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Pricing decisions

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Pricing decisions

  1. 1. Pricing Decisions Synonyms for Price * Rent * Tuition * Fee * Fare * Rate * Toll * Premium * Honorarium * Price competition * Marketer will compete by offering the product matching the competitor or at a lower price Price - Quality Strategies Basic Pricing Concepts * The Global Manager must develop systems and policies that address * Price Floors * Price Ceilings * Optimum Prices * Must be consistent with global opportunities and constraints
  2. 2. Global Pricing Objectives and Strategies * Managers must determine the objectives for the pricing objectives which may be on internal performance: * Unit Sales * Market Share * Return on investment * They must then develop strategies to achieve those objectives * Penetration Pricing * Market Skimming Step 1: Selecting the Pricing Objective * Survival- short term, recover variable cost + some fixed cost. * Maximum current profit- estimate demand and cost. Assumes firm knows current demand. * In emphasizing current performance the company may sacrifice long-run performance by ignoring the effects of: * Other marketing-mix variables. * Competitors’ reactions. * Maximum market share * Maximum market skimming * Product-quality leadership
  3. 3. Step 1, Pricing Objective ….. Maximum market share * believe that a higher sales volume will lead to lower unit costs and higher long-run profit. * market-penetration pricing. * The following conditions favor setting a low price: * The market is highly price-sensitive, and a low price stimulates market growth. * Production and distribution costs fall with accumulated production experience. * A low price discourages actual and potential competition.. Penetration Pricing and Non-Financial Objectives * Penetration Pricing * Charging a low price in order to penetrate market quickly * Appropriate to saturate market prior to imitation by competitors * When Sony was developing the Walkman in 1979, initial plans called for a retail price of ¥50,000 ($249) to achieve breakeven. * However, it was felt that a price of ¥35,000 ($170) was necessary to attract the all-important youth market segment. * After the engineering team conceded that they could trim costs to achieve breakeven volume at a price of ¥40,000, Chairman Akio Morita pushed them further and insisted on a retail price of ¥33,000 ($165) to commemorate Sony’s 33rd anniversary.
  4. 4. * At that price, even if the initial production run of 60,000 units sold out, the company would lose $35 per unit. * A first-time exporter is unlikely to use penetration pricing because the product may be sold at a loss, and companies cannot absorb such losses. * Many companies, especially those in the food industry, launch new products that are not innovative enough to qualify for patent protection. When this occurs, penetration pricing is recommended as a means of achieving market saturation before competitors copy the product. Step 1, Pricing Objective… Maximum Market Skimming * Companies unveiling a new technology favor setting high prices to maximize market skimming. - * This is also called market-skimming pricing, where prices start high and are slowly lowered over time. * Market skimming makes sense under the following conditions: * A sufficient number of buyers have a high current demand. * The high initial price does not attract more competitors to the market. * The high price communicates the image of a superior product. Market Skimming and Financial Objectives * Market Skimming
  5. 5. * Charging a premium price * May occur at the introduction stage of product life cycle * By setting a deliberately high price, demand is limited to innovators and early adopters who are willing and able to pay the price. * When the product enters the growth stage of the life cycle and competition increases, manufacturers start to cut prices. * This strategy has been used consistently in the consumer electronics industry; for example, when Sony introduced the first consumer VCRs in the 1970s, the retail price exceeded $1,000. same for compact disc players were launched in the early 1980s. Buyer Decision Process for New Products Individual Differences in Innovativeness * Consumers can be classified into five adopter categories, each of which behaves differently toward new products. Product Characteristics and Adoption * Five product characteristics influence the adoption rate. Individual Differences in Innovativeness INNOVATORS- Venturesome- 2.5 % EARLY ADOPTORS- Opinion leaders- 13.5 % EARLY MAJORITY-deliberate- 34 % LATE MAJORITY- Sceptical- 34 %
  6. 6. LAGGARDS- Tradition bound- 16 % Step 1 Pricing Objective ….. Product-Quality Leadership * Many brands strive to be “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 consumer’s reach. Step 2: Determining Demand * Price sensitivity * Estimating demand curves * Price elasticity of demand * Each price will lead to a different level of demand and therefore have a different impact on a company’s marketing objectives. * In the normal case, demand and price are inversely related; the higher the price, the lower the demand. * In the case of prestige goods, the demand curve sometimes slopes upward. Price Sensitivity * Generally speaking, customers are most price-sensitive to products that cost a lot or are bought frequently. * Customers are less price-sensitive to low-cost items or items they buy infrequently. Estimating Demand Curves
