1. Pricing
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2. Why is Pricing Important?
• Pricing deals with how much you are going to
charge your customers for your product or
service.
• Price is the primary profit determinant.
• Organisations must have clear long-term
strategies for pricing.
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3. The Role of Pricing
• To create an “image” for a product or service:
– Rolex watches, Rolls Royce cars, etc. Price is used
partially to create the aura of value.
– Sometimes too low a price can back-fire and
damage image (4 T-shirts for Rs 666 – just how
good can they be??).
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4. The Role of Pricing
• To generate revenues and income:
– Pricing tied to sophisticated demand
• Rolex watches or BMW cars
– Prices lowered to near-break even to raise cash
for operations or other opportunities.
• Deccan Airlines Rs 99 offers
– Prices raised temporarily to take advantages of
market opportunities (demand) and to increase
income
• Flowers on Mother’s Day
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5. The Role of Pricing
• To give customers incentives or disincentives
to use a product or a service:
– Zero percent financing for cars (incentive)
– Higher taxes on cigarettes (price driven dis-
incentive)
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6. The Role of Pricing
• To capture market share or squeeze out a
rival:
– Coke and Pepsi routinely use pricing to capture
share units in local markets.
– Full Airlines squeezed out Low cost carriers by
matching prices.
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7. •Making All Things Unequal
•Marketing is making all things unequal and this
can be made by price and or value.
•Some times value is developed by the
relationships that make it easy to choose your
product over all others.
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8. Flexibility
• Three of the four P’s in marketing are usually
not very flexible:
– Products/Services often take years to bring to
market.
– Distribution channels are often costly and take
time to set up.
– Promotion – Can be quick but usually takes
months to create and use.
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9. Flexibility
• Pricing is perhaps the most “flexible”
– Jet Air “ Price Saver” – Price created on Thursday
for the coming weekend.
– Negotiation for the purchase of a car.
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10. Methodology
Some industries use very sophisticated
databases and research models to test pricing
options and to track the
(1) impact of price changes
(2) the need to change prices.
(3)Others (small, retail) often go by instinct,
market knowledge.
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11. “Strategic” Pricing
• Pricing is a key part of the marketing mix.
• The “strategy” of pricing options (competitive
position, goals of pricing decisions) are key
parts of the overall marketing approach.
• In other words, pricing is a deliberate decision
with specific goals in mind (not limited to
profit) to a long-ago set base.
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12. Profit Maximization
Economic Theory
– The quantity demanded is a function of the price
that is charged
– Generally, the higher the price, the lower the
quantity demanded
Pricing
– Management should set the price that provides
the greatest amount of profit
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13. Determining the Profit-Maximizing Price and Quantity
Rupees
per unit Profit is maximized where
marginal cost equals
marginal revenue, resulting
in price p* and quantity q*.
p*
Demand
Marginal
cost Marginal Quantity made
revenue and sold
q* per month
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14. Determining the Profit-Maximizing Price and Quantity
Total cost
P Total revenue
Total profit at the
profit-maximizing
quantity and price,
q* and p*.
Quantity made
and sold
q* per month
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15. Strategic Planning for Price
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16. Price Perspectives: Price Equals Something of Value
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17. Objectives Should Guide Strategy Planning for Price
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18. Objectives Should Guide Strategy Planning for Price
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© 2005 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin

19. Objectives Should Guide Strategy Planning for Price
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© 2005 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin

20. Most Firms Set Specific Pricing Policies to Reach
Objectives
Flexible-Price
Flexible-Price
One-Price Policy
One-Price Policy Policy
Policy
• The same for • Different
everyone customers,
• Frequently different prices
purchased items OR • Databases make it
• Convenient easier
• Low cost • Salespeople can
adjust prices
• Maintains goodwill
• Too much cutting
can hurt profits
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21. Responsibility
• Finance plays a role in the setting of prices in
most industry, but often is NOT the key
decision maker.
– Factory managers for industrial products
– Store managers for consumer goods
– Even hotel front desk clerks under the right
circumstances!
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22. Legalities (General)
• Collusion/Price-Fixing.
