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Moran, Admar Research “Successful pricing is an art, not a science.” John I. Leahy, Black & Decker “Pricing decisions are not easy to make; they are often inherently ‘soft’.” William E. Johnson, William E. Johnson Assoc. Slide 4: The 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. Slide 5: Price Has Many Forms Rent Fee Rate Commission Tuition Fare Toll Premium Bribe Salary Wage Interest Tax Psychological Pricing : Psychological Pricing Reference Price Price Quality inferences Price Cues Psychological Pricing : Psychological Pricing Psychological Pricing : Psychological Pricing Used to play on consumer perceptions Classic example - £9.99 instead of £10.99! Links with value pricing – high value goods priced according to what consumers THINK should be the price Slide 9: Psychological Pricing Most Attractive? Better Value? Psychological reason to price this way? Assume Equal Quality Nine Price-Quality Strategies : Nine Price-Quality Strategies Price Cues : Price Cues “Left to right” pricing ($299 versus $300) Odd number discount perceptions Even number value perceptions Ending prices with 0 or 5 “Sale” written next to price . When to Use Price Cues : When to Use Price Cues Customers purchase item infrequently Customers are new Product designs vary over time Prices vary seasonally Quality or sizes vary across stores . Slide 13: Setting Pricing Policy 1. Selecting the pricing objective Slide 14: Pricing Objectives Survival Maximize Profits Maximize Market Share Maximum Market Skimming Product-Quality Leadership Partial Cost Recovery Slide 16: Objectives Should Guide Strategy Planning for Price Slide 17: Objectives Should Guide Strategy Planning for Price Slide 18: Maximize Profits Attract new customers Maintain current customers Increase profit per customer Introduce new product Generate cash Improve ROI Attract New Customers : Attract New Customers Introductory coupons / discounts provide incentive maintain reference price Trial offers increase familiarity reduce risk Problem perceived as unfair Maintain Current Customers : Maintain Current Customers Meet competition matching prices add to bundle (as long as customers want it!) Create barriers to exit contracts / subscriptions automatic billing phone numbers (no longer in the U.S.) family plans Provide loyalty programs frequent flyer Starbuck cards Increase Profit per Customer : Increase Profit per Customer Increase prices reduce product? (candy bar pricing) justify/ notify / base on costs Adjust product mix sales incentives for more profitable business Adjust customer mix teenagers vs. seniors Charge for extras what’s valuable to customer and cheap to company Get money up front Prepaid subscriptions Market Skimming : Market Skimming High price, Low volumes Skim the profit from the market Suitable for products that have short life cycles or which will face competition at some point in the future (e.g. after a patent runs out) Examples include: Playstation, jewellery, digital technology, new DVDs, etc. Many are predicting a firesale in laptops as supply exceeds demand. Slide 23: Price Reductions to Increase Market Share Slide 24: Skimming vs. Penetration Other Price-Level Policies : Other Price-Level Policies + Slide 26: Setting Pricing Policy Selecting the pricing objective Slide 27: Price Elasticity Price elasticity is a measure of consumers’ price sensitivity Even a crude estimate of price elasticity is useful input in pricing decisions What will happen to my sales if I change my price? What will happen if tuition is increased 10%? e = Percent change in quantity demanded Percent change in price Slide 28: Less Price Sensitive Unique Value Substitutes Less Aware Difficult to Compare Expenditure to total income Expenditure to total cost Cost borne by others Sunk investment Higher quality or prestige Perishable Demand CurvesInelastic and Elastic : Demand CurvesInelastic and Elastic Estimating Demand Curves : Estimating Demand Curves Surveys Price Experiments Statistical Analysis Price Elasticity of Demand : The percentage change in quantity demanded relative to a percentage change in price. Price Elasticity of Demand Slide 32: Setting Pricing Policy 1. Selecting the pricing objective Slide 33: Types of Costs Fixed costs Variable costs Total costs Average cost Cost at different levels of production Types of costs levels of Production : Types of costs levels of Production Deviate with changes in level of output Variable Costs Fixed Costs Do not deviate as level of output changes TYPES OF COSTS Total Costs Sum of the Fixed and Variable Costs for a Given Level of Production Slide 35: Cost / Unit at Different Levels Cost per Unit Quantity Produced per day 1,000 Accumulated Production : Accumulated Production Accumulated Production : Accumulated Production Target Costing : Target Costing Target cost is the cost that can be incurred while still earning the desired profit Selling price – desired profit = target cost The customer sets the price Profit must be achieved through cost control Slide 39: Setting Pricing Policy 1. Selecting the pricing objective Step 4: Analyzing Competitors’ Costs, Prices and Offers : Step 4: Analyzing Competitors’ Costs, Prices and Offers Identify nearest price competitors Take competitors’ features and prices into account Make decision to charge more, the same or less than competitors Monitor competitors’ reaction to your pricing strategy STEP 5 Pricing