WHAT IS PRICE

RENT FOR APARTMENT

TUTION FOR EDUCATION

FEE FOR DENTIST/DOCTOR

FARE FOR AUTORICKSHAW

RATE FOR ELECTRICITY/WATER/GAS

TOLL FOR ROAD-EXPRESS HIGHWAY

PREMIUM FOR INSURANCE

WHAT IS PRICE

HONARARIUM FOR GUEST LECTURER

RETAINER FOR LAWYER/ADVISOR

SALARY FOR EXECUTIVE

COMMISSION FOR SALESMAN

BRIBE FOR CORRUPT PERSONNEL

WAGE FOR WORKMAN

TAX FOR GOVERNANCE

SITTING FEE FOR DIRECTORS

? WHAT IS PRICE

WHO SETS THE PRICE

HOW IS IT SET

WHEN TO SET A PRICE

1. INTRODUCING A NEW PRODUCT

2. INTRODUCING IN THE NEW CHANNEL/MARKET

3. BIDS ON NEW CONTRACT WORK

POSITIONING ON QUALITY AND PRICE

SEGMENT EXAMPLE(AUTOMOBILES)

ULTIMATE MERCEDES-BENZ

LUXURY CAMI-TOYOTA-BMW

SPECIAL NEEDS LANCER – QUALIS

MIDDLE OPEL – OCTRA

EASE/CONVENIENCE ESTEEM

ME TOO BUT CHEAPER

ZEN

PRICE ALONE MARUTI 800

Nine Price-Quality Strategies

Price Price

P P

R R

O O

D D

C C

T T

qualitqualityy

HighHigh MediuMediumm

LowLow

HighHigh 1.Premium 1.Premium

StrategyStrategy

2.High Value2.High Value

StrategyStrategy

3.Super-3.Super-value value StrategyStrategy

MediumMedium 4.Overcharging 4.Overcharging

StrategyStrategy

5.Medium-5.Medium-value Strategyvalue Strategy

6.Good-6.Good-value value StrategyStrategy

LowLow 7.Rip-off 7.Rip-off StrategyStrategy

8.False 8.False economy economy StrategyStrategy

9.Economy9.Economy

StrategyStrategy

Price-Quality StrategiesPrice-Quality Strategies

• THE DIAGONAL STRATEGIES- 1,5,9 CAN THE DIAGONAL STRATEGIES- 1,5,9 CAN CO-EXIST IN THE SAME MARKET.CO-EXIST IN THE SAME MARKET.

• THE CELLS ABOVE THE DIAGONAL ARE THE CELLS ABOVE THE DIAGONAL ARE STRATEGIES 2,3 AND 6.THESE ARE WAYS STRATEGIES 2,3 AND 6.THESE ARE WAYS TO ATTACK THE DIAGONAL POSITIONS.TO ATTACK THE DIAGONAL POSITIONS.

• POSITIONING STRATEGIES 4,7,AND 8 –POSITIONING STRATEGIES 4,7,AND 8 –THERE IS AN OVER-PRICING OF THE THERE IS AN OVER-PRICING OF THE PRODUCT IN RELATION TO ITS QUALITY.PRODUCT IN RELATION TO ITS QUALITY.

SIX STEP PROCEDURE FOR PRICE SETTLING

1. SELECTING THE PRICING OBJECTIVES

2. DETERMING DEMAND

3. ESTIMATING COST

4. ANALYZING COMPETITORS, COSTS, PRICES AND OFFERS

5. SELECTING A PRICING METHOD

6. SELECTING THE FINAL PRICE

SELECTING THE PRICING OBJECTIVES

1. SURVIVAL

2. MAXIMUM CURRENT PROFIT

3. MAXIMUM SALES GROWTH

4. MAXIMUM MARKET SKIMMING

5. PRODUCT QUALITY LEADERSHIP

6. OTHER PRICING OBJECTIVE

DETERMINING DEMAND

DEMAND HAS AN INVERSE RELATIONSHIP WITH PRICE – CETRIS PARIBUS

INELASTIC AND ELASTIC DEMAND

PRICE

15

10

10 20 30

QTY DEMAND

dy 5

dx 10

dy 5

dx 30

PRICE

15

10

10 20 30

QTY DEMAND dx 5 dy 10

RELATIVELY IN ELASTIC DEMAND

dx 5 dy 30

MORE ELASTIC DEMAND

FACTORS AFFECTING PRICE SENSITIVITY

1. UNIQUE VALUE EFFECT

2. SUBSTITUTE AWARENESS EFFECT

3. DIFFICULT COMPARISON EFFECT

4. TOTAL EXPENDITURE EFFECT

5. END BENEFIT EFFECT

6. SHARED COST EFFECT

7. SUNK INVESTMENT EFFECT

8. PRICE – QUALITY EFFECT

9. INVENTORY EFFECT

• BUYERS ARE NORMALLY PRICE SENSITIVE.BUYERS ARE NORMALLY PRICE SENSITIVE.