• Pricing below cost/predatory pricing
• Manufacturer-set pricing
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23. Pricing
When setting a price, we need to take account of 3
critical points:
• Market Value – What is your product worth to
your customers
• Cost structure – What it costs you to provide the
product or service
• Competition – The price your competitors charge
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24. Market Value
• Successful businesses maximise their profit by
matching their pricing with the value customers
put on their products or services
• The Cost is the total outlay required to create the
product or service
• The Value is what the customer thinks the
product or service is worth
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25. Market Value
For a plumber to fix a burst pipe, it may cost:
• Rs.10 for travel costs
• Rs.5 for materials
• Rs.20 for one hour’s labour
• However, the value to the customer who has water
pouring down the stairway is far greater than the
Rs.35 cost. A plumber may, therefore, charge Rs.50+ to
fix a burst pipe, more so for an out of hours service
• Product pricing is often built around the “cost plus”
price model, while service pricing is generally created
on a perceived value basis.
• Both methods, however, do still require a full
understanding of costs and the competition
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26. Cost Structure
• Your cost structure provides a basis for what
you need to charge...however it will not
necessarily show what you can or should
charge.
• As long as the price you sell your product or
service at is higher than the variable cost then
each sale will make a contribution towards
covering fixed costs and making profits.
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27. Competition
• Due to deregulation companies face
competition in some form. There is a need to
benchmark potential pricing.
• Generally done by:
• Getting someone to phone or visit your rivals
and ask for a price quote.
• Look at their published annual accounts to
analyse their cost base.
• It is much easier to get prices if it is a e-
commerce company.
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28. Competition
• The analysis framework. Too low and you
throw away profit, too high you lose
customers.
• Evaluate competitors price along with other
factors such as:
• Where they deliver the product or service
• How they deliver it
• The quality of their service provision
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29. Pricing
Pricing Models:
• Cost Plus Pricing
• Marginal Costing and Contribution Pricing
• Value Based Pricing
• A mixture of pricing strategies for differing
situations
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30. Who determines the price?
 Once competition enters the market, the price of
a product becomes squeezed between the cost of
the product and the lowest price of a competitor.
Organizations that choose to compete by offering
innovative products and services have a more
difficult pricing decision because there is no
existing price for the new product or service.
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31. Influences on Price
• Customer demand
• Competitors’ behavior/prices/actions
• Costs
• Regulatory environment – legal, political and
image related
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32. Pricing approaches
1. C
o
s
t
p
l
u
s
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33. Cost Plus Pricing
• This is the most common method and is based on two
elements:
• The mark-up you must add to your costs to make
the desired profit
• The mark-up used by competitors
• The mark-up is how much you add to your costs to
arrive at your selling price. It is usually expressed as a
% of the cost, e.g. Cost plus 50%.
• Different products and businesses apply hugely
different mark-ups, e.g.
• Branded clothing: Cost plus 135%
• Jewellery: Cost plus 350%
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34. Cost-Plus Pricing
• If the final price looks uncompetitive then
review the size of the mark-up. Never remove
the mark-up altogether to make the price
competitive, instead look at reducing costs.
• Cost-plus pricing does however have pitfalls:
• It ignores the image and market position
you are looking for
• It assumes you will achieve a sales target to
make break even or better
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35. Cost-Plus Pricing Example
The costs involved in making a product are:
Direct Materials Rs.3 per unit
Direct Labour Rs.11 per unit
Direct Expenses Rs.2 per unit
Indirect Expenses Rs.4 per unit
Total cost Rs. 20 per unit
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36. Cost-Plus Pricing Example
If we want a mark up of 30% on each unit, then:
Full Cost = Direct Materials Rs. 3
Direct Labour Rs.11
Direct Expenses Rs. 2
Indirect Expenses Rs. 4
Full Cost= Rs.20
Mark Up= 30% of Rs.20 Rs. 6
Selling Price=
Rs.26
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37. Marginal Costing and Contribution Pricing
• The Marginal Cost approach takes a different
view from the Cost Plus pricing method
• Instead of starting from the cost of the product
or service, you start from the price that you can
charge, and the amount of sales you can make
at that price
• This technique will allow you to see whether
you can cover costs and make a profit at a
certain price
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38. Marginal Costing and Contribution Pricing
• This approach to costs and pricing takes cost
behaviour as the basis for allocating costs
• The categories of costs considered for this
method are the variable and fixed costs
• This method also introduces the concept of
contribution – the amount remaining after
deducting the variable costs from the selling
price
• This goes towards covering the fixed costs and
any remainder goes to profit
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39. Marginal Costing and Contribution
Pricing
Example
Sales Price of a Product: Rs.7.50 per item
Variable Costs: Rs.4.50 per item
Fixed Costs: Rs.2.90 per item
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40. Marginal Costing and Contribution
Pricing
Example
Contribution = Sales less Variable Costs
= Rs.7.50 – Rs.4.50
Contribution = Rs.3.00 per item
Fixed Cost = Rs.2.90 per item
Profit = Rs.0.10
So, selling 100 items, a profit of Rs.10 would be generated.
