Marketing Management - II

PGDM 2024-2025
(Term:- 2)

Prof. Piyush Ranjan

Assistant Professor (Marketing)
XLRI-Xavier School of Management
Jamshedpur-831001
 Definition of Price and Pricing
What is the difference between
Price and Pricing?

Price Pricing
 WHAT IS THE RIGHT PRICE?

WHAT HAPPENS
WHAT HAPPENS
WHEN THE PRICE IS
WHEN THE PRICE IS
SET TOO LOW?
SET TOO HIGH?
 The 2012 London Olympics
News Insights
Paul Williamson, who was responsible for managing the ticket program, used prices not only
to drive revenue and profit effectively but also as a powerful communications tool. The lowest
standard price for the ticket was £20.12, and the most expensive was £2,012. For children
under 18, the motto was “Pay Your Age”; for instance, a 6-year-old would pay £6, and a 16-
year-old £16. Finally, Williamson and his organization generated ticket revenues of £660
million, almost 75% more than anticipated.

Q: What was the key factor behind the success of

the 2012 London Olympics?
 Maruti Suzuki Kizashi
News Insights
Maruti Suzuki, the country’s leading carmaker,
was attempting to enter the luxury sedan
market for the first time. However, the main
reason for its failure was its high price, which
was not in line with Maruti's reputation for
making cars priced below 10 lakhs. At that
time (2011-12), the price of the Maruti Suzuki
Kizashi was around Rs 18 lakh, which was
considered too expensive for the Indian market.
Why price is important?

Represent
cost expenses

Generates
revenue
Hypothetical Scenario
 Refer Numerical Data to the scenario below

Table 1: Basic Information

Price ₹ 100 per unit

Variable unit cost ₹ 60

Sales volume 10,000 unit

Fixed cost ₹ 3,00,000

 Cont.

OPTION 1 OPTION 3
Accept a 5% increase Accept a 5% increase in
in price and other sales volume and other
things remain constant things remain constant

OPTION 2 OPTION 4
Accept a 5% decrease Accept a 5% decrease
in variable cost and in fixed cost and other
other things remain things remain constant
constant
 Price ….The strongest profit driver????

Profit Profit increases

Old New Old New by….

Price 100 105 100000 150000 50 %

Variable unit cost 60 57 100000 130000 30 %
Sales volume 10000 10500 100000 120000 20 %
Fixed cost 300000 285000 100000 115000 15 %

Profit = (Price * Volume) - Costs

 Price Elasticity of Demand

Imagine you own a You decided for a 25% Customers will go to

coffee shop hike the price of coffee other shops
 Price Elasticity of Demand

Price elasticity of demand is the ratio of the percentage change in quantity demanded
of a product to the percentage change in price.

OR

Price Elasticity of demand represents Price sensitivity

 Five Types of Price Elasticity of Demand

1. Infinite price elasticity of 2. Zero price elasticity of

demand, (ŋ = ∞). demand, (ŋ = 0).

5. Relatively price inelasticity of

demand, (ŋ < 1).

3. Unit price elasticity of 4. Relatively price elasticity of

demand, (ŋ = 1). demand, (ŋ > 1).
Cont.
 Numerical Problem

Ques: ABC Electronics initially sold 1500 LED televisions a

year at ₹1000 per TV. The price of LED TV was reduced to
₹900, and the demand increased to 1800 units.

Calculate the elasticity of demand.

 Numerical Problem
Calculate the Price Elasticity of Demand.
 Class Exercise
1. Suppose that the price of a product falls down from Rs 10 to Rs 9 per unit and due to this,
the expenditure of the consumer to purchase a product increases from Rs 800 to 1080.
What is the Price Elasticity of Demand?

2. The cost of a pair of shoes drops from Rs 8000 to Rs 6000, resulting in an increase in the
quantity demanded by 15%. Calculate the Price Elasticity of Demand?

