PRICING

1. What is Pricing and why is it termed as Critical Management function?

Price is all around us. We have to pay rent for out apartment, tuition fee for out education utility
bill for our electricity, water and gas. All profit organizations and many nonprofit organizations
must set prices on their products or services.

In narrowest sense, profit is the amount of money charged for a product or service.

DEFINITION

“The sum of values that consumer exchange for the benefits of having or using the product or
service.”

Price is a very critical in the marketing mix that produces revenue, all other elements represent
cost. It is very flexible element unlike product features and channel of distribution; price can be
changed quickly.

Marketing executives are facing number of pricing problems. The most common mistake that
companies do is that Pricing is too cost oriented rather than customer value oriented. They do not
take in to account other elements of marketing mix. Price is not varied enough for different
products, market segment and purchase occasions.

PROBLEMS

The company pricing decisions are affected by both internal company factors and external
environmental factors.

INTERNAL COMPANY FACTORS

Who will set a price? One of the internal company factors is that “who will set the price within
the organization”. Setting of price well is handled differently in small and large companies. It is a
duty of management to decide who within the organization should set the price. In small
companies prices are often set up by top management while in large organizations pricing is
handled by divisional or product line manager. In industries in which pricing is very important
factor. Companies often have a pricing department to set the best prices or help other in setting
them; this department represents the marketing department or top management. Others who have
an influence on pricing include sales managers, production managers, finance manager and
accountants.
MARKETING OBJECTIVES

If marketing objectives are not clear it will create a problem for the company. Before setting
prices company must know its objectives. The company should select its target market and
position carefully. Marketing mix strategy, including price, will be fairly straight forward. The
clearer a firm is about its objectives; the easier it is to set prices.

Different objectives of company are

 Survival
 Profit maximization
 Leadership in market share
 Leadership in product quality

Due to heavy competition and changing consumer wants, the basic objective in the start is
survival through increasing the demand of its product to survive in Market. In marketing terms it
may be called penetration. In it Company has to set low price. And when price covers variable
cost and some fixed cost it means company can stay.

If company’s goal is profit maximization (which is the goal of most of the companies) then in
that case company should estimate the demand of its products and cost that they are going to
incur to product that product and then choose the price that can maximize its profit it means clear
objectives can help in setting prices. Otherwise it creates a number of problems.

OTHER MARKETING MIX VARIABLES

Decisions made for other marketing mix variables may affect pricing decisions e.g. producers
who are using agents to support and promote their products many have to build larger agent
managers in to their price. The decision to position the product on high performance quality will
mean that the seller must charge a higher price to cover higher cost. So price decisions must be
co coordinated with product design, distribution and promotion decisions to form a consistent
and effective marketing program.

EXTERNAL FACTORS

CONSUMER PERCEPTION

Consumer perception of price affects the pricing decision, because consumer will decide whether
a product’s price is right. So pricing decision must be buyer oriented. Because when consumer
purchase any product they give something of value to get something of value effective pricing
involve to know how much value consumer places on the benefits they receive and then setting
prices according to it. But it is very difficult for the company to measure the values customer will
attach to its product.

E.g. calculating cost of ingredients in meat is easy but to know the value of taste relaxation,
satisfaction is very difficult. Because there values vary according to different situations and for
different customer so consumer perception create problem is greater than the products value they
will not buy the product. If opposite case seller loses the profit opportunities.

COMPETITOR’S COSTS PRICES AND OFFERS

Another factor affecting the company’s pricing decision is competitors costs and prices and
possible competitors reactions to the company’s own pricing moves. A consumer who is
purchasing a product will evaluate price and value against the prices and values of comparable
products. Made by competitors company need to benchmark its costs against its competitors cost
to learn whether it is operating its cost advantage or disadvantages. There is a need to learn the
price and quality of each competitor’s offer. Once company is away of competitors prices and
offers, it can use then as is starting point for its own pricing.

ECONOMIC CONDITION

Company pricing policy face problems due to economic condition

Economic factors such as boom or recession, inflation and interest rate affect pricing decision
because they affect both the cost of producing a product and consumer perception of product’s
price and value.

2. Explain the nature of pricing and its importance to the marketer.

Definition:
Price is the value placed on what is exchanged. Something of value is exchanged for satisfaction
and utility, includes tangible (functional) and intangible (prestige) factors. It can be barter.

Buyers must determine if the utility gained from the exchange is worth the buying power that
must be sacrificed. Price represents the value of a good/service among potential purchases and
for ensuring competition among sellers in an open market economy.

