Price determination : policies and strategies

Made by : Bhupinder KaurS.D.COLLEGE, AMBALA CANTT

Profit related objectives

Sales growth objectives

Competition related objectives

Customer related objectives

Other objectives

Pricing objectives

Survival Target return on investment Market share Cash flow management Price and profit stabilisation Resource mobilisation Meeting killer competition Profit maximisation Maintaning the image

The pricing objectives

Target return may be :Fixed percentage of sales Return on investment A fixed rupee amount EXAMPLE : company decide to earn 20%

return on investment of 3 crore rupees . It must set price of product in a way that it earn 60 lakh rupees.

Target return on Investment

Internal factors

•Organisational factors •Marketing mix•Product differentiation •Product costs•Product life cycle•Pricing objectives •Functional position

External factors

•Product demand•competition•Economic conditions •Governmental regulations •Ethical consideration •Suppliers and buyer behaviour

Factors influencing the pricing decision

Identify potential customers Estimates the demand Determine competitors prices Identifying alternative basic prices Calculate manufacturer net price Estimates costs Calculate expected profits Repeat the analysis for each major segment

Appropriate approach to pricing

Product-Mix Pricing Strategies

Normal Hair$3.90

Anti-dandruff$4.90

Hair Fall Defense$4.90

Oily Hair$3.90

Pricing Strategies Product line pricing takes into account

the cost difference between products in the line, customer evaluation of their features, and competitors’ prices.

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New car with ordinary rims$59,000

New car with sports rims$60,000

Product-Mix Pricing StrategiesPricing Strategies Optional product pricing takes into

account optional or accessory products along with the main product.

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Pricing Strategies Product bundle pricing combines

several products at a reduced price.

1 bottle: $2.70 Bundled 2 bottles: $4.90

Price Adjustment Strategies

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Price Adjustment StrategiesPricing Strategies By-product pricing refers to products

with little or no value produced as a result of the main product.

Producers will seek little or no profit other than the cost to cover storage and delivery.

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Price Adjustment StrategiesPricing Strategies Discount and allowance pricing

reduces prices to reward customer responses such as paying early or promoting the product.◦Discounts◦Allowances

Price Adjustment StrategiesPricing Strategies Allowances

◦ Trade-in allowance for turning in an old item when buying a new one

◦ Promotional allowance to reward dealers for participating in advertising or sales support programs

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Price Adjustment StrategiesPricing Strategies Segmented pricing is used when a

company sells a product at two or more prices even though the difference is not based on cost.◦Customer segment pricing◦Product form segment pricing◦Location pricing

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Education South Asia Pte Ltd

Pricing Strategies Promotional pricing is when prices are

temporarily priced below list price or cost to increase demand.◦ Loss leaders◦ Special event pricing◦ Cash rebates◦ Low interest financing◦ Longer warrantees◦ Free maintenance

Price Adjustment Strategies

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Price Adjustment StrategiesPricing Strategies Loss leaders are products sold below cost to

attract customers in the hope they will buy other items at normal markups.

Special event pricing is used to attract customers during certain seasons or periods.

Cash rebates are given to consumers who buy products within a specified time.

Low interest financing, longer warrantees, and free maintenance lower the consumer’s “total price.”

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Pricing Strategies Geographical pricing is used for

customers in different parts of the country or the world.◦ FOB pricing◦ Uniformed delivery pricing◦ Zone pricing◦ Basing point pricing◦ Freight absorption pricing

Price Adjustment Strategies

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Price Adjustment Strategies

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Price Adjustment Strategies

Cost plus pricing method Target return pricing Competition based methods Going rate pricingSealed bid pricing Demand based pricing methods Demand modified break even analysisPerceived value pricing

Methods of price determination

COST PLUS PRICING Example: Technologies Pvt. Has invested Rs. 10

crore in plant and machinery, with a capacity to produce 10,000 units of television per month. TVC is estimated at Rs. 5 crore and the firm expects a return of 20% on total investment. What should be the price of TV if we suppose that the firm can sell its entire output?

Solution: Base Price = TC = 10+5 = Rs. 15 crore

Margin = 20% of 15 = 3 croreTotal Revenue = 15+3 = 18 crorePrice = 18,00,00,000/10,000 = Rs. 18,000 per TV

MARGINAL COST PRICING When demand is slack and market is highly

competitive, full cost pricing may not be the right choice; an alternative in such a situation is to fix the price on the basis of variable cost, instead of full cost. The method remains same except that only variable cost is considered instead of total cost for the purpose of price determination. Marginal cost pricing is also known as incremental cost pricing.

Determine the price of television on the basis of marginal pricing:

Solution:Base price = VC = Rs. 5 crore.i) Margin = 20% (of TC) 15 = 3 crore; Total Revenue = 5 + 3 = Rs. 8 crore Price = 8,00,00,000/10,000 = Rs. 8,000 per TVii) Margin = 20% of VC = 1 crore; Total Revenue = 5+1 = Rs. 6 crore Price = 6,00,00,000/10,000 = Rs. 6,000 per TV

Perceived value pricing: The underlying philosophy of this pricing is

that a product is as good as a consumer finds it. Value of goods for different consumers depends upon their perception of utility of the good. Therefore the price a consumer is willing to pay would reflect the value of that product to him. A segment of buyers believe that higher the price, better the quality; hence they would be willing to buy anything that is tagged at high price. It is also termed as Psychological Pricing.

Rs 80000 Competitors price

+ Rs 6000 Premium for extra durability

+Rs 5000 Premium for reliability

+Rs4000 Premium for superior service

+Rs 5000 Premium for longer warranty on parts

=Rs100000 The package value

- Rs10000 Discount

= Rs90000 Final price

Example :

Going rate pricing

Competition based pricing

Cost and mark up

Competitors

Alternative 1

Alternative 2

Alternative 3

Cost of sales

Rs .5000 Rs .5100 Rs. 5100 Rs .5100

Profit margin

Rs .1000 Rs. 900 Rs .1000 Rs .800

Final price Rs .6000 Rs .6000 Rs. 6100 Rs .5900

Case Firm bid Firms profit

Probability of getting this bid

Expected profit

1 Rs .6500 Rs 100 85% Rs 85

2 Rs .7000 Rs .500 36% Rs 180

3 Rs .7500 Rs .1000 9% Rs.90

4 Rs .8000 Rs .150 3% Rs 45

5 Rs .8600 Rs .2100 1% Rs.21

Sealed bid pricing

Assessing and responding to a competitor’s price cut (depending on the market structure)