The IDEA OF Pricing

This module presents the idea of pricing and discusses its importance and relevance to organisations. With a view to the relative significance of charges on organisations revenue and sales, appropriate prices policies must be formulated strategically. The many pricing decisions that organisations need to make are price setting, adapting price and managing price change which is dealt in this component.

Pricing Strategies

Introduction

This lesson discusses pricing and its importance to organisations and the various factors to be looked at while formulating costing policies

Define the idea of price

Explain the factors influencing prices decisions.

Discuss the procedure of price setting up.

Explain how organisations adjust prices.

Discuss the purchase price change management insurance policies used by organisations.

Understanding pricing

Price is the money at which a product or service is offered on the market. It is the exchange rate of a product or service in conditions of its monetary value.

Pricing can be an important decision area for an organisation. The rates and sales level of the product put together determines the earnings for an organisation. The sales volume level itself will depend on the kind of pricing policy implemented by the company. Profits too are reliant on the pricing regulations.

Hence organisations have to formulate costing policies strategically. Rates also can determine the acceptance of the merchandise on the market, you can say that it establishes the product's future success in the market.

IKEA charges strategy is to provide quality products at low prices to its customers.

Internet advertising through Google ads,

Pricing can be an essential requirement not only for the business producing the product, but also for the consumers as well as the culture. Price represents the value of the marketplace offering to the consumers, it also reveals the quality of the product. Upsurge in price could be recognized favourably by the consumers by interpreting it as a consequence of improvement of quality.

(for reference point only)

The factors affecting pricing policies of the organisation are
Internal Factors - While making costs procedures, marketers need to take into account several factors which will be the consequence of company decisions and actions. To a great magnitude these factors are controllable and alterable by the business. Internal factors are as follows

Objectives of the organisation

Positioning wanted by organisation through pricing

Nature of product

Price elasticity of the product

The stage of Product life cycle of the product

Usage and repurchase degree of the product

Cost of production

Product distinctiveness and positioning

Other p's of the marketing mix and their impact on the pricing

Composition of product line of the firm

External Factors - There are a variety of influencing factors which are external to the organization and cannot be managed by the organization but will impact charges decisions. Exterior factors are the following

Market structure

Consumer behavior

Bargaining power of consumer groups

Bargaining ability of major suppliers

Competitors policies

Government settings/regulations

Other legal aspects

Social considerations

cartels

Setting the Price

The organisation has to think over several factors while establishing its pricing policy. The process of setting the price is as follows

Deciding the costing objectives: The organisation has to first of all analyse its position of offering on the market. If the organisational objectives are clearly set, setting price becomes easier. The major objectives that organisations look to pursue through prices policy are sustenance, income maximization, market talk about maximization, market skimming and quality leadership.

Organisations would choose sustenance policy, when there is too much competition and changing in styles anticipated to changes in customer style and personal preferences. Here the organisation would generally be seeking to cover some variable and fixed cost of development and a marginal revenue. This kind of policy pays to only in the brief run, over time firms would need to add value to its offer or face extinction.

Setting the charges policy

(for guide only)

In case the organisational goal of the company is profit maximization, the company will then choose that price that may give it maximum revenue, cash flow or maximum rate of return on opportunities. For such a technique the firm has also for taking demand situation into consideration.

In circumstance where the primary target of the company is market show maximisation, they might generally set a low price so that market can be penetrated easily. Low costing or penetration pricing policy is applicable in the next situations

Consumers are price sensitive

There is opportunity of market penetration by using low prices

Production and syndication cost semester with higher creation level and experience

Competition is discouraged due to the low prices in the market

Skimming price is used by firms to gain higher income in the brief run and does apply in the following situations

High demand is available in the market anticipated to product being truly a pioneer product

Not much competition is accessible in the market

Consumer perception is that, high price indicates quality

(for reference only)

Determining demand: The various prices set by organisations will lead to difference popular for the product on the market. The demand curve shows the different volumes demanded by customers at varying prices. Universally, as demand and price of the merchandise are inversely related, based on the law of demand at a higher price lesser the number demanded and at cheap higher the quantity demanded. Only in exceptional instances it can be seen that with upsurge in price of product, demand too increased, especially seen in circumstances of prestige goods such as perfumes, diamonds etc.

