MM-LECTURE Sheets -Developing Pricing Strategies and Programs

8/10/2019 MM-LECTURE Sheets -Developing Pricing Strategies and Programs

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DEVELOPING PRICING STRATEGIES AND PROGRAMS

Price is all around us

You pay rent for your apartment

You pay tuition for your educationYou pay a fee to your physician or dentist Airline/railway/taxi/bus companies charge you a fare Local utilities call their price a rate Local bank charges you interest for the money you borrowThe price for driving your car on Jamuna Bridge is toll The company that insures your car charges you a premium The guest lecturer charges an honorarium The price of an executive is salary The price of a sales person is commission Price of worker is wage Income tax - the price we pay for the privilege of making money

Setting the Price

Segment ExampleUltimate Mercedes BenzLuxury Audi, Lincoln, LexusSpecial Needs Volvo(safety), Porsche (performance)Middle Buick, Renault,Ease/Convenience EscortMe Too, But Cheaper HyundaiPrice Alone Yugo

Steps in Setting Price

Select the price objective Determine demand Estimate costs Analyze competitor price mix Select pricing method Select final price

Figure: Setting Pricing Policy


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Step 1: Selecting the Pricing Objective

Survival Maximum current profit Maximum market share Maximum market skimming Product-quality leadership

Survival

Companies pursue survival as their major objective if plagued with overcapacity, intensecompetition, or changing customer wants.To keep the plant operating and the inventories turning over. They will often cut prices.Profits are less important than survival.

As long as prices cover variable costs and some fixed costs, the companies stay inbusiness.It is a short run objective. The firm must learn how to add value.

Maximum Current Profit

Focused on maximizing current profit.Choose the price that produces maximum current profit, cash flow, or rate of return oninvestment.Focused on current financial performance this may not be effective in the long-run.It assumes that the firm has knowledge of its demand and cost functions; in reality, it is verydifficult to estimate.

Maximum Current Revenue

Focused on maximizing sales revenue.It requires only estimating the demand function.They believe that revenue maximization will lead to long-run profit maximization and marketshare- growth.

Maximum Sales Growth

They believe that higher sales volume will lead to lower unit costs and higher long-run profitThey set lowest price, assuming that the market is price sensitive. This is called market-penetration pricing.e.g. Texas Instrument (TI)

Market-penetration pricing- Best when: Market is highly price-sensitive, and a low price stimulates market growth,Production and distribution costs fall within accumulated production experience, andLow price discourages actual and potential competition

Maximum Market Skimming

Many companies favor setting high prices to skim the market. e.g. Du PontConditions:

A sufficient number of buyers have a high current demand Unit costs of producing small volumes are not high. High initial price does not attract more competition The price communicates the image of superior product.


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Product Quality Leadership

A company might aim to be the product quality leader in the market.e.g. Maytag builds high quality washing machines and prices them at roughly $ 100 more.Premium quality/premium price strategy

Step 2: Determining Demand

Price sensitivity- The demand curve shows the markets probable purchase quantityat different prices.

Estimating demand curves- Surveys Price experiments Statistical Analysis

Price elasticity of demand - Marketers need to know responsive, or elastic, demandwould be to a change in price.

Figure: Inelastic and Elastic Demand

Step 3: Estimating Costs

Types of Costs- Fixed, variable Accumulated Production- Learning curve Activity-Based Cost Accounting- Instead of standard cost accounting ABC accounting

tries to identify the real costs associated with serving each customer. Target Costing- Cost can be changed as a result of a concentrated effort by

designers, engineers, and purchasing agents to reduce them through target costing.

Cost Terms and Production

Fixed costs Variable costs Total costs Average cost Cost at different levels of production


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Figure: Cost per Unit as a Function of Accumulated Production: The Experience

CurveStep 4: Analyzing Competitors Costs, Prices, and Offers

The firm should first consider the nearest competitors price. If the firms offer contains features not offered by the nearest competitor, it should evaluatetheir worth to the customer and add that value to the competitors price If the competitors offer contains some features not offered by the firm, the firm shouldsubtract their value from its own price.

Figure: The Three Cs Model for Price Setting


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Perceived Value Pricing

Marketers see the buyers perceptions of value, not the sellers cost, as the key to pricing. They use non price variables in the marketing mix to build up perceived value in the buyersminds.It first well with product positioning thinking. A company develops a product concept for aparticular target market with a planned quality and priceMore for More philosophy e.g. Du Pont and Caterpillar are two major practitioners of perceived-value pricing

Value Pricing

Marketers charge a low price for a high-quality offering.e.g. Pricing of Lexus.More for less philosophy

Going Rate PricingBased on competitors prices with le ss attention paid to its own costs or demandThe firm might charge the same, more, or less than its major competitors.The smaller firms follow the leader. This pricing method is quite popular, Where costs are difficult to measure or competitiveresponse is uncertain.

Sealed Bid Pricing

Competitive- oriented pricing is common where firms bid for jobs.The firms bases its price on expectations of how competitors will price rather than on a rigid

relation to the firms costs or demand. The firm wants to win the contract.

Table: Effect of Different Bids on Expected Profit

Companys Bid

Companys Profit

Probability of GettingAward with This Bid(Assumed)

ExpectedProfit

$ 9,500 $ 100 0.81 $ 81

10,000 600 0.36 216

10,500 1,100 0.09 99

11,000 1,600 0.01 16


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Auction-Type Pricing

One major purpose of auctions is to dispose of excessinventories or used goods

English auctions- Ascending bids Dutch auctions- Descending bids. An auctioneer announces a high price for a

product and then slowly decreases the price until a bidder accepts the price.

Step 6: Selecting the Final Price

Impact of other marketing activities Company pricing policies Gain-and-risk sharing pricing Impact of price on other parties

Influence of the Other Marketing Elements

Brands with average relative quality but high relative advertising budgets charged premiumpricesBrands with high relative quality and high relative advertising budgets obtained the highestpricesThe positive relationship between high advertising budgets and high prices held moststrongly in the later stages of the product life cycle for market leaders

Figure: Nine Price-Quality Strategies

Initiating and Responding to Price Changes

Reactions to Price Changes Customer Reactions Competitor Reactions

Responding to Competitors Price Changes Maintain price Maintain price and add value Reduce price Increase price and improve quality Launch a low-price fighter line


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NOTE- for d etails please see:Marketing Management Kotler & Keller (12 th Edition),Marketing Management Philip Kotler (Millenium Edition)

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MM-LECTURE Sheets -Developing Pricing Strategies and Programs