The Concept Of Pricing

The Concept Of PricingThis module introduces the concept of impairment and discusses its richness and singularityifi heapce to nerves. With a view to the relative significance of sterilise on arrangements winnings and sales, appropriate set policies needs to be hypothesised st wandergically. The various determine decisions that organisations need to make atomic number 18 set setting, adapting price and managing price potpourri which is dealt in this module.Pricing StrategiesIntroductionThis lesson discusses pricing and its importance to organisations and the various factors to be considered slice formulating pricing policiesDefine the concept of priceExplain the factors influencing pricing decisions.Discuss the process of price setting.Explain how organisations adapt prices.Discuss the price change perplexity policies adopted by organisations.Understanding pricing outlay is the amount of money at which a plus or service is stretch outed in the securities industry . It is the exchange rate of a intersection point or service in basis of its monetary value.Pricing is an important decision atomic number 18a for an organisation. The pricing and sales volume of the point of intersection put to fastenher determines the profit for an organisation. The sales volume itself numerates on the type of pricing insurance policy adopted by the organisation. Profits too ar mutualist on the pricing policies.Hence organisations fall in to formulate pricing policies strategically. Pricing alike determines the acceptance of the intersection in the markinget, one can sound out that it determines the mathematical products proximo success in the trade.IKEA pricing outline is to provide quality products at low prices to its customers. mesh advertising through Google ads,Pricing is an important aspect non only for the organization producing the product, tho also for the consumers as well as the society. hurt represents the value of the market off ering to the consumers, it also indicates the quality of the product. Increase in price could be perceived favourably by the consumers by interpreting it as a consequence of improvement of quality.(for reference only)The factors touching pricing policies of an organisation areInternal Factors While making pricing policies, marketers need to take into account several factors which are the result of company decisions and actions. To a great design these factors are controllable and alterable by the company. Internal factors are as followsObjectives of the organisationPositioning sought by organisation through pricing spirit of productPrice elasticity of the productThe stage of Product life cycle of the productUsage and re secure take aim of the product follow of turnoutProduct distinctiveness and positioningOther ps of the marketing mix and their influence on the pricingComposition of product line of the firm outside Factors thither are a number of influencing factors which are e xternal to the firm and can non be controlled by the firm but leave alone impact pricing decisions. immaterial factors are as follows play offet structureConsumer behaviorBargaining strength of consumer groupsBargaining power of major suppliersCompetitors policiesGovernment controls/regulationsOther legal aspectsSocial considerationscartels orbit the PriceThe organisation has to think over several factors while setting its pricing policy. The process of setting the price is as followsDeciding the pricing objective lenss The organisation has to first of all analyse its position of offering in the market. If the organisational objectives are clearly set, setting price commences easier. The major objectives that organisations look to pursue through pricing policy are sustenance, profit maximization, market share maximization, market skimming and quality leadership.Organisations would adopt sustenance policy, if in that location is too much competition and changing in trends col lect to changes in customer taste and preferences. Here the organisation would principally be looking to cover several(prenominal) variable and fixed terms of product and a marginal profit. This kind of policy is useful only in the short run, in the long run firms would set about to extend value to its offer or face extinction.Setting the pricing policy (for reference only)In case the organisational objective of the firm is profit maximization, the firm will t and so choose that price which will give it maximum profits, cash flow or maximum rate of redeem on investments. For such a strategy the firm has also to take convey situation into consideration.In case w here the main objective of the organisation is market share maximisation, they would generally set a low price so that market can be penetrated easily. Low pricing or penetration pricing policy is applicable in the fol take downs situationsConsumers are price sensitiveThere is possibility of market penetration with the help of low pricesProduction and distribution apostrophize fall with soaringer drudgery level and experienceCompetition is discouraged due to the low prices in the marketSkimming price is adopted by firms to gain higher profits in the short run and is applicable in the quest situationsHigh charter exists in the market due to product being a innovator productNot much competition exists in the marketConsumer perception is that, high price indicates quality(for reference only)Determining demand The distinguishable prices set by organisations will lead to difference in demand for the product in the market. The demand curve shows the varied quantities demanded by customers at varying prices. Universally, as demand and price of the products are inversely related, according to the law of demand at a higher price lesser the quantity demanded and at raze price higher the quantity demanded. Only in exceptional cases it can be seen that with increase in price of product, demand too increased, especially seen in cases of prestige goods such as