5. Effectively designing and implementing pricing strategies
requires a through understanding of consumers pricing
psychology and a systematic approach to setting, adapting
Consumer pricing psychology how consumers arrive at
their perceptions of price the marketers must think of:
Reference price: consumers get pricing information
form internal reference price (used as habitual decision
making) or external reference price (used as limited
decision making and extend decision-making.
Price quality inferences: Many consumers use price as
an indicator of quality when ever the information is not
7. HOW COMPANIES PRICE
• In small companies, the boss often sets price.
• In large companies, division and production line managers do.
• Where pricing is key factor (aerospace, railroads, oil companies),
companies often establish pricing departments to set assists others in
setting appropriate prices. This department reports to marketing
department, finance department or top management.
• Others who influence pricing including sales managers, production
management, finance management and accounts.
9. SIX STEPS FOR SETTING A PRICE
1. Selecting price objective
2. Determining Demand
3. Estimating costs
4. Analyzing competitors Cost price and offer
5. Selecting a pricing Method
6. Selecting A Final Price
10. SELECTING THE PRICING OBJECTIVE
Where it wants to position its market offering.
The clearer a firm’s objectives, the easier it is to set
Five major objectives are:
11. STEP 1:
SELECTING THE PRICING OBJECTIVE
• Each price will lead to a different level of demand and have a
different impact on a company’s marketing objectives. The
normally inverse relationship between price and demand is
captured in a demand curve.
• Some consumers take the higher price to signify a better
13. • PRICE SENSITIVITY
They are also less price sensitive when,
– There are few or no substitutes or competitors,
–They do not readily notice the higher price,
–They are slow to change their buying habits,
–They think the higher prices are justified,
–Can’t compare the substitute good,
–Can’t identify the difference of substitute goods.
14. • ESTIMATING DEMAND
– Surveys can explore how many units consumers would buy at different proposed
prices. Although consumers might understate their purchase intentions at higher
prices to discourage the company from pricing high.
– Price experiments can vary the prices of different products in a store or
charge different prices for the same product in similar territories to see how
the change affects sales.
– Statistical analysis of past prices, quantities sold, and other factors can reveal
their relationships. The data can be longitudinal (over time) or cross-sectional
(from different locations at the same time).
15. • PRICE ELASTICITY OF DEMAND
Marketers need to know how responsive, or elastic, demand is to a change in price.
– A price increase from $10 to $15 leads to a relatively small decline in demand
from 105 to 100. In demand curve. (Inelastic demand)
– At the same price increase leads to a substantial drop in demand from 150 to
50. (Elastic demand)
• TYPES OF COSTS
– Variable costs
• A cost that varies with the level of output. It include raw
materials, packaging, and labor directly involved in a
company's manufacturing process.
– Total costs
• Total cost refers to the total expense incurred in reaching
a particular level of output.
– Average cost
• Average cost or unit cost is equal to total cost divided by
the number of unit of a good produced.
17. STEP 4:
• First analyze that how much competitor invest cost on
quality and features of product.
• It is setting the price of a service or product based on
what the competition is charging.
• Identify nearest price competitors
• Acquire competitors’ price lists and buy competitors’
products and analyze them. Also ask customers how they
perceive the price and quality of each competitor’s
product or service.
• Take competitors features and prices into account
• Make decision to charge more ,the same or less the
• Monitor competitors reaction to your pricing strategy
18. STEP 5:
SELECTING A PRICING METHOD
There are several methods of pricing products in the market. While selecting the method of fixing
prices, a marketer must consider the factors affecting pricing. The pricing methods can be broadly
divided into two groups—cost-oriented method and market-oriented method.
– Markup pricing
– Target return pricing
– Perceived value pricing
– Value pricing
19. • Markup pricing
– Markup pricing or cost-plus pricing is a
pricing strategy where the price of a product
or service is calculated by adding together
the cost of the products and a percentage of
it as a markup. The percentage or markup is
decided by the company usually fixed at the
required rate of return.
20. • Target-Return Pricing
– The Target-Return Pricing is a method wherein the firm determines the price on the basis
of a target rate of return on the investment. what the firm expects from the investments
made in the venture.
Example: Suppose the tractor manufacturer has invested 2 million in his venture and he expects
to earn 20% as an ROI. Therefore, he will set the price accordingly. The cost and sales
• Unit cost: 20
Expected sales: 50,000 units
• The Target-Return Pricing is given by:
• Target-Return Pricing = unit cost + (desired return x invested capital) /unit sales
• Thus, Target-Return Pricing = 20 + (0.20 x 2,000,000) / 50,000 = Rs 28
• To earn the ROI of 20%, the company must sell the product at Rs 28, provided 50,000 units
21. • Perceived-Value Pricing
– In this pricing method, the manufacturer decides the price on the basis of customer’s
perception of the goods and services taking into consideration all the elements such as
advertising, promotional tools, additional benefits, product quality, the channel of
distribution, etc. that influence the customer’s perception.
Example :Customer buy oppo products despite less price products available in the
market, this is because oppo company follows the perceived pricing policy where the
customer is willing to pay extra for better quality and durability of the product.
22. • Value Pricing
– Under this pricing method companies design the low priced products and maintain the
high-quality offering. Here the prices are not kept low, but the product is re-
engineered to reduce the cost of production and maintain the quality simultaneously.
Example: Suzuki cultus is the best example of value pricing, despite several Suzuki
cultus cars, the company designed a car with necessary features at a low price and
lived up to its quality.
23. STEP 6:
SELECTING THE FINAL PRICE
Pricing is process of determining what the company will in exchange
of its products.
• The influence of other Marketing activities
– The final price of a product depends on the other marketing mix
elements also like the advertising, brand name etc.
24. • Company Pricing Policies
– price of any product set should be decided according to the company's
pricing policies. In many companies a pricing department is set up to make
sure that product price should be reasonable for the customers, and that
should give profit to the company also.
• Gain-and-risk-sharing pricing
– Buyers may resist accepting a seller’s proposal because of a high perceived
level of risk and most, if not all the times, sellers offer to absorb part or all
the risk if it does not deliver the full promised value.
1st degree Price Discrimination (Intensity of demand)
2nd degree Price Discrimination(Large volume with certain service) cell phone service
• Customer segment pricing (Different price for same product)
• Image pricing (Fake price)
• Location pricing (Shipping price)
• Time Pricing (Based on current market demand)
3rd degree Price Discrimination(Different amount to different group of buyers).
Initiating price cut
A Price cutting strategy leads you to other traps:
– Low-quality trap: Consumers assume quality is low.
– Fragile-market-share trap. A low price buys market
share but not market loyalty. The same customers will
shift to any lower-priced firm that comes along.
– Shallow-pockets trap. Higher-priced competitors match
the lower prices but have longer staying power because
of deeper cash reserves.
– Price-war trap. Competitors respond by lowering their
prices even more, triggering a price war.
31. INITIATING PRICE INCREASE
Delayed quotation pricing
• The company does not set
a final price until the
product is finished or
• The company requires the
customer to pay today’s
price and all or part of any
inflation increase that
takes place before
• Market or charge for
(items or services)
separately rather than as
part of a package. Like Car
companies sometimes add
32. RESPONDING TO COMPETITORS’
• Why did the competitor change the price?
– To steal the market, to utilize excess capacity, to meet changing cost conditions, or to lead
an industry-wide price change?
• Does the competitor plan to make the price change temporary or permanent?
• What will happen to the company’s market share and profits if it does not
– Are other companies going to respond?
• What are the competitors’ and other firms’ responses likely to be to each