PRICING

WHAT IS PRICE?
• Price is the exchange value of a product or
service usually stated in monetary terms
• The seller combines cost of the good or
services and other supplementary services
• For the consumer price is an agreement
between the buyer and the seller in respect to
what each is to receive
• The price for the consumer is a also a bundle
of expectation
 OBJECTIVES OF PRICING
• To achieve target return
• To achieve maximum current profits
• Increase sales volume
• Increase in market share
• Price stability
• Meeting competition
 DETERMINANTS OF PRICING

• Product mix offering

• Target market
• Distribution of the product
• Estimated life cycle of the product: Longer life
cycles give you more time to achieve your
pricing objective.
• Projected demand of the product: When
demand for a product is expected to be high,
you have more flexibility in choosing pricing
strategies
• Are there other entities, such as the
government, that may dictate the price range
for your product?
 FACTORS INFLUENCING PRICING
DECISIONS
Internal factors influencing pricing are;
•Cost of a product
•Company objectives
•Other marketing mix elements
External factors influencing pricing are;
•Market demand
•Competition
•Legal constraints
•Psychological factors
Pricing objectives vary from firm to firm because
of the difference in the following parameters.
•Profitability
•Volume
•Competition
•Prestige
 PRICING POLICY
• Decide the pricing objectives
• Determine the demand
• Estimate the costs
• Analyze competitor's cost
• Select the final price
 PRICING STRATEGIES
• New product pricing includes market
skimming and market penetration
• Product mix pricing include product line
pricing, optional product pricing, captive
pricing, by-product pricing and product bundle
pricing.
• Price Adjustment strategies include discounts,
segmented pricing, psychological pricing etc
 MARKET PENETRATION
• Price set to ‘penetrate the market’
• ‘Low’ price to secure high volumes
• Typical in mass market products – chocolate
bars, food stuffs, household goods, etc.
• Suitable for products with long anticipated life
cycles
Eg: Dell entered through lower cost direct
channels
• Market must be price sensitive
• Production and distribution costs must
decrease with increase in sales
• Price advantage is to be maintained.
 MARKET SKIMMING
• High price, Low volumes
• Skim the profit from the market
• Suitable for products that have short life cycles
or which will face competition at some point in
the future
• Examples include: PlayStation, jewellery,
digital technology, new DVDs, etc.
Eg: Sony entered with strategy for HDTV’s in the
Japanese markets
• Quality must be good
• Cost of producing smaller units cannot be very
high
• Competitors should be avoided.
 PRODUCT LINE PRICING
• Companies offer product lines rather than
single products
• This is deciding on the price steps to set
between various products in a line
• This is based on the customer expectation,
cost differences and competitor's price
 OPTIONAL PRODUCT PRICING
• Offering to sell optional or accessory products
along with the main product
• The company should decide which items to
include in the base price and which to offer as
an option
Eg: General Motor’s economy car model
 CAPTIVE PRODUCT PRICING
• Setting a price for products that must be used
along with the main product
• Gillette Razors, HP printers
• In case of services it is called two-part pricing
• It is a combination of the base fee and the
variable usage rate
 BY-PRODUCT PRICING
• Setting the price of the by-product
• This helps in making the main product’s price
more competitive
• If by-product disposal costs are high, it is
passed on to the consumer in the form of high
price
Eg: Zoo’s selling manures
 PRODUCT BUNDLE PRICING
• Combining several products and offering the
bundle at a reduced price
• This helps in promoting products
Eg: Happy meals of McDonalds
 MARGINAL COST PRICING
• Under this pricing fixed costs are ignored and
prices are determined on the basis of marginal
cost
• The firm seeks to fix its prices so as to
maximize its total contribution
• The firm must be able to segregate markets
• No legal restrictions
• Prices are never rendered uncompetitive
merely because of a higher fixed overhead
structure
• Marginal cost represent the future
• It helps in maintaining an aggressive policy
• It helps in pricing over the life cycle of a
product
• Some accountants are not fully conversant
with this technique
• It can be easily imitated by the competitors
 GOING RATE PRICING
• The emphasis is on the market situation
• The firm adjusts its pricing policy to the
general pricing structure in the industry
• This is adopted when it is difficult to measure
costs in the industry
• It is a safe policy
• It is a less expensive method for the firm
 SEALED BID PRICING
• The firm submits bids in sealed covers for the
price of the job or the service
• This is based on the firm’s expectation about
the level at which the competitor is likely to
set up prices rather than on the cost structure
of the firm
• The bids are considered together by
the buyer who then chooses the
lowest bidder.
 PRICE AS AN QUALITY INDICATOR
• Price is an easy means of product measurement
• Product satisfaction depends in part on the
amount of effort the consumer has spent to
obtain the product. Money spending can be
viewed easily as the expenditure of effort.
• The snob appeal leading to status identification
• Not all consumers perceive price as an indicator
 PERCIEVED VALUE PRICING
• It is a strategy that businesses with a high
value product or service use. The strategy is to
sell the high value product or service at a low,
value price.
• Customers' perceptions are influenced by the
value they perceive in the relationship
between the attributes of the product or
service and the price they will have to pay for
that product or service.
• Often this value pricing strategy is used for
products or services in their mature or
declining life cycle stage; because at this stage
in their product life cycle they have already,
hopefully, built a strong brand identity.
• Perceived value pricing is a strategy that is a
variation of value pricing. This strategy is best
used if pricing within a product line and if one
product strengthens another product or other
products in the line.