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PRICING PRODUCTS
UNERSTANING AND CAPTURING CUSTOMER VALUE
CHAPTER NO. 10
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PRICE
DefinitionThe amount of money charged for a product or service, or the sum of the values that consumers exchange for the benefits of having or using the product or service.
Amounting of money refers to Cost Value Expense Worth
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Factors to Consider When Setting Prices
Customer perceptions of value
Other internal and external considerations
Marketing strategy, objective and mix.
Nature of the market and demand Competitors strategies and prices
Product cost
Price floor No profits below this price
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Cost-Based Pricing
Setting prices based on the costs for producing distributing and selling the product plus a fair rate of return for effort and risk.
Value-based Pricing
Setting prices based on buyer’s perceptions of value rather than on the seller’s cost.
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Types of Value-Based Pricing
Good value pricing Right combination of quality Good service at a fair price
Value added pricing value-added features services
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Value-Based Pricing versus Cost-Based Pricing
Product Cost Price Value Customers
Customers value Price Cost Product
Cost-Based Pricing
Value-Based Pricing
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TYPES OF COST
FIXED COST
Cost that do not vary with production or sales level.
Examples
factory land, building
machinery
management salaries
property taxes
insurance
rent
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VARIABLE COST
Cost that vary directly with the level of production.
Examples
direct material cost
direct labor cost
factory supplies
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TOTAL COST
the sum of fixed and variable cost for any given level of production.
Total cost = fixed cost + variable cost
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COST AT DIFFERENT LVELS OF PRODUCTION
Example Total fixed cost = 100,000 Rs.
No. of units = 10
Per unit cost = 100,000/10 = 10,000 Rs. No. of units = 100
Per unit cost = 100,000/100 = 1000 Rs. No. of units = 1000
Per unit cost = 100,000/1000 = 100 Rs.
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COST PER UNIT AT DIFFERERNT VELS OF PRODUCTION PER PERIOD
10 100 1000
Cos
t per
uni
t
12
3
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LEARNING CURVE
Definition
The drop in the average per unit production cost that comes with accumulated production experience.
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10
20
30
1000 2000 3000
Accumulated production
Cos
t pe
r un
it LEARNING CURVE
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COST BASED PRICING
Cost-plus Pricing
Adding a standard mark up to the cost of the product.
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EXAMPLE
Suppose
Variable cost = 10
Fixed cost = 3,00,000
Expected unit sales = 50,000
Unit cost = variable cost + Fixed cost
Unit sales
Unit cost = 10 + 30000050000 = 16
Mark up price = Unit cost
1 – desired return on sales
=16
1 – 0.2
= 20
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BREAK EVEN ANALYSIS AND TARGET PROFIT PRICING
Break Even Pricingsetting price to break even on the cost of making and marketing a product
Break Even Volumethe point at which total revenue and total cost curves cross each other.
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Example
Break even volume =
Fixed cost
Price – variable cost
= 300000
20 – 10
= 30,000 units
Total cost = fixed cost + variable cost
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600
800
1000
10 20 30 40 50
Sales volume in units (Thousands)
Cos
t in
Rup
ees
(T
hous
ands
)
Total revenue
Target profit
Total Cost
200
400
30 40 5020 30 40 5010 20 30 40 50
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Internal Factors
1. Overall Marketing Strategy
2. General Pricing Objective Survival Current profit maximization Market share leadership Customer retention and relationship building
Other Internal & External Considerations Affecting Price Decisions
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3. Marketing Mix Tools
Decisions made or other marketing is variables may affect pricing decisions.
Target Costing
4. Organizational Consideration Small Companies Large Companies Industrial Market
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EXTERNAL FACTORS
1. The Market An Demand
a) Pricing in different types of marketing
Pure competition
Monopolistic competition
Oligopolistic competition
Pure monopoly
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ANALYZING THE PRIC -DEMANDRELATIONSHIP
DEMAND CURVE
A curve that shows the number of units the market will buy in a given time period, at different prices that might be changed.
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INVERSALY RELATED
Demand and price are inversely related; that is, the higher the price and lower the demand.
the demand curve some times slopes up word
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C. PRICE ELASTICITY
Inelastic
If demand are hardly changes with small change in price, we say demand is inelastic.
Elastic
If demand changes greatly, we say the demand is elastic.
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pric
e p2
P1
P’2
P’1
Quantity demanded per period Quantity demanded per period
A. Inelastic B. Elastic
Q2 Q1 Q’2 Q’1
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FORMULA
Price elasticity of demand = -%change in quantity demand
%change in price
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2. COMPETITORS STRATEGIES AND PRICE
cost, price, and market offerings nature of competition it faces. A high- price, high-margin strategy A low- price, low margin strategy
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3. OTHER EXTERNAL FACTORS
Economic condition
The government