PRICING
MANAGEMENT
CHAPTER 2:
VALUE CREATION
The Source of Pricing Advantage
THE ROLE OF VALUE
IN PRICING
VALUE refers to the overall satisfaction that a customer
receives from using a products or service offering.
The economist call this “use value”- the utility gained
from the product.
USE
VALUE
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ECONOMIC VALUE
The value at the heart of pricing strategy is not use
value, but is what economist call “exchange value” or
“economic value”.
For economist, it refers to how long somebody is willing
to wait in order to get something.
Refers to the highest amount a customer is willing to pay
for a product or services in a free market economy
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What is Pricing Strategy?
A business can use a variety of pricing strategies
when selling a product or service. The Price can
be set to maximize profitability for each unit sold or
from the market overall.
It can be used to defend an existing market from
new entrants, to increase market share within a
market or to enter a new market.
Businesses may benefit from lowering or raising
prices, depending on the needs and behaviors of
customers and clients in the particular market.
Objectives of Pricing Strategy
Long Run Profits
Short Run Profits
Increase Sales Volume
Company Growth
Match Competitors Price
Create Interest & Excitement about the Product
Discourage Competitors From cutting Price
Social, Ethical & Ideological Objectives
Discourage New Entrants
Survival
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Pricing Strategy for Challenging Economic Times
▪ Pricing is a market consideration, not a cost consideration.
▪ Understand your customers’ primary goals. Be clear on what the customer wants first,
then set pricing and bundling decisions.
▪ Consider bundling products or services together. Always bundle a low- and high-valued
product together. This will create higher sales and greater profitability.
▪ Understand your value proposition. Have a clear understanding of if and how your
product or service is differentiated from the competition.
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Pricing Strategy for Challenging Economic Times
▪ Know where you are on the scale of "innovative-to-commoditized."
▪ Build the customers’ perception of value. Constantly build on customer perception. The
more subtle the differentiation of the product or service, the more often customers need
to be reminded of the value of your product or service.
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Factors affecting Pricing Decision
Organizational Objectives
Costs
Legal and Regulatory Issues
Product Characteristics
PRICING
DECISIONS Competition
Pricing Objectives
Price Elasticity of Demand
Competitor’s pricing Policies
Distribution Channels
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Organizational Objectives
▪ The marketers should set the prices as per the organizational goals. For
instance, an organization has set a goal to produce quality products,
thus, the prices will be set according to the quality of products.
Similarly, if the organization has a goal to increase sales by 18% every
year, then the reasonable prices have to be set to increase the demand of
the product.
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Costs
▪ The organization may sell products at prices less than that of the
competitors even if it is incurring high costs. By following this strategy, the
organization can increase sales volumes in the short run but cannot survive
in the long run. Thus, the marketers analyze the costs before setting the
prices to minimize losses. Costs include cost of raw materials, selling and
distribution overheads, cost of advertisement and sales promotion and office
and administration overheads
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Legal and Regulatory Issues
▪ The legal and regulatory laws set prices on various products, such as
insurance and dairy items. These laws may lead to the fixing,
freezing, or controlling of prices at minimum or maximum levels.
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Product Characteristics
▪ are attributes that can be added to the product definition to extend the
description of each product. Examples of Characteristics are Size, Color,
Quality, Shape or Weight. These characteristics can be used later to filter or
search products. They can be overridden on each product.
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Competition
▪ The organization matches the prices with the competitors and
adjusts the prices more or less than the competitors. The
organization also assesses that how the competitors respond to
changes in the prices.
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Pricing Objectives
▪ Help an organization in determining price decisions. For
instance, an organization has a pricing objective to increase the
market share through low pricing. Therefore, it needs to set the
prices less than the competitor prices to gain the market share.
Giving rebates and discounts on products is also a price
objective that influences the customer’s decisions to buy a
product.
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Price Elasticity of Demand
▪ Refers to change in demand of a product due to change in
price.
There are three situations that arise under it:
a. Products that have inelastic demand will be highly priced
b. Products that have more than elastic demand will be priced low
c. Products that have elastic demand will be reasonably priced.
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Competitor’s pricing Policies
▪ Influence the pricing policies of the organizations. The price of
a product should be determined in such a way that it should
easily face price competition.
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Distribution Channels
▪ Implies a pathway through which the final products of
manufacturers reach the end users. If the distribution channel is
large, price of the product will be high and if the distribution
channel is short, the price of the product will be low. Thus,
these are the major factors that influence the pricing decisions.
