UTILITY, VALUE, PRICING AND PRICE

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UTILITY, VALUE, PRICING AND PRICE

• Utility is the want satisfying capacity of an
  item or the attribute of an item that makes it
  capable of want satisfaction.
• Value is the quantitative measure of the worth
  of a product.
• Pricing is the art of translating into monetary
  terms the value of the product to the consumers
  at a particular time.
• Price is the amount of money that is needed to
  acquire some combination of a product and its
  accompanying services.

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IMPORTANCE OF PRICING

• (1) FOR THE ECONOMY Price is the basic
  regulation of the economic system because it
  influences the allocation of the factors of
  production.
• In other words the price of
  the product is influenced by the price of the
  factors of production.
• LAND LABOUR CAPITAL ENTREPRENEURSHIP
• Rent Wages
  Interest Profits

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IMPORTANCE OF PRICING

• (2) FOR AN INDIVIDUAL PRODUCT Price is a major
  determinant of the products demand ( elastic /
  inelastic ).

D1
P1
D2
PRICE
P2
Q1
Q2
QUANTITY
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IMPORTANCE OF PRICING

• (3) FOR THE FIRM Price affects a firms
  competitive position and its share of the market.
• Price of a product also affects
  a firms marketing programme. Whether the market
  will accept a higher price to have more improved
  products.

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NINE PRICE QUALITY STRATEGIES
P R I C E
High Medium Low
QUALITY
High Medium Low
1.Premium Strategy
2.High-value Strategy
3.Super-value Strategy
6.Good-value Strategy
4.Overcharging Strategy
5.Medium-value Strategy
7.Rip-off Strategy
8.False economy Strategy
9.Economy Strategy
( Contd.. )
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NINE PRICE QUALITY STRATEGIES

• The firm must decide where to position its
  product on quality and price ( placing the
  product in value-map ).
• There can be competition between price-quality
  segments ( nine strategies are possible ).
• In the figure (9 Strategies), the strategies
  1,59 can all coexist in the same market
  (products fall on value equivalence line of the
  value-map). Strategies 2,36 are ways to attack
  the diagonal positions (products fall in value
  advantaged area).Positioning strategies 4,78
  amount to overpricing the product in relation to
  its quality (positioned in value disadvantaged
  area).

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SETTING PRICING POLICY( FACTORS TO BE CONSIDERED
)

• (1) Selecting the pricing objective
• (2) Determining demand
• (3) Estimating costs
• (4) Analyzing competitors costs, prices, and
  offers
• (5) Selecting a pricing method
• (6) Selecting the final price

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STRATEGIC PRICING PROCESS
(2) Study Consumer Behav.
(4) Integrate Pricing with M.Mix
(1) Select Target Market
(6) Determine Strategic Price
(3) Identify Competition
(4) Relate cost Demand
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PRICING OBJECTIVES

• The company first decides where it wants to
  position its market offering. The clearer a
  firms objectives, the easier it is to set price.
• A company can pursue any of five major objectives
  through pricing
• Survival
• Maximum current profit
• Maximum market share (market penetration)
• Maximum market skimming
• Product-quality leadership

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FACTORS AFFECTING PRICING DECISIONS

• Internal Conditions ( Product differentiation,
  Marketing Mix, Orgn. Factors/Costs, Orgn.
  Objectives and goals.
• External Conditions ( Govt. Regulations,
  Economic Conditions, Demand Position, Buyers
  Attitude and Behaviour, Competition, Substitutes,
  Suppliers, Cost of Factors of Production )

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SELECTION OF PRICING METHOD

• Before selecting a price, the company should
  study the three Cs
• - the customers demand schedule
• - the cost function
• - the competitors prices
• Costs set a floor to the price and Market Demand
  sets the upper ceiling. Competitors prices and
  the prices of substitutes provide an orienting
  point.

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SELECTION OF PRICING METHOD

• The final price of the product or service will be
  set somewhere between the two i.e. Price that is
  too low to produce a profit and the price that is
  too high to produce any demand.
• LOW PRICE
  HIGH PRICE
• (No possible profit
  (No possible demand
• at this price)
  at this
  price)

Competitors prices and prices of substitutes
Customers assessment of unique product features
Costs
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PRICE SETTING METHOD

• (1) MARKUP PRICING (FULL COST PRICING) The most
  elementary pricing method is to add a standard
  markup to the products cost.
• Unit Cost Variable Cost
• Markup Price

Fixed Cost --------------Unit Sales
Unit Cost ------------ ( 1- desired return on
sales )
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PRICE SETTING METHOD

• (1) MARKUP PRICING ( Contd. )
• Example
• Suppose a product manufacturer has the
  following costs and sales expectations
• Variable Cost per Unit Rs. 10.00
• Fixed Cost Rs. 3,00,000
• Expected Unit Sales 50,000
• Unit Cost 10.00 3,00,000 / 50,000 Rs.
  16.00
• Manufacturer wants to earn 20 markup on
  sales
• Markup Price 16 / ( 1-0.2 ) Rs.20.00