Marketers need to understand the value consumers derive from a product and use this as a basis
for pricing a product--must do this if we are customer oriented.

Importance of Price to the Marketer

 Often the only element the marketer can change quickly in response to demand shifts.
 Relates directly to total revenue TR = Price * Qty
Profits = TR - TC
-effects profit directly through price, and indirectly by effecting the qty sold, and effects
total costs through its impact on the qty sold, (ie economies of scale)
 Can use price symbolically, emphasize quality or bargain
 Deflationary pressures, consumers very price conscious.
 3. What is price and non-price competition?

Price Competition
Match, beat the price of the competition.
To compete effectively, one needs to be the lowest cost producer. It must be willing and
able to change the price frequently. It needs to respond quickly and aggressively.
Competitors can also respond quickly to your initiatives. Customers adopt brand
switching to use the lowest priced brand. Sellers move along the demand curve by raising
and lowering prices.
Demand Curve
$|*
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|-----------Qty

Non-Price Competition

Emphasize product features, service, quality etc.

One can build customer loyalty towards the brand. They must be able to distinguish brand
through unique product features. Customer must be able to perceive the differences in brands and
view them as desirable. It should be difficult (impossible) for competitors to emulate the
differences (PATENTS). It must promote the distinguishing features to create customer
awareness. Price differences must be offset by the perceived benefits. Sellers shift the demand
curve out to the right by stressing distinctive attributes (consumers must perceive and desire
particular attributes).

Handout...Bristish Airways
$|* *
| * *
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|-------------------Qty

4. Explain the factors affecting the Price decisions.

There is considerable uncertainty regarding the reaction to price on the part of buyers, channel
members, competitors etc. It is also important in market planning, analysis and sales forecasting.
 Organizational and Marketing Objectives,

It needs to be consistent with companies goals i.e. exclusive retailer sets high prices. It
should also be consistent with the marketing objectives for the year.

 Types of Pricing Objectives

o Profit: Satisfactory profit levels vs. profit maximization. Expressed in dollar
amount or percent change from the previous period.
o Market share: Pricing objectives used to increase or maintain market share.
o Cash flow: recover cash as fast as possible, especially with products with short
life cycles.
o Status Quo: maintain market share, meeting competitors prices, achieving price
stability or maintaining public image. Primarily for non price competition.
o Survival: accept short term losses necessary for survival.
 Buyers Perceptions

How important is price to the target market?

Price sensitivity varies among market segments and across different products (i.e.
necessary products vs. luxury). One needs to know buyers acceptable range of prices and
sensitivity towards price changes. They need to gauge Price Elasticity, a measure of the
sensitivity of the demand to changes in prices.
Percent change in quantity demanded relative to the percent change in price.

% change in Qty demanded

-------------------------
% change in price

We are now looking at the actual impact on demand as price varies. Elastic demand is
more sensitive to price than inelastic demand.
Elastic demand, greater than1 (-1)
Inelastic demand, less than 1 (-1)
Unitary demand, equal to 1
Always take the absolute values

Inelastic Demand
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|-----------Qty
$
 Elastic Demand
$|*
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|-----------Qty
$

Type of demand that exists is based on:

o Available substitutes
o urgency of need
o brand loyalty

TR = Price * Qty
If demand is elastic then change in price causes an opposite change in the total revenue.
If demand is inelastic then change in price causes the same change in the total revenue.
The less elastic the demand, the more beneficial it is for the seller to increase price.

 Costs

In the long run, cannot survive by selling at or below cost. Need to take into account all costs,
costs associated with product, with total product line etc.

Analysis of Demand, Cost and Profit Relationships

Need to set a price that covers all costs. Two methods:

Breakeven Analysis:
Breakeven point is where the cost of producing the product is equal to the revenue derived from
selling the product.

Types of Cost:
Fixed.....do not change with change in # units produced
Variable.. varies directly with the change in the # units produced
BEP = FC = FC
------------- -----------------------
per unit cont. to FC price - variable cost/unit

Need to determine the BE point for each of several prices. Focuses on what is needed to break
even.
Marginal Analysis:

What happens to the costs and revenues as production increases by one unit? This will determine
at which point profit will be maximized. Need to distinguish between:
-Fixed Costs
-Average Fixed Costs, FC/units produced
-Variable Costs (materials labor etc.)
-Average Variable Cost, VC/Unit produced

Total Cost = (AFC+AVC)*QTTY

Marginal cost = the extra cost to the firm for producing one more unit.
Marginal revenue = the extra revenue with the sale of one additional unit.

