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?