  7. 7. * Most companies attempt to measure their demand curves using several different methods. * Statistical analysis of past prices, quantities sold, and other factors can reveal their relationships. * Price experiments. * Surveys. Price Elasticity of Demand * Marketers need to know how responsive or elastic, demand would be to a change in price. * If demand hardly changes with a small change in price, we say the demand is inelastic. * If demand changes considerably, demand is elastic. Demand is likely to be less elastic under the following conditions: * There are few or no substitutes or competitors. * Buyers do not readily notice a higher price. * Buyers are slow to change their buying habits. * Buyers think the higher prices are justified. Step 3: Estimating Costs * Demand sets a ceiling on the price the company can charge for its product. Costs set the floor. Step 3: Estimating Costs * Types of Costs * Accumulated Production * Activity-Based Cost Accounting * Target Costing
  8. 8. Cost Terms and Production * Fixed costs * Variable costs * Total costs * Average cost * Cost at different levels of production Cost per unit at different levels of production Accumulated production * Learning curve: With accumulated learning experience the average cost declines. * Workers learn shortcuts, materials flow more smoothly, procurement costs fall. Average Cost falls with accumulated production experience. For producing the first 100,000 it is $ 10 -------- ACTIVITY BASED COST * ABC tries to identify the real costs associated with each customer- * For e.g.: Retailer 1 may want daily delivery (to keep stock lower), while retailer 2 may accept twice a week delivery in order to get lower price. TARGET COSTING * Use MR to establish new product’s desired functions. Then determine the price at which at the product will sell given its appeal and competitors’ prices. * Then examine each cost element- design, engineering, manufacturing, sales and re-engineer , eliminate functions, and bring down supplier cost.
  9. 9. Target Costing – 8 Questions * Does the price reflect the product’s quality? * Is the price competitive given local market conditions? * Should the firm pursue market penetration, market skimming, or some other pricing objective? * What type of discount (trade, cash, quantity) and allowance (advertising, trade-off) should the firm offer its international customers? * Should prices differ with market segment? * What pricing options are available if the firm’s costs increase or decrease? Is demand in the international market elastic or inelastic? * Are the firm’s prices likely to be viewed by the host-country government as reasonable or exploitative? * Do the foreign country’s dumping laws pose a problem? Target Costing * Cost-Based Pricing is based on an analysis of internal and external cost * Firms using western cost accounting principles use the Full absorption cost method * Per-unit product costs are the sum of all past or current direct and indirect manufacturing and overhead costs Target Costing * Rigid cost-plus pricing means that companies set prices without regard to the eight foundational pricing considerations * Flexible cost-plus pricing ensures that prices are competitive in the contest of the particular market environment
  10. 10. 4. Analyzing competitors’ costs, prices, and offers * Within the range of possible prices determined by market demand and company costs, the form should consider the nearest competitor’s price. * Positive differentiation features should enable a firm to charge more than the competitor , if not……. 5. Selecting a pricing method * Cost set the floor to the price, competitor’s price provide an orienting point, customers’ assessment of unique product features (demand) establishes the ceiling price. * 5 a.MARK-UP PRICING: Expressed as a % age of cost or SP Rs. 15 is the desired markup, on a cost of Rs. 85, Markup as a % age of cost: markup/cost= 15/85=17.64% 5 b.TARGET- RETURN PRICING * Set to achieve a specified rate of return on their investments. * E.g.: Cost of each unit = Rs. 200. Investment made = Rs. 100,000 Expected sales = 500 units Desired rate of return = 15 % Product price = 200 + 0.15 x 100,000
  11. 11. 500 = Rs. 230 * 5 c. PERCEIVED VALUE PRICING Priced according to the value perceived in the minds of the customer. Perceived value is enhanced by using advertisement and sales promotion. * 5 d. Going Rate Pricing: Simply following the prevailing pricing pattern in the market. Following the market leader. * 5 e. SEALED BID PRICING Suitable for industrial products. Normally done in Govt. purchase. * 5 f. VALUE PRICING: Low price for high quality products. Times of India, Big Bazaar- EDLP- not just as a promotion offer of “high-low” pricing (although promotions create excitement and draw shoppers). STEP 6. Selecting final price * In selecting the pricing method, firms should consider other factors such as : * PSYCHOLOGICAL PRICING: Image pricing- perfumes, cars. Quality judged by the price. “99” pricing.- BATA AKAI TV- Introductory price- Rs. 9,990 (Approx)