• HOWEVER THE FOLLOWING LIST OF HOWEVER THE FOLLOWING LIST OF FACTORS ARE ASSOCIATED WITH LOWER FACTORS ARE ASSOCIATED WITH LOWER PRICE SENSITIVITYPRICE SENSITIVITY

( TOM NAGLE):( TOM NAGLE):

1) THE PRODUCT IS MORE DISTINCTIVE1) THE PRODUCT IS MORE DISTINCTIVE

( ROLLS-ROYCE)( ROLLS-ROYCE)

BUYERS & PRICE SENSITIVITY

3) BUYERS CANNOT EASILY COMPARE THE 3) BUYERS CANNOT EASILY COMPARE THE QUALITY OF SUBSTITUTES. ( OPEN HEART QUALITY OF SUBSTITUTES. ( OPEN HEART SURGERY)SURGERY)

2) BUYERS ARE LESS AWARE OF SUBSTITUTES2) BUYERS ARE LESS AWARE OF SUBSTITUTES ( PETROL AND DIESEL)( PETROL AND DIESEL)

4) THE EXPENDITURE IS A SMALLER PART OF 4) THE EXPENDITURE IS A SMALLER PART OF THE BUYER’S TOTAL INCOME. THE BUYER’S TOTAL INCOME. (COSMETICS, SALT, PERFUMES) (COSMETICS, SALT, PERFUMES)

5) THE EXPENDITURE IS SMALL COMPARED TO 5) THE EXPENDITURE IS SMALL COMPARED TO THE TOTAL COST OF THE END PRODUCT.THE TOTAL COST OF THE END PRODUCT.

( FURNISHING OF THE HOUSE, INK FOR A PEN, ( FURNISHING OF THE HOUSE, INK FOR A PEN, REFILL FOR A PRINTER)REFILL FOR A PRINTER)

6)PART OF THE COST IS BORNE BY ANOTHER 6)PART OF THE COST IS BORNE BY ANOTHER PARTY.PARTY.

( MEDICAL INSURANCE)( MEDICAL INSURANCE)

7) THE PRODUCT IS USED IN CONJUNCTION 7) THE PRODUCT IS USED IN CONJUNCTION WITH ASSETS PREVIOUSLY BOUGHT.WITH ASSETS PREVIOUSLY BOUGHT.( SPARE PARTS FOR MACHINERIES)( SPARE PARTS FOR MACHINERIES)

8) THE PRODUCT IS ASSUMED TO HAVE 8) THE PRODUCT IS ASSUMED TO HAVE MORE QUALITY, PRESTIGE, OR MORE QUALITY, PRESTIGE, OR EXCLUSIVENESS.EXCLUSIVENESS.

( PAINTINGS, JEWELLERY)( PAINTINGS, JEWELLERY)

9) BUYERS CANNOT STORE THE PRODUCT9) BUYERS CANNOT STORE THE PRODUCT ( PERISHABLE ESSENTIAL COMMODITIES)( PERISHABLE ESSENTIAL COMMODITIES)

METHODS OF ESTIMATING DEMAND V/S PRICES

1. STATISTICALLY ANALYSING PAST RELATIONSHIP

2. PRICE EXPERIEMENTS

3. BUYER RESPONSE

PRICE ELASTICITY OF DEMAND

IT IS IMPORTANT TO KNOW THE PRICE ELASTICITY OF DEMAND TO FIX THE PRICE. DEMAND IS LESS ELASTIC UNDER THE FOLLOWING CONDITIONS

Contd…

1. NO OR FEW SUBSTITUTES

2. ESSENTIALS

3. BUYERS REALLY CANNOT NOTICE THE PRICE CHANGE

4. THE PRODUCT BECOMES MORE ESSENTIAL / NEEDED / PEAK DEMAND

5. BUYERS ARE SLOW TO CHANGE THEIR BUYING HABITS

6. HIGHER PRICES ARE JUSTIFIED ON QUALITY VALUE

ESTIMATING COST

DEMAND SETS A CEILING ON PRICE.