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PRICE SETTING METHOD

• (2) TARGET-RETURN PRICING the firm determines
  the price that would yield its target rate of
  return on investment (ROI). The target-return
  price is given by the following formula
• Target-return price

Unit cost desired return x invested
capital ------------------------
-------------------------------------
Unit Sales
( Contd. )
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PRICE SETTING METHOD

• (2) TARGET-RETURN PRICING(Contd) in the above
  example , if total investment is Rs. 10,00,000/-
  and company wants to earn a 10 ROI then
• Target-return price 16.00 .10 x
  10,00,000 Rs. 18.00
• 
  50,000
• Break-even volume Fixed cost / Price -
  Variable Cost
• 3,00,000
  / 18 - 10
• 37,500
  units

------------------
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PRICE SETTING METHOD

• (3) PERCEIVED-VALUE PRICING Companies see the
  buyers perception of value, as the key to
  pricing. They use non-price variables of the
  marketing mix to build up perceived value in
  buyers minds. It helps in product positioning.

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PRICE SETTING METHOD

• (4) VALUE PRICING In recent years, several
  companies have adopted value pricing, in which
  they charge a fairly low price for a high-quality
  offering. Value pricing says that the price
  should represent a high-value offer to consumers.

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PRICE SETTING METHOD

• (5) GOING-RATE PRICING The firm bases its price
  largely on competitors prices. The firm might
  charge the same, more or less than major
  competitor(s).
• Going-rate pricing is quite popular, where costs
  are difficult to measure or competitive response
  is uncertain, firms feel that the going price
  represents a good solution

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PRICE SETTING METHOD

• (6) SEALED-BID PRICING Competitive-oriented
  pricing is common where firms submit sealed bids
  for jobs. The firm bases its price on
  expectations of how competitors will price rather
  than on a rigid relation to the firms costs or
  demand. The firm wants to win the contract, and
  winning normally requires submitting a lower
  price bid. At the same time, the firm can not set
  its price below cost.

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SELECTING THE FINAL PRICE

• Pricing methods narrow the range from which the
  company must select its final price. In selecting
  that price, the company must consider following
  additional factors
• - Psychological Pricing ( Image Pricing,
  Odd-ending Pricing )
• - The influence of other Marketing-Mix
  Elements ( the brands quality and advertising
  relative to competition )
• - Company Pricing Policies (reasonable to
  customers and profitable to the company )
• - Impact of Price on Other Parties

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PRICE ADAPTATION STRATEGIES( PRICING TACTICS
TECHNIQUES )

• Companies usually do not set a single price but
  rather a pricing structure that reflects
  variations in geographical demand and costs,
  market segment requirements, purchase timing,
  order levels, delivery frequency, guarantees,
  service contracts, and other factors.
• As a result of discounts, allowances, and
  promotional support, a company rarely realizes
  the same profit from each unit of product that it
  sells.

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PRICE ADAPTATION STRATEGIES( PRICING TACTICS
TECHNIQUES )

• Following are the several price-adaptation
  strategies
• (1) Geographical Pricing involves the company
  in deciding how to price its products to
  different customers in different locations and
  countries. Another issue is how to get paid.
  
  

( Contd. )
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PRICE ADAPTATION STRATEGIES( PRICING TACTICS
TECHNIQUES )

• Geographical Pricing ( Contd. )
• 5 Major Approaches
• FOB Origin Pricing
• Uniform Delivery Pricing ( Postage Stamp Pricing
  )
• Zone Pricing ( Falls between the above two )
• Base Point Pricing
• Freight Absorption Pricing

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PRICE ADAPTATION STRATEGIES( PRICING TACTICS
TECHNIQUES )

• (2) Price Discounts and Allowances
• Cash Discount ( e.g. 2/10,net 30 )
• Quantity Discount
• Functional Discount
• Seasonal Discount
• Allowances ( Trade-in allowances, Promotional
  Allowances )

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PRICE ADAPTATION STRATEGIES( PRICING TACTICS
TECHNIQUES )

• (3) Promotional Pricing
• Loss-leader pricing
• Special-event pricing
• Cash rebates
• Low-interest financing
• Longer payment terms
• Warranties and service contracts
• Psychological discounting

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PRICE ADAPTATION STRATEGIES( PRICING TACTICS
TECHNIQUES )

• (4) Product-Mix Pricing
• Product-Line Pricing
• Optional-Product Pricing
• Captive-Product Pricing
• Two-Part Pricing
• By-Product Pricing
• Product-Bundling Pricing

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PRICE ADAPTATION STRATEGIES( PRICING TACTICS
TECHNIQUES )

• (5) Discriminatory / Differential Pricing
• Customer-segment pricing
• Product-form pricing
• Image pricing
• Location pricing
• Time pricing