pricing methods

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PRICING METHODS

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A. COST-BASED PRICING

Under cost based pricing the marketer primarily looks Under cost based pricing the marketer primarily looks at at production costsproduction costs as the key factor in determining the as the key factor in determining the initial price. initial price.

This method offers the advantage of being This method offers the advantage of being easy to easy to implementimplement as long as costs are known. But one major as long as costs are known. But one major disadvantage is that it does not take into consideration disadvantage is that it does not take into consideration the the target market’s demandtarget market’s demand for the product. for the product.

This could present major problems if the product is This could present major problems if the product is operating in a highly competitive market where operating in a highly competitive market where competitors frequently alter their prices. competitors frequently alter their prices.

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(I)(I) MARKUP ON COSTMARKUP ON COST

Using this method price is determined by simply Using this method price is determined by simply multiplying the cost of each item by a predetermined multiplying the cost of each item by a predetermined percentage then adding the result to the cost. percentage then adding the result to the cost.

A major general retailer, may apply a set percentage A major general retailer, may apply a set percentage for each product category (e.g., women’s clothing, for each product category (e.g., women’s clothing, automotive, garden supplies, etc.) making the pricing automotive, garden supplies, etc.) making the pricing consistent for all like-products. Alternatively, the consistent for all like-products. Alternatively, the predetermined percentage may be a number that is predetermined percentage may be a number that is identified with the marketing objectives (e.g., required identified with the marketing objectives (e.g., required 20% ROI). The calculation for markup on cost is:20% ROI). The calculation for markup on cost is:

Item Cost + (Item Cost x Markup Percentage) = Price Item Cost + (Item Cost x Markup Percentage) = Price 50 + (50 x .30) = Rs 6550 + (50 x .30) = Rs 65

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(II)(II) COST-PLUS PRICINGCOST-PLUS PRICING

Cost-plus pricing also adds to the cost by using a fixed Cost-plus pricing also adds to the cost by using a fixed monetary amount rather than percentage. monetary amount rather than percentage.

For instance, a contractor hired to renovate a office For instance, a contractor hired to renovate a office owner’s office will estimate the cost of doing the job by owner’s office will estimate the cost of doing the job by adding their total labor cost to the cost of the materials adding their total labor cost to the cost of the materials used in the renovation. The homeowner’s selection of used in the renovation. The homeowner’s selection of carpet to be used in is likely to have little effect on the 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 labor needed to install it whether it is a low-end, low priced tile or a high-end, premium priced carpet. priced tile or a high-end, premium priced carpet. Assuming most material in the office project are Assuming most material in the office project are standard sizes and configuration, any change in the standard sizes and configuration, any change in the total price for the renovation is a result of changes in total price for the renovation is a result of changes in material costs while labor costs are constant.material costs while labor costs are constant.

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(III)(III) BREAKEVEN PRICINGBREAKEVEN PRICING

Breakeven pricing is associated with breakeven Breakeven pricing is associated with breakeven analysis, which is a forecasting tool used by marketers analysis, which is a forecasting tool used by marketers to determine how many products must be sold before to determine how many products must be sold before the company starts realizing a profit. the company starts realizing a profit.

The formula for determining breakeven takes into The formula for determining breakeven takes into consideration both variable and fixed costs as well as consideration both variable and fixed costs as well as price, and is calculated as follows:price, and is calculated as follows:

Fixed Cost Fixed Cost = Number of Units to = Number of Units to BreakevenBreakeven

Price – Variable Cost Price – Variable Cost

Per UnitPer Unit

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

3,000,0003,000,000 = 40,000 units = 40,000 units 120 - 45 120 - 45

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B. TARGET RETURN PRICING

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

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C. VALUE-BASED PRICING

Companies price their product based on the value it creates Companies price their product based on the value it creates for the customer. This is usually the most profitable form of for the customer. This is usually the most profitable form of pricing, if one can achieve it.pricing, if one can achieve it.

In this method it is the buyers perception of value and not In this method it is the buyers perception of value and not

the sellers cost which is the key to the product pricing. the sellers cost which is the key to the product pricing.

Let's say that a tube light manufactured by Mahamaya Let's say that a tube light manufactured by Mahamaya Electric Devices saves the typical customer Rs.1,000 a year Electric Devices saves the typical customer Rs.1,000 a year in, say, energy costs. In that case, price tag of Rs.60 seems in, say, energy costs. In that case, price tag of Rs.60 seems too cheap. If the product reliably produced that kind of cost too cheap. If the product reliably produced that kind of cost savings, company could easily charge Rs.150, Rs.200 or more savings, company could easily charge Rs.150, Rs.200 or more for it, and customers would gladly pay it, since they would for it, and customers would gladly pay it, since they would get their money back in a matter of months.get their money back in a matter of months.

