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Introduction

Price is a fundamental element in determining profits, and thus conditions the evolution of a
company. As crazy as it seems, many entrepreneurs work for years to release a new product and
then fix it a price in a few hours during a meeting. Obviously, decisions regarding price
shouldnt be the last decisions you make, since a products price can be a vital factor in its
reception by clients. or example, it can affect how much you will sell, how much cash flow the
company will have or the decision of competitors to enter or not the market. A common mistake
by new entrepreneurs is the important devaluation of their products because they are afraid of
losing sales. !owever, a low price can affect the credibility of a product, and is not always a
"udicious pricing strategy. Another common mistake is to decide the price only on the costs of
production. #he principal criteria should instead be the perceived value from the customers. #his
essay paper attempt to explain importance of Pricing strategy , factors that are to be considered
whe setting a price and lastly methods of pricing a product or service.
Pricing Policy
$usiness %ictionary.com define Pricing policy as the policy by which a company determine the
wholesale and retail prices of its product or &ervices
What is Price
Price is the amount of money charged for a product or service, the sum of the value that
customers exchange for the benefit of having or using a product. #he price is the only element in
the marketing mix that produce revenue, all the other elements represents cost.
Importance of having a comprehensive pricing policy for a company
Profit Margins
#he price you set affects your profit margin per unit sold, with higher prices giving you a higher
profit per item if you dont lose sales. !owever, higher prices that lead to lower sales volumes
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can decrease, or wipe out, your profits, because your overhead costs per unit increase as you sell
fewer units.
Sales Volumes
One of the most obvious affects pricing will have on your business is an increase or decrease in
sales volume. 'conomists study price elasticity, or the response of consumer purchasing to a
price change. (ncreasing your prices might lower your sales volume only slightly, helping you
make up for decreased volume with higher total profits generated by higher margins. )owering
your prices can increase your profits if your sales "ump significantly, decreasing your overhead
expense per unit. #est the markets response to price increases by changing prices in targeted
areas before instituting an across*the*board price increase.
Position
#he price you set sends a message to some consumers about your business, product or service,
creating a perceived value. #his affects your brand, image or position in the marketplace. or
example, higher prices tell some consumers that you have higher +uality, or you wouldnt be
able to charge those prices. Other consumers look for low*priced products and services,
believing theyll get the +uality they need at a low price. Offering sales, discounts, rebates and
closeouts can send the message you cant sell your products or services at your regular price, or
tell buyers they have a short*term opportunity to get a bargain.
Market Share
#he price you set makes you more or less competitive in the marketplace, affecting your share of
the markets volume. &ome businesses lower prices temporarily to gain market share from
competitors, who cant respond to and meet a price decrease. After consumers have had time to
try your product and develop a brand preference or loyalty, you can raise your prices again to a
level that wont cause them to leave you. Predatory pricing is the practice of selling a product or
service below cost for the specific purpose of taking market share away from a competitor or
closing it down, then raising prices on consumers when they have fewer, or no options after that
competitor is gone. #his is illegal.
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Loss Leaders
&ome businesses price products or services at or below cost to get customers into their
businesses, who then spend more money elsewhere. or example, big*box retailers might buy
large +uantities of tennis balls, selling them at or below cost to entice affluent tennis players who
use many cans of balls during the year into their stores. $y placing the low*cost balls at the back
of the store, they hope to generate impulse buys as the shopper walks to the sports area and back
to the front. ,estaurants offer low*margin specials to offer a change*of*pace to regular diners to
keep their normal business, or to let regulars bring friends who want upscale dishes at a
moderately priced eatery.
Factors to Consider When Setting Prices:
A companys pricing decisions are affected by both internal and external environmental factors.
Internal Factors ffecting Pricing !ecisions:
(nternal factors affecting pricing include the companys marketing ob"ectives, marketing
strategy, costs and organizational considerations.
"# Marketing $%&ectives:
$efore setting a price, the company must decide on its strategy for the product. (f the company
has selected its target market and positioning carefully, then its marketing mix strategy,
including price, will be fairly straightforward. or example, when !onda and #oyota decided to
develop their Acura and )exus brands to compete with 'uropean luxury*performance cars in the
higher income segment, this re+uired charging a high price. Pricing strategy, thus, largely
determined by decisions on market positioning.
At the same time, the company may seek additional ob"ectives. -ommon ob"ectives include
survival, current profit maximization, market share leadership, and product quality leadership.
-ompanies set survival as their ma"or ob"ectives if they are troubled by too much capacity, heavy
competition, or changing consumer wants. #o keep a plant going, a company may set a low
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price, hoping to increase demand. (n the long run, however, the firm must learn how to add value
that consumers will pay for or face extinction.
