price
- amount of money charged for product
- sum of all values that ustomers give up to gain the benefits of having or using a product/service
types of pricing - FIND EXAMPLES FOR EACH
1) perceived value-based or customer-oriented
- uses buyers’ perceptions of values to set price instead of seller’s cost
- acquisition value or transaction value
2) cost-based
- adding a standard markup to the cost of the product; product-driven
- Price = cost + profit
- full cost/mark-up; marginal cost/contribution pricing
- may also be ‘follow the crowd’ pricing
3) good-value - offering the right combo of quality and good service at a fair price; EDLP (everyday low pricing)
4) value-added - attaching value-added features and services to differentiate your offer and support higher prices (increasing your pricing power - power to escape price competition and justify higher prices and margins without losing market share)
break-even analysis and target profit pricing
- break-even analysis - setting prices to break even on the costs of making and marketing a product
- BEP = FC/(price p.u. = VC p.c.)
- target profit pricing - setting prices to make a target profit
factors to consider when pricing
1) marketing strategy, objectives and marketing mix
2) corporate objectives - e.g. CSR; see other pricing objectives below
3) the market and demand, incl. PED (%ch in Qd/%ch in price) - TINS with examples!; customer inertia; price-quality perception
5) rivals’ strategies and likely reacions - depends on market position (leader?) and competition in market (e.g. oligopoly, monopolistic markets)
6) govt policy - sales taxation (GST and other excise duties make large proportion of final price in India), tariffs, govt restrictions on raising or reducing price (e.g. MRP)
7) costs
pricing objectives
1) maximise current profits and ROI
- estimate current demand and costs with alternative price options; select the price which maximises current profits, ROI or cash flow. Depends on firm’s knowledge of cost and demand function
2) exploit competitive position (pricing power)
- depending on if firm is a market leader due to customer perception of quality or technology, for e.g., may use skimming, penetrating or geographic pricing
3) survival in a competitive market
- may discount product if: firm loses brand equity; products are in maturity/decline; consumer preferences shift; many undifferentiated substitutes; tough economic conditions like recession
4) balance price over product line to maximise LT profits
- A company may have a product line with different versions — e.g., a basic, mid-range, and premium model.
- Some products sell very fast but with low profit margins, while others sell slowly but with high margins or a strong brand image.
- balance these differences so the line as a whole earns the most profit — not just one product.
- e.g. iPhone SE is cheaper and sells in high volume (fast-selling, lower margin); iPhone Pro Max is expensive, sells less, but has higher margins and enhances Apple’s premium image. Balance prices so both support each other — the cheaper model attracts more users, while the premium model boosts profit and brand image.
explain the cost-based pricing methods
1) Full Cost or Mark up Pricing:
- The marketer estimates the total cost of producing a product.
- Adds up a markup or a margin that the firm wants.
- It ensures all costs are recovered and the firm makes a profit.
- It may ignore the fact that it may not be able to sell its entire merchandize at this price
2) Marginal Cost or Contribution Pricing:
- It works on the premise of recovering its marginal cost.
- It works well in a market already dominated by giant firms, with intense competition.
- The firm has inventory of finished goods and wants to liquidate it.
- Problem: It sparks price wars which is not beneficial to any firm.
3) Follow the Crowd:
- The firm prices its product at the same level as that of competition.
- PRO: Prevents price wars.
- CON: It is not true that all firms or the leader firm is operating efficiently.
- CON: may not be consistent with firm’s overall marketing strategy/mix or brand image
explain the customer-oriented or perceived value pricing methods
- Price the product based on the customer’s perception of its value.
- The marketing mix, the positioning strategy of the firm, as the value of the product is a function of all these variables.
- It helps the firm in reducing the threat of price wars.
- Market research plays an important role
1) acquisition value
- refers to the perceived benefits and the sacrifice made by the customer to get it, based on buyer’s experience.
- Example: Air India has a low perceived value when compared to other airlines.
2) transaction value
- determined by comparing the buyer’s reference price to the actual price they pay
- To measure value: Direct Price Rating Method; Diagnostic Method; Economic Value to the Customer.
Direct Price Rating Method: Measures how fair or reasonable consumers feel the price is through direct ratings or surveys.
