Assignment on marketing management

SUBMITTED TO

SUBMITTED BY

Mr.

Maninderpal Kaur(120425718) Hardeep Sharma(120425717)

at

SCHOOL OF MANAGEMENT STUDIES PUNJABI UNIVERSITY, PATIALA

Meaning of pricing

The price is the amount customers pay for a product. The cost is the amount spent by a business making the product the price a business charges for its product or service is one of the most important business decisions management take. For example, unlike the other elements of the marketing mix (product, place & promotion), pricing decisions directly affect revenues rather than costs. Pricing also has to be consistent with the other elements of the marketing mix, since it contributes to the perception of a product or service by customers. So pricing is important, but it is really tough to get right. There are so many factors to consider, and much uncertainty about whether a price change will have the desired effect.

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. 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 is one of the four elements of the marketing mix, along with product, place and promotion. Pricing strategy is important for companies who wish to achieve success by finding the price point where they can maximize sales and profits. Companies may use a variety of pricing strategies, depending on their own unique marketing goals and objectives.

A well chosen price should do three things:

achieve the financial goals of the company (e.g., profitability) Fit the realities of the marketplace (Will customers buy at that price?)

Support a product's positioning and be consistent with the other variables in the marketing mix.

Pricing strategy
Activities aimed at finding a products optimum price, typically including overall marketing objectives, consumer demand, product attributes, competitors' pricing, and market and economic trends.
Pricing - Pricing 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.

Cost based pricing

This involves setting a price by adding a fixed amount or percentage to the cost of making or buying the product. In some ways this is quite an old-fashioned and somewhat discredited pricing strategy, although it is still widely used. After all, customers are not too bothered what it cost to make the product they are interested in what value the product provides them. Cost-plus (or mark-up) pricing is widely used in retailing, where the retailer wants to know with some certainty what the gross profit margin of each sale will be. An advantage of this approach is that the business will know that its costs are being covered. The main disadvantage is that cost-plus pricing may lead to products that are priced un-competitively. Cost-plus pricing is the most basic type of pricing and simply represents setting the cost of a product at some level above the cost of producing and distributing that product. Here is an example of cost-plus pricing, where a business wishes to ensure that it makes an additional 50 of profit on top of the unit cost of production.

Unit cost

100

Mark-up

50%

Selling price

150

How high should the mark-up percentage be? That largely depends on the normal competitive practice in a market and also whether the resulting price is acceptable to customers.

The main advantage of cost-based pricing is that selling prices are relatively easy to calculate. If the mark-up percentage is applied consistently across product ranges, then the business can also predict more reliably what the overall profit margin will be.

Competition-Based Pricing
Competition-based pricing is the second-most-popular price-setting approach. A pricing method in

which a seller uses prices of competing products as a benchmark instead of considering own costs or the customer demand. Managers sometimes refer to this approach as strategic pricing,
although it's not particularly strategic. When taking this approach, a firm simply checks out its competition's price and then sets the price of its own product at about the same level, plus or minus a few percent. Once again, this approach has the virtue of being simple: It's an easy way to make a pricing decision without having to conduct any thorough market research. It also seems relatively safe: By setting a price close to the rival's and adjusting with it, a firm does not risk losing its market share to the competition.

Customer-based pricing
A method of pricing in which the seller makes a decision based on what the customer can justify paying. Customer-driven pricing is not simply what the consumer is willing to pay, but reflects the value of the product or service from the consumer's perspective. Pricing decisions are made to justify purchase decisions and are at a level that convinces the customer he/she benefits from the transaction. To optimize pricing, companies need to consider how to best segment the market so that prices reflect the differences in value perceived by different types of consumers. To do

this, companies must ensure that there is a comprehensive understanding of the customer and what he or she values. A company would make the most money if they could figure out the maximum each customer would pay, and charge them that amount. Demand-based pricing is any pricing method that uses consumer demand - based on perceived value - as the central element. These include: price skimming, price discrimination and yield management, price points, psychological pricing, bundle pricing, penetration pricing, price lining, value-based pricing, geo and premium pricing. Pricing factors are manufacturing cost, market place, competition, market condition, quality of product.

Penetration pricing

Penetration pricing is a product mix pricing strategy designed to gain market share by introducing a new product or service at a low price point to encourage consumers to try the product. Companies using penetration pricing may even price their products at lower than cost to raise awareness and capture a large share of the market. You often see the tagline special introductory offer the classic sign of penetration pricing. Even though penetration pricing may initially create a loss for the company, the hope is that it will help to generate word-of-mouth and create awareness amid a crowded market category. The aim of penetration pricing is usually to increase market share of a product, providing the opportunity to increase price once this objective has been achieved. Penetration pricing is the pricing technique of setting a relatively low initial entry price, usually lower than the intended established price, to attract new customers. The strategy aims to encourage customers to switch to the new product because of the lower price. Penetration pricing is most commonly associated with a marketing objective of increasing market share or sales volume. In the short term, penetration pricing is likely to result in lower profits than would be the case if price were set higher. However, there are some

significant benefits to long-term profitability of having a higher market share, so the pricing strategy can often be justified. Penetration pricing is often used to support the launch of a new product, and works best when a product enters a market with relatively little product differentiation and where demand is price elastic so a lower price than rival products is a competitive weapon.

