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PRICING STRATEGY
         &
PSYCHOLOGICAL PRICING



      Presented by
       TEAM NEXUS
  ( JYOTI(17),CHANDA(60), KAUSHAL
     SHEEREEN(27),SHAHZAD(9))
     (IIBM PATNA)
PRICING
•
    Pricing is the process of determining what a company will receive in
    exchange for its products.
    Pricing factors are manufacturing cost, market place, competition, market
    condition, and quality of product.
    It is also a key variable in microeconomic price allocation theory.
    Pricing is a fundamental aspect of financial modeling and is one of the
    four Ps of the marketing mix. The other three aspects are
    product, promotion, and place. Price is the only revenue generating
    element amongst the four Ps, the rest being cost centers
Pricing Method

                            Markup pricing




Perceived value
                                                 Target return
pricing
                                                 pricing
                              METHOD




                  Value pricing          Auction pricing
Pricing Objectives

A goal that guides a business in setting the cost of a product or service to
potential consumers.
It should reflect a company's marketing, financial, strategic and product
goals, as well as consumer price expectations and the levels of available stock
and production resources.

Five major objective through pricing
Survival
Maximum current profit
Maximum market share
Maximum market skimming
Product quality leadership
Other objectives
Sequence of steps for developing the pricing
            for a new product

Develop marketing strategy : perform marketing
analysis, segmentation, targeting and positioning.

Make marketing mix decision: define the product, distribution and
promotional tactics.

Estimate the demand curve: estimate how quantity demanded varies with
price.

Calculate Cost: include fixed and variable costs associated with the product.

Understand environmental factors: evaluate likely competitor
actions, understand legal constraints, etc.
Set pricing objectives: like profit maximization, revenue maximization or
price stabilisation.

Determine pricing: using information collected in the above steps, select a
pricing method, develop the pricing structure and define discounts.
Pricing approaches and strategies


There are three main approaches a business takes
 to setting price:
Cost-based pricing: price is determined by adding a profit element on top
 of the cost of making the product.

Customer-based pricing: where prices are determined by what a firm
 believes customers will be prepared to pay.

Competitor-based pricing: where competitor prices are the main influence
 on the price set
Pricing Strategies


                         Premium Pricing
Use a high price where there is a unique brand. This approach is used where a
substantial competitive advantage exists and the marketer is safe in the
knowledge that they can charge a relatively higher price. Such high prices are
charged for luxuries such as Savoy Hotel rooms, and first class air travel.

                       Penetration Pricing
The price charged for products and services is set artificially low in order to
gain market share. Once this is achieved, the price is increased.
                  e.g. France Telecom and Sky TV
Economy Pricing
The costs of marketing and promoting a product are kept to a minimum.
Budget airlines are famous for keeping their overheads as low as possible and
then giving the consumer a relatively lower price to fill an aircraft.
                       Price Skimming
In most skimming, goods are sold at higher prices so that fewer sales are
needed to break even.

 Selling a product at a high price, sacrificing high sales to gain a high profit is
therefore "skimming" the market.

Skimming is usually employed to reimburse the cost of investment of the
original research into the product.

                 e.g.- Electronic markets
.                          Product Line Pricing

    Where there is a range of products or services the pricing reflects the benefits
    of parts of the range.
           e.g.- car washes; a basic wash could be $2,
                         a wash and wax $4 and
                         the whole package for $6

                     Optional Product Pricing
    Companies will attempt to increase the amount customers spend once they
    start to buy.

    Optional 'extras' increase the overall price of the product or service.
               e.g.- airlines will charge for optional extras.
Predatory pricing

     Prices are deliberately set very low by a dominant competitor in the market
    in order to restrict or prevent competition.
    The price set might even be free, or lead to losses by the predator. Whatever
    the approach, predatory pricing is illegal under competition law.

                           Value Pricing
    This approach is used where external factors such as recession or increased
    competition force companies to provide value products and services to retain
    sales.
           e.g. value meals at McDonalds and other fast-food restaurants.



•
Product Bundle Pricing

   Sellers combine several products in the same package.
   This also serves to move old stock.
   Blu-ray and videogames are often sold using the bundle approach once
they reach the end of their product life cycle.