  12. 12. Influence of other marketing mix variables: * The final price should take into account the brand quality and advertising relative to competition. * Consumers are willing to pay higher prices for known brands than for unknown brands, which is more ad. (but average relative quality) * Distribution outlets - service quality, location, ambience and image - perception of the price of the product. Pricing impact on other parties * On distributors and dealers, sales persons, Govt., customers, producers of complementary products * Motorola cell phones meant for China & Brazil diverted to US. Companion Products * Products whose sale is dependent upon the sale of primary product * Video games are dependent upon the sale of the game Console * “If you make money on the blades you can give away the razors.” Adapting the price * Normally no single price is set. Several aspects like ; * Geographical demand and cost- transportation , how to pay - cash ? Countertrade… * Promotional pricing- short term incentive- Loss-leader, special event (Back-to-school). * Discriminatory pricing: Hotels and airlines, magazine subscription vs. magazine stall. Publishers price International edition higher than Indian edition Terms of the Sale
  13. 13. * Obtain export license if required * Obtain currency permit * Pack goods for export * Transport goods to place of departure * Prepare a land bill of lading * Complete necessary customs export papers * Prepare customs or consular invoices * Arrange for ocean freight and preparation * Obtain marine insurance and certificate of the policy Terms of the Sale * Incoterms * Ex-works – seller places goods at the disposal of the buyer at the time specified in the contract; buyer takes delivery at the premises of the seller and bears all risks and expenses from that point on. * Delivery duty paid – seller agrees to deliver the goods to the buyer at the place he or she names in the country of import with all costs, including duties, paid. Environmental Influences on Pricing Decisions * Currency Fluctuations * Inflationary Environment * Government Controls, Subsidies, Regulations * Competitive Behavior
  14. 14. * Sourcing Global Pricing: Three Policy Alternatives * Extension * Adaptation * Geocentric Gray Market Goods * Trademarked products are exported from one country to another where they are sold by unauthorized persons or organizations * Occurs when product is in short supply, when producers use skimming strategies in some markets, and when goods are subject to substantial mark-ups Dumping * Sale of an imported product at a price lower than that normally charged in a domestic market or country of origin. * Occurs when imports sold in the US market are priced at either levels that represent less than the cost of production plus an 8% profit margin or at levels below those prevailing in the producing countries * To prove, both price discrimination and injury must be shown Price Fixing * Representatives of two or more companies secretly set similar prices for their products * Illegal act because it is anticompetitive * Horizontal price fixing occurs when competitor within an industry that make and market the same product conspire to keep prices high * Vertical price fixing occurs when a manufacture conspires with wholesalers/retailers to ensure certain retail prices are maintained
  15. 15. Transfer Pricing * Pricing of goods, services, and intangible property bought and sold by operating units or divisions of a company doing business with an affiliate in another jurisdiction * Intra-corporate exchanges * Cost-based transfer pricing * Market-based transfer pricing * Negotiated transfer pricing Countertrade * Countertrade occurs when payment is made in some form other than money * Options * Barter * Counter-purchase * Offset * Compensation trading * Cooperation agreements * Switch trading Barter * The least complex and oldest form of bilateral, non-monetary counter-trade * A direct exchange of goods or services between two parties Incoterms
  16. 16. * FAS (free alongside ship) named port of destination – seller places goods alongside the vessel or other mode of transport and pays all charges up to that point * FOB (free on board) – seller’s responsibility does not end until goods have actually been placed aboard ship * CIF (cost, insurance, freight) named port of destination – risk of loss or damage of goods is transferred to buyer once goods have passed the ship’s rail * CFR (cost and freight) – seller is not responsible at any point outside of factory Extension * Ethnocentric * Per-unit price of an item is the same no matter where in the world the buyer is located * Importer must absorb freight and import duties * Fails to respond to each national market Adaptation * Polycentric * Permits affiliate managers or independent distributors to establish price as they feel is most desirable in their circumstances * Sensitive to market conditions but creates potential for gray marketing Geocentric * Intermediate course of action * Recognizes that several factors are relevant to pricing decision * Local costs * Income levels * Competition
  17. 17. * Local marketing strategy Currency Fluctuations Inflationary Environment * Defined as a persistent upward change in price levels * Can be caused by an increase in the money supply * Can be caused by currency devaluation * Essential requirement for pricing is the maintenance of operating margins Government Controls, Subsidies, and Regulations * The types of policies and regulations that affect pricing decisions are: * Dumping legislation * Resale price maintenance legislation * Price ceilings * General reviews of price levels Competitive Behavior * If competitors do not adjust their prices in response to rising costs it is difficult to adjust your pricing to maintain operating margins * If competitors are manufacturing or sourcing I a lower-cost country, it may be necessary to cut prices to stay competitive Using Sourcing as a Strategic Pricing Tool * Marketers of domestically manufactured finished products may move to offshore sourcing of certain components to keep costs down and prices competitive