PRICING POLICIES & DECISIONS
PRICING POLICIES & DECISIONS PRICE • The only P of Marketing Mix that generates revenue • Pricing can make or mar an enterprise • Price, Volume and Cost are interrelated and can affect profit • High Price ~ Low Volumes • Low Price ~ High Volumes
PRICING POLICIES & DECISIONS Considerations for Pricing, Marketing or Finance or Cost considerations
Parameters
Marketing – Tend to be important when
Finance & Cost – Tend to be important when
Time Frame
Short to Medium
Medium to Long
Market Conditions
Buyer’s Market, Intense Seller’s Market, Less Competition Competition
Primary Marketing Objectives
Market Share
Profitability
Buying Behaviour of Customer
Erratic, Impulsive, Irrational
Stable, Predictable, Rational
Product Characteristics, Perceived Attributes Subjective or Objective
Physical or Measurable Attributes
PRICING POLICIES & DECISIONS Pricing Policy Considerations Market Conditions • Demand and Supply • Application of Marginal Analysis Technique Marginal Cost = Marginal Revenue
PRICING POLICIES & DECISIONS Pricing Based on Marketing Considerations Market Conditions Generally Dominate • High Price Low Volume or Low Price High Volume • Going Rate Pricing – in tune with competition • Sealed Bid Pricing – for tenders • Geographical Pricing – uniform delivery price, FOB pricing, zone pricing
PRICING POLICIES & DECISIONS Pricing Based on Marketing Considerations • Discount Pricing – bulk purchase or prompt payments • Discriminatory Pricing – customer, place or time • Penetration Pricing – low price for market entry / share • Skimming Pricing – for maximum profits, short term • Snob Value Pricing – high price to give snob value to the product
PRICING POLICIES & DECISIONS Pricing Based on Marketing Considerations • Pre-emptive Pricing – to pre-empt the competitors • PLC Pricing – as per PLC stages • Price Reductions Price cutting – to drive away competition Price warfare – to reduce number of competitors • Cartels – protective mechanism in duopoly or oligopoly industries
PRICING POLICIES & DECISIONS Pricing Based on Cost Considerations Full Cost Pricing • All cost are added • Taxes, duty, freight etc are extra • Desired minimum long run price • Applicable for new products, customised products and for products where prices are not established • Advantage – Total cost recovery and planned profit margin
PRICING POLICIES & DECISIONS Pricing Based on Cost Considerations • Limitations of Full Cost Pricing • Ignores elasticity of demand • Lacks consideration to competition • No differentiation between fixed cost and variable cost – impact of change in volume is ignored • Products give variable profit, a flat percentage profit principle can not be applied
PRICING POLICIES & DECISIONS Pricing Based on Cost Considerations Cost Conversion Method • Profits are based on value addition by manufacturers • Useful for products where cost of raw material varies considerably • Practiced by printing press, casting industry etc. • Where material is provided for conversion
PRICING POLICIES & DECISIONS Pricing Based on Cost Considerations Marginal Cost Pricing • Direct material + variable OH • Sales – Contribution = Marginal Cost • Contribution / Sales = C/S Ratio • Pricing based on C/S ratio • Variable Cost Rs.30, C/S ratio 0.40 find price • C/S Ratio = 1 – (variable cost / selling price) • 0.40 = 1 – (30 / SP), therefore SP = Rs.50
PRICING POLICIES & DECISIONS Pricing Based on Cost Considerations Marginal Cost Pricing • Useful in assessing product profitability • Decision on Make or Buy • Useful for export pricing • For decisions on addition or deletion of products • Unutilised capacity is starting point for marginal costing
PRICING POLICIES & DECISIONS Pricing Based on Cost Considerations ROI Pricing • Useful for multi product company • Decision pricing of new product with no competition or product is new for the company Formula P = (F+V.Sv+R.Fc)/Sv 1 - R.Wc
