Pricing Strategy Unit-

PRICING STRATEGY PRICE Quantity of money received by the seller Price =

-----------------------------------------------Quantity of goods & services received by the buyer

Pricing strategy • Success of any business depends on long run profit, growth,& survival objectives • Contributing to +ve cash flow, price helps to finance growth objectives • A diversed firm with multiple product lines can hold several pricing strategy in operation at one time

New product introduction • •

Substantial investment stage How fast a firm should recover its investment depends on

- nature of product & its life span - Strength of potential competition - Type of demand - Financial strength of the company Stra teg ies for p ricin g a ne w prod uct • Market skimming • Market penetration

Market skimming strategy • Charge an artificially high price & gradually reducing over time • If development & marketing cost recovered before competitors enter, surplus earnings used for product improvement & expansion into large volume markets thus reducing average cost of producing • Skimming is more effective when the product has strong patent protection or other barriers to market entry exist(complex tech. Or high capital requirements) • Drawback: High margins attract competition

Market penetration strategy • Penetration pricing is based on the assumption that demand for product is highly elastic • By setting low price ,firm stimulates market growth , capture large share & thereby increases its scale & efficiency of operation,realizing lower production cost than competitors Dr awb acks: • Larger volume must be sold before startup cost are recovered.Thus, short run profits are sacrificed to gain mkt. Share & long run profits • The profit ratio is lower (profit on sales)

Pricing strategy • Skimming & penetration pricing strategies are only guides & cannot be applied in all situations • Choice of an appropriate pricing strategy for new product is based on - firms objectives - Relevant customer segments - Impact of price on the actions of competition - Cost considerations - Distribution strategies

Product life cycle considerations

• Gro wth more customers start use for product, competitors are able to offer substitutes ---- price decision • Marketers face a pressure of lowering the prices below introduction stage • Buyers develop different purchasing policy as more than one suppliers enter the market , thus, making the innovator firm to lower the price

Maturity stage pricing strategy

• Competitors are wellentrenched & aggressive • To increase sales volume,marketer has to cut into competitor’s mkt share • Pricing strategy : lowering the price • Buyers – cost benefit analysis of various suppliers

Decline stage pricing strategy

• Reduce cost to earn profit & not price • Cut price to increase the sales volume & use the product to sell other products in the product mix • If competitors withdrawn from the mkt, marketers can consider selective increase in price in some segment which are not price sensitive

Competitive bidding • Clo se d b id

Starts with a formal invitation to potential suppliers to submit written, sealed bids & all bids are opened & reviewed at a pre established time

• Open bid Suppliers make a series of oral or written offers up to a specified date

Competitive bidding Developing bids is a costly & time consuming process Awarding of bids is highly dependent on PRIC E

• Bi dding Strat egy - Prebid Analysis - Bid Determination

Prebid analysis

• Company objectives Assist the firm in deciding what type of business to pursue, when to bid, & the level of pricing to use • Sc re eni ng Bi d oppor tuni ties

3 stages in screening

 A identification of criteria deemed

important in evaluating contracts  A measure of their relative importance  An evaluation of bid opportunity To assess the value of various bids, marketing mgr must consider – plant capacity, competition, delivery requirements & profits

Bid Determination

Optimal bid price is dependent on • Perception of how competitors might bid • Profit to be expected if the bid is accepted • Probability that contract will be won

A high bid with a large expected profit has LOW probability of acceptance A low bid with little or no profit has HIGH probability of acceptance • Price determination in competitive bidding ------- Probability model (evaluating potential profits)

Bidding model Obj : To determine the optimum

level of profit if the bid is accepted & likelihood of its acceptance Optimum bid – Offers highest expected payoff.

It would maximize E(A) as expressed in the equation

E(A) = P(A) x T(A) Where, A = Bid price in rupees E(A) = Expected profit at bid price A P(A) = Probability of acceptance of the bid price A T(A) = Profit if the bid price is accepted

Assessment on possible bid prices Bid price (A)

Total cost/unit (c )

P(A)

T(A) = A-C

E(A) =

P(A)x T(A

450

350

0.00

100

0

440

350

0.05

90

4.50

430

350

0.15

80

12

420

350

0.25

70

17.50

410

350

0.40

60

24

400

350

0.50

50

25

390

350

0.60

40

24

380

350

0.72

30

21

370

350

0.85

20

17

360

350

0.90

10

9

350

350

0.92

0

0

Price Negotiation • Negotiation – Price,service, delivery, technical assistance, product characteristics & quality • Process begins with quotation/ bid , later modified to reflect requirements of buyers & strengths of seller • Employed – new products • With no experience in estimating cost – sellers prefer to negotiate • Buyers – negotiated price is closer to right price than original quotations • Sellers – requires skill, experience & preparation

Negotiation Strategy  A negotiated strategy  A dictatorial strategy  A defensive strategy  A gamesmanship strategy 100 %

defensive strategy

Buyers strength

X

negotiated strategy

Sellers strength

5%

gamesmanship strategy

100 %

dictatorial strategy 5%

Measuring buyer & seller strength

• Buyers strength - organization size

- amount of past purchase - future buying power - business periodicity - need for the product

• Sellers strength - company image

- product quality & uniqueness - delivery capability - technical assistance - post sale service

Measurement table Strength Criteria

Scale Value (1-10)

Org. size

9

Weights Total score 4

Past purchase Repeat Purchase Total score = % score = 54%

&

62%

36

Evaluating Buyer & Seller product Need • Tactics in negotiation process depend on buyers need for the product w.r.t to sellers need for the sale • Buyers product need classified as - Acute , Moderate or marginal • Sellers need to make sale >Acute – operating well below capacity,or to secure prototype order leading to repeat business >Marginal – production is near full capacity or no repeat orders

Determining key Negotiable factors • Seller – determine where the buyer stands w.r.t all factors relevant to negotiation • Factors – 3 categories  Non – Negotiable factors  Prime trade – off candidates  Non value factors Most industrial negotiations aim at win – win result