(Fig 1. 1 - Demand Curve)

(For research)

Figure 1. 1, in the first circumstance shows flexible demand and the next circumstance it shows inelastic demand.

Price Awareness: The demand curve shows the market segments sensitivity to the changes in prices of the merchandise. It shows the response of customers to changes in prices. Generally customers are usually more price delicate to products that cost much such as speciality goods and those goods which are frequently such as staple goods. These are less price delicate to goods that happen to be brought infrequently or such products, the expense of which is insignificant to the client.

Products which would have less price sensitivity are

Distinctive products

Where there very few substitutes to the merchandise or customers are not aware of substitute products

Quality evaluation of alternative products aren't easy

The price of product is insignificant to the consumers income

It is a complementary good to an earlier purchase

The product is assumed to be of top quality, prestige.

It is not possible to store the merchandise.

The development of internet has resulted in an elevated price level of sensitivity in the culture. Internet has made it possible for folks to compare prices instantly and go for the lowest prices available. Organizations have to understand the price sensitivity of their marketplace and appropriately formulate pricing regulations.

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 you can use to arrive at demand estimation and forecast.

Where different parameters of the price are recognized statistical evaluation can be performed, data for these factors gathered and then examination is performed by using various statistical solutions to reach the demand forecast.

Experimentation method is another manner in which demand can be approximated at various prices. Here the costs of the merchandise are charged in different ways in different market segments or in the same market different prices are introduced at differing times and then your effect is analysed to reach at the demand.

Another method does customer surveys and interview to gauge the customers response to varying prices.

Price elasticity of demand: Elasticity of demand is to extend the responsiveness of demand to the several prices costed. The marketer needs to have a concept of how reactive the market requirements are, to various prices establish by the firm. If with the change in price the demand for the merchandise changes substantially then we can say that the demand is flexible to price. If with a big change in price there in very less or no change in the demand for the merchandise the demand would be said to be inelastic.

Demand would usually be less or inelastic in the following situations

There is not any competition or replacement products in the market

Habits

Necessity goods

Where the price of product is small or insignificant to the consumer

Price elasticity depends on the degree of change in prices. Elasticity would be less in case of low level price change and would become more if the purchase price change is significant. For instance - consumer durables like tv set and washing machines, with a slight upsurge in their prices the demand for these product would not fall season significantly but with a considerable increase in their prices the demand will come down significantly.

If price elasticity is different based on the time period under consideration, in the short run the elasticity would vary than over time. This happens because in the brief run certain determinants stay static which may be varied in the long run. For example - Habits of folks can be modified in the long run, competitive scenario can transform in the long run.

Cost estimation

Pricing plans of organizations significantly will depend on the price of creation and other related costs incurred by the organisation for offering the merchandise in the market. Organizations generally would charge a cost which includes the production cost as well as a fair income for the firms work and risk.

There will vary types of cost related to production of a product

Fixed cost - that happen to be fixed in dynamics, nor vary with the level of development or sales. For example - hire, interest on capital invested etc.

Variable cost - fluctuate directly with the level of production of the organization. For example - wages, vitality use etc.

Total cost - can be said as the total of the fixed and variable costs for the total development level.

Average Cost: can be said as the total cost divided by the total number of systems produced.

The firm would like to bill at least a cost which would cover the full total development cost.

To develop enough pricing policies the management must know how cost ranges with different degrees of production.

Cost of development would also change relating to its production size and experience. Over the time of time, the knowledge gained by company leads in making more effective and production arranging policies resulting in lower costs. Aswell as with the growth of herb and equipment, i. e large level creation helps organisations to reduce the price tag on production considerably.

Organisations now a days try to modify their offering according to the requirements of different buyers. A maker may establish different terms and prices for different retail chains relating with their requirements. Certain dealer might not exactly want to stock too much inventory of a specific product, in that case the delivery that should be made to this dealer would be much repeated. Alternatively a shop who has the stocking facility may want deliveries less frequently, consequently the costs and profit degrees of the manufacturer would differ too.

