Price mix

price mix

1. Price Mix 11/28/2016 1

2. What is a price? In the narrowest sense, price is the amount of money charged for a product or service. More broadly, price is the sum of all the values that consumers exchange for the benefits of having or using the product or service. Price goes by many names, the rent paid for apartment, tuition for your education, fee to your physicians or dentist, fare paid for bus, airline or taxi, interest charged by bank on money borrowed, the salary paid to employees, wages paid to labors, premium paid to insurance companies etc. are all price Price is the only element in the marketing mix that produces revenue, all other elements represent costs. Price is also one of the most sensitive and flexible marketing mix elements. 11/28/2016 2

3. Concept of pricing Pricing is the act or process of determining of price of a product. Pricing means the process of selecting the pricing objectives, determining the possible range of prices, developing price strategies, setting the final price and implementing and controlling pricing decision. The determination of price is a very important and crucial decision. It affects all parties in the production, distribution and consumption of goods. Price affects volume of production, sales and the amount of profit. It is the source of income to producers and distributers. According to W.J.Stanton :- Pricing is the functions of determining the products value in monitory terms. In conclusion, pricing is the process of fixing price of the product. It is very complex process. Both internal and external environmental factors affect this process of pricing. The price of the product should be equal with its utility or value. It is very sensitive element in marketing mix so, the marketer should have deep knowledge and to be aware while price determination. 11/28/2016 3

4. Factors Affecting Pricing 11/28/2016 4

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6. Internal factors affecting price Company objective plays crucial role in determining the price of the product. Common company objectives can be survival, current profit maximization, market share leadership and product quality leadership . Firm adopting survival strategy set a low price, hoping to increase demand. Firms adopting current profit maximization as their pricing goal and use a price that will produce the maximum current profit. To achieve market share leadership firms set price as low as possible. To achieve product quality leadership, firm set high price to cover higher performance quality and the high cost of R&D. For example when Toyota and Honda decided to enter and compete with European luxury performance cars for their Lexus and Acura brands, set high price. 11/28/2016 6

7. Internal factors affecting price cont…. Marketing Mix strategy is another factor that affect the price of the product. Price decisions must be coordinated with product design, distribution, and promotion decisions to form a consistent and effective marketing program. If business organization decides to use many resellers , heavy promotion, and superior features in product need to invest more money for those activities hence set higher price for their product and vice- versa. Company wants to charge a price that both covers all its costs of producing, distribution and selling a fair rate of return for its effort and risk. If these costs are high for company, its price will be high and vice-versa. Structure of pricing or organizational consideration means who within the organization should set prices. For example If finance manager has to set price then he would rather consider through the costs of the product, if by top executives then they consider competitor’s price and standardized formats. 11/28/2016 7

8. External factors affecting pricing Market and demand- price and the demand of the product have adverse relationship. In economics, higher the price lower will be the demand of the product and vice-versa. Market is another consideration for price determinant. If the market is characterized by monopoly conditions, the price would be higher. If it is a pure competition the price would be uniform among all sellers. Price elasticity of demand need to be considered for this determining price while considering this element. If Competitors’ costs, prices and offers are better then company costs, prices and offers should be adjusted. For example, last year Pepsi deducted its price on its 200 ml cola bottle. By next 24 hours Coca-Cola also deducted its price to the price of Pepsi. Other considerations like economic conditions, inflation, intermediaries interests, social concern, government regulations also need to be considered for setting price. 11/28/2016 8

9. General Pricing Approaches or methods 11/28/2016 9

10. General Pricing Approaches The price the company charges will be somewhere between one that is too low to produce a profit and one that is too high to produce any demand. Companies set prices by selecting a general pricing approach that includes one or more of these sets of factors. 11/28/2016 10

11. Cost based pricing 11/28/2016 11 Generally , most of the organizations set their product price on the basis of costs. While setting pricing, it should be covered at least total costs (Production, distribution, promotion) of their product. Mark-up pricing, target return and break even methods are mostly used in different organizations. Cost based pricing method ignores the competition and market demand of the product.

