PRICING STRATERGIESPresented by ,ALVEENA PAPPAN 2013-31-108

Marketing Mix

Product Price

Promotion

Place

Revenue Producer

Cost

Cost

Cost

PRICE is the one element of the marketing mix that produces revenue; the other elements produce costs. Prices are perhaps the easiest element of the marketing program to adjust; product features, channels and even communications take more time. Price also communicates to the market the company’s intended value positioning of its product and brand. A well –designed and marketed products can command a price premium and reap big profits. Ex: Gillette.

DEFINITION OF PRICING:

Select Final Price

Setting the Price

1

Price Method

Competitor Analysis

2

3

4

5

6

Estimate Costs

Determine Demand

Pricing Objective

Selecting the Pricing Objective

•Survival.

•Maximum Current Profit.

•Maximum Market Share.

•Maximum Market Skimming.

•Product-Quality Leadership.

•Other Objectives

SURVIVAL

• Company pursue SURVIVAL as their major objective if they are plagued with over capacity, intense competition, or changing consumer wants.

• As long as the prices cover variable costs and some fixed costs the company stay in business.

• Survival is the short run objective in the long run, the firm must learn how to add value or face extinction.

MAXIMUM CURRENT PROFIT

• Many companies try to set a price that will MAXIMIZE CURRENT PROFITS.

• They estimate the demand and costs associated with alternative prices and choose the price that produces maximum current profit, cash flow, rate of return on investment.

• This strategy assumes that the firm has knowledge of its demand and cost functions; these are difficult to estimate.

• In focusing current performance the company may ignore the effects of other marketing mix variables, competitors, and legal restraints on price.

MAXIMUM MARKET SHARE

• Some companies want maximize their market share so that the higher sales volume will lead to lower units costs and higher long run profit.

• They fix lowest price assuming that the market is price sensitive.

• Ex: TEXAS INSTRUMENTS(TI) practised this market-penetration for years.

• IT followed many strategies to win a large market share.

MAXIMUM MARKET SKIMMING

• Companies unveiling a new technology favour setting high prices to maximize market skimming.

• Ex: SONY. This firm is a practitioner of market skimming pricing.

• PHILIPS the Dutch electronic manufacturer and Japanese competitors.

CONDITIONS TO FOLLOW SKIMMING

1) A sufficient number of buyers have a high current demand.

2) The unit costs of producing a small volume are not so high that they cancel the advantage of charging what the traffic will bear.

3) The high initial price does not attract more competitors to the market.

4) The high price communicates the image of a superior product.

PRODUCT QUALITY LEADERSHIP

• A company always aim to be the PRODUCT QUALITY leader in the market.

• Many BRANDS strive to be “ affordable luxuries”- products or services characterised by the high level of perceived quality, taste, and status with a price just high enough not to be out of customers’ reach.

• EX: STARBUCKS COFFEE, MERCEDES AND BMW CARS, CAFÉ COFFEE DAY TAJ LUXURY HOTELS & SO ON.

• These brands have already positioned them as leaders in quality with premium pricing & a very loyal customer base.

OTHER OBJECTIVES

• Non profit and public organizations may have other pricing objectives.

Survival is a short-run objective for firms to deal with overcapacity, intense competition, or changing consumer wants.Maximize current profits emphasis current performance . But firms may sacrifice long-run performance by ignoring the effects of other marketing variables, competitors’ reactions, and legal restraints on price.Maximum market share utilizes a market-penetration pricing strategy, in which a higher sales volume will lead to lower unit costs and higher long-run profit.Maximum market skimming utilizes a market-skimming pricing strategy, in which prices start high and slowly drip over time. This strategy can be fatal if competitors price low.A firm striving to be a product-quality leader offers brands that are “affordable luxuries” –products or services characterized by high levels of perceived quality, taste, and status with a price just high enough not to be out of consumers’ reach.Other objectives: Nonprofit and public organizations may have other pricing objectives.

DETERMINING DEMAND

• The first step in determining demand is to understand what affects price sensitivity.

• Customers are less price sensitive to low cost items or items they buy frequently.

• They also become price sensitive when there are few or no substitutes or competitors.

• When they think higher price are justified.

• When they are slow to change their buying habits.

• Companies prefer customers who are less price sensitive.

Estimating Costs

Demand Price Ceiling

Costs

Profit

Price

Price Floor

Demand sets the price ceiling while costs set the floor. Costs include production, distribution, and selling expenses, plus a fair return (profit) to cover effort and risk. The company wants to charge a price that covers its cost of producing, distributing, and selling the product, including a fair return for its effort and risk. Yet when companies price products to cover their full costs, profitability isn’t always the net result.

ESTIMATING DEMAND CURVE

•Survey•Price experiments•Statistical analysis

Estimating Costs

Fixed Costs (overhead)

Variable Costs Total Costs

Types of costs

Fixed costs, also known as overhead, are costs that do not vary with production level or sales revenue. Variable costs vary directly with the level of production. Total costs consist of the sum of the fixed and variable costs for any given level of production. Average cost is the cost per unit at that level of production; it equals total costs divided by production.

Estimating Costs

Accumulated Production

Experience Curve(Learning Curve)

Experience curve or learning curve refers to the decline in the average cost with accumulated production experience.

Estimating Costs

Target Costing

Market research Design engineers

Costs can also change as a result of a concentrated effort by designers, engineers, and purchasing agents to reduce them through target costing. Market research establishes a new product’s desired functions and the price at which it will sell, given its appeal and competitors’ prices. This price less desired profit margin leaves the target cost the marketer must achieve.

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