Pricing strategy

Pricing
What are the issues ?
Price cannot be considered in isolation of value
Value Price
Product
Facility
Service
Expertise
Reputation
Money
Time
Inconvenience
Risk Taking
Price cannot be determined in isolation by the seller
Price is the “meeting point” between the buyer and the seller
Customer wants Value > Price. Company wants Price > Cost.
# of Customers
Average Size
Of a Customer
High
Low
HighLow
B2B
B2C
Individually Negotiated Price
Standard Price List
Standard Price
But negotiated discounts
Different Price Lists
For different classes of customers
We refer to strategic pricing ; not tactical pricing.
It really depends on “Value Spread” and not cost.
Value
Price
Cost
Customer Surplus
Seller’s Surplus
Value
Created
/ Added
Subjective
Decision
Objective
3 Main determinants of pricing are
1. Value the customer places on the product
2. Cost incurred by the marketing company
3. Asymmetrical influencing relationship ( who needs the other more ?)
Apart from being an “Exchange Value”
Price is a signal
Other things being equal ; Price signals quality
Other things being equal; Price signals who is it meant for
Organization structural effect on pricing
Time effect : senior people can have longer planning horizons
Portfolio effect : senior people, large portfolios, impact is spread
Pricing is driven by how the company
wants to respond to expectations of its stakeholders
 COMPANY
 Sales, Margins, Utilization, Geographic Penetration
 CUSTOMERS
 Positioning in the mind of the customer
 Customer loyalty and purchase behavior
 COMPETITORS
 Market share
 COLLABORATORS
 ROI of collaborators
 CONTEXT
 Compliance with statutes
Achieve a sale of 60000 cars in “C” segment cars in one year
Example : Increase sales by 25% in a market growing by 15%. Increase plant
utilization of X factory by 20%. Put pressure on competitor X to revise his plans.
Strengthen our dealer network in North.
Pricing in Practice
 Setting Price for the first time
 Changing the price because …
 The sale is declining
 The market share is declining
 When the price is higher (lower) than competitors.
 When middlemen seem disinterested
 Imbalance in product line prices.
 If existing price created distortion in the positioning
 Changes in the environment that affect rules, values, costs
You need to know your costs well for pricing
 The ratio of fixed costs to variable costs
 The economies of scale / learning curve
 The cost structure of a firm vis-à-vis competitors.
 Out-of-pocket costs
 Incremental costs
 Opportunity costs
 Replacement costs.
You need to know your competition well
 Published competitive price lists and advertising
 Competitive reaction to price moves in the past
 Timing of competitors’ price changes and initiating factors
 Information on competitors’ special campaigns
 Competitive product line comparison
 Assumptions about competitors’ pricing/marketing objectives
 Competitors’ reported financial performance
 Estimates of competitors’ costs—fixed and variable
 Expected pricing retaliation
 Analysis of competitors’ capacity to retaliate
 Financial viability of engaging in price war
 Strategic posture of competitors
 Overall competitive aggressiveness
How will demand be affected
 Ability of customers to buy.
 Willingness of customers to buy.
 Place of the product in the customer’s lifestyle
 Benefits that the product provides to customers.
 Prices of substitute products.
 Is demand unfulfilled or is the market saturated?
Strategies
Pricing strategy
New Products: Skimming Strategy
 Definition: Setting a relatively high price during the initial stage
of a product’s life.
 Objectives
 To serve customers who are not price conscious while the market is at the
upper end of the demand curve and competition has not yet entered the
market.
 To recover a significant portion of promotional and research and
development costs through a high margin.
 Requirements: :
 Heavy promotional expenditure to introduce product, educate consumers,
and induce early buying.
 Relatively inelastic demand at the upper end of the demand curve.
 Lack of direct competition and substitutes.
 Expected Results:
 Market segmented by price-conscious and not so price conscious
customers.
 High margin on sales that will cover promotion and research and
development costs.