12. Cost based pricing C ost -Plus pricing/ Mark -Up pricing method:- This pricing method is very simple and popular. Under this pricing method a particular profit margin should be added to the unit cost of a product. This method is popular in intermediaries and small business organizations. It is traditional way of price determination. The margin may be expressed in terms of percentage or may be in value. For example Total per unit cost = Rs 150000 Mark up = 15% Cost plus price= Total cost + mark-up = Rs.150000+ 15% of 150000 = Rs.150000+ Rs15000 = Rs.165000 11/28/2016 12

13. Cost based pricing cont… Target return pricing:- Under this pricing method a desired rate on investment should be added to the total cost of the product while setting pricing. Target return pricing is a pricing method in which a formula is used to calculate the price to be set for a product to return a desired profit or rate of return on investment assuming that a particular quantity of the product is sold. This pricing method is used almost exclusively by market leaders. For example Total investment = Rs . 9,00,000 Target return on investment = 20% Total cost= Rs 5,00,000/-, unit sales = 10,000 ROI = 20% of 9,00,000 = 1,80,000/- Per unit price = = Per unit price would be Rs . 68 /-   11/28/2016 13

14. Cost based pricing cont… Break even pricing Breakeven point is no profit no loss situation, where revenue equals to total costs. It is very popular and important method of pricing. Under this pricing method, price is determined on that point where revenue equals to cost, that point is called breakeven point or BEP. The objectives of breakeven pricing is to use low prices as a tool to gain market share and drive competitors from the market place. It is a difficult approach for a smaller, resource-poor company that cannot survive for long with zero margins. For example Fixed cost = Rs.500000 variable cost per unit= Rs . 10 Selling price per unit= Rs 20 BEP point in unit = = = 50000 units . BEP Point in rupees = = = Rs . 1000000     11/28/2016 14

15. Demand-based/Value-based pricing Value-based pricing (VBP) is the most highly recommended pricing technique by consultants and academics. The basic concept is setting a price to capture the majority of what your customers are willing to pay. Under this method price is set on the basis of customer's value perception and demand . In this method marketers ignores the production costs and market prices to determine the product price. This pricing method also ignores the market competition and total cost of the product. Perceived value pricing and customer value pricing are the major value oriented pricing method. 11/28/2016 15

16. Demand-based/Value-based pricing cont … 1. Perceived value pricing In perceived valued pricing method, first, the producer collects buyer's views, experiences, feelings and perception of the value and fixed the price around the average perceived value of the product . Costs and demand of product are secondary factors in perceived value pricing. This method can implement on the basis of market survey and market research and understand the customer's product perception. This types of pricing reflects a sustainable competitive advantage where there is little or no competition . 11/28/2016 16

17. Demand-based/Value-based pricing cont … 2. Customer value pricing:- In the method, low price is charged for high quality product to attract value conscious customers. companies may apply this method only to some products but not to all product. They sell other products or services at premium prices. Many companies have a significant opportunity to differentiate themselves from competitors by learning how to create, quantify, communicate and capture customer value by implementing customer value based pricing strategies. 11/28/2016 17

18. Competition based pricing Under this pricing method prices are set on the basis of competitor's price. This pricing method does not force to change their price, like same as the competitors. It depends on nature of competition and product market expectations. This method ignores the market demand and cost of the product. 11/28/2016 18

19. Competition based pricing cont … Going rate pricing:- Going rate pricing (also known as meet competition pricing) is a popular pricing method that involves pricing a product at the same rate as the rest of the competitor's prices. If the marketers cannot control the market, they take force to determine their price to meet the competitor's price of their goods and services. Generally agriculture products set prices under this pricing method. In Nepal noodles companies are setting this pricing method in the market. Pricing Below competitor:- It is a competitive pricing method in which initial price is set at levels intended to be below competitors' price . The main purpose of this method is to attract price sensitive customers by sweeping market competitors aside. In this method, price of every product is fixed lower than the competitor's price. Nepal Airlines Corporation has fixed its fare lower than other airlines in our country. 11/28/2016 19

20. Competition based pricing cont … Pricing above competition:- Under this method product prices are set above the competitor's price level . Marketers determine their product price above the prevailing market price. It supports to increase market image or goodwill of the product and its organization. Most of the technical equipment's prices are determined by the above competitor's level. Sealed bid pricing method:- Organization buying decision are based on sealed -bid pricing method. Sealed bid is mainly used for pricing the tender transaction . Sealed bid price is determine confidentially. A bidder tries to bid at lower price rather than other bidders say competitors to win the contract. Because the lowest bid is awarded order. If the price becomes higher than the competitor's price, such sealed bid may be rejected. 11/28/2016 20

21. Pricing strategies 11/28/2016 21

22. Strategies are action plan organization's overall function. They help to the marketer to achieve pricing objective. Marketing managers can begin developing pricing strategies by determining company pricing goals, such as increasing short term and long term profits, stabilizing prices, increasing cash flow and facing competition. The effective pricing strategies are as follows . Product lifecycle pricing strategy:- Price change pricing strategy :- Price response pricing strategy :- Psychological pricing strategy:- Traditional/ customary pricing strategy Promotional pricing strategy 11/28/2016 22