Methods : STEP 5 Pricing Methods Markup Pricing Target Return Pricing Perceived Value Pricing Value Pricing Going Rate Pricing Auction Type Pricing Value Pricing : Value Pricing Value Pricing : Value Pricing Price set in accordance with customer perceptions about the value of the product/service Examples include status products/exclusive products Companies may be able to set prices according to perceived value. Slide 44: Perceived Value PricingExample Caterpillar Tractor is $100,000 vs. Market $90,000 $90,000 if equal 7,000 extra durable 6,000 reliability 5,000 service 2,000 warranty $110,000 in benefits - $10,000 discount! Going Rate (Price Leadership) : Going Rate (Price Leadership) Going Rate (Price Leadership) : Going Rate (Price Leadership) In case of price leader, rivals have difficulty in competing on price – too high and they lose market share, too low and the price leader would match price and force smaller rival out of market. May follow pricing leads of rivals especially where those rivals have a clear dominance of market share Where competition is limited, ‘going rate’ pricing may be applicable – banks, petrol, supermarkets, electrical goods – find very similar prices in all outlets. Tender Pricing : Tender Pricing ACTION Pricing : ACTION Pricing Many contracts awarded on a tender basis Firm (or firms) submit their price for carrying out the work Purchaser then chooses which represents best value Mostly done in secret TYPES OF ACTUIONS: English auctions Dutch Auctions Sealed-bid auctions Slide 50: Setting Pricing Policy 1. Selecting the pricing objective Impact of other marketing ActivitiesCompany Pricing policies:AirlinesGain-and-risk-sharing pricingImpact of price on other parties:OPEC : Impact of other marketing ActivitiesCompany Pricing policies:AirlinesGain-and-risk-sharing pricingImpact of price on other parties:OPEC Slide 52: Price-Adaptation Strategies Geographical pricing Discounts/allowances Differentiated pricing Promotional pricing Geographical Pricing : Geographical Pricing BARTER COMPENSATION DEAL: BRITISH AIRLINE BUYBACK ARRANGEMENT: US.CHEMICAL COMPANY OFFSET Price Discounts and Allowances : CommonTactics for Fine-Tuning the Base Price Quantity Discounts Cash Discounts Functional Discounts Seasonal Discounts ALLOWANCE Promotional Discount Price Discounts and Allowances Slide 55: Reductions from List Price Cash discount: price reduction offered to a consumer, industrial user, or marketing intermediary in return for prompt payment of a bill 2/10 net 30, a common cash discount notation, allows consumers to subtract 2 percent from the amount due if payment is made within 10 days 19-55 Discounts and Allowances Slide 56: Trade Discounts: payment to a channel member or buyer for performing marketing functions; also known as a functional discount 19-56 Slide 57: Quantity discount: price reduction granted for a large-volume purchase Justified on the grounds that large orders reduce selling expenses, storage, and transportation costs Cumulative quantity discounts reduce prices in amounts determined by purchases over stated time periods Non-cumulative quantity discounts provide one-time reductions in the list price 19-57 Slide 59: Allowances Trade-in: credit allowance given for a used item when a new item is purchased Promotional allowance: advertising or promotional funds provided by a manufacturer to other channel members in an attempt to integrate the promotional strategy within the channel Rebates: refund for a portion of the purchase price, usually granted by the product’s manufacturer 19-59 Pricing Policies : Pricing Policies Pricing policy: general guidelines based on pricing objectives and intended for use in specific pricing decisions Psychological pricing: pricing policy based on the belief that certain prices or price ranges make a good or service more appealing than others to buyers 19-60 Promotional Pricing : Promotional Pricing Loss leader pricing Special event pricing Cash rebates Low-interest financing Longer payment terms Warranties and service contracts Psychological discounting Loss Leader : Loss Leader Goods/services deliberately sold below cost to encourage sales elsewhere Typical in supermarkets, e.g. at Christmas, selling bottles of gin at £3 in the hope that people will be attracted to the store and buy other things Purchases of other items more than covers ‘loss’ on item sold e.g. ‘Free’ mobile phone when taking on contract package Differentiated Pricing : 14-63 Differentiated Pricing Customer segment pricing Product form pricing Image pricing Channel pricing Location pricing Time pricing Initiating and responding Price Changes : Initiating and responding Price Changes Price Cuts Price Increases Responding to competitor’s Price changes Slide 65: Price discrimination: The use of different prices for different customers. It is illegal if a price advantage is granted to one, but not another, where both compete and the articles are similar. Granting promotional allowances must be done on a proportionate basis to all customers. 14 - 65 Slide 66: Competitive Pricing Strategy: reduces emphasis on price as a competitive variable by pricing goods at the general level of competitors Firms focus their own marketing efforts on the product, distribution and promotion elements of the marketing mix 19-66 Slide 67: Thank you You do not have the permission to view this presentation. In order to view it, please contact the author of the presentation.