MGT301 Principles of Marketing Lecture-25

Summary of Lecture-24

Factors Affecting Price Decisions

Internal Factors Pricing Decisions External Factors Factors to Consider When Setting Prices This CTR corresponds to Figure 10-1 on p. 303 and relates to the discussion on pp. 303-313. Pricing Decisions Positioning Objectives Target Market External Factors

Setting Pricing Policy Today’s Topics Setting Pricing Policy

1. Selecting the pricing objective 2. Determining demand 3. Estimating costs 4. Analyzing competitors’ costs, prices, and offers 5. Selecting a pricing method 6. Selecting final price 3 3 3

Pricing Objectives Profit- Oriented Sales- Oriented Status Quo

Pricing Objectives Profit Oriented Pricing Objectives Target Return Maximize Profits Pricing Objectives

Profit Oriented Pricing Objectives Sales Oriented Target Return Profit Oriented Maximize Profits Pricing Objectives Sales Oriented Dollar or Unit Sales Growth Growth in Market Share

Profit Oriented Pricing Objectives Sales Oriented Status Quo Oriented Target Return Profit Oriented Maximize Profits Dollar or Unit Sales Growth Pricing Objectives Sales Oriented Growth in Market Share Status Quo Oriented Meeting Competition Nonprice

General Pricing Approaches Cost-based Pricing Value-based Pricing Competition-based Pricing

Cost-based pricing Cost plus pricing add a standard mark up to cost

Break-even…for Determining Target Return Price and Break-even Volume Break even pricing total costs = total revenue Break-even…for Determining Target Return Price and Break-even Volume

Sales volume in units (thousands) Total revenue 1200 Target profit Total cost 1000 Break-even point 800 600 Rupees (in thousands) 400 Fixed cost 200 10 20 30 40 50 Sales volume in units (thousands) 4 7 7 7

Fixed Cost --------------- Price - Variable Cost Break-even Volume =

Value-Based Pricing Uses buyer’s perceptions of value not the seller’s cost as the basis for pricing. Price is considered along with the other marketing-mix variables before the marketing program is set.

Cost-Based Pricing Value-Based Pricing This CTR corresponds to Figure 10-7 on p. 316 and relates to the discussion on pp. 316-318. Cost-Based Pricing Value-Based Pricing Customer Value Price Cost Product Product Cost Price Value Customers Buyer-Based Approach Value-Based Pricing . This approach uses the buyer's perception of value as the key to pricing. Strategy under this approach utilizes non price mix variables to help set perceived value in the buyer's mind. As illustrated on the CTR, this approach is the reverse of the cost-based approach to pricing. The key is that the marketer must have an accurate view of what benefits and features consumer want and are willing to pay for in setting a specific value-pricing goal. Discussion Note: Toyota Motor company used a value-based approach on its lower end cars like the Tercel and the Corolla in the early 1980s. Once the value price was determined and profit per car objectives set, engineers and designers were challenged with the task of making the cost of production support those goals.

Competition-based pricing

? Setting Prices Going-Rate Company Sets Prices Based on What Competition-Based Pricing This CTR relates to the discussion on pp. 318-319. Going-Rate Company Sets Prices Based on What Competitors Are Charging. Sealed-Bid Company Sets Prices Based on What They Think Competitors Will Charge. Competition-Based Approach Going-Rate Pricing. This approach bases price largely on what competitors charge for their products. This approach is popular in markets where demand elasticity is difficult to measure. Sealed-Bid Pricing. This approach involves competition between sellers attempting to under price each other while still covering costs. Winning a sealed bid contract requires careful estimation of competitor's costs and likely profit margins to bid successfully. This approach is common in bidding for government contracts. Teaching Tip: You might consider giving students an out of class assignment to obtain bids on one or more projects from cooperating vendors in your area. For example, a two-car garage pricing might vary by 100% among three contractors in a sealed bid. ?

New Product Pricing Strategies Market Skimming Market Penetration

Market-Skimming Setting a High Price for a New Product to “Skim” Maximum Revenues from the Target Market. Results in Fewer, But More Profitable Sales. I.e. Intel

Use Under These Conditions Product’s quality and image must support its higher price. Costs can’t be so high that they cancel the advantage of charging more. Competitors shouldn’t be able to enter market easily and undercut the high price.