3. The quantity demanded of a product at a price of Rs 8 per unit is 500 units. Its price falls to
Rs 6 and as a result its quantity demanded rises to 600 units. What is its Price Elasticity of
Demand?
 Price Optimization

Eliminate
Different Prices for
the Same Product Multi-Products

+ =
More Profits Same Customers Growing Business
 Hypothetical Example
SALES #Total Quantity
= 1000
Red Tshirt,
25%

₹100 ₹100
Blue TShirt
75%
 Cont.
SALES

Red Tshirt,
25%

₹100 ₹100
Blue TShirt
75%
 Cont.
SALES #Total Quantity
= 1000
Red Tshirt
40%

₹110 ₹90 Blue TShirt

60%
 Cont.
SALES
Red Tshirt
40%

10%
₹110 ₹90 Blue TShirt
60%
profit
 Brainstorming Session
Imagine You are in a Coffee Shop.
It sells high-quality loose coffee beans at Rs 1777.24 per 500g.

Make your
choice now.

OPTION A OPTION B
33% extra free 33% off the price
 Brainstorming Session

Suppose you are in P&M Mall, and you are looking to buy a jacket.

OPTION A OPTION B
Double Discount Deal @ FLAT Discount Deal @
20% + 25% Make Your 40%
Choice Now.
 Brainstorming Session

Suppose you are in the Airport Longue, and you are looking to buy a pair
of sunglasses.
You see two different pairs of sunglasses, Pair A and B, which are on sale.

PAIR A PAIR B
Original Price ₹5990 Original Price ₹6390
Discounted Price ₹4590 Discounted Price ₹4990
Make Your
Choice Now.
 Brainstorming Session
Assume You are in a Pizza Shop.
You are offered a choice of promotional offers on pizza.

Make your
choice now.

OPTION B
OPTION A 4 Small Pizzas
Unlimited Toppings with four Toppings
3 Medium Pizzas only @ ₹2400 only @ ₹2400
 Price-Setting Process

Selecting the Pricing Objectives

Determining Demand

Estimating Cost ₹
Analysing Competitors

Selecting a pricing Method

Offering the Final Price

 Class Exercise
Identify the category of Pricing Objectives
1. Institute a companywide policy that all products must provide for at least an 18 percent
profit margin to reach a particular profit goal for the firm.

2. Set prices very low to generate new sales and take sales away from competitors, even if
profits suffer.

3. To discourage more competitors from entering the market, set prices very low.

4. Target a market segment of consumers who highly value a particular product benefit and
set prices relatively high (referred to as premium pricing).
 Cont.
Pricing Objectives Examples of Price Strategy Implications

Institute a companywide policy that all products must provide for at least an 18
Profit-oriented percent profit margin to reach a particular profit goal for the firm.

Set prices very low to generate new sales and take sales away from
Sales-oriented competitors, even if profits suffer.

Competitor-oriented To discourage more competitors from entering the market, set prices very low.

Target a market segment of consumers who highly value a particular product

Customer oriented benefit and set prices relatively high (referred to as premium pricing).
 Price-Setting Process

Selecting the Pricing Objectives

Determining Demand

Estimating Cost ₹
Analysing Competitors

Selecting a pricing Method

Offering the Final Price

Four Levels of Competition
 Classification of Pricing Strategies
B2C (Consumer Market) B2B (Industrial Market)
Differential Pricing Strategy Unit Pricing Strategy
Dynamic Pricing Strategy Competitive Bidding
Psychological Pricing Strategy Negotiated Pricing Strategy
Price promotion
New Product Pricing Strategy
(Skimming & Penetration)
Price bundling
Pay-What-You-Want Pricing Strategy
Cost-Plus Pricing Strategy
Competition-based Pricing Strategy
Value-based Pricing Strategy
 Differential Pricing Strategy
It is a pricing strategy where a company sets different prices for the same
product on the basis of differing customer segments, buying locations, and
purchasing patterns.
 Cont.
Customer Segment Buying Locations Purchasing Patterns
 Dynamic Pricing Strategy
It is a pricing strategy where a company sets flexible prices based on the
current market conditions.
 Bundle Pricing Strategy
It is a pricing strategy where a company combines two or more products
at a discounted price compared to the individual product prices.
 Identify the Pricing Strategy.

DIGITAL DIGITAL + PRINT PRINT

12 Months for only 12 Months for only 12 Months for
Rs 650 Rs 1050 only Rs 850
 Decoy Pricing Strategy
It is a pricing strategy where a company introduces a new, less attractive
product option at an unreasonable price.

₹49 ₹149 ₹199

₹299 ₹699 ₹799

Identify the Pricing Strategy.