Some companies choose target costs, here to begin with through market survey the firm arrives at the product features and design. The next phase would be to determine at what price the product will be sold. Based on the price, a share is deducted as income and the others would be the price of development. Hence the organisation has arrived at the price at which development should happen and this is the target cost of which development should happen.

Competitors pricing plans analysis

Competitors procedures have significant effect on the firm's own guidelines and strategies. The firm really needs a good understanding of the competitors regulations and their possible response to the firms pricing policies. In the event the firm offers product features that happen to be exclusive rather than provided by its competitors then their price should be set accordingly. If rival provides additional features then their value to the clients should be assessed and subtracted from firm's price.

Selecting a costs method
The various costs methods that organisations may use as follows
Mark up Rates

The most widely used pricing technique is to include a standard mark up to the merchandise cost.

Mark up is expressed in conditions of percentage. Here, either the price price or the sale price is used as the base for determination of the make up.

Eg. Cost price of travel tote - Rupees 2000

Mark up Rupees 400

Therefore selling price - Rupees 2400

Mark up predicated on cost price = 500/2000 = 25%

Mark up predicated on Selling price = 500/2400= 20. 8%

Mark up costs
Example

Shopkeeper purchases goods for Rupees 300/- at a inexpensive 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 = 400

While determining any pricing insurance plan current demand, value of product perceived by customers, competition existing on the market must be considered. Symbol up price would only be useful if it earns expected sales.

Mark up price is quite is popular due to the following reasons

Determining cost is rather easy than estimating demand

It is a easier way of pricing

If all firms in industry use this pricing insurance plan then price would be similar, resulting in less extreme price competition.

It is presumed that cost prices is good for both customers and manufacturers, where customers aren't exploited and manufacturers get a good enough return.

Rate on come back pricing -

The price is set based on a planned rate of return on investment created by the company.

The total cost of 1 financial year's standard creation is approximated and taken as the typical cost. The draw up ratio of income is obtained by multiplying capital turnover by estimated rate of go back.

Perceived value costing : Here the valuation of the product is done based on how much the clients are prepared to pay, rather than considering the development and related costs.

(for reference point)

Value prices : Here the organization charges a reasonably lower price for high quality products in so doing winning devoted customer.

Tesco, UK is one of the most significant vendors in UK.

Tesco's key competence is its prices plan. It keep its product prices low so that sales can be maximised. Whole lot many customers were drawn to its products because of its value added reasonably priced products.

Tesco launched the 'unbeatable value' plan in the 1996, it made considerable reductions in its prices in this campaign. Tesco followed a low daily low price strategy alongside its promotional programs. This stragegy pressured on regularising low prices for its customers on a normal and daily basis.

Going rate Prices : Going rate prices emphasises on market conditions.

The firm adjusts its own costing policy to the purchase price composition existing at the industry level. This sort of costing is usually seen in oligopolistic market structure, where the prices are mutually chose by the organizations. Also in cases where costs are difficult to be established, firms tend to follow the heading rate price because it reflects the whole business price rate. Instances would be petroleum and engine oil.

Auction rates or price bidding: This type of costs methods has surfaced in the recent years especially because of the development of Internet. These kind of pricing strategy is mostly seen in electronic goods market, offering a diverse range of products and services by auctioning them through the bidding process. The key function of public sale is to dispose of surplus products existing with the firm. You will find three major auction type charges.

These types are

Ascending bids, (British auctions) : One seller and many clients. The seller sets up the merchandise or public sale and the potential buyers bid prices, the best price is accepted.

Descending bids (Dutch auctions) : One vendor and many buyers or one buyer and many vendors. In this kind of auction the buyer quotes an increased price and then decreases it little by little till a bidder accepts the price. In the other circumstance the buyers allows know his intention to buy a specific product and then your sellers bids the prices by offering lower prices.

Sealed bid auctions: Here the suppliers can submit only one bet, nor know about other bids. In the posted bids the most possible bid is selected

(for reference only)

While selecting the final price, additional factors must be considered by the firm such as

Psychological prices : Psychological charges a marketing practice which is dependant on the theory that certain kind of prices have mental health effect on customers minds. The prices are portrayed as peculiar prices: e. g. Rs. 299. 00 or Rs. 499. 00.