COST SETS THE FLOOR ON PRICE

TYPES OF COST

• FIXED

• VARIABLE

FACTORS TO BE CONSIDERED IN COSTING

1. COST BEHAVIOUR AT DIFFERENT LEVELS OF PRODUCTION PER PERIOD

2. COST BEHAVIOUR AS A FUNCTION OF ACCUMULATED PRODUCTION

3. COST BEHAVIOUR AS A FUNCTION OF DIFFERENTIATED MARKETING OFFERS. i.e ACTIVITY BASED COSTING INSTEAD OF STANDARD COSTING

4. TARGET COSTING – JAPANESE METHOD

ANALYSING COMPETITORS COSTS, PRICES AND OFFERS

TO FIND OUT THE COMPETITIVE COSTS, PRICES AND OFFERING IS REQUIRED -

1.TO BENCH MARK

2.TO FIND OUT COMPARATIVE ADVANTAGES

SELECTING A PRICING METHOD

THREE “C” MODEL FOR PRICE SETTING

1.CUSTOMERS DEMAND SCHEDULE

2.COST FUNCTION

3.COMPETITORS PRICE

1. MARKUP PRICING

2. TARGET RETURN PRICING

3. GOING – RATE PRICING

4. RETENTION PRICING

5. ADMINISTERED PRICE MECHANISM

6. DIFFERENTIAL PRICING

7. SEALED BID PRICING

8. BLACK MARKET PRICING

PRICING METHODS

SELECTING A PRICING METHOD

LOW PRICE HIGH PRICE

NO PROFIT NO DEMANDAT THIS PRICE AT THIS PRICE

COSTS COMPETITOR CUSTOMER PRICE AND PRICES ASSESMENT OF SUBSTITUTES OF UNIQUE PRODUCT VALUE

1. MARK UP PRICING

COST ≠ PLUS –

• ADD A STANDARD MARKUP TO THE PRODUCTS COSTS

DOLL MANUFACTURER

VARIABLE COST PER UNIT Rs 10FIXED COST Rs 3,00,000EXPECTED UNIT SALES 50,000 Nos

UNIT COST = VC + FC = 10 + 3,00,000 = Rs 16

SALES 50,000

ASSUME THE MANUFACTURER WANTS20%FOR MARK UP ON SALES. THE MARKUP IS GIVEN BY ?

MARKUP = UNIT COST = 16 = Rs 20 PRICE 1- DESIRED 1- 0.2

RETURN ON SALES

SUPPOSE THE DEALER WANTS 50%-FOR SELLING PRICE. WHAT SHOULD BE HIS MARKUP PRICE?

MARKUP = UNIT COST = 20 = Rs 40 PRICE 1- DESIRED 1- 0.5

RETURN ON SALES

Rs 40 PER UNIT

THIS IS A MODIFICATION OF COST PRICING APPROACH. THE PRICE WILL GIVE THE TARGET RATE RETURN ON INVESTMENT (ROI)

IN THE ABOVE CASE, IF THE DOLL

MANUFACTURER INVESTED Rs 10 LAKHS IN HIS BUSINESS AND HE WANTS TO ACHIEVE A ROI OF 20% HE WILL APPLY THE FOLLOWING FORMULA

TRP = UNIT COST + DESIRED RETURN x INVESTED

CAPITAL UNIT SALES

16 + .20 x 1,00,000 = Rs 20 50,000

TO KNOW THE BREAK EVEN VOLUME

BREAK EVEN VOLUME = FIXED COST = 3,00,000 = 30,000 UNIT SALES 20 – 10

1200

▬

1000

▬

800

▬

600

▬

400

▬

200

▬

10 20 30 40 50 SALES

TC

FC

BEP

REVENUE

3.PERCEIVED – VALUE PRICING :

THIS PRICING IS BASED ON THE PRODUCTS PERCEIVED VALUE. WHAT IS THE BUYERS PERCEPTION OF VALUE AND NOT SELLERS COST IS BASED FOR FIXING THE PRICE

