How should a company How should a company initially set prices initially set prices

for their products or sevices?for their products or sevices?

Setting Pricing PolicySetting Pricing Policy

1.1. Selecting the pricingSelecting the pricingobjectiveobjective

2. Determining demand2. Determining demand

3. Estimating costs3. Estimating costs

4.4. Analyzing competitors’Analyzing competitors’costs, prices, and offerscosts, prices, and offers

5.5. Selecting a pricingSelecting a pricingmethodmethod

6. Selecting final price6. Selecting final price

It is set as objective when:•If they are plagued with overcapacity.•Intense competition•Changing consumer wants

• Setting a price that produces maximum profit.

• The firm knows its demand and cost functions.

• The company may sacrifice long run performance.

• Higher sales volume will lead to lower unit costs and higher long run profit.

• Lowest price possible is set.

• Market penetration is their main motivation.

• The market is highly price sensitive and low price stimulates market growth.

• Production and distributed costs fall with accumulated production experience

• Low price discourages actual and potential competition.

• Start high and slowly drop over time.

• May not work if competitors price low.

• Can lead to outcry, when consumers buy at high price in beginning.

• Sufficient buyers have a high current demand.

• The unit costs of producing a small volume are high enough .

• Initial high price doesn’t attract competition.

• High price communicates superior product quality.

• Some brands wants to be- “affordable luxuries”

• Brands like, Rolls Royce, BMW, Armani have positioned themselves as quality leaders.

• They charge premium prices.

Price SensitivityPrice Sensitivity

• There are few or no substitutes or competitors.

• They are slow to change their buying habits

• They do not readily notice the higher price.

• They are slow to change their buying habits.

• They think the higher prices are justified.

• The product is more distinctive• Buyers are less aware of substitutes• Buyers cannot easily compare the quality• Part of cost is borne by another party.• Buyers cannot store the product.• Price is small compared to buyers’s

income

• Surveys

• Price Experiments.

• Statistical Analysis

• Greater the volume growth resulting from a 1 percent price reduction.

• Makes sense as long as cost price and selling price doesn’t vary proportionately.

• Long run price elasticity may differ from short run price elasticity.

• 1 percent decrease in prices led to 2.62 percent increase In sales.

• Price elasticity were higher for durable goods.• Inflation led to higher price elasticities• Promotional Price elasticities were higher

than actual price.• They are higher at the individual term.

• Variable Costs

• Fixed costs

• Total Costs= Variable Costs + Fixed costs

Costs at different levels of production

Cost per unit at different levels of production

• Firms must analyze the competition with respect to: Costs Prices Possible price reactions

• Pricing decisions are also influenced by quality of offering relative to competition

• Price-setting begins with the three “Cs”• Select pricing method:

– Markup pricing– Target-return pricing– Perceived-value pricing– Value pricing– Going-rate pricing– Auction-type pricing– Group pricing

Three C’sThree C’s

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Costs Competitors’prices andprices ofsubstitutes

Customers’assessmentof uniqueproductfeatures

Low PriceLow Price

No possibleNo possibleprofit atprofit atthis pricethis price

High PriceHigh Price

No possibleNo possibledemand atdemand atthis pricethis price

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1. Markup pricingVariable cost per unit =10$ , fixed cost =300,000$Expected unit sales = 50,000 unit

the unit cost is given by:Unit cost = 10$ + 300,000/50,000 =16$

Assume the manufacturer wants to earn a 20 percent markup on sales, the markup price is given by:

Markup price = unit cost /(1- desired return on sales) =16/(1- 0.2)= 20$It will make profit of 4$ per unit

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Target-return price = unit cost + desired return * invested capital Unit sales

2.Target-Return Pricing

Target-return price =16$ + 0.20 * 1,000,000

$50,000

pricing used to achieve a planned or target rate of return on investment

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3. Perceived-Value Pricing• Companies base their price on the customer’s perceived

value.• The key to perceived-value pricing is to deliver more value

than the competitor and to demonstrate this to prospective buyers.

• There are three groups of buyers :Price buyersValue buyersLoyal buyers

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4. Value Pricing• Win loyal customer by charging a fairly low

price for a high-quality offering, that means : reengineering the companies operations to be low-cost without sacrificing quality.

5. Going-Rate Pricing• The firm bases its price largely on competitors’

prices. (smaller firms “follow the leader”).• It is quite popular where costs are difficult to

measure or competitive response is uncertain.

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6. Auction-Type Pricing• One major purpose of auctions is to dispose of excess

inventories or used goods.• Three major types of auctions: 1- English auctions (ascending bids). 2- Dutch auctions (descending bids). 3- Sealed-bid auctions.

7. Group Pricing• Consumers and business buyers join groups to buy at a

lower price (www.volumebuy.com).

• Requires consideration of additional factors:– Psychological pricing– Influence of other marketing mix variables– Company pricing policies– Gain-and-risk-sharing pricing– Impact of price on other parties

Thank You.Thank You.