perfumes, diamonds etcetera(Fig 1.1 Demand Curve)(For reference)Figure 1.1, in the first case shows elastic demand and the second case it shows inelastic demand.Price Sensitivity The demand curve shows the markets sensitivity to the changes in prices of the product. It shows the response of customers to changes in prices. Generally customers are more(prenominal) price sensitive to products that salute much such as speciality goods and those goods which are frequently such as staple goods. They are less price sensitive to goods which are brought infrequently or such products, the make up of which is insignificant to the customer.Products which would bind less price sensitivity areDistinctive productsWhere there very few substitutes to the products or customers are not cognizant of substitute productsQuality comparison of substitute products are not easyThe price of product is insignificant to the consumers income It is a complementary good to an earlier purchaseThe product is assumed to be of higher quality, prestige.It is not possible to store the product.The advent of internet has led to an increased price sensitivity in the society. Internet has made it possible for people to compare prices instantly and go for the lowest prices available. Firms have to understand the price sensitivity of their stain market and accordingly formulate pricing policies.Demand estimation and forecasting is an important function to be carried out by organisations for determining the demand for their products. There are various methods that can be used to arrive at demand estimation and forecast.Where different variables of the price are identified statistical analysis can be undertaken, information for these variables collected and thusly analysis is do by using various statistical methods to arrive at the demand forecast.Experimentation method is an different instruction in which demand can be estimated at various price levels. Here the prices of the products are wind upd differently in different markets or in the same market different prices are introduced at different times and then the result is analysed to arrive at the demand.Another method is doing customer surveys and question to gauge the customers response to varying prices.Price elasticity of demand Elasticity of demand is to extend the responsiveness of demand to the different prices aerated. The marketer needs to have an idea of how responsive the market demands are, to various prices set by the firm. If with the change in price the demand for the product changes substantially then we can say that the demand is elastic to price. If with a change in price there in very less or no change in the demand for the product the demand would be said to be inelastic.Demand would usually be less or inelastic in the following situationsThere is no competition or substitute products in the marketHabitsNecessity goodsWhere the price of product is small or insignificant to the consumerPrice elasticity depends on the score of change in prices. Elasticity would be less in case of low level price change and would be more if the price change is significant. For example consumer durables like television and washing machines, with a slight increase in their prices the demand for these product would not fall significantly but with a substantial increase in their prices the demand can come down considerably.If price elasticity differs according to the time period under consideration, in the short run the elasticity would be different than in the long run. This kick downstairss because in the short run certain determinants remain static which can be varied in the long run. For example Habits of people can be changed in the long run, competitive scenario can change in the long run.Cost estimationPricing policies of firms significantly depends on the cost of production and other related costs incurred by the organisat ion for offering the product in the market. Firms generally would charge a price which covers the production cost as well as a fair profit for the firms movement and risk.There are different types of cost related to production of a product Fixed cost which are fixed in nature and do not vary with the level of production or sales. For example rent, interest on capital invested etc.Variable cost vary directly with the level of production of the firm. For example wages, power consumption etc.Total cost can be said as the sum total of the fixed and variable costs for the total production level.Average Cost can be said as the total cost divided by the total number of units produced.The firm would want to charge at least a price which would cover the total production cost.To develop adequate pricing policies the management needs to recognise how cost varies with different levels of production.Cost of production would also change according to its production scale and experience. Ove r the period of time, the experience gained by organisation leads in making more effective and production scheduling policies leading to lower costs. As well as with the expansion of plant and machinery, i.e large scale production helps organisations to decrease the cost of production considerably.Organisations now a days try to adapt their offering as per the requirements of different buyers. A manufacturer whitethorn set different terms and prices for different retail chains according to their requirements. Certain retailer may not want to stock too much inventory of a grouchy product, in that case the delivery that has to be made to this retailer would be much frequent. On the other hand a retailer who has the stocking facility may want deliveries less frequently, accordingly the pricing and profit levels of the manufacturer would differ too.Some companies adopt target pricing, here first of all through market survey the firm arrives at the product features and design. The next step would be to determine at what price the product will be sold. On the basis of the price, a percentage is deducted as