VALUE PRICING

CHARGING FAIRLY LOW PRICE FOR A HIGH QUALITY OFFERING

3.GOING – RATE PRICING – MOSTLY BASED ON COMPETITORS PRICE

4.RETENTION PRICING – (GOVT)

5.ADMINISTERED PRICE MECHANISM – (GOVT)

6.DIFFERENTIAL PRICING

7.SEALED BID PRICING

8.BLACK MARKET PRICING – (SHORTAGE SITUATION)

SELECTING THE PRICE

APART FROM PRICING METHOD, THE COMPANY WOULD CONSIDER ADDITIONAL FACTORS SUCH AS -

1. PSYCHOLOGICAL PRICING

2. OTHER MARKETING MIX ELEMENTS

3. COMPANY PRICING POLICIES

4. IMPACT OF PRICE ON OTHER FACTORS

5. LEGAL ENVIRONMENT

ADAPTING THE PRICE GEOGRAPHICAL PRICING - (CASH, COUNTER

TRADE AND BARTER)

COUNTER TRADE TAKES THE FOLLOWING FORMS :

1. BARTER – GOODS FOR GOODS

2. COMPENSATION DEAL – SOME % IN CASH, THE BALANCE IN GOODS

3. BUY BACK ARRANGEMENT – SELLS PLANT, EQUIPMENT, TECHNOLOGY AND BUY BACK PART OF THE PRODUCT MANUFACTURED

4. OFFSET – THE SELLER RECEIVES FULL PAYMENT IN CASH BUT AGREES TO SPEND A SUBSTANTIAL AMOUNT IN THAT COUNTRY IN A STATED TIME PERIOD

PRICE, DISCOUNTS AND ALLOWANCES

COMPANIES REWARDS CUSTOMERS FOR EARLY PAYMENTS, VOLUME PURCHASES AND OFF SEASON BUYING. THEY ARE CALLED

DISCOUNTS

ALLOWANCES

REBATES

QUANTITY DISCOUNTS - THIS IS GIVEN FOR CERTAIN VOLUME PURCHASES.

FUNCTIONAL DISCOUNTS – THEY ARE ALSO CALLED TRADE DISCOUNTS. THIS IS FOR CHANNEL MEMBERS LIKE DISTRIBUTORS, WHOLESALERS, RETAILERS, STOCKISTS, BROKER AGENTS. THIS IS A REWARD FOR STOCK KEEPING, WAREHOUSING, FORWARDING, CLEARING, ACCOUNTING, BILLING, FINANCING, GUARANTEEING etc,.

ALLOWANCES - TRADE IN ALLOWANCE (FOR GIVING THE OLD MODEL LIKE OLD TV OR OLD CAR)

PROMOTIONAL ALLOWANCE – THESE ARE PAYMENTS OR PRICE REDUCTION TO DEALERS IN PARTICPATING IN ADVERTISING AND SALES PROMOTIONAL PROGRAMS

REBATES - REBATES ARE GIVEN TO STIMULATE SALES – REBATES ARE NORMALLY PASSED ON TO THE BUYER. KHADI & VILLAGE INDUSTRIES DEVELOPMENT BOARD GIVE FESTIVAL REBATES FOR THEIR PRODUCTS ESPECIALLY TEXTILES

PROMOTIONAL PRICINGSEVERAL PRICING TECHNIQUES ARE USED TO STIMULATE EARLY PURCHASE AND ALSO INCREASE SALES. THEY ARE

LOSS LEADER PRICING

SPECIAL EVENT PRICING

CASH REBATES

LOW INTEREST FINANCING

LONGER PAYMENT TERMS

WARRANTIES AND SERVICE CONTRACTS

PSYCHOLOGICAL DISCOUNTING

PROMOTIONAL PRICINGLOSS LEADER PRICING - SUPER MARKETS DROPS PRICES ON WELL KNOWN BRANDS. THIS ATTRACTS MORE CUSTOMERS TO THEIR SHOPS AND INCREASE TOTAL SALES.

SPECIAL EVENT PRICING - TO ATTRACT CUSTOMERS IN CERTAIN SEASONS – LIKE ONAM, CHRISTMAS, DIWALI etc,.