 Opportunity for the firm to lower its price and sell to the mass market
before competition enters.
New Products: Penetration Strategy
 Definition: Setting a relatively low price during the initial stages
of a product’s life.
 Objectives
 To discourage competition from entering the market by quickly taking a
large market share and by gaining a cost advantage through realizing
economies of scale
 Requirements:
 Product must appeal to a market large enough to support the cost
advantage.
 Demand must be highly elastic in order for the firm to guard its cost
advantage
 Expected Results:
 High sales volume and large market share.
 Low margin on sales.
 Lower unit costs relative to competition due to economies of scale.
Established Products: Maintain the Price
 Definition: To maintain position in the marketplace (i.e., market
share, profitability, etc)
 Objectives: Maintain Status Quo
 Requirements:
 Firm’s served market is not significantly affected by changes in the
environment.
 Uncertainty exists concerning the need for or result of a price change.
 Firm’s public image could be enhanced by responding to government
requests or public opinion to maintain price.
 Expected Results:
 Status quo for the firm’s market position.
 Enhancement of the firm’s public image.
Established Products: Reduce the Price
 Objectives:
 To act defensively and cut price to meet the competition.
 To act offensively and attempt to beat the competition.
 To respond to a customer need created by a change in the environment.
 Requirements:
 Firm must be financially and competitively strong to fight in a price war if
that becomes necessary.
 Must have a good understanding of the demand function of its product.
 Expected Results:
 Lower profit margins (assuming costs are held constant).
 Higher market share might be expected, but this will depend upon the
 price change relative to competitive prices and upon price elasticity.
Established Products: Increasing the Price
 Objectives:
 To maintain profitability during an inflationary period.
 To take advantage of product differences, real or perceived.
 To segment the current served market.
 Requirements:
 Relatively low price elasticity but relatively high elasticity with respect to
some other factor such as quality or distribution.
 Reinforcement from other ingredients of the marketing mix; for example, if
a firm decides to increase price and differentiate its product by quality, then
promotion and distribution must address product quality.
 Expected Results:
 Higher sales margin.
 Segmented market (price conscious, quality conscious, etc.).
 Possibly higher unit sales, if differentiation is effective
Price Flexibility Strategy: One Price
 Definition: Charging the same price to all customers under
similar conditions and for the same quantities.
 Objectives:
 To simplify pricing decisions.
 To maintain goodwill among customers.
 Requirements:
 Detailed analysis of the firm’s position and cost structure as compared with
the rest of the industry.
 Information concerning the cost variability of offering the same price to
everyone.
 Knowledge of the economies of scale available to the firm.
 Information on competitive prices; information on the price that customers
are ready to pay.
 Expected Results:
 Decreased administrative and selling costs.
 Constant profit margins.
 Favorable and fair image among customers.
 Stable market.
Price Flexibility Strategy: Flexible Pricing
 Definition: Charging different prices to different customers for
the same product and quantity.
 Objective:
 To maximize short-term profits and build traffic by allowing upward and
downward adjustments in price depending on competitive conditions and
how much the customer is willing to pay for the product.
 Requirements: Usually implemented in one of four ways:
 by market / by product,
 by timing / by technology.
 Other requirements include
 A customer-value analysis of the product,
 An emphasis on profit margin rather than just volume.
 A record of competitive reactions to price moves in the past.
 Expected Results:
 Increased sales, leading to greater market share.
 Increased short-term profits.
 Increased selling and administrative costs.
 Legal difficulties stemming from price discrimination.
Product Line Pricing Strategy
 Definition: Pricing a product line according to each product’s
effect on and relationship with other products in that line,
whether competitive or complementary.
 Objective: To maximize profits from the whole line, not just
certain members of it.
 Requirements: Have the information needed to implement the
strategy. Usually this strategy is implemented in one of four
ways:
 For a product already in the line, strategy is developed according to the
product’s contributions to its pro rata share of overhead and direct costs.
