mktg2007 egm pclass101112second
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1
Issues in Pricing
2
Useful Price terms
Gross Revenue
Net Revenue
Gross Margin
Contribution
Break-Even Volume
3
Useful Price terms
FOB : Free on Board
FOR : Free on Rail
CIF : Cost Insurance Freight
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Useful Price Concepts
Reservation Price
Zone of agreement
Customer Surplus
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dQ Q dP P/ / /
Price Elasticity Formula
Price Elasticity
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Useful Price Concepts
Administered Price Mechanism (APM)
explicit implicit
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Administered Price Mechanisms (APM) : regulation of price structure by the government
(i) the price may be set by some government agency like the Bureau of Industrial Costs and prices (BICP) or the Tariff Commission and the firm has to abide by it - e.g. Rs.1 per kwh to SEBs by NTPC as set by power ministry
(ii) the price may be set by a firm within the framework or on basis of a formula given by the government. e.g. set a tariff that allows 16% rate of return
(iii) the same efficiency produces apparently higher return on depreciated plants
Implicit administered price mechanisms : Tax concessions, amortisation oflicense fees, tax breaks for investments available for e.g. to the infrastructureindustries such as telecom indirectly influence prices and competition.
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Useful Price Concepts
Price Discrimination
Direct
Indirect
Temporal
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Direct Price Discrimination- customer segment pricing – electricity – residential and industrial use- product form pricing – Dettol hard soap different from liquid soap; satchets vs bottle- image pricing – Haute couture products and ego sensitive products such as
perfumes and expensive cars priced differently- location pricing – Movie tickets in PVR/INOX different from other theatres
Indirect Price Discrimination- Quantity discounts- Block Pricing e.g. landline telephone in bimonthly bills
Temporal Price Discrimination- telephones time of day- books – first hardcover, then paper back, then economy editions – price skimming
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Useful Price ConceptsBundling
Y
Z
A B
products
Segments
12 4
4 12
Reservation Price Table
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Bundling
Two products A, B; Two equal segments – Y,Z
Variable cost of A < 4, B < 4
As other forms of discrimination among Y,Z is difficult
P(A) = 12; P(B) = 12; Z do not buy A, Y do not buy B
Bundling Offer – P(A) = 12, P(B) = 12, P(A,B) = 16
All buy both A,B
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Useful Price Concepts
Reference Price
Cartels / Collusive pricing
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Generic pricing strategies
market skimming
market penetration
value for money
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Industrial pricing methods
published list prices
competitive bidding
cost-plus pricing
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Setting Pricing Policy
1. Selecting the pricing objective
2. Determining demand
3. Estimating Costs
4. Analyzing Competitors’ costs, prices, and offers
5. Selecting a pricing Method
6. Selecting the final price
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Selecting the Pricing Objective
Survival – overcapacity, intense competition, changing consumer wants, short term objective
Maximize current profit – may sacrifice long run performance
Maximize Market share – experience curve – falling cost, market penetration pricing, consumer is price sensitive,low price discourages competition
Maximize Market skimming – high price does not attract new entrants, high price indicates superior product
Product Quality leadership – Maytag
Partial Cost Recovery – Universities with grants
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Determine Demand
Establish Demand Curve – statistics on past data, price experiments, buy intention curve (ask)
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Estimating Costs
Variable Cost, Fixed Cost, Total Cost, Average Cost (= Total cost / No of units in Production)
Learning Curve: Decline in average cost with accumulated production experience is called experience curve or learning curve
Activity Based Costing (instead of standard cost accounting) : To find real costs of serving each customer
Target Costing – First Price is determined from its appeal and competitor prices Next target cost is obtained after deducting profit Achieve target cost by examining design, engg, m/f, sales If target cost is is not possible then drop product
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Analyzing Competitor’s Costs, Prices, Offers
Relative to competitors offering of benefits and their prices what should our firm offer given our benefits
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Selecting a Pricing Method
Markup Pricing
Target return Pricing
Perceived Value Pricing
Ceiling Price – Unique Product Features; Orienting Point – Competition and substitutes; Floor Price - Costs
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Value Pricing
Going Rate Pricing
Auction type Pricing
Group Pricing
Selecting a Pricing Method
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Markup Pricing = Markup on sales
Price = Unit Cost /(1- Desired Markup)
Markup Pricing works only if the marked up price brings in the expected level of sales
Target Return Pricing
Price = Unit Cost + (desired return * invested capital)/ (total sales in units)
One example is that it is used by General Motors
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Perceived Value Pricing (Offer more value than competitor and demonstrate it)
Perceived Value Price = F ( buyer’s image of product, channel deliverables, warranty quality,customer support, firm reputation, trustworthiness)
Dupont is a major practitioner
Buyers
Price buyers – stripped down product
Value buyers – keep innovating for these buyers
Loyal buyers – relationship building and customer initmacy
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Value Pricing
Low price for high quality offering e.g. WalMart.
It is as much a philosophy as a method
One pricing strategy based on Value Pricing is EDLP
Going Rate Pricing
Go by competitor’s prices
Charge same as, less than or more than competitor’s prices
Follow the leader pricing is another example as in Commodity oligopolies such as steel, paper, fertilizers
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Auction Type Pricing
One seller – many buyers, seller puts an item for sale and bidders raise prices to top pricee.g. real estate
Group Pricing
Group together and buy at discounts e.g. cooperatives
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Selecting Final Price
Factor to consider
-psychological pricing – price-quality combination, reference price, odd number pricing ($299/)
- Gain and risk sharing pricing -- Large IT orders the buyer may not realize gains; in which caseseller guarantees differences – full or part of it
-Influence of other Marketing Mix elements – such as advertising
- Company pricing policies
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Price Adaptations
-- Geographical
-- Price Discounts and Allowances- Cash discount, quantity discount, functional discount (given to intermediaries if they perform
certain functions), seasonal discount (off-peak buying), allowances (trade allowance to resellers for participating in trade-ins, promotion allowance given to resellers forparticipating in advertisement and promotion programs of the firm)
-- Promotional pricing - loss leader pricing, special event pricing ( Going to school program of Bata), Cash rebates (as in
jeweler shops) low interest financing (0% for 12 months), longer payment terms,warranties / service contracts, psychological discounting (price high and then discount)
-- Price discrimination
-- Product Mix Pricing - Product line pricing, optional feature pricing (power windows for car), captive product pricing (razor is low price and blade is high price), two part pricing (telephones), bundling
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