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41. Value Based Pricing
• States that the price should reflect the value of
a product as customers perceive it (the
“willingness-to-pay”)
• Value-based pricing is an effort to extract this
perceived value from the market
• This involves quantifying perceived value and
increasing it whenever possible—i.e., when the
customer’s willingness to pay for the increased
value exceeds the cost of delivering it
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42. Value Based Pricing
This perceived-value pricing takes a number of forms:
• Convenience: A convenient, local service will
normally be able to charge more
• Brand: Many customers will pay more for a well
marketed brand
• Competition: The less competition there is then
the less choice the customer has
• Supply & Demand: More customer demand than
there is supply will lead to the ability to charge
higher prices
• Overcharging could alienate customers and could
draw in competitors 42

43. Cost-based vs. Value-based
• Cost-based • Value-based
– most common – optimal profits
pricing method – requires research
– easiest pricing – complicated to
method administer
– considered fair – can be considered
– difficult to allocate unfair
fixed costs
– sub-optimal profits
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44. Margins
Margins indicate the % profit a business makes
after applying a mark-up
• If an enterprise, for example, costs its product or
service at Rs.100 and marks it up by 50% to sell it
for Rs150 then
• its profit margin is 33.3% (Rs.50), i.e. the value of
the mark-up (Rs.50), divided by the selling price
(Rs.150) x 100
• Margins are good barometers of how important
particular products or services are to the
profitability of your business.
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45. Opportunity cost
• Opportunity cost is the most fundamental
cost concept.
– The opportunity cost of doing or getting
something is:
• what you could have done or gotten
instead
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46. Price
The price of a chocolate bar is the amount of money
that I have to give up to buy.
In paying the price, The customer is sacrificing what
else these coins could have bought.
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47. Opportunity cost is what you forgo.
Example: Your opportunity cost for taking this class
includes:
• Whatever else you could have bought with your
tuition and fee money
Plus
• the work, family participation, and recreation that
you are not doing because you are here.
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48. Opportunity cost is not resources used
• Strictly speaking, the cost of something is not the
resources used up to get it.
• Instead, the cost is what else you could have done
with those resources.
• Resources have value only because you can use them
to make goods and services that have value.
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49. Using prices for costs
• Opportunity cost can be hard to use in practice.
• Rupee costs (prices) are easier to determine
And easier to add up.
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50. But one should not lose sight of
opportunity cost.
For example:
• saving medical institutional costs by discharging
patients early
• adds opportunity costs for family members drafted
into being home caregivers
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51. Opportunity cost = price?
Prices can reflect society's opportunity cost
• Means that the ratio of prices of any two goods or
services is the opportunity cost of the one in terms of
the other.
• If the market system works properly then the price
ratio of any two goods or services tells you how many
of good X you give up to get each unit of good Y.
• For this to work properly, you have to have strong
competition and savvy consumers. Competition will
then force the sellers to be efficient, and provide
goods and services at prices in line with costs.
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52. Inefficiency
• To know that the resources that could be used to
make more of the drug are instead being used to
make something less valuable?
• Because the price of a resource depends on what it
can be used for.
• If there are some resources that are not being used
in the most valuable way, that is the definition of
inefficiency and loss of opportunity.
