OF UNITS PRODUCED

TFC

AFC

A

CC

B

DD

XX

EE

FF

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Cost to the buying firmincludesCost to the buying firmincludesbasic Pricebasic Price,,freight, transit insurance,installation,risks offreight, transit insurance,installation,risks of

product failure,delayeddelivery, etc,product failure,delayeddelivery, etc,

Some customers are Some customers are price buyersprice buyers..

Marketers,should follow transactionalMarketers,should follow transactional

relationships & offerbasic properties.relationships & offerbasic properties.

Some otherbuyers are Some otherbuyers are loyal buyersloyal buyers, for, for

whommarketersshould follow relationshipwhommarketersshould follow relationshipmarketing with partnering / collaborativemarketing with partnering / collaborative

approach andmutually acceptable prices.approach andmutually acceptable prices.

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FRAMEWORK OF PRICING DECISIONS

(i) Pricing objectives

(ii) Customer analysis

(iii) Cost analysis

(iv) Competitors' analysis

(v) Govt. regulation / policies

Before taking pricing

decisions, a buying firm must

find "price determinants".(i.e. factors that influence

pricing decisions)

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Tw o t y p e s o f p r i c in g d e c i s io n s .

P r i c i ng s t ra t eg i e s P r i c i ng p o l i c ie s

S e t ti ng a p r ic e( p r o d u c t / m a r k e t

s i tua t ions )

In i t ia t ing a

p r i c e ch ang e

R e s p o n d i n g to a c o m p e t it o r's

p r i c e ch ang e

D i s c o u n t s

G e o g r a p h i c a l

pr ic ing

L e a s i n gHEENA SHARMA


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PRICE DETERMINANTS OR FACTORS

INFLUENCING PRICING DECISIONS

((ii)) Pricing objectives,(ii)customeranalysis,Pricing objectives,(ii)customeranalysis,(iii)cost analysis,(iv)competitive analysis,(v)(iii)cost analysis,(iv)competitive analysis,(v)Govt. policies.Govt. policies.

1. Pricing Objectives1. Pricing Objectives

Some of the pricing objectives areSome of the pricing objectives are

survival,maximumshortsurvival,maximumshort term profits,term profits,maximumshortmaximumshort termsales,maximumsalestermsales,maximumsalesgrowth, product quality leadership, etc.growth, product quality leadership, etc.

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2.2. Customer (Demand) analysisCustomer (Demand) analysis

It includesdemand analysis & costIt includesdemand analysis & cost -- Benefit analysisBenefit analysis

(i)(i)Demand analysisDemand analysis. Using experimentalresearch,it. Using experimentalresearch,itmeasuresrelationship between price anddemand(ormeasuresrelationship between price anddemand(orsalesvolume). It sums up how sensitive customerssalesvolume). It sums up how sensitive customers

are to the price changes. The formula is:are to the price changes. The formula is:

IfPED is > 1,demandis elastic, & customers are price sensitive

IfPED is < 1,demandisinelastic,customers are lesssensitive to prices.

=% change in quantity demanded

% Change in price

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3.3. Cost Analysis.Cost Analysis.

A firms totalcost of a product is the lowest point on theA firms totalcost of a product is the lowest point on theprice range. Hence, forpricingdecisions, the marketerprice range. Hence, forpricingdecisions, the marketermust know the various types ofcostslike fixed,variable,must know the various types ofcostslike fixed,variable,total,direct, etc. fora product / service.total,direct, etc. fora product / service.

Costsvary based on productioncapacity (i.e. economiesCostsvary based on productioncapacity (i.e. economiesofscale), and accumulated experience (ofscale), and accumulated experience (ii. e. learning. e. learningcurve) asshown.curve) asshown.

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C o s t

p e rU n i t

Q u a n t i t y P r o d u c e d p e r y e a r

C o s t

p e r

U n i t

A c c u m u l a t e d P r o d u c t io n

E x p e r ie n c e /

L e a r n i n g

C u r v e .

A v . C o s t R e d u c t io n

= 1 0 - 3 0 %

E c o n o m ie s o f S c a le

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Sales

&

osts

Sales Volume

Sales evenue at 3

Sales evenue at 2

Sales evenue at 1

Total ost

Fixed ost

Break - ve alysis is use ul to consider di erent

prices ( 1, 2, 3), and its e ect on sales revenue and pro its.

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PRICING STRATEGIES

Pricingstrategiesvary as perproductPricingstrategiesvary as perproduct--marketmarket

situationssuch as(i) Competitive biddinginsituationssuch as(i) Competitive biddingin

competitive markets,(ii) New product pricing,competitive markets,(ii) New product pricing,

(iii)Pricing across product life(iii)Pricing across product life--cycle.cycle.

