how should a company set prices initially for products or services?
TRANSCRIPT
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HOW SHOULD A COMPANY SET PRICES INITIALLY FOR PRODUCTS OR SERVICES?
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A firm must set a price for the first time when it develops a new product, when it introduces its regular product into anew distribution channel or geographic area, and when it enter bids on new contact work.
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This can be done in 5 steps.
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STEP 1
Selecting the pricing objective.
The company first decides where it wants to position
its market offering.
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STEP 1
Selecting the pricing objective.
The company first decides where it wants to position
its market offering.
There are 5 objectives to keep in mind.
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SURVIVAL
Companies pursue survival as their major objective if they are plagued with overcapacity intense competition, or
changing want.
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SURVIVAL
Companies pursue survival as their major objective if they are plagued with overcapacity intense competition, or
changing want.
Survival is a short-run objective; in the long run, the firm must learn how to add value or face extinction.
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MAXIMUM CURRENT PROFIT
The company estimate the demand and costs associated with alternative prices and choose the price that produces
maximum current profit, cash flow, or rate of return on investment.
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MAXIMUM CURRENT PROFIT
The company estimate the demand and costs associated with alternative prices and choose the price that produces
maximum current profit, cash flow, or rate of return on investment.
However, this strategy is difficult to implement.
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MAXIMUM MARKET SHARE
Companies believe a higher sales volume will lead to lower unit costs and higher long-run profit. They set the lowest
price assuming the market price is sensitive.
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MAXIMUM MARKET SHARE
Companies believe a higher sales volume will lead to lower unit costs and higher long-run profit. They set the lowest
price assuming the market price is sensitive.
The following conditions need to be fulfilled first:
• The market is a highly price sensitive
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MAXIMUM MARKET SHARE
Companies believe a higher sales volume will lead to lower unit costs and higher long-run profit. They set the lowest
price assuming the market price is sensitive.
The following conditions need to be fulfilled first:
• The market is a highly price sensitive
• Production costs fall with rise in production experience
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MAXIMUM MARKET SHARE
Companies believe a higher sales volume will lead to lower unit costs and higher long-run profit. They set the lowest
price assuming the market price is sensitive.
The following conditions need to be fulfilled first:
• The market is a highly price sensitive
• Production costs fall with rise in production experience
• A low price discourages competition
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MAXIMUM MARKET SKIMMING
A pricing strategy by which a firm charges the highest initial price that customers will pay.
As the demand of the first customers is satisfied, the firm lowers the price to attract another, more price sensitive
segment.
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PRODUCT QUALITY LEADERSHIP
Many companies strive to be “affordable luxuries”; products or services characterized by high levels of perceived quality, taste and status with a price just high enough not to be out
of consumers’ reach
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STEP 2
Determining Demand
There are 3 main factors that help determine demand
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PRICE SENSITIVITY
Price sensitivity (also called price elasticity of demand) is the degree to which price affects a consumer’s decision to purchase a product or service.
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PRICE SENSITIVITY
Customers are less price sensitive when:
• There are few or no substitutes or competitors
• They do not readily notice the higher prices
• They are slow to change their buying habits
• They think the higher prices are justified
• Price is only a small part of the total cost involved in purchasing the product or service
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ESTIMATING DEMAND CURVES
Most companies attempt to measure their demand curves using several different methods such as surveys, price experiments & statistical analysis.
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PRICE ELASTICITY OF DEMAND
It is measured to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price.
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PRICE ELASTICITY OF DEMAND
There is Elastic demand:
If a small change in price is accompanied by a large change in quantity demanded, the product is elastic.
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PRICE ELASTICITY OF DEMAND
And there is inelastic demand:
If a change in price is accompanied by very little change in quantity demanded, the product is inelastic.
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STEP 3
Estimating Costs
There are 3 ways companies perform cost estimation
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CONSIDERING DIFFERENT TYPES OF COSTS
Fixed Costs
These are costs defined as expenses that do not change as a function of the activity of a business, within the relevant
period.