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Value ExampleValue Example::

ITL Tractor is Rs 100,000 ITL Tractor is Rs 100,000 vs. Market Rs. 90,000vs. Market Rs. 90,000

Rs. 90,000 if equalRs. 90,000 if equal 7,000 extra durable7,000 extra durable 6,000 reliability6,000 reliability 5,000 service5,000 service 2,0002,000 warranty warranty Rs. 110,000 in benefits - Rs. 110,000 in benefits -

Rs. 10,000Rs. 10,000 discount!discount!

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D. PSYCHOLOGICAL PRICING

This method takes into consideration the consumer's This method takes into consideration the consumer's perception of price.perception of price.

Odd-Even PricingOdd-Even Pricing: a product priced at Rs. 299.95 may : a product priced at Rs. 299.95 may be perceived as offering more value than a product be perceived as offering more value than a product priced at Rs. 300.00. priced at Rs. 300.00.

Prestige PricingPrestige Pricing:: The higher the price the more likely The higher the price the more likely customers are to perceive it has being higher quality customers are to perceive it has being higher quality compared to a lower priced product. marketers, compared to a lower priced product. marketers, looking to present an image of high quality, may choose looking to present an image of high quality, may choose to price products at even levels (e.g., Rs. 100 rather to price products at even levels (e.g., Rs. 100 rather than Rs.99.99). than Rs.99.99).

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E. MARKET PRICING

Under the market pricing Under the market pricing method cost is not the main method cost is not the main factor driving price factor driving price decisions; rather initial price decisions; rather initial price is based on analysis of is based on analysis of market research in which market research in which customer expectations are customer expectations are measured. measured.

The main goal is to learn The main goal is to learn

what customers in an what customers in an organization’s target market organization’s target market are likely to perceive as an are likely to perceive as an acceptable price. acceptable price.

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F. COMPETITION BASED PRICING

When setting price it makes sense to look at the price of competitive When setting price it makes sense to look at the price of competitive offerings. For some, competitor’s price serves as an important offerings. For some, competitor’s price serves as an important reference point from which they set their price. reference point from which they set their price.

Below Competition PricingBelow Competition Pricing: A marketer attempting to reach : A marketer attempting to reach objectives that require high sales levels (e.g., market share objective) objectives that require high sales levels (e.g., market share objective) may monitor the market to insure their price remains below may monitor the market to insure their price remains below competitors. competitors.

Above Competition PricingAbove Competition Pricing: Marketers using this approach are : Marketers using this approach are likely to be perceived as market leaders in terms of product features, likely to be perceived as market leaders in terms of product features, brand image or other characteristics that support a price that is brand image or other characteristics that support a price that is higher than what competitors offer.higher than what competitors offer.

Parity PricingParity Pricing: A simple method for setting the initial price is to : A simple method for setting the initial price is to

price the product at the same level competitors price their product.price the product at the same level competitors price their product.

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A successful pricing strategy must be A successful pricing strategy must be driven by the "Three C's" of pricing driven by the "Three C's" of pricing

strategy: strategy:

Customers, Competitors, and Costs. Customers, Competitors, and Costs.

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ProductMix

PricingStrategies

ProductMix

PricingStrategies

Product Line PricingProduct Line PricingSetting Price Steps Between Product Line Items

i.e. Rs. 299, Rs. 399

Product Line PricingProduct Line PricingSetting Price Steps Between Product Line Items

i.e. Rs. 299, Rs. 399

Optional-Product PricingOptional-Product PricingPricing Optional or Accessory Products

Sold With The Main Producti.e. Car Accessory

Optional-Product PricingOptional-Product PricingPricing Optional or Accessory Products

Sold With The Main Producti.e. Car Accessory

Captive-Product PricingCaptive-Product PricingPricing Products That Must Be Used

With The Main Producti.e. Razor Blades, Film, Software, telephone

Captive-Product PricingCaptive-Product PricingPricing Products That Must Be Used

With The Main Producti.e. Razor Blades, Film, Software, telephone

By-Product PricingBy-Product PricingPricing Low-Value By-Products To Get Rid

of Themi.e. Lumber Mills, Zoos

By-Product PricingBy-Product PricingPricing Low-Value By-Products To Get Rid

of Themi.e. Lumber Mills, Zoos

Product-Bundle PricingProduct-Bundle PricingPricing Bundles Of Products Sold Together

i.e. Season Tickets, Computer Makers

Product-Bundle PricingProduct-Bundle PricingPricing Bundles Of Products Sold Together

i.e. Season Tickets, Computer Makers

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Price Adjustment StrategiesPrice Adjustment Strategies

Discount & AllowanceReducing Prices to Reward

Customer Responses such asPaying Early or Promoting

the Product.

Discount & AllowanceReducing Prices to Reward

Customer Responses such asPaying Early or Promoting

the Product.

SegmentedAdjusting Prices to Allow

for Differences in Customers,Products, or Locations.

SegmentedAdjusting Prices to Allow

for Differences in Customers,Products, or Locations.