(i)(i) Competitive BiddingCompetitive Bidding

In businessmarkets,large volume ofIn businessmarkets,large volume ofpurchasingisdone through competitivepurchasingisdone through competitive

bidding, using eitherclosed(orsealed)bidding, using eitherclosed(orsealed)

bidding oropen(ornegotiated) biddingbidding oropen(ornegotiated) bidding

method.method.HEENA SHARMA


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InInclosed biddingclosed bidding, often used by the Govt., often used by the Govt.buyer,sealed bids are invited throughbuyer,sealed bids are invited through

newspaper tendernotices. Sealed bids arenewspaper tendernotices. Sealed bids are

openedin presences ofsuppliers and ordersopenedin presences ofsuppliers and orders

are placed on the lowest price bidder(s).are placed on the lowest price bidder(s). InInopen biddingopen bidding, afterreceiving bids, afterreceiving bids

(quotations), the buyernegotiates technical(quotations), the buyernegotiates technical

andcommercial parts with suppliers, andandcommercial parts with suppliers, and

then places orders. Thismethodis oftenthen places orders. Thismethodis oftenfollowed by commercial enterprisesin privatefollowed by commercial enterprisesin private

sector.sector.

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Strategy / Model Used for Competitive Bidding

One of the often usedstrategiesis One of the often usedstrategiesis ProbabilisticProbabilistic

BiddingBidding, which makes two assumptions:, which makes two assumptions:

((ii)Pricing objective is profit maximizations,)Pricing objective is profit maximizations,

(ii) Lowest price bidderwillget the order.(ii) Lowest price bidderwillget the order.

Equation usedEquation used : E (A) = P(A) x T(A), where: E (A) = P(A) x T(A), where

A=Bid price, E(A) = Expected profit at bid price A,A=Bid price, E(A) = Expected profit at bid price A,

P(A) = Probability of winning(orgetting order) atP(A) = Probability of winning(orgetting order) atthe bid price A, T(A) = profit,if bid price Aisthe bid price A, T(A) = profit,if bid price Ais

accepted.accepted.

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(ii) New Product Pricing Strategy(ii) New Product Pricing Strategy

In the introductionstage of a new product,In the introductionstage of a new product,two alternative pricingstrategies are availabletwo alternative pricingstrategies are available((ii) Skimming(high initial price)strategy, and) Skimming(high initial price)strategy, and(ii)Penetration(low initial price)strategy.(ii)Penetration(low initial price)strategy.

Skimming StrategySkimming Strategy is appropriate fora newis appropriate fora newproduct that isdistinct, highproduct that isdistinct, hightech, orcapitaltech, orcapitalintensive, and purchased by a marketintensive, and purchased by a marketsegment that isnot sensitive to the initial highsegment that isnot sensitive to the initial high

price..price..

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Penetration strategyPenetration strategy is appropriate when(is appropriate when(ii) buyers) buyers

are highly price sensitive,(ii)strong threat exists fromare highly price sensitive,(ii)strong threat exists frompotentialcompetitors(due to low entry barrier). Thepotentialcompetitors(due to low entry barrier). Theselling firmsselling firmsobjectiveobjective is to achieve longis to achieve long termtermprofits through high market share. The firmcan alsoprofits through high market share. The firmcan alsoachieve achieve cost leadershipcost leadership thru economies ofscale thru economies ofscale

and experience curve, which gives competitiveand experience curve, which gives competitiveadvantage.advantage.

(iii)(iii) Pricing Across Product LifePricing Across Product Life CycleCycle(PLC)(PLC)

Marketing and pricingstrategiesvary as the productMarketing and pricingstrategiesvary as the productmoves across 4moves across 4 stages of PLC.stages of PLC.

(a)(a) Introduction stageIntroduction stage....

(b)(b)Growth stageGrowth stage..

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(c)(c) Maturity stageMaturity stage..

(d)(d) Decline stageDecline stage..

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Responding to competitors price changes

A marketershouldrespond afteranswering theA marketershouldrespond afteranswering thefollowing questions.following questions.

(i)(i) Why the competitor haschanged the price?Why the competitor haschanged the price?

(ii)(ii) Is the price change temporary orpermanent?Is the price change temporary orpermanent?

(iii)(iii) What will happen to the companyssales andWhat will happen to the companyssales andprofits,profits, ifit doesnot respond.ifit doesnot respond.

(iv)(iv) What would be the reactions of othercompetitors.What would be the reactions of othercompetitors.

The responsescan be inseveral ways:The responsescan be inseveral ways:

(a)maintain price andvalue (benefits),(b)match(a)maintain price andvalue (benefits),(b)matchcompetitors price,(c)develop andlaunch lowcompetitors price,(c)develop andlaunch low--pricepriceproduct item,(d)maintain price. The right responseproduct item,(d)maintain price. The right responsedepends on the businesssituations faced by the firm.depends on the businesssituations faced by the firm.

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PRICING POLICIES

Purpose.Purpose.A firm evolves pricing policies to adjust basicA firm evolves pricing policies to adjust basic

prices(orprice list) fordifferent types ofcustomers(likeprices(orprice list) fordifferent types ofcustomers(likeOEMs, users, anddealers) who buy various quantitiesOEMs, users, anddealers) who buy various quantitiesand are located at different locations..and are located at different locations..

Price listPrice list is a statement of basic prices of a product,is a statement of basic prices of a product,havingvarioussizes/specifications.havingvarioussizes/specifications.