MR - MC tells us if it is profitable to produce one more unit.

Profit maximization at MR = MC

To produce/sell more units than the point MR = MC the additional cost of producing one more
unit is greater than the additional revenue from selling one more unit. At any point prior to MR =
MC, MR will be greater than MC, therefore the additional revenue from selling one more unit
will be greater than the additional cost of producing one more unit, therefore forgoing the
opportunity to generate additional profits. Therefore MR = MC = Profit Maximization; assuming
all products are sold.

Due to the environment it is difficult to predict costs and revenues etc.

 Other marketing Mix variables,

All marketing mix variables are interrelated i.e. price determines the quality status. It determines
the type of distribution (selective/intensive). It affects the margin for wholesalers and retailers.
Type of promotion, use price (bargain).

 Channel Member Expectations,

-Expect to receive a profit for services performed.

-Need to keep distributors/retailers happy, avoid conflicts, use exclusive dealing, avoid
discounters.
-May use price guarantees to assure wholesalers/retailers that the price they pay is the lowest
available.
-Cooperation depends on the equitable distribution of costs and profits within the channel.

5. How to select appropriate price level?

Demand Oriented Pricing:

It is determined by the demand for the product. Here we determine the demand first, calculate the
mark up needed for each channel member, then determine how much is available (cost ceiling) to
produce the product. We also need to estimate the amount of products demanded at each price
level.

Demand - Minus pricing--determine final selling price and work backwards to compute costs. It
is used by firms that sell directly to consumers. Price decisions revolve around what people will
pay.
Determine the final selling price, mark-up required, then maximum acceptable/unit cost for
production or buying a product.

Range of acceptable prices, used when firm believes that price is key factor in consumer decision
making process. Price ceiling is the maximum the consumers will pay for a product. We need to
understand the elasticity of demand.

Use Yield Management Pricing-right mix price-quantity to generate highest revenue--airlines.

Price manages demand!

Types of policies:

 Price Skimming Charge highest price possible those buyers who most desire the product
will pay. Generate much needed initial cash flow, cover high R&D costs. Especially good
for limited capacity introductions. Attract market segment more interested in quality,
status, uniqueness etc. Good if competition can be minimized by other means, IE, brand
loyalty, patent, high barriers to entry etc. Consumers demand must be inelastic.
 Penetration Pricing Price reduced compared to competitors to penetrate into markets to
increase sales. Less flexible, more difficult to raise prices than it is to lower them. May
use it to follow price skimming. Good as a barrier to entry. Appropriate when the demand
is elastic. Use if there is an increase in economies of scale through increased demand.
 Odd-even pricing, end prices with a certain number, $99.95 sounds cheaper than $100.
may tell friends that it is $99. Customers like to receive change, since change is given,
then the transaction must be recorded. Consumers may perceive that a lot of time taken
considering the price, and it is set as low as possible. Even prices are more unusual than
odd prices. Even prices for upscale goods.
 Price bundling, Offer a product, options, and customer service for one total price.
Prevalent in the BB market, include installation etc. May unbundle price, ie, breakdown
prices and allow customers to decide what they want to purchase. Fast food industry.
 Prestige Pricing, when price is used as a measure of quality.

Cost oriented pricing:

$ Amount or % added to cost. Need to know the desired margins etc. It is easy to administer.

 Cost-plus pricing Cost calculated then a % added. Costs, overhead may be difficult to
determine. Establish the # of units to produce, calculate the fixed and variable costs and
add a predetermined cost-popular with rapid inflation. Profit is stated as a % of costs, not
sales, price not established through consumer demand, little incentive to hold down costs.
Adjustments for rising costs are poorly conceived. Good when consumers are price
 inelastic and the firm has control over prices. Good for establishing a floor price, for
which you can't charge less.
 Mark-up pricing, Common among retailers. May vary from one product category to
another depending on turnover rates. Reduces prices to a routine. Stated as a % of costs
or selling price.