.any companies use current profit maximization as their pricing goal. #hey estimate demand
and costs will be at different prices and choose the price that will produce the maximum current
profit, cash flow, or return on investment. Other companies want to obtain market share
leadership. #o become the market share leader, these firms set prices as low as possible.
A company might decide that it wants to achieve product quality leadership. #his normally calls
for charging a high price to cover higher performance +uality and high cost of ,/%. ort
example, -aterpillar charges 01 percent to 21 percent more than competitors for its heavy
construction e+uipment based on superior product and service.
A company might also use price to attain other, more specific ob"ectives. (t can set prices low to
prevent competitors from entering the market or set prices at competitors level to stabilize the
market. Prices can be set to keep the loyalty and support of resellers or to avoid government
intervention. Prices can be reduced temporarily to create excitement for a product or to draw
more customers into retail store. One product may be priced to help the sales of other products in
the companys line. Thus, pricing may play an important role in helping to accomplish the
companys objectives at many levels.
3ot*for*profit and public organizations may adopt a number of other pricing ob"ectives. A
university aims for partial cost recovery, knowing that it must rely on private gifts and public
grants, to cover the remaining costs. A not*for*profit hospitals may aim for full cost recovery in
its pricing. A not*for*profit theatre company may price its production to fill the maximum
number of theatre seats. A social service agency may set a social pricing geared to the varying
income situations of different clients.
'# Marketing Mi( Strategy:
Price is only one of the marketing mix tools that a company uses to achieve its marketing
ob"ectives. Price decisions must be coordinated with product design, distribution, and promotion
decisions to form a consistent and effective marketing program. %ecisions made for other
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marketing mix variables may affect pricing decisions. or example, producers using many
resellers who are expected to support and promote their products may have to build larger
reseller margins into their prices. #he decision to position the product on high*performance
+uality will mean that the seller must charge a higher price to cover higher cost.
)# Costs:
-osts set the floor for the price that the company can charge. #he company wants to charge a
price that both covers all its cost for producing, distributing, and selling the product and delivers
a fair rate of return for its effort and risk. A companys costs may be an important element in its
pricing strategy. .any companies, such as Southwest irlines, !al"#art, and $nion %arbide,
work to become the 4low*cost producers5 in their industries. -ompanies with lower costs can set
lower price that result in greater sales and profits.
*# $rgani+ational Considerations:
.anagement must decide who within the organization should set prices. -ompanies handle
pricing in a variety of ways. (n small companies, prices are often set by top management rather
then by the marketing or sales departments. (n large companies, price is typically handled by
divisional or product line managers. (n industrial markets, salespeople may be allowed to
negotiate with customers with a certain price ranges. 'ven so, top management sets the pricing
ob"ective and policies, and often approves the prices proposed by lower*level*management or
salespeople.
(n industries in which pricing is a key factor 6aerospace, steel, railroad, oil companies7,
companies often have a pricing departments to set the best prices or help others in setting them.
#his department reports to the marketing department or top management. Others who have an
influence on pricing include sales manager, production managers, fianc8 managers and
accountants.
,(ternal Factors ffecting Pricing !ecisions:
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'xternal factors that affect pricing decisions include the nature of market and demand,
competition, and other environmental factors.
"# -he Market and !emand:
#he sellers freedom varies with different types of markets. 'conomists recognize four types of
markets, each presenting a different pricing challenge.
9nder pure competition, the market consists of many buyers and sellers trading in a
uniform commodity such as wheat, copper of financial securities. 3o single buyer or
seller has much effect on the going market price. A seller cannot charge more than the
going price, because buyers can obtain as much as they need at the going price.
9nder monopolistic competition, the market consists of many buyers and sellers who
trade over a range of prices rather than a single market price. A range of prices occurs
because sellers can differentiate their offers to buyers. 'ither the physical product can be
varied in +uality, features, or style or the accompanying services can be varied. $uyers
see differences in sellers products and will pay different prices for them.
9nder oligopolistic competition, the market consists of a few sellers who are highly
sensitive to each others pricing and marketing strategies. #he product can be uniform
6steel, aluminum7 or non*uniform 6computers, cars7. #here are few sellers because it is
difficult for new sellers to enter the market. 'ach seller is alert to competitors strategies
and moves. (f a steel company slashes its price by :1 percent, buyers will +uickly switch
to this supplier.
(n a pure monopoly, the market consists of one seller. #he seller may be a government
monopoly 6the 9& postal service7, a private regulated monopoly 6a power company7, or a
private non*regulated monopoly. Pricing is handled differently in each case. A
government monopoly can pursue a variety of pricing ob"ectives.
(n a regulated monopoly, the government permits the company to set rates that will yield
a 4fair return5, one that will let the company maintain and expand its competitors as
needed. 3on regulated monopolies are free to price at what the market will bear.