₹99 ₹249 ₹300

 Freemium Pricing Strategy
It is a pricing strategy where a company offers a basic set of services for
free and enhanced features and/or content for a fee.
 Captive-Product Pricing Strategy
It is a pricing strategy where a company charges higher prices for products
that are required for the use of main products.

Good Knight
Video game consoles Machine & Printer & Ink
Razor and blades cartridges
and games Liquid
 Promotional Pricing Strategy
It is a pricing strategy where a company temporarily charges lower prices
for products to attract more customers and increase sales.
 Psychological Pricing Strategy
It is a pricing strategy where a company sets prices for products based on
emotional impulses rather than rational ones.

Original Price ₹6000

₹100.00 ₹99.99 Discounted Price ₹4990
 Pay-What-You-Want Pricing Strategy
It is a pricing strategy that provides complete price-setting power to buyers
without any restriction on payment amount.

Buyers can pay any price

they want, even zero
Street music artists
 New Product Pricing Strategy
1. Price Skimming Strategy 2. Penetration Pricing Strategy
 Competition-based Pricing Strategy
It is a pricing strategy where a company charges the same price similar to
competitors in the market.
 Competition-based Pricing Strategy

CRM Software Market Cloud Service Providers

 Cost-Plus Pricing Strategy
It is a pricing strategy where a company charges prices at a certain margin
above the cost of production.
 Value-based Pricing Strategy
It is a pricing strategy where a company sets prices based on the buyer's
perceived value and their willingness to pay for a product.
 Willingness-to-Pay
Imagine if you give one lakh rupees to an individual and ask him to buy a
new mobile phone.

Rs. 125,000 Rs. 70,000

approx. approx.
Willingness-to-Pay
 Classification of Pricing Strategies
B2C (Consumer Market) B2B (Industrial Market)
Differential Pricing Strategy Unit Pricing Strategy
Dynamic Pricing Strategy Competitive Bidding
Psychological Pricing Strategy Negotiated Pricing Strategy
Promotional Pricing Strategy
New Product Pricing Strategy
(Skimming & Penetration)
Decoy Pricing Strategy
Captive-Product Pricing Strategy
Freemium Pricing Strategy
Bundle Pricing Strategy
Pay-What-You-Want Pricing Strategy
Cost-Plus Pricing Strategy
Competition-based Pricing Strategy
Value-based Pricing Strategy
 Unit Pricing Strategy
It is a pricing strategy where a company assigns the price per unit of
standard measure at a point of sale.

Example: Wholesale Purchase of Office Supplies

Supplier A Supplier B

• Supplier A offers a bulk package of printer • Supplier B offers a bulk package of printer
paper for Rs. 3,000. paper for Rs. 3,500.
• Supplier A's package contains 10 reams of • Supplier B's package contains 12 reams of
paper. paper.
 Cont.

To calculate the unit price per sheet of paper:

• For Supplier A: Rs. 3,000 / 5,000 sheets = Rs. 0.60 per sheet
• For Supplier B: Rs. 3,500 / 6,000 sheets = Rs. 0.58 per sheet
 Negotiated Pricing Strategy
It is a pricing strategy where buyers and sellers determine the price of a
product through bargaining power.
100%

Defensive Negotiated
Strategy Strategy X-axis represents the
50% Seller's Strength &
5% 100% Y-axis represents the
Buyer’s Strength.
Gamesmanship Autocratic
Strategy Strategy

5%
Figure- Pricing Strategy Quadrangle
 Competitive Bidding
Competitive bidding is a process of issuing a public bid to encourage
companies to compete for a specific project.

Competitive bidding is of two types:

1. Open Bidding 2. Closed Bidding

 Soren Chemical:
Why is the New Swimming Pool Product
Sinking?

Baines et al.: Marketing, International Edition

 Case Briefings
Jen Moritz, the marketing manager for Soren Chemical Co. is struggling with the poor sales

performance of Coracle, a new clarifier for residential swimming pools. The performance is

puzzling because Coracle is chemically similar to another Soren product that has sold well for

the treatment of larger pools. Soren distributes the other product B2B through "chemical

formulators" serving the commercial pools market -- but Soren uses wholesale distributors to

sell Coracle. Given the slow start in establishing Coracle as a consumer brand, Moritz suspects

that the go-to-market strategy may be flawed, but she is unsure where the problem lies; she

examines channel strategy, distribution partners, the Coracle pricing scheme, the threat of

competitors' offerings, and other potential problem sources.

