Pricing strategy

1. PRICING …

2. Structure of the Session …
• Essentials about pricing
• Basic concepts revisited
• Key questions which a brand manager faces
• Recommending an approach to pricing
• Developing the pricing strategy

3. Essentials about pricing
• Price is the only element in the marketing mix that produces
‘revenue’; the other elements produce ‘costs’
• Also, it is one of the two mix elements (along with
packaging) with a public face. The packaging says what the
brand is while the price should say what it is worth or what is
its value.
• Price is also the most flexible elements of the marketing mix.
It can be changed quickly, unlike product features and
channel commitments.

4. Essentials about pricing …
• Price can also convey image connotations regarding the
brand to its consumers.
• Finally, price is not only absolute but comparative and is
linked with the brand offer which is being made.

5. Basic Economic Concepts
Demand curve:
The relationship between a given set of prices and the
quantity bought at each price point.
Market demand curve:
Represents the sum total of the quantity demanded by all
individuals in that market at each price point.
Supply curve:
The relationship between the market price and the
amount of commodity that marketers are willing to
market at that price .

6. Basic elements of supply and demand
• Factors affecting demand:
 Average income
 Population
 Price of related products
 Preferences
 ‘Other’ influences on demand.

7. Basic elements of supply and demand (contd.)
Price of automobiles
(thousands of Rupees per unit)
P
D
D’
The role of marketing
(or product differentiation)
D
D’
Quantity demanded of automobiles
(millions per year)
Q

8. Basic elements of supply and demand (contd.)
• Factors affecting supply:
 Production availability
 Cost of production (prices of inputs & technological
advances)
 Prices of related goods
 Government policies
 ‘Other’ influences on supply

9. Elasticity of demand
• The price elasticity of demand measures how much the
quantity demanded of a good changes when its price
changes
 Price elasticity of demand = Ep
 Ep = Percentage change in quantity demanded
Percentage change in price

10. Elasticity and revenue
Value of demand Description
elasticity
Definition
Impact on revenues
Greater than Elastic demand
one (Ep>1)
% change in demand
greater than the %
change in price
Equal to one
(Ep=1)
% change in demand
similar to the change
in price
Unit-elastic
demand
Less than one Inelastic demand % change in demand
(Ep<1)
less than % change in
(relative) price
Revenues
increase when
price
decreases or
decreases
when price
increases
Revenues
unchanged
when price
decreases
Revenues
decrease when
price
decreases

11. Implications on Pricing
• Consumer price value relationship needs to be assessed and
price positioned accordingly.
• We need to recognise that price insensitivity can be
generated

12. Main approaches to pricing …
•
•
•
•
Premium pricing,
Penetration pricing
Economy pricing,
Price skimming

13. Nine Price-Quality Strategies
High
High
Product ..
Quality
Low
Price ..
Low

14. Price Positioning Options
Products Quality
High
Super
bargain
strategy
(Air Deccan)
Medium
Bargain
Strategy
(Big Bazaar)
Low
Economy
Strategy
Low
Penetration
strategy
(Motorola)
Average
quality
strategy
Shoddy –
goods
Medium
Price
Premium
strategy
(Benz)
Overpricing
strategy
Hit-and-run
strategy
High

15. Other approaches to pricing …
• Pschycological pricing
• Geographic pricing
• Product Line pricing
• Value pricing
• Captive pricing
• Optional procing
• Bundling

16. Price insensitivity can be generated
• How? : Desensitising factors can be used to diminish the
impact of price changes
• Desensitizing factors may either be through an
understanding of
consumer behaviour / impacting
consumer pschycgraphics and point-of-sale variations
• Where favourable desensitising differentials exist in a
particular sale, the sale will not be lost until the price is
increased more than the value of the desensitising
differentials

17. Price insensitivity can be generated (Contd.)
• Insensitivity will tend to be greater where:
 Point of Sale effectiveness
 After Sales
 Consumer loyalties are significant
 There are multiple dimensions of product quality
 Unit price is low
 The
product is more sophisticated or not fully
understood by the consumer