 For a new product, a product/market analysis determines whether the
product will be profitable. Pricing is then a function of costs, profit goals,
experience, and external competition. to price moves in the past.
Leasing Strategy
 Definition: An agreement by which an owner (lessor) of an
asset rents that asset to a second party (lessee). The lessee
pays a specified sum of money, which includes principal and
interest, each month as a rental payment.
 Objective:
 To enhance market growth by attracting customers who cannot buy
outright.
 To realize greater long-term profits; once the production costs are fully
amortized, the rental fee is mainly profit.
 To increase cash flow.
 To have a stable flow of earnings.
 To have protection against losing revenue because of technological
obsolescence
 Expected Results:
 Well-balanced and consistent pricing schedule across the product line.
 Greater profits in the long term.
 Better performance of the line as a whole.
Leasing Strategy
 Requirements:
 Necessary financial resources to continue production of subsequent
products for future sales or leases.
 Adequate computation of lease rate and minimum period for which lease is
binding such that the total amount the lessee pays for the duration of the
lease is less than would be paid in monthly installments on an outright
purchase.
 Customers who are restrained by large capital requirements necessary for
outright purchase or need write-offs for income tax purposes.
 The capability to match competitors’ product improvements that may make
the lessor’s product obsolete.
 Expected Results:
 Increased market share because customers include those who would have
forgone purchase of product.
 Consistent earnings over a period of years.
 Greater cash flow due to lower income tax expense from depreciation write-
offs.
 Increased sales as customers exercise their purchase options.
Bundling-Pricing Strategy -1
 Definition: Inclusion of an extra margin in the price to cover a
variety of support functions and services needed to sell and
maintain the product throughout its useful life.
 Objective:
 In a leasing arrangement, to have assurance that the asset will be properly
maintained and kept in good working condition so that it can be resold or
re-leased.
 To generate extra revenues to cover the anticipated expenses of providing
services and maintaining the product.
 To generate revenues for supporting after-sales service personnel.
 To establish a contingency fund for unanticipated happenings.
 To develop an ongoing relationship with the customer.
 To discourage competition with “free” after-sales support and service.
Bundling-Pricing Strategy - 2
 Requirements: Well-balanced and consistent pricing schedule
across the product line. This strategy is ideally suited for
technologically sophisticated products that are susceptible to
rapid technological obsolescence because these products are
generally sold in systems and usually require the following:
 Extra technical sales assistance.
 Custom design and engineering concept for the customer,
 Peripheral equipment and applications,
 Training of the customer’s personnel, and
 Strong service/maintenance department offering prompt responses and
solutions to customer problems.
 Expected Results:
 Asset is kept in an acceptable condition for resale or release.
 Positive cash flow.
 Instant information on changing customer needs.
 Increased sales due to “total package” concept of selling because
customers feel they are getting their money’s worth.
Price Leadership Strategy
 Definition: This strategy is used by the leading firm in an
industry in making major pricing moves, which are followed by
other firms in the industry.
 Objectives: To gain control of pricing decisions within an
industry in order to support the leading firm’s own marketing
strategy (i.e., create barriers to entry, increase profit margin,
etc.).
 Requirements:
 An oligopolistic situation.
 An industry in which all firms are affected by the same price variables (i.e.,
cost, competition, demand).
 An industry in which all firms have common pricing objectives. (d) Perfect
knowledge of industry conditions; an error in pricing means losing control.
 Expected Results:
 Prevention of price wars, which are liable to hurt all parties involved.
 Stable pricing moves.
 Stable market share.
Pricing Strategy to Build a Market
 Definition: Setting the lowest price possible for a new product
 Objectives: To seek such a cost advantage that it cannot ever
be profitably overcome by any competitor.
 Requirements:
 Enough resources to withstand initial operating losses that will be
recovered later through economies of scale.
 Price-sensitive market.
 Large market.
 High elasticity of demand.