Market Penetration Setting a Low Price for a New Product in Order to “Penetrate” the Market Quickly and Deeply. Attract a Large Number of Buyers and Win a Larger Market Share. I.e. Dell

Use Under These Conditions Market must be highly price-sensitive so a low price produces more market growth. Production/distribution costs must fall as sales volume increases. Must keep out competition & maintain its low price position or benefits may only be temporary.

Product Mix Pricing Strategies Product Line Pricing Optional-Product Pricing Product-Mix Pricing Strategies This CTR corresponds to Table 11-1 on p. 331 and the relates to the material on pp. 331-334. Product Mix Pricing Strategies Captive-Product Pricing By-Product Pricing Product Mix Pricing Strategies Product-Mix Pricing Strategies Product Line Pricing. Companies usually develop product lines rather than single products. In product line pricing, management must decide on the price steps to set between each product in the line. Companies often use price points to target distinctive combinations of product features and value represented by a particular price. Optional-Product Pricing. Under this strategy, the company offers a base product and prices differently for each combination of additional features or options added to the base product as desired by the customer. Automobile pricing is famous -- or infamous -- for this practice. But many manufacturers use optional-product pricing, such as personal computer makers. Captive-Product Pricing. Under this strategy, producers price products that must be used with a main product. The text describes razor blades as an example. The razor is priced low while high markups are attached to the price of the blades. Discussion Note: Students should distinguish captive pricing from optional pricing on the basis of need versus convenience. When Apple Computer prices its keyboards separately from its computers, it is practicing captive-product pricing. When it offers additional RAM beyond the included board memory, it is practicing optional-product pricing. By-Product Pricing. Waste from production and distribution may be marketable as by-products. Selling by-products allows producers to lower prices and costs on their main products. Otherwise, the prices of main products must cover the disposable or storage of by- products. Product-Bundle Pricing. This strategy combines several products and offers them at a reduced price from the cost of each product purchased separately. Season tickets and group rates are examples. Product-Bundle Pricing

Product Line Pricing Setting Price Steps Between Product Line Items i.e. Rs. 299, Rs. 399

Optional-Product Pricing Pricing Optional or Accessory Products Sold With The Main Product i.e. Car Options

Captive-Product Pricing Pricing Products That Must Be Used With The Main Product i.e. Razor Blades, Film, Software

By-Product Pricing Pricing low-value By-Products to get rid of them

Product-Bundle Pricing Pricing bundles of products sold together i.e. Season tickets, Computer makers

Enough for today. . .

Setting Pricing Policy Summary Setting Pricing Policy

General Pricing Approaches New Product Pricing Strategies Market Skimming Market Penetration Product Mix Pricing Strategies

Optional-Product Pricing Product Line Pricing Optional-Product Pricing Product-Mix Pricing Strategies This CTR corresponds to Table 11-1 on p. 331 and the relates to the material on pp. 331-334. Captive-Product Pricing By-Product Pricing Product Mix Pricing Strategies Product-Mix Pricing Strategies Product Line Pricing. Companies usually develop product lines rather than single products. In product line pricing, management must decide on the price steps to set between each product in the line. Companies often use price points to target distinctive combinations of product features and value represented by a particular price. Optional-Product Pricing. Under this strategy, the company offers a base product and prices differently for each combination of additional features or options added to the base product as desired by the customer. Automobile pricing is famous -- or infamous -- for this practice. But many manufacturers use optional-product pricing, such as personal computer makers. Captive-Product Pricing. Under this strategy, producers price products that must be used with a main product. The text describes razor blades as an example. The razor is priced low while high markups are attached to the price of the blades. Discussion Note: Students should distinguish captive pricing from optional pricing on the basis of need versus convenience. When Apple Computer prices its keyboards separately from its computers, it is practicing captive-product pricing. When it offers additional RAM beyond the included board memory, it is practicing optional-product pricing. By-Product Pricing. Waste from production and distribution may be marketable as by-products. Selling by-products allows producers to lower prices and costs on their main products. Otherwise, the prices of main products must cover the disposable or storage of by- products. Product-Bundle Pricing. This strategy combines several products and offers them at a reduced price from the cost of each product purchased separately. Season tickets and group rates are examples. Product-Bundle Pricing

Next…. Pricing (cont..)

MGT301 Principles of Marketing Lecture-25