Diagnostic Method: Analyzes why consumers perceive value by examining factors like quality, features, and satisfaction.
Economic Value to the Customer (EVC): Quantifies the monetary worth of a product by comparing its benefits and savings to alternative
EVC=ReferenceValue(nextbestalternative)+DifferentiationValue
A new energy-efficient air conditioner costs ₹60,000, while a regular one costs ₹40,000.
However, the new model saves ₹10,000 per year on electricity.
Over 3 years, the customer saves ₹30,000 in energy costs — making its EVC = ₹40,000 (reference value) + ₹30,000 (savings) = ₹70,000.
So, even though it’s priced higher, the customer perceives greater overall value because of long-term savings.
price sensitivity
- extent to which price is an important criterion in the customer’s decision- making process;
- price sensitive customer is likely to notice
a price rise and switch to a cheaper brand or supplier.
techniques to measure price sensitivity
Controlled Experimentation:
- Assumed the competition does not change and there will be no qualitative difference in its strategy.
- Price level at which demand starts declining is when price sensitivity sets in
- The level varies depending on the nature of the product and buyer characteristics. (TINS!)
- In reality competition changes price and other variables
price band
- represents the minimum and the maximum price the customer is willing to pay for a product
- What is the most appropriate price in this price band which maximizes customers’ value?
Ways to determine a price band:
1) direct probing
- Customers are asked the minimum and maximum price they would be willing to pay.
- Simple technique but not free from respondent bias
- Convenient but does not provide sufficient information - each respondent only provides two levels.
2) price sensitivity meter
- probability sample is presented with the
description of a product/service and is then asked a variation of questions which covers the following aspects:
A) So inexpensive that you doubt its quality, and would not consider buying or recommending it
B) Inexpensive, and good bargain
C) Getting expensive, but consider the price to be acceptable
D) Too expensive, and would not consider the price acceptable
- max and min price will be between two limits set where there is maximum clustering of responses, e.g. Mercedes Cars
3) sequential preferences
- Customer is asked to choose a brand from multiple brands at different price levels
- establishes each respondent’s preference when prices are equal
- establishes respondents’ reactions to price changes in brand B, when price of A is constant.
- helps estimate the price difference needed to induce a customer to switch from the preferred brand to another in the product category.
- e.g. if customer prefers A at equal prices but switches to B when it is 500 INR cheaper, marketer knows this is the amount to shift preference
pricing strategies for new products
1) economy pricing - low quality, low price
2) prentration pricing - high quality, low price. initial low price attracts large number of buyers quickly
- The market must be highly price sensitive so that the low price significantly increases sales
- Production and distribution costs must fall as sales volume increases - EOS helps firm to keep prices low while still making a profit, even at thinner margins.
- low price must help keep out the competition (BTE to higher-cost producers), and low price position must be maintained or rivals may undercut you
3) price skimming - low quality, high price. typically used by new inventions to skim revenues layer by layer from the market
- product quality and image must support higher price, and enough buyers must want it at that price
- costs of producing a smaller volume cannot be so high that they cancel out the advantage of charging more
- competitors should not be able to enter the market easily (highly differentiated product and other BTE) and undercut the high price
4) premium pricing - high quality, high price
remember quality is relative to price AND rivals, and as perceived by customers!!!!
SEE COST, CUSTOMER, COMPETITION COMPARISON FOR SKIM, PENETRATION AND NEUTRAL
product mix pricing
1) product line pricing
2) optional-product pricing
3) captive-product pricing
4) by-product pricing
5) product bundle pricing
price-adjustment strategies
1) Discount and Allowance Pricing
- Reducing prices to reward customer responses such as paying early or promoting the product.
- Discounts include cash discount, quantity discount, functional discount and seasonal discount.
- Allowances - trade-in allowances and
promotional allowances.
2) Segmented Pricing
- adjusting prices depending on differences in consumer groups, product form, location and time
3) Psychological Pricing
- adjusting prices to have a desired psychological effect
- reference prices; sale signs; prices ending in 9; signpost pricing; price-match guarantees
4) Promotional Pricing
- Temporarily reducing prices to increase short run sales, e.g. selling below the cost price, cash rebates, low interest financing, discounts, etc.