For example, a retailer must pay rent & utility bills irrespective of sales.
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CONSIDERING DIFFERENT TYPES OF COSTS
Variable Costs
Those costs that vary depending on a company’s production volume; they rise as production increases and vice versa.
Examples are rent, advertising, insurance & office supplies.
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CONSIDERING DIFFERENT TYPES OF COSTS
Total Costs
This consists of the sum of the fixed and variable costs for any given level of production.
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CONSIDERING DIFFERENT TYPES OF COSTS
Average Costs
This is the cost per unit at that level of production; it equals total costs divided by production.
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ACCUMULATED PRODUCTION
The average cost pricing method, but using an estimate of future average costs , based on accumulated production creating an experienced learning curve.
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TARGET COSTING
Target costing is a pricing method where overall cost of a product is reduced over its entire life cycle with the help of production, engineering, research and design.
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STEP 4
Analyzing Competitor’s Costs, Prices & Offers
Competitors are most likely to react when there is any price change and when the number of firms is few, the product is
homogeneous, and buyers are highly informed.
Analyzing these reactions and consequent strategies can be beneficial.
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STEP 5
Selecting a Pricing Method
There are 3 major considerations in price setting:
• Costs set a floor to the price.
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STEP 5
Selecting a Pricing Method
There are 3 major considerations in price setting:
• Costs set a floor to the price.
• Competitor’s prices and the price of substitutes provide an orienting point.
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STEP 5
Selecting a Pricing Method
There are 3 major considerations in price setting:
• Costs set a floor to the price.
• Competitor’s prices and the price of substitutes provide an orienting point.
• Customer’s assessment of unique features etablishes the price ceiling.
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SELECTING A PRICING METHOD
Keeping these three considerations in mind, these are the six methods of pricing:
MARKUP PRICING
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SELECTING A PRICING METHOD
Keeping these three considerations in mind, these are the six methods of pricing:
MARKUP PRICING
TARGET-RETURN PRICING
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SELECTING A PRICING METHOD
Keeping these three considerations in mind, these are the six methods of pricing:
MARKUP PRICING
TARGET-RETURN PRICING
PERCEIVED-VALUE PRICING
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SELECTING A PRICING METHOD
Keeping these three considerations in mind, these are the six methods of pricing:
MARKUP PRICING
TARGET-RETURN PRICING
PERCEIVED-VALUE PRICING
VALUE PRICING
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SELECTING A PRICING METHOD
Keeping these three considerations in mind, these are the six methods of pricing:
MARKUP PRICING
TARGET-RETURN PRICING
PERCEIVED-VALUE PRICING
VALUE PRICING
GOING-RATE PRICING
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SELECTING A PRICING METHOD
Keeping these three considerations in mind, these are the six methods of pricing:
MARKUP PRICING
TARGET-RETURN PRICING
PERCEIVED-VALUE PRICING
VALUE PRICING
GOING-RATE PRICING
AUCTION-TYPE PRICING
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STEP 6
Selecting the Final Price
Pricing methods narrow the range from which the company must select its final price.
In selecting that price, the company must consider additional factors such as…….
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SELECTING THE FINAL PRICE
Impact Of Other Marketing Activities
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SELECTING THE FINAL PRICE
Company Pricing Policies
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SELECTING THE FINAL PRICE
Gain & Risk Sharing Pricing
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SELECTING THE FINAL PRICE
Impacting of Price On Other Parties
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SO TO RECAP….
The Main Strategies Of Pricing are:
Selecting the Pricing Objective
Determining Demand
Estimating Costs
Analyzing Competitor’s Costs, Prices and Offers
Selecting a Pricing Method
Selecting the Final Price
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THANK YOU
.
Created byKunal Eapen, IIIT AllahabadDuring an internship under
Prof Sameer Mathur, IIM Lucknow
www.iiminternship.com