Gain and Risk writing pricing

This type of pricing can be used for pricing organic, high valued products. Many times clients refrain from accepting sellers proposal due to the risky if the guaranteed value is not supplied.

In order to provide some form of risk sharing or price safeguard as new drugs are followed into formularies biopharma companies and payers are getting 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 osteoporosis drugs are some of the best known drugs.

In Germany, Italy and the US, manufacturers have decided to provide drugs cost-free if no improvement is seen after the first treatment, or even to recompense health ideas, say for occasion if bone fractures arise despite the osteoporosis remedy.

While setting the final price, firm in addition has to consider - the brand quality, advertising, company rates policies. Firms also have to consider the vendors and real estate agents, sales persons, rivals, suppliers response to the costs of the product. Finally, firms also have to consider the legal implications while preparing their prices.

Adapting the purchase price :

Organisations generally arranged different prices matching to variants in geographical demand and costs, market portion requirements, purchase time frame, order levels, consistency of delivery, promises and different other factors.

Various price adaptation strategies are as follows

Geographical rates: It requires the pricing of products to different customers in several locations and countries. Taking into consideration the transport costs example shipping and delivery / cargo costs for faraway customers. Also the organization needs to lower the costs of its product/s from sales campaign viewpoint to keep or develop its business. Taking into consideration the export of products to countries in another country where the payment from buyer becomes important, should he lack payment he might offer other items. This practice also accepted as countertrade. Countertrade accounts approximately up to twenty five percent of current world trade. Usually this trading is performed as Buyback agreements, Barter, offset and Payment deals.

Countertrade deals could become intricate for example an ' A ' company in Europe offers 50 yachts to Turkey and allows in trade 150 Turkish made cars, which it sold to Pakistan for Grain, which in turn sold to America and achieved payment in us dollars. Such offers are transported by another section within the company. Other companies may depend on barter houses or countertrade specialists.

Most companies give discount rates and allowances to be able to receive early on payments on volume level acquisitions and off-season buying. This may lead to lowered profits, hence an assumptive price of the merchandise needs to be worked out with planning. Marketing analysts have discovered that up to 35 percent of customers generally in most categories are price sensitive. Higher income people tend to be more interested in buying products with added features, customer service, quality and brand. Hence it's essential for a solid brand never to enter price discounting in order to respond to low price problems.

A company can gain some concessions, if a customer agrees to hint a contract for a bulk years example 3-5 years or if an order is positioned in a more substantial number or if an order is placed online thus keeping the business money.

It is necessary to keep up and monitor all documents regarding discounts including the quantity of customers obtaining discount and average discount, etc. It is essential for higher degrees of management to execute a world wide web price analysis in order to get the real price offered. Nevertheless the realised price is affected not only by discounts, also but by firm's average promotional spending's, advertising spending's to stores to back the product, thus the outlined price of the merchandise and so for the net price of the merchandise are two ends of the same thread with couple of other expenses among.

However companies within an overcapacity tend to offer their branded products at a deep discounted rate. Businesses should avoid offering discounts to stores in the long term which would decrease theirs profits in an effort to meet short-term volume level goals.

In order to encourage early purchase of a product firm's can use several rates techniques. Good examples could be found where top quality products are offered at a discounted price to be able to energize extra purchases of other store products. This will pay only if the revenue is generated by advertising other products in proportion to the lower margins on losing -leader product.

In certain seasons and situations of festive intervals example every June there are again -to-back school sales and during Diwali, Christmas and New Calendar year special prices will be set up on products.

In order to clear inventories without affecting the shown price, vehicle companies and other consumer goods companies offer cash rebates to help purchase of products throughout a certain period.

Some car companies offer the product with a nice-looking finance plan such as zero interest rate or in case of consumer durable goods buy now and begin paying after six or nine a few months instead of cutting its price.

Equated regular instalments may be extended over a longer time in order to lower them, here the consumer target is on affording to pay back in instalments somewhat the rate of interest. This can be in cases of automobile companies and consumer durable goods etc.