 Case Briefings
• Protagonist: Jen Moritz, the marketing manager for Soren Chemical Co.

• Soren Chemical had launched Coracle, a new clarifier for smaller, residential-

size swimming pools.

• Coracle product has been budgeted at $1.5 million in sales for the year, but so

far, Soren has sold a very disappointing only $111,000 in five months.

• Soren Co. has chosen to use wholesale distributors to sell Coracle.

 Important Questions

What are the key challenges facing Soren Chemical Co. regarding the poor
sales performance of Coracle?

Distribution The threat of

Partners Competitors' offerings

Channel
Strategy Coracle Pricing
Scheme
Cont.
Cont.
Cont.
 Question 1

What is the addressable market size for Coracle?

Is the first-year goal of $1.5 million sales
reasonable?
Solution
 Question 2-a

What are the implications of the channel

structure for pool chemicals?
Cont.
 Question 2-b

How would you describe the selling process for

Kailan MW versus Coracle?
 Solution
Water Parks (Kailan MW or equivalent) Swimming Pools (Coracle or equivalent)
• Purchase specifically from regional • Purchase of consumers is from specialty retailers or mass
formulators that provide value-added retailers—all of which carry similar product lines. For
services and/or customization. service professionals, the purchase is likely to be
influenced by the availability and price point at the
• Purchase is technical, with influence from
distributor.
chemical and equipment manufacturers.
• Purchase is not technical, and the use of clarifiers is
• Purchase is specifically oriented to water
optional.
safety, due to particular risk factors of
• Emphasis is on aesthetics and perceived cleanliness.
water parks.
Consumers likely unaware of safety distinctions between
competing products.
 Question 2-c

Why is Soren Chemical struggling to sell Coracle?

 Solution
• Coracle is not offered as a private-label brand, as requested by some of the wholesale
distributors. The case suggests that formulators may provide an alternative source, as
they have begun marketing a diluted version of Kailan MW and they also sell to
distributors (per Figure A).

• Coracle’s benefits include a material reduction in the need for other pool chemicals,
and this fact is promoted on the packaging itself. Because the distributors sell a broad
range of chemicals, promoting Coracle and its benefits would lead to cannibalization of
existing sales.
 Question 3

Evaluate different approaches to pricing, including value

pricing, competitive parity pricing, and customer
indifference pricing (cannibalization).
 Value Price

Value price: charging a consumer based on the amount

saved from using Coracle.
Leading Competitors
 Value Price

Value price: charging a consumer based on the amount saved

from using Coracle.
Data:
– Annual Coracle treatments for a typical pool are 10 times annually—twice a
month for 5 months (Table A).
– Treatment at retail prices is $3.91 per treatment (Table A).
– Average annual spending on chemicals for a typical pool is $300, not including
clarifiers (Exhibit 3).
 Value Price

– The Keystone and Kymera clarifiers do not reduce the amount of pool
chemicals required,
– but Soren Chemicals’ Coracle and Jackson Laboratories’ ClearBlu reduce
spending on other chemicals by 25% and 15%, respectively:
 Value Price

What would be the retail price?

Competitive Parity Price/ Going rate price

Charging a price that positions Coracle at parity

with its closest competitors, factoring in the
differences in benefits.
Leading Competitors
 Competitive Parity Price/ Going rate price

• Annual cost to pool owners in case they use

– Keystone Chemicals’ Purity = $300 + $46.88 = $346.88

– Kymera Chemicals’ HydroPill = $300 + $35 = $335

– Jackson Labs’ ClearBlu = $300 + $75 - $45 = $330

• Jackson Lab’s ClearBlu is described as the preferred choice among pool service professionals
and the only competing product shown to materially reduce usage of other chemicals.
 Competitive Parity Price/ Going rate price
Average annual chemical spend with savings from Coracle
= $300 - $75 = $225

– Competitive Parity Pricing window after factoring in the differences in benefits

= $330 - $225 = $105

– Competitive parity price per treatment, retailer price (10 treatments/yr) = $ 10.50

What would be the retail price?

 Distributor and Retailer Indifference Price
(Other Chemicals Cannibalization):

Offering gross profit (or “penny profit”) for distributors and

retailers that fully offsets the lost revenue from reduced sales of
other pool chemicals.