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Pricing Strategies
1. Market Skimming Pricing
Setting a high price for a new product to
skim maximum revenues layer by layer
from segments willing to pay the high
price.
Ex. Play station, Digital Technology &
DVD
2. Value Pricing
is customer focused pricing, meaning companies
base their pricing on how much the customer
believes a product is worth. Value-based pricing is
different than "cost-plus" pricing, which factors
the costs of production into the pricing calculation.
3. Loss Leader Pricing
a product lower than its production cost in order
to attract customers or sell other, more expensive
products. ... Large companies can afford
to price a product with no margin because they
have other products they can sell profitably to
make up for the loss.
4. Psychological Pricing
is the business practices of
setting prices lower than a whole
number. The idea
behind psychological pricing is
that customers will read the slightly
lowered price and treat it lower than
the price actually is
5. Going Rate Pricing
is when a business sets the price of
their product or service based on the
market price. ... Businesses that
choose a going rate pricing strategy
often set their prices based on the
leader of the market.
6. Tender Pricing
means the amount or amounts
indicated by a Bidder as the lowest
amount or amounts for which that
Bidder is prepared to perform the
Contract.
7. Price Discrimination Pricing
is a selling strategy that charges customers
different prices for the same product or
service based on what the seller thinks they
can get the customer to agree to. In
pure price discrimination, the seller
charges each customer the
maximum price he or she will pay.
8. Penetration Pricing
a marketing strategy used by businesses to
attract customers to a new product or
service by offering a lower price during its
initial offering. The lower price helps a new
product or service penetrate the market
and attract customers away from
competitors.
9. Cost Plus Pricing
is a pricing method that attempts to ensure
that costs are covered while providing a
minimum acceptable rate of profit for the
entrepreneur. It is calculated by adding a
fixed mark-up to average (or unit) costs of
production.
Cost-plus pricing is also known as mark-up pricing
where cost + mark-up = selling price.
10. Contribution Pricing
Contribution pricing is where the price
charged is based on the variable costs of
production. A price is set that is greater than
the variable costs, so that a contribution is
made towards fixed costs.
For example, if the variable costs are $4 per unit and
the firms sells the good for $6, then each unit sold will
make a 'contribution' to fixed costs of $2. If total fixed
costs are $1,000, then the firm will need to make 500
units to break-even.
10. Contribution Pricing
Contribution pricing is where the price
charged is based on the variable costs of
production. A price is set that is greater than
the variable costs, so that a contribution is
made towards fixed costs.
For example, if the variable costs are $4 per unit and
the firms sells the good for $6, then each unit sold will
make a 'contribution' to fixed costs of $2. If total fixed
costs are $1,000, then the firm will need to make 500
units to break-even.
11. Target Pricing
is the process of estimating a
competitive price in the marketplace and
applying a firm's standard profit margin to
that price in order to arrive at the maximum
cost that a new product can have.
Mark-up = Profit/Cost x 100
12. Marginal Cost Pricing
the practice of setting the price of a product
to equal the extra cost of producing an
extra unit of output. By this policy, a
producer charges, for each product unit
sold, only the addition to total cost resulting
from materials and direct labor.
For example, it may cost $10 to make 10 cups of Coffee. To
make another would cost $0.80. Therefore, that is
the marginal cost – the additional cost to produce one extra
unit of output. ... This includes both fixed and variable costs.
13. Absorption Cost Pricing
Absorption pricing is where you factor in
all the costs associated with your product's
selling price, including the proportion of
your fixed costs and your profit margin.
14. Destroyer Pricing
is used to eliminate competition. It involves
a business setting a very low price in order
to attract customers away from competitors,
who will struggle to match the low price and
may go bust. ... Destroyer pricing is illegal
in the UK.
Deliberate price cutting or offer of ‘free gifts/products’ to
force rivals (normally smaller and weaker) out of
business or prevent new entrants
15. Influence of Elasticity Pricing
is a measure of the relationship between a
change in the quantity demanded of a
particular good and a change in
its price. Price Elasticity of Demand (PED)
is a term used in economics when
discussing price sensitivity.
% change in Q < % change in P • e.g. a 5% increase in price
would be met by a fall in sales of something less than 5% •
Revenue would rise • A 7% reduction in price would lead to a rise
in sales of something less than 7% • Revenue would fall
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