                     Geographical Pricing

Geographical pricing sees variations in price in different parts of the world.
e.g. – rarity value, or where shipping costs increase price.
 More tax on certain types of product which makes them more or less
expensive.
Cost-plus (or “mark-up”) pricing
  It is used in retailing, where the retailer wants to know with some certainty what the
  gross profit margin of each sale will be.
( e.g. Assume a manufacturer costs & sales expectation:-
variable cost per unit- $10, fixed cost- $ 300000
 expected unit sales 50000.
Unit cost= vc + fc/unit sale = $10+$300000/50000=$16
 if manufacturer want to earn a 20% markup on
sale, Markup price= unit cost/(1- desired return on sale)
=$16/1-0.2=$20,profit=$4)

                         Promotional Pricing

Pricing to promote a product is a very common application.
  e.g.- BOGOF (Buy One Get One Free), money off vouchers and discounts.
 Sales are extravaganzas of promotional pricing.
PSYCHOLOGICAL PRICING


“A pricing strategy that specializes in inflicting psychological effects on
consumers.”
 It is a marketing strategy based on utilizing particular pricing techniques to
 form a psychological impact on consumers.
Popular techniques that raise sales :
   Odd Pricing
   Prestige Pricing
    The opposite of odd pricing,
    e.g. pricing at $10 rather than $9.99.
   BOGOF
The Aspects of Psychological Pricing
1.Order of Information Processing

2. Knowledge of The Base
•   Scenario one:
      Shirt A costs $30
       Shirt B costs $60
• Scenario two:
        Pilot-less Remote Car System A costs $50,000
        Pilot-less Remote Car System B costs $80,000

3. Image Associations
       Great Perfume ABC and Hugo Boss
Advantages
                     Overall Improvement
  Raising profits, growing customer base, increasing sales and
conversions, attracting potential businesses.

                  Emotional-Based Pricing
Focuses on the weakness of how human beings tend to look at prices in a
non-rational perspective, plus the fact that we are all humans here, the
strategies will be effective against everyone.

                    Employee Control.
Odd-even pricing which derived from a real life incident:- in
supermarkets, most products were priced at a clean and simple price such as
$50.00,
Disadvantages
                       Calculation Complication
 Transaction mistakes
                     Rational Decision-Making.
 Everyone pays much attention into the true cost of a price especially with a
 “.99″ ending, some people still do value their efforts into calculating
 individual prices carefully, therefore psychological pricing may not work on
 everybody as it is dependent on different types of audiences.
                               More is Less
 The opposite effect of the “less is more” principle, since playing numbers
 with the mind isn’t the latest invention, it has been around for years, the key
 is, you can see almost everyone in the world doing it, so what’s the point when
 everyone is offering a few cents discount?
Pricing strategy & psychological pricing

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Pricing strategy & psychological pricing