Often vehicle companies offer an attractive warrantee and servicing contract in order to market 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 brains of people that they have got purchased the product at a substantially lower price and have gained however in simple fact haven't.

Often to be able to accommodate distinctions in customers, products, locations, etc firms change their basic price. Thus price differentiation develops in which a product is sold at several prices without the proportional difference in costs. Customers are recharged depending on their depth of demand. Potential buyers would be billed at a lower rate with respect to the level of buying.

In circumstance of Museum's or places of ancient importance there is leaner admission payment to children, foreigners, etc.

A organization charges 30 Rs for adding 150 gms glucose in a Rasgulla tin pack sweet, however it charges 35 Rs for adding the same level of sugar for a Kala Jamun pack sweet.

A company can price the same product at two different levels predicated on image variances. A detergent company can put detergent in a single packet, name it with a graphic, and price it at 50 Rs. It can place the same detergent in another packet with a new name and image and price it at 75 Rs.

Soft refreshments prices often fluctuate in an A class restaurant, vending machines or when sold in canteens or general stores.

Same product is priced diversely at different locations even though the price of offering at each location is the same. A concert audience is charged variably for seats according to their personal preferences for different locations.

Prices change by season, day or hour etc.

Electricity as an important public utility source is priced differently by period in United Kingdom. Restaurants and Night clubs in UK demand less during happy time.

Airlines have different fares on same airline flight for same course for illustration its economy class, which is known as Yield Management / Income Management system. They have got child fares, adult fares, seasonal fares etc. Extra suitcases price by an flight for an individual kilo differs from Dubai to London instead of exploring the other in the past from London to Dubai.

Websites have combined up different seller's product collectively such as AUTO INSURANCE, Consumer durable goods, home insurance, medical care insurance etc, which allows customers to discriminate between retailers by evaluating their prices.

Responding to price changes :

Many time organisations have to go for price slashes and increase according to the problem.

Price Slashes : It is a likelihood that company may go for price reductions scheduled to existence of price reductions, also where even with added work the sales have not increased or credited to declining market share. Price cuts can lead to price wars on the market. Cheap can be utilized by firms to be able to dominate market. Organisations could also have to decrease the prices in case of recession.

Price Increase : Price boosts are undertaken by organisations when there is cost inflation. With go up in cost of creation the organisations income lessens, hence they have to go for price increase to earn normal revenue. Often organisations increase their prices more than the increase in cost anticipated to expectation of further cost increase.

Price increase can also happen when there is certainly too much demand for the product and the supply is less.

Price increase can be carried out in the next ways

Final price is not placed, before product is sent to the customer. Generally observed in development and heavy equipment companies.

Here firm needs customers to pay current price and everything or part of any cost inflation that can occur before the delivery of the merchandise.

Here the purchase price is placed same but some elements are segregated from the merchandise and priced singularly. Example in case of cars, accessories, other additional features come with extra cost.

Discount if any, could be reduced to keep up profits.

Organisation also can handle high cost and over demand without increasing prices as follows

Reducing the amount offered without increasing the prices

By substituting recycleables with less expensive materials wherever possible

Lessening the product features to lessen its cost

Lessening product services

Usage of less cost packaging

Creating current economic climate brands

Reacting to changes in prices

Price changes can have a effect from customers, competition, marketers, suppliers and governments.

Customers may perceive and react to price cuts in different ways. Price slashes may be interpreted as lower quality product or faulty products. Price go up would generally bring some positive signs to customers. The merchandise is known as to be of high quality and having added value when prices increased.

Competitors could also respond in various ways to price changes. To contemplate opponents response organisations have to access their finances, sales circumstance, market show and their objectives. In case the competitors objective is to increase market show then they will change their price in response of firm's price changes. If its goal is profit determination then it will increase its promotional activities to keep its sales.

Responding to competition price changes

It is an important decision how firm should react to price changes by competitors, the products could go for product augmentation having homogenous characteristics. If product enhancement is extremely hard then they would need to go for price slashes to counter the competition price cuts. If price is increased by the rival in the homogenous market, then other firms may not increase their prices until it is inevitable.

