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pricing
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PRICING DECISIONS
II ELEMENT OF MARKETING MIX
PRICE Price is the amount of money charged for a product or
service.
Of all marketing mix elements price is the only one
which generates revenue for the company.
Price is said to be the most flexible element of the
marketing mix as it can be changed quickly.
Price to a large extent depends on the number of
competitors and level of competition.
FACTORS INFLUENCING PRICE DETERMINATION
EXTERNAL FACTORS
Market Characteristics - Major Firm resort to low
pricing in the time recession Eg. HUL decreased the
price of Pepsodent , Coca Cola also dropped the prices
of all its 330 ml cans from Rs. 25 to Rs. 20.
Buyer Behavior in respect of the product – Diamond
Government controls / regulation on Pricing – Sugar
Prices, Oil Prices etc.
Competitor’s Pricing Strategy.
FACTORS INFLUENCING PRICE DETERMINATION
Two types of factors – Internal & External Internal Factors : 1. Price as per the objectives of the firm – For example-
Wal Mart’s objective is to Provide the customers what they want, when they want it, all at a value, and therefore they follow EDLP.
2. Stage of Product life Cycle.3. Manufacturing Costs – Price difference in China v/s
other countries4. Nature of the Product. Eg Necessity, Luxury
PRICING OBJECTIVES Profit Maximization in Short Term/ Long Term A minimum return on Investments. Achieving Particular Market Share. Deeper Penetration of the market Entering New Markets. Counter the Competition. Keeping at Pace with Competition. Providing the commodities at prices that will
stimulate Economic Development. Providing the commodities at prices affordable by
weaker section.
PRICING METHODS / APPROACHES
COST- BASED PRICING
DEMAND BASED PRICING / VALUE
BASED
COMPETITOR BASED
COST – BASED PRICING Cost based pricing considers cost to be an
important element of the price. Under this method Price is decided on the basis of Cost of the product. Following Policies are used under this strategy:
Cost Plus Pricing / Mark Up Pricing – Mark up Pricing involves fixing a price for a product by adding mark ups/ margins to the cost price.
Mark ups are decided by trial and error and there is no fixed criteria of reaching the mark up.
Eg. Honda . Recent Case of KFAR : And a decision for Cost
Based Pricing.
COST – BASED PRICING CONTD… Target Return Pricing / Break Even Pricing : The Firm
Decides that price which would yield its target rate of ROI. GM used to price its automobile to achieve a 15 % - 20% ROI.
Formula ,Target Return Price = Unit Cost + Desired return * Invested Capital
Unit Sales
Eg Investment = Rs 10,00,000, ROI = 20% , Unit Sales(Projected) = 50,000, Unit Cost 20
T. R. P = 20 + .20 * 10,00,000 50,000 T.R.P = Rs. 24
DEMAND BASED PRICING / VALUE BASED PRICING
Under this method Price of a Product is determined keeping the demand concept into the mind :
Following Policies are popular under this strategy : What the Market can Bear Pricing : The highest price
that the consumers are willing to pay for the product under a specific situation, that price is fixed.
Skimming Pricing (For New Products) : Keeping high initial Prices to skim the high end customers and then settle to low prices later on. Eg. A good Strategy for Luxury and Speciality Products. LG Electronics in India.
Peneteration Pricing (For New Products) : Seeks penetration in the Market with Low Prices. Appropriate for large sales of no frill products. Eg. Reliance Communications.
COMPETITION – ORIENTED PRICING Under this Pricing approach Firm fixes it price Keeping the
price of the Competitor in the mind : Following Policies are majorly used : Premium Pricing : Charging a Price above the Price of the
competitor. Eg. Bentley, Rolex. Discount Pricing : Charging the Price below the Prices charged
by the Competitor. Eg. Big Bazar , Easy Day. A very popular strategy in recent past in Indian Aviation sector.
Kodak & Fuji Films in USA markets in Late 1990’s. Going Rate Pricing : Charging the same price as the
competitor. Majorly famous for Industrial Products like Steel, Paper etc.
EXAMPLE OF COMPETITION BASED PRICING
Pay- Per- Second Pricing in Telecom Sector of India.
Tata- Docomo entered the market in June 2009 by Pay-
per use plan. On Oct 30 Aircel Announced its Pay – Per –
Second Plan. Airtel also announced per-second pricing
later.
ADAG, Reliance Com followed the suit on 3rd Nov 2009
for both GSM and CDMA
4TH Nov Vodafone also launched same scheme.
6th November BSNL also adopted the policy.
PRICING TO VALUE Is based on assumption that the objective is not cover
cost but to realize the value of the product perceived by the customer. Following Policies are popular :
Perceived Value Pricing : Few companies Price their products on Customer’s Perceived value, Perceived Value is made up of several elements like (Quality, Warranty, Customer service, Brand name etc). Companies Charge Premium Price for a Positive Perceived value for their products. Eg. Apple, Caterpillar, Louis Vuitton.