Net priceNet price = price list (orlist= price list (orlist--price)lessdiscount (orprice)lessdiscount (orallowances). Business buyers are more interestedinallowances). Business buyers are more interestedinnet pricenet price

Types of discountsTypes of discounts : Trade, quantity (orvolume), and: Trade, quantity (orvolume), and

cash.cash.Trade discountsTrade discounts. It is offered to traders or. It is offered to traders orintermediaries(dealers / distributors / stockiest ) anditintermediaries(dealers / distributors / stockiest ) anditshould be equal andsufficient (as perindustry norms orshould be equal andsufficient (as perindustry norms orfunctions performed).functions performed).

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Cash DiscountsCash Discounts. The objective is to get prompt. The objective is to get prompt

payments. If a credit customerpays the bill beforepayments. If a credit customerpays the bill beforedispatch orwithin 7dispatch orwithin 7--days ofdispatch, the customerdays ofdispatch, the customerisgivencash discount on the gross amount of bill..isgivencash discount on the gross amount of bill..

Geographical PricingGeographical Pricing

It includesdecisions on how to price the companysIt includesdecisions on how to price the companysproducts to customerslocatedindifferentproducts to customerslocatedindifferent

geographic areas. There are two alternatives:geographic areas. There are two alternatives:

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((ii)) ExEx Factory PricingFactory Pricing. It means prices quoted are. It means prices quoted arebased on the prices at the factory gate,i.e. freightbased on the prices at the factory gate,i.e. freight

( transportationcosts) and transit insurance costs are to( transportationcosts) and transit insurance costs are tothe customers accounts. Hence, the landed price (orthe customers accounts. Hence, the landed price (orcosts) to customersvary depending on theircosts) to customersvary depending on theirgeographiclocations.geographiclocations.

(ii)(ii) F.O.R. Destination PricingF.O.R. Destination Pricing. Here, the quoted. Here, the quotedpricesinclude freight costs. Transit insurance is apricesinclude freight costs. Transit insurance is asmall amount to be covered by the customers opensmall amount to be covered by the customers openinsurance policy. Hence, allcustomersget theinsurance policy. Hence, allcustomersget theproduct almost at the same price,despite differentproduct almost at the same price,despite different

geographiclocations. Marketeradds the averagegeographiclocations. Marketeradds the averagefreight cost to the basic prices and then prepares thefreight cost to the basic prices and then prepares thepriceprice list, orabsorbs the freight cost,ifcompetitionlist, orabsorbs the freight cost,ifcompetitiondemands.demands.

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Taxes and DutiesTaxes and Duties. Knowledge of. Knowledge of

exciseexcise duty,sales tax,duty,sales tax, octroioctroi,,

entryentry tax, roadtax, road permits etcispermits etcisessential forsales andmarketingessential forsales andmarketing

persons,since they have animpactpersons,since they have animpact

on the landed price (orcosts) toon the landed price (orcosts) tobusiness buyers.business buyers.

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ROLE OF LEASING.

Business buyers have options of eitherleasing orBusiness buyers have options of eitherleasing or

buyingcapitalitemslike machinery.buyingcapitalitemslike machinery. The advantagesThe advantages

for the lessee (asset user) are :(i)conservingcapital,for the lessee (asset user) are :(i)conservingcapital,

(ii)gaining tax advantages, (iii)getting the latest(ii)gaining tax advantages, (iii)getting the latest

products. The lessor(asset owner) often earnsgoodproducts. The lessor(asset owner) often earnsgoodincome from buying firms who cannot afford outrightincome from buying firms who cannot afford outright

purchase.purchase.

A leaseA lease is a contract (oran agreement) by which theis a contract (oran agreement) by which theasset owner(lessor)gives the right to use the assetasset owner(lessor)gives the right to use the asset

to anotherparty (lessee)inreturn forpayment, overato anotherparty (lessee)inreturn forpayment, overa

specified period.specified period.

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Types of LeasesTypes of Leases ::((ii) Financial(or full) Financial(or full payment)leases,payment)leases,

and(ii) operating(service orrental)and(ii) operating(service orrental)

leasesleases

Financial leasesFinancial leases. These are full. These are full

payment,nonpayment,non -- cancellable,longcancellable,long -- termterm

contracts and fully amortized(sum ofcontracts and fully amortized(sum of

lease payments purchase price oflease payments purchase price of

capitalitem)capitalitem)

>

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Operating LeasesOperating Leases are service/rentalare service/rentalleases, that are cancellable,shortleases, that are cancellable,short--termtermcontracts oragreements, and are notcontracts oragreements, and are notfullyfully amortisedamortised. The rates are higher. The rates are higherthan those of financialleases, becausethan those of financialleases, becauserisk of obsolescence are of therisk of obsolescence are of the lessorlessor

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Otherpricingpolicies Zone pricingZone pricing Psychological pricingPsychological pricing

Bundle pricingBundle pricing

Promotional PricingPromotional Pricing

Premium pricingPremium pricing

Price discriminationPrice discrimination

CaptiveCaptiveHEENA SHARMA

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