If price change happens in a heterogeneous market then your various aspects must be looked at before giving an answer to the purchase price change

What is the reason for opponents price cuts - is it credited to over capacity of development, go up in costs of creation or the motive is to increase market share.

Is the price change momentary or permanent

What would be the situation if the organization does not reply to opponents price change

Are other rivals going to respond to the purchase price change of course, if yes how?

Market leaders many a times have to handle price changes from new entrants on the market or smaller rivals. There are many ways that a market leader can react to rivals price changes
Maintain price - Market head my decide to maintain its current price and earnings because of the notion that

Too much revenue will be lost if prices are decreased

It would not lose too much market share

It can be done to gain back market show when required

Maintain price and add value to its offering

The product could be augmented, its services and communication better.

Reduce price : Innovator may go for price reductions to match the competitors price cuts anticipated to pursuing reasons

As the market is price very sensitive it could lose market share

It would be difficult to build market talk about once lost

Its costs reduces with higher volume in production

Increase price and increase quality: The first choice may decide to start price increase and can also increase quality of product and also present new brands or progressive products.

Introduce inexpensive product line : It could contemplate adding a minimal priced product line to counter the tournaments price.

Responding to rivals price changes -

For example, when Southwest Airlines came into a new market offering lower prices, the majority of the airlines retorted to lower pricing. Nonetheless it didn't have to lower its price for the First class, nor did it have to lower its charges for faithful business customers used to frequent-flyer benefits. On this example products which were highly differentiated needn't needed to be marked down, nor do products that were geared to different customer communities. In this particular example other airlines centered on differentiating their products, in other words, adding value, and targeting customer segments with offerings created for them.

It is vital to find out from the above example why was there a price change created by the rivals? The attempt might have been to remove the surplus inventory or aiming to make profit. The purchase price change may be short-term and not necessary to follow suit. One shouldn't use price as a lever to increase market share unless one is for certain to maintain a posture to win a cost war. What does it indicate to win a cost war? It doesn't mean cleaning out your competitor. What it will mean is concluding up with an increase of revenue when the price war is over than when it started out. But now that your prices are lower, so if your revenues should be higher, you must make them up in three places: increased market development, lower costs and market share

The genuine response of the organization to competitors price change would be again dependent on the problem that exists in the market, life routine of product, tournaments intensions and resources, market sensitivity to price and quality etc.

Session Summary

Price is the money at which a product or service is offered in the market. It is the exchange rate of something or service in terms of its monetary value.

Pricing is an important decision area for an organisation. The prices and sales level of the product come up with determines the earnings for an organisation. Hence organisations have to formulate rates regulations strategically.

The factors influencing pricing policies of an organisation are

Internal Factors - While making costing policies, marketers must consider several factors which are the result of company decisions and actions. To a great degree these factors are controllable and alterable by the company.

External Factors - There are many factors which can be external to the company which cannot be controlled by the firm but will have an effect on charges decisions.

The organisation must think over several factors while setting up its pricing insurance policy. The process of setting the purchase price is as follows

Deciding the costs objectives

Determining demand

Cost estimation

Competitors pricing guidelines analysis

Selecting a charges method

The various charges methods are the following

Mark up Pricing

Rate on go back pricing

Perceived value pricing

Value pricing

Going rate Prices

Auction costing or price bidding

Psychological pricing

Gain and Risk writing pricing

Organisations generally established different prices according to modifications in geographical demand and costs, market segment requirements, purchase time period, order levels, frequency of delivery, guarantees and different other factors.

Various price adaptation strategies are the following

Geographical pricing

Price discounts and allowances

Promotional pricing

Discriminatory pricing

Product combination pricing

Many time organisations have to go for price slashes and increase according to the situation.

Price cuts

Price increase

Price changes can have a reaction from customers, suppliers, rivals, governments and distributors.

It is an important decision on how firm should react to price changes by challengers, in cases where the merchandise has homogenous characteristics, it could go for product enhancement. If product augmentation is extremely hard then they would need to go for price slashes to counter the opponents price slices. If price is increased by the competition in the homogenous market, then other companies might not increase their prices until it is inevitable.

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