Cash DiscountCash Discount

Quantity DiscountQuantity Discount

Functional DiscountFunctional Discount

Seasonal DiscountSeasonal Discount

CustomerCustomer

Product FormProduct Form

LocationLocation

TimeTime

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

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

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

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

Psychological Pricing

Promotional Pricing

Geographical Pricing

International Pricing

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

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.

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INITIATING AND RESPONDING TO PRICE CHANGES

InitiatingPrice

Increases

CompetitorReactions

toPrice

Changes

Initiating Price Cuts

Buyer Reactions

to Price

Changes

Price Changes

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Hold Current Price;Continue to MonitorCompetitor’s Price.

Hold Current Price;Continue to MonitorCompetitor’s Price.

Reduce PriceReduce Price

Raise PerceivedQuality

Raise PerceivedQuality

Improve Quality& Increase PriceImprove Quality& Increase Price

Launch Low-Price“Fighting Brand”

Launch Low-Price“Fighting Brand”

Has Competitor CutPrice?

Has Competitor CutPrice?

Will Lower Price Negatively Affect Our

Market Share & Profits?

Will Lower Price Negatively Affect Our

Market Share & Profits?

Can/ Should EffectiveAction be Taken?

Can/ Should EffectiveAction be Taken?

Yes

No

No

No

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HOW TO SET PRICE?

RESEARCHRESEARCH Monadic DesignMonadic Design

In monadic design, each respondent is exposed to one, and In monadic design, each respondent is exposed to one, and only one, price point for any given product. only one, price point for any given product.

Comparative designComparative design

Comparative testing asks people to evaluate brand X first at Comparative testing asks people to evaluate brand X first at one price and then again at a second price. It is a more one price and then again at a second price. It is a more sensitive testing. sensitive testing.

Declarative designDeclarative designWhat do you, as a consumer, believe that this product is really What do you, as a consumer, believe that this product is really worth to you? In declarative design, each respondent is asked worth to you? In declarative design, each respondent is asked to volunteer his or her own maximum and/or reasonable, to volunteer his or her own maximum and/or reasonable, acceptable prices. acceptable prices.

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A. PRICE SENSITIVITY METER

Introduced in the 1970s by a Dutch economist, Peter van Introduced in the 1970s by a Dutch economist, Peter van Westendorp.Westendorp.

The premise of the PSM is to ask respondents four price-The premise of the PSM is to ask respondents four price-related questions and then evaluate the cumulative related questions and then evaluate the cumulative distributions for each question. Specifically, respondents are distributions for each question. Specifically, respondents are asked:asked:

At what price would you consider the product to be so expensive At what price would you consider the product to be so expensive that you would not consider buying it? (Too expensive)that you would not consider buying it? (Too expensive)

At what price would you consider the product to be priced so low 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)that you would feel the quality couldn’t be very good? (Too cheap)

At what price would you consider the product starting to get 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 expensive, so that it is not out of the question, but you would have to give some thought to buying it? (Expensive)to give some thought to buying it? (Expensive)

At what price would you consider the product to be a bargain, a At what price would you consider the product to be a bargain, a great buy for the money? (Cheap)great buy for the money? (Cheap)

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

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The point at which an equal number of respondents believe the test 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 product is expensive as believe it is too cheap is referred to as the point of marginal cheapnesspoint of marginal cheapness (PMC). The point at which an equal (PMC). The point at which an equal number of respondents believe the test product is too expensive as number of respondents believe the test product is too expensive as believe it is cheap is referred to as the believe it is cheap is referred to as the point of marginal point of marginal expensivenessexpensiveness (PME). The point at which an equal number of (PME). The point at which an equal number of respondents believe the test product is expensive as believe it is respondents believe the test product is expensive as believe it is cheap is referred to as the cheap is referred to as the indifference price pointindifference price point (IPP). The point (IPP). The point at which an equal number of respondents believe the test product 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 is too expensive as believe it is too cheap is referred to as the optimal price pointoptimal price point (OPP).(OPP).

In this method, the optimal price point for a product is the point at 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 which the same number of respondents indicate that the price is too expensive as those who indicate that the price is too cheap. too expensive as those who indicate that the price is too cheap.

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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

B. CONCEPT TEST/CONCEPT EVALUATION

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C. CONJOINT ANALYSIS

Ice within 15 minutes

Rs. 8000

Ice within one-hour

Rs. 7000

Which refrigerator would you prefer?

Strongly Prefer Strongly Prefer

Product on Left Product on Right

1 2 3 4 5 6 7 8 9

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D. DISCRETE CHOICE

BRAND X

75 Channels

Extremely clearpicture quality

Rs. 10, 000

BRAND Y

250 Channels

Clearpicture quality

Rs. 9,000

BRAND Z

150 Channels

Somewhat fuzzypicture quality

Rs. 8,000

NONE

If these werealternatives

onlyI would notpurchaseanything

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THANKS YOU

pricing methods

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