18. Some Concepts in Pricing …

19. Factors Influencing Price
Internal Factors
•
•
•
•
•
Marketing objectives
Marketing mix strategies
Costs
Organizational considerations
Market positioning influences
pricing strategy
•
Other pricing objectives:
 Survival
 Profit maximization
 Market share leadership
 Product quality leadership
•
Non Profit objectives:
 Partial or full cost recovery
 Social pricing

20. Factors to Consider When Setting Price
Internal Factors
•
•
•
•
•
Marketing objectives
Marketing mix strategies
Costs
Organizational considerations
Pricing must be carefully
coordinated with the other
marketing mix elements.
•
Target costing is often used to
support product positioning
strategies based on price
•
Non Price positioning can also
be used

21. Factors to Consider When Setting Price
Internal Factors
•
•
•
•
•
Marketing objectives
Marketing mix strategies
Costs
Organizational considerations
Types of costs:
 Variable
 Fixed
 Total costs
•
How costs vary at different
production levels will influence
price setting
•
Experience (learning) curve
effects on price

22. Factors to Consider When Setting Price
Internal Factors
•
•
•
•
Marketing objectives
Marketing mix strategies
Costs
Organizational considerations
•
Who sets the price?
 Small companies: CEO or
top management
 Large companies: Divisional
or product line managers
•
Price negotiations

23. Factors to Consider When Setting Price
External Factors
•
Types of markets
 Pure competition
 Monopolistic competition
 Oligopolistic competition
 Pure monopoly
•
Consumer perceptions of price
and value
•
Price-demand relationship
 Demand curve
 Price elasticity of demand
•
•
Nature of market and demand
Competitors’ costs, prices, and
offers
• Other environmental elements

24. Factors to Consider When Setting Price
External Factors
•
•
Nature of market and demand
Competitors’ costs, prices, and
offers
• Other environmental elements
•
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

25. Factors to Consider When Setting Price
External Factors
•
Economic conditions
 Affect production costs
 Affect buyer perceptions of
price and value
•
Reseller reactions to prices
must be considered
•
Government may restrict or
limit pricing options
•
Social considerations may be
taken into account
•
•
Nature of market and demand
Competitors’ costs, prices, and
offers
• Other environmental elements

26. Key issues which a manager faces ..
• How should a brand be priced for the first time?
• How should the price be changed over time to meet varying
circumstances and opportunities?
• When should the company initiate a price change, and how
should it respond to a competitor’s price change?

27. Recommended approach to pricing (contd.)
Stage I : Select a market target
Stage II : Choose a Brand Position
• Need to select a price which establishes the image
Stage III : Develop a marketing mix
• Determine the role which price has to play

28. Recommended approach to pricing (contd.)
Stage IV : Select a pricing policy
•
Questions that need to answered are :
 How should price compare with “average” prices in the industry ?
» How ‘above’ or ‘below’ ?
» Who comprises the ‘average’?
 How fast will we meet price reductions or increases by rivals ?
 How frequently is it advisable to vary price?
 To what extent is stability of price advantageous?
 How frequently should ‘price promotions’ be run?

29. Recommended approach to pricing (contd.)
Stage V : Determine a pricing strategy
• Formulate a strategy to guide management in setting price
during the time that the special situation endures.
Stage IV : Select specific price
• However, the ideal situation does not happen too often …..
What happens is :
 Price calculated/selected is not in line with ideal price so
hence :
» Re-examine assumptions
» Re-examine costs
» Re-examine sales plan

30. Finally … The Procedure for Price setting
Select the pricing objective
Estimate costs
Estimate margins
Establish Company price
Calculate excise,local taxes
and regional margins
Establish price

31. Procedure for Price setting (contd)
Establish price
Compare with competition
Confirm if in line with
strategy
Establish final price

32. Further …
• Parity pricing , Cost + pricing … etc
• ‘Market clearing price’
• Modern pricing concepts .. ‘reference price’ ,
‘EDLP’ ..