- Frequent use can lead to industry price wars.
5) Geographical Pricing
- accounts for the geographic location of customers since costs (mainly shipping/transportation) and competitive conditions vary by region
- FOB-origin pricing; uniform-delivered pricing; zone pricing; basing-point pricing; freight- absorption pricing.
6) Dynamic Pricing
- Prices constantly adjusted based on customer behavior, demand, competition, or the situation to match what each individual customer is willing to pay at a given time.
- Technology (like the web, apps, or AI) makes it easy for sellers to change prices quickly for each customer or situation.
- tech benefits buyers too: Online platforms can offer personalized deals or discounts; Prices can reflect real-time demand, so customers may get lower prices during off-peak times.
7) International Pricing
- price charged in specific country depends on factors like economic conditions; competitive
situation; consumer perceptions and preferences, etc.
FOB-Origin Pricing:
“FOB” = Free On Board.
The buyer pays the shipping cost from the factory to their location.
Price is the same at the factory, but total cost varies depending on distance.
Uniform-Delivered Pricing:
The seller charges the same price to all customers, regardless of location.
Shipping is averaged out across all buyers.
Zone Pricing:
The market is divided into geographic zones.
Each zone has a different fixed price, usually increasing with distance from the seller.
Basing-Point Pricing:
A specific location is chosen as a “basing point.”
Customers are charged freight from that basing point, even if the product is shipped from elsewhere.
Freight-Absorption Pricing:
The seller absorbs all or part of the shipping cost to keep prices consistent for distant customers.
Useful for competing in faraway markets without penalizing customers for distance.
initiating and responding to price changes
1) Maintain price and perceived quality; selectively prune customers - focus on serving only your most profitable or loyal customers. Less profitable ones may be encouraged to leave.
2) Raise price and perceived quality - creating a premium positioning. Customers feel they’re paying more for better value.
3) Partially cut price and raise quality - signaling better value and attracting price-sensitive customers without cheapening the brand.
4) Fully cut price, maintain perceived quality - aiming to attract more customers quickly and retain existing ones.
5) Maintain price, reduce perceived quality (e.g., smaller size, cheaper materials) - Often a cost-cutting tactic, though risky for brand reputation.
6) Introduce an economy model - lower-priced version with fewer features or simpler design, targeting budget-conscious customers while also keeping the original product at its current price (capturing wider market)
initiating price changes
price cuts desirable when:
- Has excess capacity
- Faces falling market share due to price competition
- Desires to be a market share leader by earning market share
- Responding to economic recession
price increases desirable when
- If a firm can increase profit
- faces cost inflation
- faces greater demand than can be supplied
- may increase price using: delayed quotation pricing, escalator clauses, unbundling, reducing discounts
- alternatives to increasing price: reducing product size, using less expensive materials, unbundling the product
Delayed quotation pricing: Postponing the final price announcement to adjust for market or cost changes.
Escalator clauses: Automatically increasing price based on specific cost or inflation metrics.
Unbundling: Separating product features or services and charging for them individually.
Reduction of discounts: Increasing effective price by offering fewer or smaller discounts.
responding to price changes
firm should respond to rival price changes only if:
- market share/profits will be negatively affected if nothing is changed
- effective action can be taken by: reducing price to match; hold price and raise perceived value/quality, improving quality and increasing price; hold price and launch low-price rival brand (fighting brand); hold price and launch higher-priced brand
- if not, hold current price and continue to monitor rivals’ prices
buyer and competitor reactions to price changes
Buyers’ Reactions/perceptions:
1) Price may come down further – might delay buying.
2) Quality has been reduced
3) Company is in financial trouble - worries regular buyers
4) Current models are not selling well
5) Being phased out or replaced by newer models (e.g. obsolete, clearing inventory)
Competitors’ Reactions:
1) Number of firms is small – In markets with few competitors, price changes can trigger strong reactions like matching or countering.
2) Product is uniform – If products are very similar, competitors may feel pressured to adjust prices too.
3) Buyers are well informed – Competitors know that informed customers can easily switch, so they may respond quickly to maintain market share.
