Pricing: Understanding and Capturing Customer Value

What Is a Price? Price is the amount of money charged for a product or service. It is the sum of all the values that consumers give up in order to gain the benefits of having or using a product or service. Price is the only element in the marketing mix that produces revenue; all other elements represent costs

Factors to Consider When Setting Prices Customer Perceptions of Value

Customer Perceptions of Value Value-based pricing uses the buyers’ perceptions of value, not the sellers’ cost, as the key to pricing. Price is considered before the marketing program is set. Value-based pricing is customer driven Cost-based pricing is product driven

Customer Perceptions of Value

Is “Good Value” same as “Lower Price”

Customer Perceptions of Value Good-value pricing offers the right combination of quality and good service at a fair price . Mc Donalds value menus , Armani Exchange Fashion line , Tata Nano, Levis Existing brands are being redesigned to offer more quality for a given price or the same quality for a lower price. Tata Indigo CS , No frill Airlines - Everyday low pricing (EDLP) involves charging a constant everyday low price with few or no temporary price discounts - High-low pricing involves charging higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected it

Customer Perceptions of Value Value-added pricing attaches value-added features and services to differentiate offers, support higher prices, and build pricing power Pricing power is the ability to escape price competition and to justify higher prices and margins without losing market share

Company and Product Costs Cost-based pricing involves setting prices based on the costs for producing, distributing, and selling the product plus a fair rate of return for its effort and risk Cost-based pricing adds a standard markup to the cost of the product Fixed costs Variable costs Total costs

Costs at Different Levels of Production Diseconomies of scale: too many workers to manage Plant becomes inefficient The plant has become inefficient

Costs as a Function of Production Experience Experience or learning curve is when average cost falls as production increases because fixed costs are spread over more units Gains Experience Learn how to do it better Work becomes better organized Better equipment and production process This drop in AC with accumulated production experience is called the experience curve

Cost Based Pricing Cost-plus pricing adds a standard markup to the cost of the product(Construction companies, Lawyers , Software Consultants , accountants ) Variable cost : Rs.10 Fixed Cost : Rs. 300,000 Expected unit sales : 50,000 Unit cost : Variable cost + Fixed Cost ------------- = Rs 16 Unit Sales Mark up price = Unit cost --------------- = Rs. 20 1- Desired Return on sales Does standard mark ups to set prices make sense ? Benefits Sellers are certain about costs Prices are similar in industry and price competition is minimized Consumers feel it is fair Disadvantages Ignores demand and competitor prices

GM in US (15% to 20% profit on Investment Cost Based Pricing Break-even pricing is the price at which total costs are equal to total revenue and there is no profit Target profit pricing is the price at which the firm will break even or make the profit it’s seeking. GM in US (15% to 20% profit on Investment

Break-Even Analysis and Target Profit Pricing Cost Based Pricing Break-Even Analysis and Target Profit Pricing

Public Policy and Pricing Price competition is a core element of our free-market economy. In setting prices, companies usually are not free to charge whatever prices they wish. Many laws govern the rules of fair play in pricing. The Monopolies and Restrictive Trade Practices (MRTP) Act, 1969 The Competition Act, 2002

Public Policy and Pricing Salient features of the MRTP Act: Under the MRTP Act, acts such as misleading consumers about the prices at which goods and services are available in the market and false offers of bargain prices are considered to be unfair trade practices The Consumer Protection Act, 1986 (amended in 2002), also safeguards the interests of consumers

Public Policy and Pricing Salient features of the Competition Act: anti-competitive agreements prohibition of abuse of dominant positions by an enterprise regulation of combinations such as acquisitions, mergers, joint ventures, takeovers, and amalgamations

Public Policy and Pricing Predatory pricing, or selling and providing services with the intention of reducing competition or eliminating competitors, is not permissible under the MRTP Act or the Competition Act. Microsoft – have been accused of predatory pricing strategies in offering ‘free’ software as part of their operating system – Internet Explorer and Windows Media Player - forcing competitors like Netscape and Real Player out of the market. Title: Bill Gates speaks at UNIX convention. Copyright: Getty Images, available from Education Image Gallery