CASH REBATES - THIS IS GIVEN TO BUYERS

LOW INTEREST FINANCING – CAR DEALERS

LONGER PAYMENT TERMS

WARRANTIES AND SERVICE CONTRACTS

PSYCHOLOGICAL DISCOUNTING - ORIGINAL PRICE Rs 500 NOW ONLY Rs 399/-

KOTLER SAYS, “ PROMOTIONAL

PRICING IS ZERO SUM GAME. THEY

WORK, COMPETITORS COPY THEM AND

ITS EFFECT IS LOST. IF THEY DO NOT

WORK, THEY WASTE COMPANY

MONEY”.

DISCRIMINATORY PRICING

CUSTOMER SEGEMENT PRICING – PARKS, MUSEUMS, RAILWAYS

PRODUCT FORM PRICING – DIFFERENT PACKING

IMAGE PRICING – PERFUME

LOCATION PRICING – SEATS IN A THEATRE

TIME PRICING – UTILITIES – HOLIDAY RESORTS, AIRLINES

FOR PRICE DISCRIMINATION CERTAIN CONDITIONS MUST EXIST.

1. MARKET MUST BE SEGMENTABLE

2. LOWER PRICE SEGMENT MUST NOT BE ABLE TO RESELL THE PRODUCT TO HIGHER SEGMENT

3. COMPETITORS SHOULD NOT BE ABLE TO UNDER SELL AT HIGHER PRICE SEGEMENT

4. PRACTICE SHOULD NOT BREED CUSTOMER RESENTMENT

5. SHOULD NOT BE ILLEGAL

IN A CONTROLLED ECONOMY, ESPECIALLY IN

SHORTAGE SITUATION THE GOVERNMENT

OR PUBLIC AUTHORITIES ENFORCE

DISCRIMINATORY PRICE FOR EQUITABLE

DISTRIBUTION OF ESPECIALLY ESSENTIAL

ITEMS AND UTILITIES. IT IS CONTROLLED BY

RATIONING, PERMIT, QUOTA, AND PRICE

FIXING. THIS ALWAYS LEADS TO BLACK

MARKET, BLACK MARKET ECONOMY AND

BLACK MARKET PRICES. WHY ?

PRODUCT MIX PRICING

WHEN A PRODUCT IS A PART OF A PRODUCT MIX, THE PRICING IS MODIFIED TO TAKE CARE OF THE TOTAL REVENUE FROM ALL PRODUCTS AS A MIX. THE COMPANY HERE FIX THE PRICE TO MAXIMISE THE TOTAL REVENUE AND PROFIT. THERE ARE SIX SITUATIONS WHERE PRODUCT MIX PRICING IS ADOPTED

1. PRODUCT LINE PRICING – LIKE A SHOE SHOP OR CLOTH SHOP – DIFFERENT PRICES FOR PRODUCTS IN THE SAME LINE

2. OPTIONAL FEATURE PRICING – EXTENSIVELY ADOPTED BY AUTOMOBILES

3. CAPTIVE PRODUCT PRICING – RAZOR BLADES AND RAZORS. FILMS & CAMERAS

4. TWO – PART PRICING – AS IN TELEPHONE FIXED RENT AND CALL CHARGES AS PER USE

5. BY PRODUCT PRICING

6. PRODUCT – BUNDILING PRICES – SEASON TICKETS IN THEATRES AND RAILWAYS

INITIATING AND RESPONDING TO PRICE CHANGES

INITIATING PRICE CUTS:

1. EXCESS PLANT CAPACITY

2. DECLINING MARKET SHARE

3. DRIVE TO DOMINATE THE MARKET THROUGH LOWER COST

INITIATING AND RESPONDING TO PRICE CHANGES

INITIATING PRICE INCREASE:

1. TO INCREASE PROFIT

2. TO OFFSET COST INFLATION

3. TO EXPLOIT OVER DEMAND

4. TO FOLLOW THE COMPETITOR / MARKET LEADER

INITIATING AND RESPONDING TO PRICE CHANGES

PRICE ADJUSTMENTS:

1. USE OF ESCALATOR CLAUSES

2. PERFORMANCE LINKED PRICING

REACTIONS TO PRICE CHANGES:

1. CUSTOMER REACTION

2. COMPETITORS REACTION

3. AUTHORITIES REACTION

4. PUBLIC REACTION

RESPONDING TO COMPETITORS PRICE CHANGES:

1. MAINTAIN PRICE

2. RAISE PERCEIVED QUALITY

3. REDUCE PRICE

4. INCREASE PRICE AND IMPROVE QUALITY

5. LAUNCH LOW-PRICE FIGHTER LINE