profits and the rest would be the cost of production. Hence the organisation has arrived at the cost at which production should happen and that is the target cost at which production should happen.Competitors pricing policies analysis Competitors policies have significant effect on the firms own policies and strategies. The firm has to have a good knowledge of the competitors policies and their possible response to the firms pricing policies. In case the firm is offering product features which are exclusive and not provided by its competitors then their price should be set accordingly. If competitor provides additional features then their worth to the customers should be evaluated and subtracted from firms price.Selecting a pricing method The various pricing methods that organisations can use as follows Mark up Pricing The most widely used pricing technique is t o add a standard mark up to the products cost.Mark up is expressed in terms of percentage. Here, either the cost price or the sale price is taken as the base for determination of the mark up.Eg. Cost price of travel bag Rupees 2000Mark up Rupees cdTherefore selling price Rupees 2400Mark up based on cost price = cholecalciferol/2000 = 25%Mark up based on Selling price = 500/2400= 20.8%Mark up pricingExample Shopkeeper buys goods for Rupees 300/- at a wholesale rate. His cost based mark-up is 25%.Hence sale mark-up price = 100-30 = 75% or 0.75%.Therefore sales price = 300/ 0.75 = 400While determining any pricing policy current demand, value of product perceived by customers, competition subsisting in the market has to be considered. Mark up price would only be useful if it brings in expected sales.Mark up price is quite is popular due to the following reasons Determining cost is quite easy than estimating demandIt is a much simpler way of pricingIf all firms in industry use this pricing policy then price would be similar, leading to less intense price competition.It is believed that cost pricing is fair for both customers and producers, where customers are not exploited and producers get a fair enough return.Rate on return pricing The price is determined on the basis of a planned rate of return on investment made by the organisation.The total cost of one financial years standard production is estimated and taken as the standard cost. The mark up percentage of profit is obtained by multiplying capital turnover by estimated rate of return.Perceived value pricing Here the valuation of the product is done on the basis of how much the customers are willing to pay, instead of considering the production and related costs.(for reference)Value pricing Here the firm charges a fairly lower price for high quality products thereby winning loyal customer.Tesco, UK is one of the largest retailers in UK.Tescos key competence is its pricing policy. It keep its product pr ices low so that sales can be maximised. Lot many customers were attracted to its products due to its value added low priced products.Tesco launched the unbeatable value campaign in the 1996, it made massive reductions in its prices during this campaign. Tesco adopted a low daily low price strategy alongside its promotional programs. This stragegy stressed on unshakableising low prices for its customers on a regular and daily basis.Going rate Prices Going rate pricing emphasises on market conditions.The firm adjusts its own pricing policy to the price structure existing at the industry level. This kind of pricing is usually seen in oligopolistic market structure, where the prices are mutually decided by the firms. Also in cases where costs are difficult to be determined, firms tend to follow the sack rate price because it reflects the entire industries price rate. Examples would be petroleum and oil.Auction pricing or price bidding This type of pricing methods has emerged in the recent years especially due to the growth of Internet. These kind of pricing strategy is mostly seen in electronic goods market, selling a diverse range of products and services by vendueing them through the bidding process. The important function of auction is to dispose of excess products existing with the firm. There are three major auction type pricing.These types areAscending bids, (English auctions) One seller and many buyers. The seller puts up the product or auction and the buyers bid prices, the highest price is accepted.Descending bids (Dutch auctions) One seller and many buyers or one buyer and many sellers. In this kind of auction the buyer quotes a higher price and then decreases it gradually till a bidder accepts the price. In the other case the buyers lets know his intention to buy a particular product and then the sellers bids the prices by offering lower prices.Sealed bid auctions Here the suppliers can submit only one bid and do not know about other bids. From th e submitted bids the most feasible bid is selected(for reference only)While selecting the final price, additional factors has to be considered by the firm such as mental pricing Psychological pricing a marketing practice which is based on the theory that certain kind of prices have psychological influence on customers minds. The prices are expressed as odd prices e.g. Rs. 299.00 or Rs. 499.00.Gain and Risk sharing pricing This type of pricing is used for pricing complex, high set products or services. Many times buyers refrain from accepting sellers proposal due to the high risk if the promised value is not delivered.In order to provide some form of risk sharing or price protection as new drugs are adopted into formularies biopharma companies and payers are entering into agreements.Onyx/Bayers Nexavar (sorafenib) and Pfizers Sutent (sunitinib malate) both anti-cancer drugs Novartis Aclasta (zoledronic acid), and Sanofi-Aventis/Procter Gambles Actonel (risedronate sodium), both o steoporosis drugs are some of the best known drugs.In Germany,Italy and the US, manufacturers have agreed to provide drugs free of charge if no progress is seen