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53. Hospital day price example
• Prices for hospital days late in a patient’s stay are
higher than opportunity cost.
• This leads to substituting other forms of care.
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54. Functional-Based Management Model
Cost View
Resources
Operational View
Efficiency Analysis Functions Performance Analysis
Products
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55. Activity-Based Management Model
Cost View
Resources
Process View
Driver Analysis Activities Performance Analysis
Why? What? How Well?
Products and
Customers
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56. Comparison of FBM and ABM
Accounting Systems
Functional-Based Activity-Based
1. Unit-based drivers 1. Unit- and nonunit-based drivers
2. Allocation-intensive 2. Tracing-intensive
3. Focus on managing cost 3. Focus on managing activities
4. Sparse activity information 4. Detailed activity information
5. Maximization of individual unit 5. Systemwide performance
performance maximization
6. Use of financial measures of 6. Use of both financial and
performance nonfinancial measures of
performance
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57. Customer perception of product
•Price is the amount of money you pay to buy the
equipment.
•Cost is the amount of money you pay to operate the
equipment over the lifetime.
•This is called the Total Cost of Ownership. There are five
key points that affect the Total Cost of Ownership (TCO).
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58. The five key points that affect the Total Cost of
Ownership (TCO)
Labor Cost
If your laundry runs 10 loads per day, a washer
with 3⁄4” water valves versus 1⁄2” water valves could save
you 30 minutes of operating time.
Lower priced machines generally have lower extraction
speeds. To get the lowest TCO, you should invest in higher
extraction speeds to remove more water from linens.
This allows the linen to dry faster. If extraction efficiency is
measured by G-force, a 300 G-force washer will remove
significantly more water than a 90 G-force washer.
The dry time difference in a 60 lb load of terry towels can be
almost ten minutes! How much labor can you save in your
operation by cutting ten minutes on every load of towels? 58

59. Cost of Power
•Utilities are a controllable cost that is often overlooked when
considering which laundry equipment to buy.
•Using the above scenario, you might save more than Rs.1500
per year by reducing the time in your save in your utility bill by
cutting ten minutes of drying time on every load of towels?
Value for Your Money
•Look at the total weight of the machine. Weight generally
indicates if the frame or bearings are built to a higher standard
and are more likely to give you extended years of service.
•This may even lower maintenance costs over the life of the
product. Stainless steel panels versus painted panels are worth
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spending a little extra money for.

60. Past Performance
It is the best indicator of future performance! What do you
know about the machine you are considering?
Do you know anyone that has used this brand of machine for
5+ years?
What do you know about the company you are buying from?
How will they perform service for you in the future?
Service support
How many service technicians do they have? How many hours
does it take to respond to your future service needs?
It is worth paying a little more for good service support for the
equipment. 60

61. Warranty?
The industry warranty period varies from one year to three
years. Having the longest and most comprehensive
warranty should lower your TCO.
Is there a labor warranty? You may even consider an
extended labor warranty.
So when buying laundry equipment customer looks for the
products that will lower Total Cost of Ownership (TCO)!
The marketer must make sure you determine the under
lying difference between price and cost.
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62. Defining business and value
• The horse carriage makers mistakenly thought they were in the
horse carriage business (product) rather than the
transportation market (benefit).
• The best way to succeed is not to focus on the product, but the
benefit you're providing your customers:
• It is important to bear in mind that people value benefits and
not necessarily forms.
• The key benefit that journalists and news organizations have
provided has been relevant, timely, accurate information that
helps people make decisions, take action, and form opinions.
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63. Pricing Strategies
According to McKinsey, “80 to 90 percent
of all poorly chosen prices are too low…
Companies habitually charge less than they
could for new offerings. It’s a terrible
habit.”
Glenn Voss
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64. Target costing vs traditional cost based
pricing
a. traditional cost based pricing is designed to appeal to any
customers, but target costing target specific customers.
b. traditional cost based pricing consider the market that is
available for the product at the end of the process, whereas
target costing considers the market at the beginning of the
process.
c. product costs are irrelevant under target costing, but are
very important under traditional cost based pricing.
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