 Expected Results:
 Start-up losses to build market share.
 Creation of a barrier to entry to the industry.
 Ultimately, cost leadership within the industry.
 Expected Results:
 Prevention of price wars, which are liable to hurt all parties involved.
 Stable pricing moves.
 Stable market share.
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Pricing strategy

  • 2. Price cannot be considered in isolation of value Value Price Product Facility Service Expertise Reputation Money Time Inconvenience Risk Taking
  • 3. Price cannot be determined in isolation by the seller Price is the “meeting point” between the buyer and the seller Customer wants Value > Price. Company wants Price > Cost. # of Customers Average Size Of a Customer High Low HighLow B2B B2C Individually Negotiated Price Standard Price List Standard Price But negotiated discounts Different Price Lists For different classes of customers
  • 4. We refer to strategic pricing ; not tactical pricing. It really depends on “Value Spread” and not cost. Value Price Cost Customer Surplus Seller’s Surplus Value Created / Added Subjective Decision Objective 3 Main determinants of pricing are 1. Value the customer places on the product 2. Cost incurred by the marketing company 3. Asymmetrical influencing relationship ( who needs the other more ?)
  • 5. Apart from being an “Exchange Value” Price is a signal Other things being equal ; Price signals quality Other things being equal; Price signals who is it meant for
  • 6. Organization structural effect on pricing Time effect : senior people can have longer planning horizons Portfolio effect : senior people, large portfolios, impact is spread
  • 7. Pricing is driven by how the company wants to respond to expectations of its stakeholders  COMPANY  Sales, Margins, Utilization, Geographic Penetration  CUSTOMERS  Positioning in the mind of the customer  Customer loyalty and purchase behavior  COMPETITORS  Market share  COLLABORATORS  ROI of collaborators  CONTEXT  Compliance with statutes Achieve a sale of 60000 cars in “C” segment cars in one year Example : Increase sales by 25% in a market growing by 15%. Increase plant utilization of X factory by 20%. Put pressure on competitor X to revise his plans. Strengthen our dealer network in North.
  • 8. Pricing in Practice  Setting Price for the first time  Changing the price because …  The sale is declining  The market share is declining  When the price is higher (lower) than competitors.  When middlemen seem disinterested  Imbalance in product line prices.  If existing price created distortion in the positioning  Changes in the environment that affect rules, values, costs
  • 9. You need to know your costs well for pricing  The ratio of fixed costs to variable costs  The economies of scale / learning curve  The cost structure of a firm vis-à-vis competitors.  Out-of-pocket costs  Incremental costs  Opportunity costs  Replacement costs.
  • 10. You need to know your competition well  Published competitive price lists and advertising  Competitive reaction to price moves in the past  Timing of competitors’ price changes and initiating factors  Information on competitors’ special campaigns  Competitive product line comparison  Assumptions about competitors’ pricing/marketing objectives  Competitors’ reported financial performance  Estimates of competitors’ costs—fixed and variable  Expected pricing retaliation  Analysis of competitors’ capacity to retaliate  Financial viability of engaging in price war  Strategic posture of competitors  Overall competitive aggressiveness
  • 11. How will demand be affected  Ability of customers to buy.  Willingness of customers to buy.  Place of the product in the customer’s lifestyle  Benefits that the product provides to customers.  Prices of substitute products.  Is demand unfulfilled or is the market saturated?
  • 14. New Products: Skimming Strategy  Definition: Setting a relatively high price during the initial stage of a product’s life.  Objectives  To serve customers who are not price conscious while the market is at the upper end of the demand curve and competition has not yet entered the market.  To recover a significant portion of promotional and research and development costs through a high margin.  Requirements: :  Heavy promotional expenditure to introduce product, educate consumers, and induce early buying.  Relatively inelastic demand at the upper end of the demand curve.  Lack of direct competition and substitutes.  Expected Results:  Market segmented by price-conscious and not so price conscious customers.  High margin on sales that will cover promotion and research and development costs.  Opportunity for the firm to lower its price and sell to the mass market before competition enters.