  • 1. PRICING STRATEGY & PSYCHOLOGICAL PRICING Presented by TEAM NEXUS ( JYOTI(17),CHANDA(60), KAUSHAL SHEEREEN(27),SHAHZAD(9)) (IIBM PATNA)
  • 2. PRICING • Pricing is the process of determining what a company will receive in exchange for its products. Pricing factors are manufacturing cost, market place, competition, market condition, and quality of product. It is also a key variable in microeconomic price allocation theory. Pricing is a fundamental aspect of financial modeling and is one of the four Ps of the marketing mix. The other three aspects are product, promotion, and place. Price is the only revenue generating element amongst the four Ps, the rest being cost centers
  • 3. Pricing Method Markup pricing Perceived value Target return pricing pricing METHOD Value pricing Auction pricing
  • 4. Pricing Objectives A goal that guides a business in setting the cost of a product or service to potential consumers. It should reflect a company's marketing, financial, strategic and product goals, as well as consumer price expectations and the levels of available stock and production resources. Five major objective through pricing Survival Maximum current profit Maximum market share Maximum market skimming Product quality leadership Other objectives
  • 5. Sequence of steps for developing the pricing for a new product Develop marketing strategy : perform marketing analysis, segmentation, targeting and positioning. Make marketing mix decision: define the product, distribution and promotional tactics. Estimate the demand curve: estimate how quantity demanded varies with price. Calculate Cost: include fixed and variable costs associated with the product. Understand environmental factors: evaluate likely competitor actions, understand legal constraints, etc.
  • 6. Set pricing objectives: like profit maximization, revenue maximization or price stabilisation. Determine pricing: using information collected in the above steps, select a pricing method, develop the pricing structure and define discounts.
  • 7. Pricing approaches and strategies There are three main approaches a business takes to setting price: Cost-based pricing: price is determined by adding a profit element on top of the cost of making the product. Customer-based pricing: where prices are determined by what a firm believes customers will be prepared to pay. Competitor-based pricing: where competitor prices are the main influence on the price set
  • 8. Pricing Strategies Premium Pricing Use a high price where there is a unique brand. This approach is used where a substantial competitive advantage exists and the marketer is safe in the knowledge that they can charge a relatively higher price. Such high prices are charged for luxuries such as Savoy Hotel rooms, and first class air travel. Penetration Pricing The price charged for products and services is set artificially low in order to gain market share. Once this is achieved, the price is increased. e.g. France Telecom and Sky TV
  • 9. Economy Pricing The costs of marketing and promoting a product are kept to a minimum. Budget airlines are famous for keeping their overheads as low as possible and then giving the consumer a relatively lower price to fill an aircraft. Price Skimming In most skimming, goods are sold at higher prices so that fewer sales are needed to break even. Selling a product at a high price, sacrificing high sales to gain a high profit is therefore "skimming" the market. Skimming is usually employed to reimburse the cost of investment of the original research into the product. e.g.- Electronic markets
  • 10. . Product Line Pricing Where there is a range of products or services the pricing reflects the benefits of parts of the range. e.g.- car washes; a basic wash could be $2, a wash and wax $4 and the whole package for $6 Optional Product Pricing Companies will attempt to increase the amount customers spend once they start to buy. Optional 'extras' increase the overall price of the product or service. e.g.- airlines will charge for optional extras.
  • 11. Predatory pricing Prices are deliberately set very low by a dominant competitor in the market in order to restrict or prevent competition. The price set might even be free, or lead to losses by the predator. Whatever the approach, predatory pricing is illegal under competition law. Value Pricing This approach is used where external factors such as recession or increased competition force companies to provide value products and services to retain sales. e.g. value meals at McDonalds and other fast-food restaurants. •
  • 12. Product Bundle Pricing Sellers combine several products in the same package. This also serves to move old stock. Blu-ray and videogames are often sold using the bundle approach once they reach the end of their product life cycle. Geographical Pricing Geographical pricing sees variations in price in different parts of the world. e.g. – rarity value, or where shipping costs increase price. More tax on certain types of product which makes them more or less expensive.
  • 13. Cost-plus (or “mark-up”) pricing It is used in retailing, where the retailer wants to know with some certainty what the gross profit margin of each sale will be. ( e.g. Assume a manufacturer costs & sales expectation:- variable cost per unit- $10, fixed cost- $ 300000 expected unit sales 50000. Unit cost= vc + fc/unit sale = $10+$300000/50000=$16 if manufacturer want to earn a 20% markup on sale, Markup price= unit cost/(1- desired return on sale) =$16/1-0.2=$20,profit=$4) Promotional Pricing Pricing to promote a product is a very common application. e.g.- BOGOF (Buy One Get One Free), money off vouchers and discounts. Sales are extravaganzas of promotional pricing.
  • 14. PSYCHOLOGICAL PRICING “A pricing strategy that specializes in inflicting psychological effects on consumers.” It is a marketing strategy based on utilizing particular pricing techniques to form a psychological impact on consumers. Popular techniques that raise sales : Odd Pricing Prestige Pricing The opposite of odd pricing, e.g. pricing at $10 rather than $9.99. BOGOF
  • 15. The Aspects of Psychological Pricing 1.Order of Information Processing 2. Knowledge of The Base • Scenario one: Shirt A costs $30 Shirt B costs $60 • Scenario two: Pilot-less Remote Car System A costs $50,000 Pilot-less Remote Car System B costs $80,000 3. Image Associations Great Perfume ABC and Hugo Boss
  • 16. Advantages Overall Improvement Raising profits, growing customer base, increasing sales and conversions, attracting potential businesses. Emotional-Based Pricing Focuses on the weakness of how human beings tend to look at prices in a non-rational perspective, plus the fact that we are all humans here, the strategies will be effective against everyone. Employee Control. Odd-even pricing which derived from a real life incident:- in supermarkets, most products were priced at a clean and simple price such as $50.00,
  • 17. Disadvantages Calculation Complication Transaction mistakes Rational Decision-Making. Everyone pays much attention into the true cost of a price especially with a “.99″ ending, some people still do value their efforts into calculating individual prices carefully, therefore psychological pricing may not work on everybody as it is dependent on different types of audiences. More is Less The opposite effect of the “less is more” principle, since playing numbers with the mind isn’t the latest invention, it has been around for years, the key is, you can see almost everyone in the world doing it, so what’s the point when everyone is offering a few cents discount?