P = Selling Price, F = Fixed Cost, V = Variable Cost Fc = Capital Investment in Fixed Cost, Wc = Working Capital expressed as percent of Sales Value, Sv = Annual Sales Volume in Units, R = Target Rate of Return on Capital Employed
PRICING POLICIES & DECISIONS Development of Pricing Strategies • Consider combination of consideration to Market based and Cost based approach • Understand two different issues – The price buyer is willing or prepared to pay and Marketing objectives and priority that influences firm’s pricing plan
PRICING POLICIES & DECISIONS Development of Pricing Strategies • Buyer willingness depends upon Value of Goods to the Buyer Ability to buy or buyer’s budget Price of Competitors Availability of Substitutes
PRICING POLICIES & DECISIONS Development of Pricing Strategies • Corporate Objectives Target ROI Market Share Economy of Scale / Planned Production Desired Growth Rate for Turnover or Profits Beating or Meeting Competition Product Pruning Government Intervention or Restriction
PRICING POLICIES & DECISIONS Development of Pricing Strategies • Corporate and Market Considerations needs balance and considerations In Pricing Strategies for each product Each Market Each Segment Time Frames, Short, Medium or Long • Balance of above with Expectations, Plans, Perceptions of Key Elements and Customers plays role in Pricing Decisions
PRICING POLICIES & DECISIONS Development of Pricing Strategies • Factors that can influence Pricing Decisions Intermediate Customers Competitors Suppliers Government Company Executives – Production Marketing, Sales, Finance, Procurement Advertising, etc can have varying perceptions about Price
PRICING POLICIES & DECISIONS Development of Pricing Strategies • Factors that can influence Pricing Decisions Competitive Advantage and Sustainability Pricing in Professional Service Sector Pricing should follow Product Positioning Different Pricing Strategy for Different Market Segments – Hotels, Airlines Activity Based Costing for Speciality Products Other P’s of Marketing
PRICING POLICIES & DECISIONS Pricing Problems • Factors that can influence Pricing Decisions New Product – Marginal to start with Product New for the Company but Not for Market – Company has to be more careful. Watch competitors Sale to Government – Bulk Purchase, Spare Capacity, go for Cost Analysis Recession – Try for Minimisation of Loss, Marginal Cost Theory
PRICING POLICIES & DECISIONS Pricing Problems • Factors that can influence Pricing Decisions Joint Product Pricing – Allocation not useful in Pricing Pricing Depends Upon Profit Expectations of the Organisation Transfer Pricing Pricing of After Sales Service – Consider Cost of Spare Parts and Service Personnel
PRICING POLICIES & DECISIONS Export Pricing Pricing Additional Costs Quality Specifications Packaging Transportation Warehousing Insurance
Benefits Incentives Duty Drawbacks Duty free Imports SEZ / EOU Low Interest Rates
PRICING POLICIES & DECISIONS Export Pricing Pricing Objectives Market Penetration Market Share Market Skimming Competitor Driven New Entrant Prevention Early Pay Back Early Cash Recovery Export Obligation Export Surplus Capacity Utilisation Target ROI Profit Maximisation
PRICING POLICIES & DECISIONS Export Pricing Factors Affecting Pricing Policy Decision • Pricing Objectives • Costs • Competition • Product Differentiation • FOREX Rate • Market Characteristics • Image • Cartels
PRICING POLICIES & DECISIONS Export Pricing Factors Affecting Pricing Policy Decision Government Factors • Margins • Ceiling & Floor Prices • Subsidies • Tax Concessions and Exemptions • Incentives, Assistance in Marketing • Cheap Credit • Government Competition • Taxes • Trade Agreements
PRICING POLICIES & DECISIONS Export Pricing Factors Affecting Pricing Policy Decision Government Factors • Margins • Ceiling & Floor Prices • Subsidies • Tax Concessions and Exemptions • Incentives, Assistance in Marketing • Cheap Credit • Government Competition • Taxes • Trade Agreements