Competitive Oriented Pricing:

It considers competitors prices primarily. Especially with products that are homogeneous. It can
choose to be below, at or above competitor’s prices. Better position for estimating pricing if
marketers know what competitors are charging. IE employ competitive shopping, purchase
pricing, and call up. Sometimes it is very difficult to determine, esp. in the resellers market.
How will competitors respond to an adjustment in price? What is the market structure?
Oligopoly-- Marlboro's Black Monday. Perfect competition--buyers will only pay the market
determined price. Is the competitive environment Market controlled, Company controlled or
Government controlled price environment? Policies consistent w/ competition oriented:

 Customary prices, priced on the basis of tradition, i.e., candy bar was 5c for a longtime,
mf. change the size before they change the price, alter other MM variables before pricing.
Wrigley's Gum only varied price 5 times, 10-15, 15-20, 20-25, 25-30, and 30-35

Selecting a Price level in today's marketplace:

Price resistance from consumers.
Age of disinflation due to:

 Overcapacity
 Global competition...US most competitive in the world
 slow growth
 Increased unemployment

Therefore need to rethink all aspects of business. Price has been restored as the economic arbiter:
How the marketplace truly values goods and services. No cloak of inflation to disguise mgt.
decision errors "When you have inflation, it covers a lot of sins."

Strategies:

 Redesign products for ease and speed of manufacture

 Strip away costly features customers don't want
 Reduce rebates/discounts for everyday low prices
 Forge closer links with customers (relationship marketing)
 Accelerate new product development
 Invest in information technology
 Reduce bureaucratic layers
"Management challenge of the '90s is to reduce costs and increase perceived value of the
product"

Cannot let the internal processes determine price, price MUST determine process.
Traditional view of pricing = add up costs, overruns and acceptable profit margin.
Now...set target price (what the customer is willing to pay), determine acceptable level of profit,
intermediary costs, then determine allowable costs of production.
"Back into price from the customer’s perspective"

Must accelerate product development, since costs and demand patterns will shift over time.
Cars' development cycle was 5-6 yrs, now less than 3 = Neon.

Compaq "Design to price", built computers costing 60% less. Price target from marketing, profit
margin goal from management, team then determines what the costs must be. Prolinea and
Contura Notebook were developed in less than 8 months.

Alternative:

 Value added strategy...Non Price competition.

Feature that is truly valued by the consumer, no one else has, you have a monopoly of
feature but customers are less willing to over pay for feature...perceived quality of all
products has risen, making this strategy very difficult.
 Strip down product to bear minimum...Southwest Airlines

6. "Setting the right price of goods and services is an important part of effective
marketing." Explain the right pricing strategy? Also explain how to manage price
changes?

It is true to say that - "Setting the right price of goods and services is an important part of
effective marketing." Pricing the products properly is crucial for the success of any business.
According to Charles Toftoy, associate professor of management science at George Washington
University, "Pricing is probably the toughest thing there is to do."

Out of four P's of marketing, Pricing is the only element of marketing mix that generates
revenue; remaining elements - product, place, and promotion are cost to the business.

Right Pricing

There are many factors that affect profitability of a business, pricing is one of them. Setting the
right price is an important part of effective marketing and crucial step toward achieving that
profit. Setting the right price not only maximise profit, but also help in maintaining a good
relationship with customers. Right pricing help businesses avoid the serious financial problems
that may occur if the prices are too high or too low.
"Setting the price for a product at which both the customer and the business are happy (i.e.
customer is willing to pay, and business is able to cover cost and make maximum profit) is called
right pricing."

How to Set Right Price for Products or Services

Research help in setting right pricing. Research of following three key areas is required to set
right pricing:-

1. Research of existing cost,

2. Research of competitors' pricing, and
3. Research of target market

Research of Existing Cost

The research of existing cost is done to identify the actual costs, to take into account any
hidden and infrequent costs such as superannuation, insurance, licensing, adviser fees, or any
professional development, training or networking cost, and to reduce cost in some areas.

It may be difficult to reduce cost in some areas like rent and wages, but some costs can be
reduced like purchasing cost if the stock is purchased in bulk taking into consideration the
cash flow, storage, and product delivery.

Research of Competitors' Pricing

Research of competitors' pricing is necessary to know the pricing strategies of competitors to
rightly set the price of products or services. If the price is much higher than the competitors'
price, the pricing is out of the market. If the price is much lower than the competitors' price,
there is the risk of underselling the product or service. Both problems can be avoided by
doing the research of competitors' pricing before setting the prices of products or services.

Research of Target Market

It is necessary to know how much the target market is willing to pay for the product or
service that is offered. If customers believe that the price of offered product or service is too
high they will probably buy from the competitor. If they believe the price is too low they may
question the quality of offered product or service and buy elsewhere. Target market research
helps in understanding the target market and setting the right prices.