after the first treatment, or to hire health plans, say for represent if bone fractures occur despite the osteoporosis therapy.While setting the final price, firm has also to consider the brand quality, advertising, company pricing policies. Firms also need to consider the distributors and agents, sales persons, competitors, suppliers response to the prices of the product. Finally, firms also need to consider the legal implications while setting their prices.Adapting the price Organisations generally set different prices according to variations in geographical demand and costs, market segment requirements, purchase time period, order levels, frequency of delivery, guarantees and various other factors.Various price version strategies are as followsGeographical pricing It involves the pricing of products to different custo mers in different locations and countries. Taking into consideration the transportation costs example shipping / freight costs for distant customers. Also the firm needs to lower the prices of its product/s from sales promotion point of view to retain or go its business. Considering the export of products to countries abroad where the payment from buyer becomes crucial, should he lack payment he may offer other items. This practice also recognised as countertrade. Countertrade accounts approximately up to 25 percent of current world trade. Usually this trading is done as Buyback agreements, Barter, offset and Compensation deals.Countertrade deals may become complex for example an A company in Europe sells 50 yachts to Turkey and accepts in exchange 150 Turkish made cars, which it sold to Pakistan for Rice, which in turn sold to America and achieved payment in dollars . Such deals are carried by a separate department within the organisation. Other companies may depend on barter h ouses or countertrade specialists.Most companies give discounts and allowances in order to receive early payments on volume purchases and off-season buying. This may lead to decreased profits, hence an assumptive price of the products needs to be worked out with planning. commercialiseing researchers have found that up to 35 percent of buyers in most categories are price sensitive. Higher income people are more interested in buying products with added features, customer service, quality and brand. Hence its essential for a strong brand not to get into price discounting in order to react to low price attacks.A company can gain some concessions, if a customer agrees to sign a contract for a bulk years example 3-5 years or if an order is placed in a larger quantity or if an order is placed online thus saving the company money.It is necessary to maintain and monitor all records regarding discounts such as the quantity of customers receiving discount and average discount, etc. It is ess ential for higher levels of management to conduct a net price analysis in order to get the real price offered. However the pull in price is affected not only by discounts, also but by firms average promotional spendings, advertising spendings to retailers to back the product, thus the listed price of the product and so for the net price of the product are two ends of the same thread with couple of other expenses in between.However companies in an overcapacity tend to offer their branded products at a deep discounted rate. Firms should avoid offering discounts to retailers in the long term which in turn would decrease theirs profits in an effort to meet short term volume goals.In order to stimulate early purchase of a product firms can use several pricing techniques. Examples could be found where branded products are offered at a discounted price in order to stimulate extra purchases of other store products. This pays only if the tax is generated by selling other products in propor tion to the lower margins on the loss -leader product.In certain seasons and occasions of festive periods example every June there are back -to-back school sales and during Diwali, Christmas and New Year special prices will be established on products.In order to clear inventories without affecting the listed price, railroad car companies and other consumer goods companies offer cash rebates to help purchase of products during a certain period.Some auto companies offer the product with an attractive finance fascinate such as zero interest rate or in case of consumer durable goods buy now and start paying after sise or nine months instead of cutting its price.Equated monthly instalments may be stretched over a longer period in order to lower them, here the consumer focus is on affording to pay back in instalments rather the rate of interest. This can be in cases of auto companies and consumer durable goods etc.Often auto companies offer an attractive warranty and servicing contract in order to promote their sales.Many a times products price is listed at an artificially high price and then offered with a discount .This creates a psychological discounting in minds of consumers that they have purchased the product at a considerably lower price and have gained but in fact havent.Often in order to accommodate differences in customers, products, locations, etc firms adjust their basic price. Thus price differentiation arises where a product is sold at two or more prices without any proportional difference in costs. Customers are charged depending on their intensity of demand. Buyers would be charged at a lower rate depending on the volume of buying.In case of Museums or places of historic importance there is lower admission tumble to children, foreigners, etc.A firm charges 30 Rs for adding 150 gms saccharide in a Rasgulla tin pack sweet, however it charges 35 Rs for adding the same quantity of sugar for a Kala Jamun pack sweet.A firm can price the same product a t two different levels based on image differences. A detergent manufacturer can put detergent in one packet, name it with an image, and price it at 50 Rs. It can put the same detergent in another packet