  • 15. New Products: Penetration Strategy  Definition: Setting a relatively low price during the initial stages of a product’s life.  Objectives  To discourage competition from entering the market by quickly taking a large market share and by gaining a cost advantage through realizing economies of scale  Requirements:  Product must appeal to a market large enough to support the cost advantage.  Demand must be highly elastic in order for the firm to guard its cost advantage  Expected Results:  High sales volume and large market share.  Low margin on sales.  Lower unit costs relative to competition due to economies of scale.
  • 16. Established Products: Maintain the Price  Definition: To maintain position in the marketplace (i.e., market share, profitability, etc)  Objectives: Maintain Status Quo  Requirements:  Firm’s served market is not significantly affected by changes in the environment.  Uncertainty exists concerning the need for or result of a price change.  Firm’s public image could be enhanced by responding to government requests or public opinion to maintain price.  Expected Results:  Status quo for the firm’s market position.  Enhancement of the firm’s public image.
  • 17. Established Products: Reduce the Price  Objectives:  To act defensively and cut price to meet the competition.  To act offensively and attempt to beat the competition.  To respond to a customer need created by a change in the environment.  Requirements:  Firm must be financially and competitively strong to fight in a price war if that becomes necessary.  Must have a good understanding of the demand function of its product.  Expected Results:  Lower profit margins (assuming costs are held constant).  Higher market share might be expected, but this will depend upon the  price change relative to competitive prices and upon price elasticity.
  • 18. Established Products: Increasing the Price  Objectives:  To maintain profitability during an inflationary period.  To take advantage of product differences, real or perceived.  To segment the current served market.  Requirements:  Relatively low price elasticity but relatively high elasticity with respect to some other factor such as quality or distribution.  Reinforcement from other ingredients of the marketing mix; for example, if a firm decides to increase price and differentiate its product by quality, then promotion and distribution must address product quality.  Expected Results:  Higher sales margin.  Segmented market (price conscious, quality conscious, etc.).  Possibly higher unit sales, if differentiation is effective
  • 19. Price Flexibility Strategy: One Price  Definition: Charging the same price to all customers under similar conditions and for the same quantities.  Objectives:  To simplify pricing decisions.  To maintain goodwill among customers.  Requirements:  Detailed analysis of the firm’s position and cost structure as compared with the rest of the industry.  Information concerning the cost variability of offering the same price to everyone.  Knowledge of the economies of scale available to the firm.  Information on competitive prices; information on the price that customers are ready to pay.  Expected Results:  Decreased administrative and selling costs.  Constant profit margins.  Favorable and fair image among customers.  Stable market.
  • 20. Price Flexibility Strategy: Flexible Pricing  Definition: Charging different prices to different customers for the same product and quantity.  Objective:  To maximize short-term profits and build traffic by allowing upward and downward adjustments in price depending on competitive conditions and how much the customer is willing to pay for the product.  Requirements: Usually implemented in one of four ways:  by market / by product,  by timing / by technology.  Other requirements include  A customer-value analysis of the product,  An emphasis on profit margin rather than just volume.  A record of competitive reactions to price moves in the past.  Expected Results:  Increased sales, leading to greater market share.  Increased short-term profits.  Increased selling and administrative costs.  Legal difficulties stemming from price discrimination.
  • 21. Product Line Pricing Strategy  Definition: Pricing a product line according to each product’s effect on and relationship with other products in that line, whether competitive or complementary.  Objective: To maximize profits from the whole line, not just certain members of it.  Requirements: Have the information needed to implement the strategy. Usually this strategy is implemented in one of four ways:  For a product already in the line, strategy is developed according to the product’s contributions to its pro rata share of overhead and direct costs.  For a new product, a product/market analysis determines whether the product will be profitable. Pricing is then a function of costs, profit goals, experience, and external competition. to price moves in the past.