23. Product lifecycle pricing strategy 11/28/2016 23

24. Product lifecycle pricing strategy :- Introduction Stage At the introduction stage, new products enter in the market. Marketers implement different pricing strategies for different kinds of new product. Pricing skimming strategy:- Market skimming pricing strategy attempts to "skim the cream" top of the market by setting a high price and selling to those customers who are less price sensitive. Skimming strategy is used to pursue the objective of profit margin maximization. Price skimming strategy implements high price for an innovative product in the initial stage for assuming that the customer will pay high price for a new product. Penetration pricing strategy:- Market penetration pricing is the setting a low price for a new product in order to attract a large number of buyers and a large market share. In this strategy, the price of new products is fixed lower than the expectation of the target market. This strategy is most effective for increasing market share and sales volume and discourages to competitors. Competitive pricing strategy:- At the introduction stage, products are modified from existing product and they become new product in the market. The marketers implement this competitive pricing strategy by setting equal price with competitors . Competitive pricing strategy is used if there are already same type of product in the existing market. 11/28/2016 24

25. Product lifecycle pricing strategy:- Growth stage:- At this stage, rapidly sales grow. High volume of the production remains price will be falling down. Generally the marketer wants high market share with lower price strategy. Maturity stage:- There is high competition. Producers segments their product and expand different product line as possible. Producer charge low price to defend the market share and competition. Decline stage:- Sales decline rapidly. Hardcore loyal and laggards buy the product. Price is decreased. 11/28/2016 25

26. Price change strategy In order to adopt with the changing environmental factors and meet the increasing competition an organization has to be careful while determining its pricing strategy. In such types of situation marketers implement the price change strategy. These strategy are mentioned below. Price increase strategy:- Environmental factors are not favorable forever. In price increase strategy, the company increased its product prices due to the cause of shortage of raw materials, implementation of new tax, inflation, quality increment, competitor's price, and other forces. Price decrease strategy:- In price decrease strategy, the company decreased its product price to capture the market share, to sweep the competitors to win price war, and so on. When they decrease the product prices it helps to increase the number of customers and can sell high volume of product. Price maintain strategy:- Under this strategy, the producer try to maintain its product price by adjusting the value of the product. The value of product might be increased or decreased but price of the product remain same. 11/28/2016 26

27. Product mix pricing strategies The strategy for setting a product’s price often has to be changed when the product is part of a product mix. In this case, the firm looks for a set of prices that maximizes the profits on the total product mix. Pricing is difficult because the various products have related demand and costs and face different degrees of competition. 11/28/2016 27 Product line pricing Setting price steps between product line items Optional product pricing Pricing optional or accessory products sold with the main product Captive product pricing Pricing products that must be used with the main product By-product pricing Pricing low value by products to get rid of them Product bundle pricing Pricing the bundles of products sold together

28. Product line pricing: companies usually make product lines rather than a single product. Sony offers not just one type of television, but several lines of televisions, each containing many models. In product line pricing management must decide on the price steps to set between the various products in a line based the products, customer evaluations of different features, and competitors’ prices. Optional product pricing: those companies who sell optional or accessory products along with their main product use optional product pricing strategy. For example refrigerators come with optional ice makers, car buyer may choose to order power windows, cruise control. Optional product pricing sets the price of optional or accessory products along with main product. Captive-product pricing: companies that make products that must be used along with a main product are using captive product pricing. Examples of captive product include razor blades, memory card for mobiles, printer cartridges. By-product pricing: setting a price for by-products in order to make the main product’s price more competitive. Product bundle pricing: combining several products and offering that bundle at a reduced price. Theaters and sports teams sell season tickets at less than the cost of single tickets; hotels sell specially priced packages that include room, meals, and entertainment. 11/28/2016 28

29. Psychological pricing strategy This strategy is used when the marketer think the customers respond to the product on an emotional, rather than rational basis. Customers buying activities affects the emotional factors. Psychological pricing strategies are as follows Prestige pricing strategy:- This strategy focus on high price for prestigious products. Price is set at an artificially high level. Perfumes, ornaments, watches, wine are suitable for such pricing strategy. Odd - Even pricing strategy:- Odd and even pricing strategies are mostly used in Nepal, India and China. In practical, both pricing strategies are used only on physical product not on service products. Odd number pricing entertains on economic image of the product. For example Rs.199, 999 etc. Similarly even numbers focus on quality image on the product. For example Rs.200, 250, 300 etc. This strategies are used by Philips, Sony and LG companies. Psychological discount strategy:- This pricing strategy is seller's tactics while selling process of the product. Most of the street shops/ venders and retailers implement this pricing strategy. In this strategy price is set highly in first and provides heavy discount to attract customers. Some organizations use 'sale' or 'discount' offer for their product in the market. for example Original price= Rs.2500 Discount= Rs.500 Product selling price = Rs.1500 11/28/2016 29