with a different name and image and price it at 75 Rs.Soft drinks prices often differ in an A grade restaurant, vending machines or when sold in canteens or general stores.Same product is priced differently at different locations even though the cost of offering at each location is the same. A concert audience is charged variably for seating as per their preferences for different locations.Prices differ by season, day or hour etc.Electricity as an important public utility source is charged differently by time of day in United Kingdom. Restaurants and Clubs in United Kingdom charge less during happy hours.Airlines have different fares on same flight for same class for instance its economy class, which also is known as Yield Management / Revenue Management system. They have child fare s, adult fares, seasonal fares etc. Extra baggage price by an airline for a single kilo differs from Dubai to London as opposed to travelling the other way back from London to Dubai.Websites have coupled up different sellers product together such as Car Insurance, Consumer durable goods, home insurance, medical insurance etc, which allows buyers to discriminate between sellers by comparing their prices.Responding to price changes Many time organisations have to go for price cuts and increase as per the situation.Price Cuts It is a possibility that organisation may go for price cuts due to existence of price cuts, also where even with added effort the sales have not increased or due to declining market share. Price cuts can lead to price wars in the market. Lower price can be used by firms so as to dominate market. Organisations may also have to cut down the prices in case of recession.Price Increase Price increases are undertaken by organisations when there is cost inflation. With rise in cost of production the organisations profits lessens, hence they need to go for price increase to earn normal profits. Many times organisations increase their prices more than the increase in cost due to anticipation of further cost increase.Price increase can also happen when there is too much demand for the product and the supply is less.Price increase can be done in the following ways Final price is not set, until the product is delivered to the customer. Generally seen in construction and heavy equipment industries.Here firm wants customers to pay current price and all or part of any cost inflation that can happen in front the delivery of the product.Here the price is kept same but some elements are separated from the product and priced individually. Example in case of automobiles, accessories, other additional features come with extra cost.Discount if any, could be reduced to maintain profits.Organisation also can tackle high cost and over demand without raising price s as follows Reducing the amount offered without increasing the pricesBy substituting raw materials with less expensive materials wherever possibleLessening the product features to lessen its costLessening product servicesUsage of less cost packagingCreating economy brandsReacting to changes in prices Price changes can have a response from customers, competitors, distributors, suppliers and governments.Customers may perceive and respond to price cuts in different ways. Price cuts may be interpreted as lower quality product or faulty products. Price rise would generally carry some positive indications to customers. The product is considered to be of high quality and having added value when prices increased.Competitors may also respond in various ways to price changes. To contemplate competitors reaction organisations have to access their financial situation, sales scenario, market share and their objectives. In case the competitors objective is to increase market share then they wil l change their price in response of firms price changes. If its objective is profit motivation then it will increase its promotional activities to maintain its sales.Responding to competitors price changes It is an important decision on how firm should react to price changes by competitors, the products could go for product augmentation having homogenous characteristics. If product augmentation is not possible then they would have to go for price cuts to counter the competitors price cuts. If price is increased by the competitor in the homogenous market, then other firms may not increase their prices until it is unavoidable.If price change happens in a heterogeneous market then the various aspects needs to be considered before responding to the price change What is the reason for competitors price cuts is it due to over capacity of production, rise in costs of production or the intention is to increase market share.Is the price change temporary or permanentWhat will be the scenario if the firm does not respond to competitors price changeAre other competitors going to respond to the price change and if yes how?Market leaders many a times have to face price changes from new entrants in the market or smaller competitors. There are many ways in which a market leader can respond to competitors price changesMaintain price Market leader my decide to maintain its current price and profit due to the belief that Too much profits will be disconnected if prices are decreasedIt would not lose too much market shareIt is possible to regain market share when requiredMaintain price and add value to its offeringThe product could be augmented, its services and communication improved.Reduce price Leader may go for price cuts to match the competitors price cuts due to following reasons As the market is price sensitive it would lose market shareIt would be difficult to build market share once lostIts costs reduces with higher volume in productionIncrease price and increase qual ity The leader may decide to initiate price increase and also increase quality of product and also introduce new brands or innovative products.Introduce low priced product line It could contemplate adding a low priced product line to