Value Pricing : The companies win Loyalty of customers by charging Fairly low prices for good Quality offerings ( Claim to Provide Value for Money) eg. Wal Mart, Big Bazar, Bata, Jet Lite.
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MARKET ENTRY PRICING STRATEGIES
Market-Skimming PricingMarket-Skimming Pricing: Setting a high initial price for a new product.Works if product is new, distinctive and desiredEarly in Product Life Cycle, when demand
inelasticProtected by entry barriers, e.g. patents
Market-Penetration PricingMarket-Penetration Pricing: Setting a low initial price for a new product.Works if large market, elastic demandEconomies of scale are possibleFierce competition
PRODUCT MIX PRICING STRATEGIES
1. Product Line Pricing : Pricing the entire Product line
Optimally, in order to ensure there is minimal chance of
self – cannibalization.
Usually marketers differentiates their items in Product
line by different price levels : HUL : Wheel, Rin & Surf
Excel.
The customer thus associates it with low, medium and
high quality.
In such a case Perceived Quality difference should be
established to justify prices.
PRODUCT LINE PRICING : A CASE OF VARIANTS & HOW YOU JUSTIFY
NOKIA – LUMINA : Launched in India on 14th Nov 2011. Available widely by Mid dec 2011.
NOKIA – LUMNIA -800 NOKIA LUMINA - 710
Rs 29,000 Rs 19,000
512MB RAM 512MB RAM
3.7-inch screen (480 x 800 pixels) LED flash and 3.7-inch TFT screen (480 x 800 pixels)
8MP rear camera with dual-LED flash
5 megapixels
16GB storage. 8GB storage
Very Elegant and High End Look Average Looking
LUMINA – WHICH IS WHICH ?
PRODUCT MIX PRICING STRATEGIES
Optional Product Pricing : Relates to the pricing of the
accessories or the optional products.
The question “Which to price separately”?
Idea is to make “Usual things optional”
Prominent in Automobile sector ( Economy Model to
High end Model ) point of competition .
Also very much Popular in Aviation ( Extra Prices for the
blanket, Water, food etc. ) : Ryan Air, Indigo . American
Airlines in 2008 started the concept of charging for
checking bags.
OPTIONAL PRODUCT PRICING visit :
http://www.youtube.com/watch?v=tvu0j06rENQ&feature=player_embedded.
To see the optional product pricing in aviation sector.
PRODUCT MIX PRICING STRATEGIES
Captive – Product Pricing : Related to the pricing of the
products which are used along the main product.
Captive products are items designed specifically for use
with another product
Camera- Rolls, Printer- Cartridges, Razor- Blade.
HP selling low- priced printers but making money on
cartridges. Gillette with same strategy for blades, and
low priced razors.
PRODUCT MIX PRICING STRATEGIES
Product – Bundle Pricing : Combining the several
products and offering the bundle at reduced price.
Mostly used by retailers like Big – Bazar, Shopper’s
Stop.
Also popular in Tourism and Leisure Business : the total
package price less than the individual product prices.
TENDER PRICING Few firms, Basically in Industrial markets fix the prices on
the basis of tenders.
The Institutional Customers are called for competitive
bidding through sealed tenders or quotations.
the buyer looks for the lowest price.
The focus here is to fix a price that takes care of all costs
and profits and is low enough to get the business.
Eg. For Printing of Workbooks for an Institution , quotations
are invited. Lowest Quotation becomes the price of the
Workbook. And the contract is given to the bidder.
AFFORDABILITY BASED PRICING
This strategy is also called Social Welfare Pricing.
This strategy is popular in case of those products which are
basic needs of all the segments of consumers.
The pricing is done in such a way that all segments of the
total market can afford to buy and consume the product as
per their need.
Here price is Independent of Cost.
This Pricing Strategy is commonly used by the Government.
Eg. Item sold through PDS.
DIFFERENTIATED PRICING
Charging different prices for same product by the
same company in different market segments or zones.
This is mostly related to place of production ( Bread,
Rusk), Customer’s Ability to pay etc.
NOKIA’s Apps Store OVI is using differentiated Pricing
Strategy – Nokia having different Prices on OVI stores
as per the purchasing power of the customers pf
different countries. Eg. For same applications Pricces
are different in Pakistan, UK and USA.
Price Discrimination.
PSYCHOLOGICAL PRICING
Consumer Buying Decisions are influenced by Psychological Factors ( As per few Research findings)
The research reveals that customer responds better to certain types of prices and will more likely to buy items with these prices eg. Rs.
999 , 49, 449 etc.
This focus on a belief that people feel that they are getting savings on what they have bought.
Bata has been a Pioneer in this strategy and now other firms are also using this strategy.
INTERESTING PRICING STRATEGIES