Marketing 21

PRICING METHODS 18-1

A. COST-BASED PRICING Under cost based pricing the marketer primarily looks at production costs as the key factor in determining the initial price. This method offers the advantage of being easy to implement as long as costs are known. But one major disadvantage is that it does not take into consideration the target market’s demand for the product. This could present major problems if the product is operating in a highly competitive market where competitors frequently alter their prices. 18-2

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MARKUP ON COST Using this method price is determined by simply multiplying the cost of each item by a predetermined percentage then adding the result to the cost. A major general retailer, may apply a set percentage for each product category (e.g., women’s clothing, automotive, garden supplies, etc.) making the pricing consistent for all like-products. Alternatively, the predetermined percentage may be a number that is identified with the marketing objectives (e.g., required 20% ROI). The calculation for markup on cost is: Item Cost + (Item Cost x Markup Percentage) = Price 50 + (50 x .30) = Rs 65 18-3

(II) COST-PLUS PRICING Cost-plus pricing also adds to the cost by using a fixed monetary amount rather than percentage. For instance, a contractor hired to renovate a office owner’s office will estimate the cost of doing the job by adding their total labor cost to the cost of the materials used in the renovation. The homeowner’s selection of carpet to be used in is likely to have little effect on the labor needed to install it whether it is a low-end, low priced tile or a high-end, premium priced carpet. Assuming most material in the office project are standard sizes and configuration, any change in the total price for the renovation is a result of changes in material costs while labor costs are constant. 18-4

(III) BREAKEVEN PRICING Breakeven pricing is associated with breakeven analysis, which is a forecasting tool used by marketers to determine how many products must be sold before the company starts realizing a profit. The formula for determining breakeven takes into consideration both variable and fixed costs as well as price, and is calculated as follows: Fixed Cost = Number of Units to Breakeven Price – Variable Cost Per Unit 18-5

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 For example, assume a company operates a single-product manufacturing plant that has a total fixed cost per year of Rs. 3,000,000 and the variable cost (e.g., raw materials, labor, electricity, etc.) is Rs. 45.00 per unit. If the company sells the product directly to customers for Rs.120, it will require the company to sell 40,000 units to breakeven.  3,000,000 = 40,000 units 120 - 45

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B. TARGET RETURN PRICING

 In this method marketer sets price to achieve a target return-on-investment (ROI). For example, let's assume that marketer have invested Rs.10,000 in the company. Expected sales volume is 1,000 units in the first year. Marketer want to earn all his investment in the first year, so he need to make Rs.10,000 profit on 1,000 units, or Rs. 10 profit per unit, giving a price of Rs. 60 per unit. 18-8

C. VALUE-BASED PRICING  Companies price their product based on the value it creates for the customer. This is usually the most profitable form of pricing, if one can achieve it.  In this method it is the buyers perception of value and not the sellers cost which is the key to the product pricing.  Let's say that a tube light manufactured by Mahamaya Electric Devices saves the typical customer Rs.1,000 a year in, say, energy costs. In that case, price tag of Rs.60 seems too cheap. If the product reliably produced that kind of cost savings, company could easily charge Rs.150, Rs.200 or more for it, and customers would gladly pay it, since they would get their money back in a matter of months.

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Value Example: ITL Tractor is Rs 100,000 vs. Market Rs. 90,000 Rs. 90,000 if equal 7,000 extra durable 6,000 reliability 5,000 service 2,000 warranty Rs. 110,000 in benefits Rs. 10,000 discount! 18-10

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D. PSYCHOLOGICAL PRICING This method takes into consideration the consumer's perception of price.  Odd-Even Pricing: a product priced at Rs. 299.95 may be perceived as offering more value than a product priced at Rs. 300.00.  Prestige Pricing: The higher the price the more likely customers are to perceive it has being higher quality compared to a lower priced product. marketers, looking to present an image of high quality, may choose to price products at even levels (e.g., Rs. 100 rather than Rs.99.99).

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E. MARKET PRICING  Under the market pricing method cost is not the main factor driving price decisions; rather initial price is based on analysis of market research in which customer expectations are measured.  The main goal is to learn what customers in an organization’s target market are likely to perceive as an acceptable price. 18-13

F. COMPETITION BASED PRICING When setting price it makes sense to look at the price of competitive offerings. For some, competitor’s price serves as an important reference point from which they set their price.  Below Competition Pricing: A marketer attempting to reach objectives that require high sales levels (e.g., market share objective) may monitor the market to insure their price remains below competitors.  Above Competition Pricing: Marketers using this approach are likely to be perceived as market leaders in terms of product features, brand image or other characteristics that support a price that is higher than what competitors offer.  Parity Pricing: A simple method for setting the initial price is to price the product at the same level competitors price their product. 18-14

A successful pricing strategy must be driven by the "Three C's" of pricing strategy: Customers, Competitors, and Costs.