  • 22. Leasing Strategy  Definition: An agreement by which an owner (lessor) of an asset rents that asset to a second party (lessee). The lessee pays a specified sum of money, which includes principal and interest, each month as a rental payment.  Objective:  To enhance market growth by attracting customers who cannot buy outright.  To realize greater long-term profits; once the production costs are fully amortized, the rental fee is mainly profit.  To increase cash flow.  To have a stable flow of earnings.  To have protection against losing revenue because of technological obsolescence  Expected Results:  Well-balanced and consistent pricing schedule across the product line.  Greater profits in the long term.  Better performance of the line as a whole.
  • 23. Leasing Strategy  Requirements:  Necessary financial resources to continue production of subsequent products for future sales or leases.  Adequate computation of lease rate and minimum period for which lease is binding such that the total amount the lessee pays for the duration of the lease is less than would be paid in monthly installments on an outright purchase.  Customers who are restrained by large capital requirements necessary for outright purchase or need write-offs for income tax purposes.  The capability to match competitors’ product improvements that may make the lessor’s product obsolete.  Expected Results:  Increased market share because customers include those who would have forgone purchase of product.  Consistent earnings over a period of years.  Greater cash flow due to lower income tax expense from depreciation write- offs.  Increased sales as customers exercise their purchase options.
  • 24. Bundling-Pricing Strategy -1  Definition: Inclusion of an extra margin in the price to cover a variety of support functions and services needed to sell and maintain the product throughout its useful life.  Objective:  In a leasing arrangement, to have assurance that the asset will be properly maintained and kept in good working condition so that it can be resold or re-leased.  To generate extra revenues to cover the anticipated expenses of providing services and maintaining the product.  To generate revenues for supporting after-sales service personnel.  To establish a contingency fund for unanticipated happenings.  To develop an ongoing relationship with the customer.  To discourage competition with “free” after-sales support and service.
  • 25. Bundling-Pricing Strategy - 2  Requirements: Well-balanced and consistent pricing schedule across the product line. This strategy is ideally suited for technologically sophisticated products that are susceptible to rapid technological obsolescence because these products are generally sold in systems and usually require the following:  Extra technical sales assistance.  Custom design and engineering concept for the customer,  Peripheral equipment and applications,  Training of the customer’s personnel, and  Strong service/maintenance department offering prompt responses and solutions to customer problems.  Expected Results:  Asset is kept in an acceptable condition for resale or release.  Positive cash flow.  Instant information on changing customer needs.  Increased sales due to “total package” concept of selling because customers feel they are getting their money’s worth.
  • 26. Price Leadership Strategy  Definition: This strategy is used by the leading firm in an industry in making major pricing moves, which are followed by other firms in the industry.  Objectives: To gain control of pricing decisions within an industry in order to support the leading firm’s own marketing strategy (i.e., create barriers to entry, increase profit margin, etc.).  Requirements:  An oligopolistic situation.  An industry in which all firms are affected by the same price variables (i.e., cost, competition, demand).  An industry in which all firms have common pricing objectives. (d) Perfect knowledge of industry conditions; an error in pricing means losing control.  Expected Results:  Prevention of price wars, which are liable to hurt all parties involved.  Stable pricing moves.  Stable market share.
  • 27. Pricing Strategy to Build a Market  Definition: Setting the lowest price possible for a new product  Objectives: To seek such a cost advantage that it cannot ever be profitably overcome by any competitor.  Requirements:  Enough resources to withstand initial operating losses that will be recovered later through economies of scale.  Price-sensitive market.  Large market.  High elasticity of demand.  Expected Results:  Start-up losses to build market share.  Creation of a barrier to entry to the industry.  Ultimately, cost leadership within the industry.  Expected Results:  Prevention of price wars, which are liable to hurt all parties involved.  Stable pricing moves.  Stable market share.