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Factors affecting price decisions
- 1. Factors Effecting Pricing Indian Institute of Management Raipur 1 Submitted By : Group 5 Manoj Bhoye 15PGP087 Nithin Manuka 15PGP088 Shruti Mate 15PGP089 Jaffar MD 15PGP090 Nabil Abdulla 15PGP091 Nikita Rokde 15PGP092 Marketing Management -II
- 2. Factors Affecting Price Decisions Indian Institute of Management Raipur 2
- 3. INTERNAL FACTORS Indian Institute of Management Raipur 3
- 4. Marketing Objectives & Marketing Mix Strategies • Survival: companies strive to survive against intense competition and changing consumer wants. The company stays in the business so long as the prices cover variable costs and some fixed costs. • Maximum current profit: companies estimate the demand and costs associated with alternative prices and choose the price that produces maximum profits, cash flows and return on investment. • Maximum market share: companies believe that a higher sales volume will lead to lower unit costs and higher long run profits. Hence they set the lowest price……often termed as penetration pricing Indian Institute of Management Raipur 4
- 5. Marketing Objectives & Marketing Mix Strategies • Maximum market skimming: here the company unveiling the new technology favor setting high prices to maximize market skimming. Here the price start high and slowly drop over time. • Product quality leadership: here in some brands position themselves as leaders in quality with a premium pricing and a very loyal customer base . For instance MERCEDES AND BMW CARS, TAJLUXURY HOTELS. • OTHER OBJECTIVES: Non profit and public organizations may have other objectives. For example a university, a charitable hospital, social institutions etc. Indian Institute of Management Raipur 5
- 6. Marketing Objectives & Marketing Mix Strategies Indian Institute of Management Raipur 6
- 7. Costs • Depends on it product life cycle • The costs of the product—its inputs—including the amount spent on product development, testing, and packaging required have to be taken into account when a pricing decision is made. So do the costs related to promotion and distribution. • For a product to be profitable it must attain a break even point • Its where a company recovers the money it has spend on a product and start attaining profits • Break even point is generally attained during growth or maturity stage Indian Institute of Management Raipur 7
- 8. Costs • Total cost = Fixed cost + Variable cost • Company tries to attain lower fixed cost per product by increasing its sales Indian Institute of Management Raipur 8
- 9. Organizational Consideration • It is the duty of the management who sets the price • Management must decide who within the organization should set prices. Companies handle pricing in a variety of ways. • For Small companies: CEO or top management • For Large companies: Divisional or product line managers • Price negotiation is common in industrial settings • Some industries have pricing departments. Indian Institute of Management Raipur 9
- 10. Organizational Consideration • In industries in which pricing is a key factor (aerospace, steel, railroads, oil companies), companies often have a pricing department to set the best prices or help others in setting them. • This department reports to the marketing department or top management. • Others who have an influence on pricing include sales managers, production managers, finance managers, and accountants. Indian Institute of Management Raipur 10
- 11. EXTERNAL FACTORS Indian Institute of Management Raipur 11
- 12. Nature of Market and Demand • In a perfect competition where the goods are similar and customers can switch from one product to another, the prices should be kept low or risk losing customers to competitors. Indian Institute of Management Raipur 12
- 13. Nature of Market and Demand • In a monopolistic competition, where goods are similar with many market players but slight differentiation is possible, the product can be priced at small premium. Indian Institute of Management Raipur 13
- 14. Nature of Market and Demand • In a Oligopolistic competition where a few players dominate the market, the price sticks at a certain level and the company loses customers if it tries to increase price and if it decrease price to attract customers, the competitors will also decrease price leading to loss in revenue Indian Institute of Management Raipur 14
- 15. Nature of Market and Demand • In a pure monopoly market, as there are no competitors, the company can charge high premium charges. In real, pure monopoly seldom exists. • When a new product is launched by Apple, it is priced high till the competitors introduce similar products at which point Apple reduces the price drastically Indian Institute of Management Raipur 15
- 16. Competition • Consider competitors’ costs, prices, and possible reactions when developing a pricing strategy • Pricing strategy influences the nature of competition – Low-price low-margin strategies inhibit competition – High-price high-margin strategies attract competition • Benchmarking costs against the competition is recommended Indian Institute of Management Raipur 16
- 17. Other Environmental Factors Factors Influencing Pricing Price Quality Relationship Product Line Pricing Explicability Competition Negotiating Margins Effect On Distributors & Retailers Political Factor Earning Very High Profits Indian Institute of Management Raipur 17
- 18. Other Environmental Factors Example: Product Line Pricing Indian Institute of Management Raipur 18
- 19. THANK YOU Indian Institute of Management Raipur 19
Hinweis der Redaktion
- Price is not determined by a simple step rather there are many factors affecting pricing decisions. The reason is that the price is a very sensitive issue for the customers in their purchasing behavior. Following are the two main factors that affect pricing decisions. 1– Internal Factors 2- External Factors Internal Factors: Internal factors are those factors that are related to the internal environment of the business. This means that the issues that prevail within the business organization and upon which the organization has control are included in this category. Internal factors further include the following. Marketing Objectives & Marketing Mix Strategies Costs Organizational Considerations Each of these is discussed one by one.
- Price can be used to accomplish other objectives for a business. Example include lowering of price to avoid increasing competition, keep prices competitive to make market stable and avoid government intervention, to increase demand by lowering prices etc. In short the decisions taken in respect of price affect other marketing mix variable decisions and so all of these decisions should be consistent with one another to make a marketing program effective. The business should also keep its product as differentiated and set relatively high price for the uniqueness of its product. In this way price is based on many non-pricing factors.
- Cost is the fundamental element in setting prices for a product or service. The simple rule is that the business charges such price that should not only cover all of the costs incurred in manufacturing, distribution and promotion of the product or service, but also provide a fair return on the invested money. If a business has low costs, then it can increase its sales and profit by lowering the price of its product or service. Kinds of Costs: Generally there are two major types of costs which are as follow. a) Fixed Cost b) Variable Cost Fixed Cost: The fixed cost is such cost that remains fixed and does not change with the changing level of production or sales. The total fixed cost remains same but fixed cost per unit may change. The example includes rent paid for the building, interest paid on loan, salaries to employee staff etc. Variable Cost: The variable cost is that kind of cost which changes with the change in the level of production and sales. Although the total variable cost change but the unit variable cost remains the same. For example, each car produced includes the variable cost of tires, metal sheets, Misc items etc that change with the increase or decrease in the quantity of production and sales. The management of the business should ascertain different level of costs with respect to different levels of production and sales so that the lowest cost can be attained for the determination of effective prices for the manufactured products or services.
- This factor includes the fact that who should be given the responsibility to set the price within the organization. There many ways to deal with such an issue. In smaller businesses, top management is responsible for setting the price of the product. On the other hand, in large organizations product line managers or divisional manager has the authority to set price for the product or service. In case of industrial markets, salespersons handle the pricing of product by negotiating with the customers within the pre-specified range of prices. In certain price sensitive industries (Oil Companies, Aerospace etc) have a separate pricing department that can either directly determine the best price or facilitates the pricing process of the business. In some firms, top management like the proposed prices of the lower level employees like salespersons etc.