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Product Line Pricing Setting Price Steps Between Product Line Items i.e. Rs. 299, Rs. 399

Product Mix Pricing Strategies

Optional-Product Pricing Pricing Optional or Accessory Products Sold With The Main Product i.e. Car Accessory Captive-Product Pricing Pricing Products That Must Be Used With The Main Product i.e. Razor Blades, Film, Software, telephone By-Product Pricing Pricing Low-Value By-Products To Get Rid of Them i.e. Lumber Mills, Zoos Product-Bundle Pricing Pricing Bundles Of Products Sold Together i.e. Season Tickets, Computer Makers 18-16

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Price Adjustment Strategies

Discount & Allowance Reducing Prices to Reward Customer Responses such as Paying Early or Promoting the Product.

Segmented Adjusting Prices to Allow for Differences in Customers, Products, or Locations.

Cash Discount

Customer

Quantity Discount

Product Form

Functional Discount

Location

Seasonal Discount

Time

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Psychological Pricing

• Adjusting Prices for Psychological Effect. •Price Used as a Quality Indicator.

Promotional Pricing

• Temporarily Reducing Prices to Increase Short-Run Sales. • i.e. Loss Leaders, Special-Events

Geographical Pricing

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

International Pricing

• Adjusting Prices for International Markets. • Price Depends on Costs, Consumers, Economic Conditions & Other Factors. 18-19

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Microsoft – has been accused of predatory pricing strategies in offering ‘free’ software as part of their operating system – Internet Explorer and Windows Media Player - forcing competitors like Netscape and Real Player out of the market.

Deliberate price cutting or offer of ‘free gifts/products’ to force rivals (normally smaller and weaker) out of business or prevent new entrants- Destroyer/Predatory Pricing

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INITIATING AND RESPONDING TO PRICE CHANGES Competitor Reactions to Price Changes

Initiating Price Cuts

Price Changes Buyer Reactions to Price Changes

Initiating Price Increases

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Has Competitor Cut Price?

Will Lower Price Negatively Affect Our Market Share & Profits?

No Hold Current Price; Continue to Monitor Competitor’s Price.

No

Reduce Price

Can/ Should Effective Action be Taken?

No

Raise Perceived Quality

Yes

Improve Quality & Increase Price Launch Low-Price “Fighting Brand” 18-24

HOW TO SET PRICE?  RESEARCH  Monadic Design In monadic design, each respondent is exposed to one, and only one, price point for any given product.  Comparative design Comparative testing asks people to evaluate brand X first at one price and then again at a second price. It is a more sensitive testing.  Declarative design What do you, as a consumer, believe that this product is really worth to you? In declarative design, each respondent is asked to volunteer his or her own maximum and/or reasonable, acceptable prices. 18-25

A. PRICE SENSITIVITY METER Introduced in the 1970s by a Dutch economist, Peter van Westendorp. The premise of the PSM is to ask respondents four pricerelated questions and then evaluate the cumulative distributions for each question. Specifically, respondents are asked:    

At what price would you consider the product to be so expensive that you would not consider buying it? (Too expensive) At what price would you consider the product to be priced so low that you would feel the quality couldn’t be very good? (Too cheap) At what price would you consider the product starting to get expensive, so that it is not out of the question, but you would have to give some thought to buying it? (Expensive) At what price would you consider the product to be a bargain, a great buy for the money? (Cheap)

The cumulative frequencies obtained are then plotted and the four key intersections are interpreted. 18-26

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 The point at which an equal number of respondents believe the test product is expensive as believe it is too cheap is referred to as the point of marginal cheapness (PMC). The point at which an equal number of respondents believe the test product is too expensive as believe it is cheap is referred to as the point of marginal expensiveness (PME). The point at which an equal number of respondents believe the test product is expensive as believe it is cheap is referred to as the indifference price point (IPP). The point at which an equal number of respondents believe the test product is too expensive as believe it is too cheap is referred to as the optimal price point (OPP).  In this method, the optimal price point for a product is the point at which the same number of respondents indicate that the price is too expensive as those who indicate that the price is too cheap. 18-28

B. CONCEPT TEST/CONCEPT EVALUATION

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 Probably would purchase Might or might not purchase Probably would not purchase Definitely would not purchase

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C. CONJOINT ANALYSIS Which refrigerator would you prefer? Ice within 15 minutes

Ice within one-hour

Rs. 8000

Rs. 7000

Strongly Prefer Strongly Prefer Product on Left 1

2

Product 3

4

on Right 5

6

7

8

9

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D. DISCRETE CHOICE

BRAND X

BRAND Y

BRAND Z

NONE

75 Channels

250 Channels

150 Channels

Extremely clear picture quality

Clear picture quality

Somewhat fuzzy picture quality

Rs. 10, 000

Rs. 9,000

Rs. 8,000

If these were alternatives only I would not purchase anything

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THANKS YOU 18-32