Price skimming

Skimming is a pricing strategy used most frequently by new entrants to a market or by companies who have developed new products that have little to no competition. Skimming establishes pricing at a high price point to take advantage of sales that will occur before competitors enter the market--which they ultimately will.

Skimming involves setting a high price before other competitors come into the market. This is often used for the launch of a new product which faces little or no competition usually due to some technological features. Such products are often bought by early adopters who are prepared to pay a higher price to have the latest or best product in the market. Premium pricing strategy establishes a price higher than the competitors. It's a strategy that can be effectively used when there is something unique about the product or when the product is first to market and the business has a distinct competitive advantage. Premium pricing can be a good strategy for companies entering the market with a new market and hoping to maximize revenue during the early stages of the product life cycle. People will buy a premium priced product because:

1. They believe the high price is an indication of good quality; 2. They believe it to be a sign of self-worth - "They are worth it;" it authenticates the buyer's success and status; it is a signal to others that the owner is a member of an exclusive group;

Good examples of price skimming include innovative electronic products, such as the Apple iPad. There are some other problems and challenges with this approach: Price skimming as a strategy cannot last for long, as competitors soon launch rival products which put pressure on the price (e.g. the launch of rival products to the iPod). Distribution (place) can also be a challenge for an innovative new product. It may be necessary to give retailers higher margins to convince them to stock the product, reducing the improved margins that can be delivered by price skimming. A final problem is that by price skimming, a firm may slow down the volume growth of demand for the product. This can give competitors more time to develop alternative products ready for the time when market demand (measured in volume) is strongest.

Loss leaders

The use of loss leaders is a method of sales promotion. A loss leader is a product priced below cost-price in order to attract consumers into a shop or online store. The purpose of making a product a loss leader is to encourage customers to make further purchases of profitable goods while they are in the shop. But does this strategy work?

Pricing is a key competitive weapon and a very flexible part of the marketing mix. If a business undercuts its competitors on price, new customers may be attracted and existing customers may become more loyal. So, using a loss leader can help drive customer loyalty. One risk of using a loss leader is that customers may take the opportunity to bulk-buy. If the price discount is sufficiently deep, then it makes sense for customers to buy as much as they can (assuming the product is not perishable).Using a loss leader is essentially a short-term pricing tactic for any one

product. Customers will soon get used to the tactic, so it makes sense to change the loss leader or its merchandising every so often.

Psychological pricing Sometimes prices are set at what seem to be unusual price points. For example, why are DVDs priced at 12.99 or 14.99? The answer is the perceived price barriers that customers may have. They will buy something for 9.99, but think that 10 is a little too much. So a price that is one pence lower can make the difference between closing the sale, or not!

The aim of psychological pricing is to make the customer believe the product is cheaper than it really is. Pricing in this way is intended to attract customers who are looking for value.

Geographical Pricing

Geographical pricing is more discretionary in nature. Companies realize that the cost of living is higher in certain markets in the U.S. In addition, people may earn more in certain areas of the city or state. Therefore, the company may use a geographical pricing structure and set its prices higher in certain markets. Consequently, pricing can become extremely complicated, so the company may need to decentralize marketing and finance departments on a more regional basis. That way each region can track product sales and make pricing changes as needed.

Product bundle pricing A marketing ploy in which several product are offered for sale in one combined unit that is often marked at a reduced price compared to the sum of their separate purchase prices. Product bundle pricing is often actively used by the marketing departments of companies that produce computer

software products, fast food meals and cable television connections that involve putting multiple products together to make a more attractive or economical whole. Also called package deal pricing. Optional-Product Pricing Optional-product pricing is defined in the textbook as the pricing of optional or accessory products along with a main product . This pricing method allows companies to present a low base price that is capable of attracting customers while maintaining the possibility of generating high customer revenues by selling costly add-ons later. Optional-product pricing is a technique that it becoming increasingly popular in the airline industry. In the past, most airlines have charged higher ticket prices that they do now, but these ticket prices provided the customer with more than just a small seat and transportation from one airport to another. Among other things, airlines have historically allowed their flyers to check a limited number of bags free of charge and provided customers with free in-flight snacks. Increasingly, however, airlines have changed their strategy. Now tickets are generally priced fairly low most airlines charge customers separately for virtually anything beyond the ticket. Most airlines now charge for snacks, the use of headphones, checking kennels for pets, reserving a window , checking bags, and many other things.

Discount Pricing Strategy Businesses use discount pricing to sell low-priced products in high quantities. With this strategy, it is important to cut costs and stay competitive. Large retailers are able to demand price discounts from suppliers and make a discount pricing strategy effective. It is usually impossible to compete with these retailers based solely on a discount pricing strategy. Use discounts off the list wisely and sparingly. Occasional discounts and discounts that reward loyal customers are

effective. Discounts used too often begin a downward pricing spiral that may eventually damage your ability to sell the product at full price.