– Margin structure assumptions are shown in Exhibit 2

– Typical distributor gross margins are 20% (Retailers @ 15%) for chlorine,
shock treatments, and enzymes (Case page 6, fourth paragraph)
Cont.
Cont.
 Question

Calculate Potential loss in revenues and gross profits if

consumers reduce their pool chemical purchase because of
their use of Coracle.
 Calculate Potential loss in revenues and gross profits

Retailers Distributors

Revenues per pool, chemicals excluding clarifier

% reduction in other chemical purchases due to Coracle usage
Lost revenue from chemical reductions due to Coracle
% Gross margin on lost chemical sales
Lost gross profit (annual)
Required gross profit per treatment (10 treatments/yr)
 Calculate Potential loss in revenues and gross profits

Retailers Distributors

Revenues per pool, chemicals excluding clarifier $ 300.00 $ 255.00*

% reduction in other chemical purchases due to Coracle usage 25% 25%
Lost revenue from chemical reductions due to Coracle $ 75.00 $ 63.75
% Gross margin on lost chemical sales 15% 20%
Lost gross profit (annual) $ 11.25 $ 12.75
Required gross profit per treatment (10 treatments/yr) $ 1.13 $ 1.28

*Retailers sell at $ 300 after a 15% markup. So, the cost price of the retailer would be = 300 – 15% 0f
300 = $255, which is the sales price for Distributors.
 Two Options:

1. Keep the Soren Chemical’s selling price constant at $2.32 per

treatment (Exhibit 2)

2. Keep the margin of the retailer constant at 15%

 Option 1
– Soren Chemical manufacturer price per treatment is $ 2.32
– Distributor price per treatment with required gross profit = ($2.32 + $1.28)
= $ 3.60
– Implied gross margin for distributor = ??
– Retailer price per treatment with required gross profit = ($3.60 + $1.13)
= $ 4.72
– Implied gross margin for retailer = ??

What would be the retail price?

 Option 1
– Soren Chemical manufacturer price per treatment is $ 2.32
– Distributor price per treatment with required gross profit = ($2.32 + $1.28)
= $ 3.60
– Implied gross margin for distributor = 36%
– Retailer price per treatment with required gross profit = ($3.60 + $1.13)
= $ 4.72
– Implied gross margin for retailer = 24%

What would be the retail price?

 Two Options:

1. Keep the Soren Chemical’s selling price constant at $2.32 per

treatment (Exhibit 2)

2. Keep the margin of the retailer constant at 15%

 Option 2
– Retailer price per treatment with required gross profit

= ($1.13 ÷ 15%) = $ 7.53

– Distributor price per treatment

= ($7.53 x (1 - 15%)) = $ 6.43

What would be the retail price?

 Questions

What is the highest price Soren Chemical can set for Coracle?

What is Coracle really worth to end-users?

Given its superior performance, how can Coracle be priced relative to

the competition?

What is the impact of a higher retail price on distributors? Retailers?

 Summary of Price Calculations

Method Price per Retail price Annual

treatment spending
Value price $ 7.5 $48 $75

Competitive Parity Price $ 10.5 $67.5 $105

Distributor and Retailer $ 4.72 $ 30.21 $47.2

Indifference Price 1
Distributor and Retailer $7.53 $48.13 $75.2
Indifference Price 2
 Purchase Decisions

• Annual purchase: All chemicals ($300)

• Sticker shock

• Average annual spending on clarifiers (exhibit 3) is $50

• Overall chemical purchases

• Packaging
 Packaging (Dealing with “sticker shock”)

Method Price per Retail Retail price

treatment price (20 Ounce)

Value price $ 7.5 $48 $15

Competitive Parity Price $ 10.5 $67.5 $21
Distributor and Retailer $ 4.72 $ 30.21 $9.44
Indifference Price 1
Distributor and Retailer $7.52 $48.13 $15.04
Indifference Price 2
Cont.
Cont.
 Key Challenges Observed
– How do we Convince distributors to push Coracle?

– How do we Convince retailers to create shelf space for Coracle?

– Is the product priced so that the economies are attractive to our channel partners?

– Create Greater Awareness to end-users? (About safety and cost-saving benefits of

coracle)