!owever, they do not always charge the full price for a number of reasons; a desire to
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attract competition, a desire to penetrate the marker faster with a low price, or a fear of
government regulation.
'# Consumer Perception of Price and Value:
(n the end, the consumer will decide whether a products price is right. Pricing decisions, like
other marketing mix decisions, must be buyer*oriented. <hen consumers buy a product, they
exchange something of value 6the price7 to get something of value 6the benefits of having or
using the product7. 'ffective, buyer*oriented pricing involves understanding how much value
consumers place on the benefits they receive from the product and setting a price that fits this
value.
)# Competitors. Costs/ Prices/ and offers:
Another external factor affecting the companys pricing decisions is competitors cost and prices
and possible competitor reactions to the companys own pricing moves. A consumer who is
considering the purchase of a -anon camera will evaluate -anons price and value against the
prices and values of comparable products made by &ikon, #inolta, 'entax, and others. (f canon
follows a high*price, high *margin strategy, it may attract competition. A low*price, low*margin
strategy, however, may stop competitors or drive them out of the market.
-anon needs to benchmark its costs against its competitors costs to learn whether it is operating
at a cost advantage or disadvantage. (t also needs to learn the price and +uality of each
competitors offer. Once canon is aware of competitors price and offers, it can use them as
starting point for its pricing. (f -anons cameras are similar to 3ikons, it will have to price close
to 3ikon or lose sales. (f -anons cameras are not as good as 3ikons, the firm will not be able to
charge as much. (f -anons products are better than 3ikons, it can charge more. $asically,
-anon will use price to position its offer to the competition.
*# Industry Standards
(t=s hard to know what others are charging, but try asking around. ind out what larger businesses
charge as well as other freelancers. #he more you know about what others are charging and what
services they provide for the money, the better you=ll know how you fit in to the market.
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0# ,(perience
Although often bundled with skill, experience is a different factor altogether. >ou may have two
very talented photographers, but one with more experience might have better client skills, be able
to foresee problems 6and thus save the client time and money7, intuitively know what=s going to
work for a certain audience and so on. 'xperience should affect how much you charge.
1# 2our Service
<hat you provide for your clients will also make a big difference to your price tag. or example
you might be a freelancer who will do whatever it takes to get a "ob "ust right, or perhaps you are
on call 0?*@, or perhaps you provide the minimum amount of communication to cut costs.
<hatever the case, ad"usting your pricing to the type and level of service you provide is a must.
3# Who is 2our Client
>our price will often vary for different clients. #his happens for a few reasons. &ome clients
re+uire more effort, some are riskier, some are repeat clients, some have "obs you are dying to
do, some you wouldn=t want to go near with a stick. >ou should vary your price to account for
these sorts of factors.
4# $ther ,(ternal Factors:
<hen setting prices, the company also must consider other factors in its external environment.
(conomic conditions can have a strong impact on the firms pricing strategies. 'conomic factors
such as boom or recession, inflation, and interest rates affect pricing decisions because they
affect both the cost of producing a product and consumer perception of the products price and
value. #he company must also consider what impact its prices will have on other parties in its
environment. !ow will reseller react to various pricesA #he company should set prices that give
resellers a fair profit, encourage their support, and help them to sell the product effectively. #he
government is another important external influence on pricing decisions. inally, social concerns
may have to be taken into account. (n setting prices, a companys short*term sales, market share,
and profit goals may have to be tempered by broader social considerations.
Pricing approaches
"#Value %ased pricing
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Balue based pricing is the practice of setting the price of a product or service at its perceived
value to the customer. #his approach does not take into account the cost of the product or
service, nor existing market prices. Balue based pricing tends to result in very high prices and
correspondingly high profits for those companies that can persuade their customers to agree to it.
Balue based pricing is usually applied to very specialized services. or example, an attorney
experienced in defense against criminal charges can charge a very high price to his or her clients,
since the value to them of not being incarcerated is presumably +uite high. &imilarly, an attorney
skilled in initial public offerings can use value pricing, since clients might not otherwise raise
millions of dollars without their services.
Balue based pricing is also more applicable to situations where customer approval is made at the
executive level, rather than by the procurement department. #he purchasing staff is more skilled
in evaluating supplier prices, and so would be less likely to allow such pricing. #here two
5ood6Value Pricing Strategy
According to -otler and Armstrong, Cood*Balue Pricing is the strategy that offers the right
combination of +uality and good services at fair price. (t involve introduction of less *expensive
version of established brand name product and in other cases 'xisting brands are being
redesigned to offer more +uality for a given price or the same +uality for less price.
(mportant types of Cood*Balue pricing at retail levels are 'veryday low pricing 6'%)P7 that
involves charging a constant everyday low price with few or no temporary price discounts
8igh 6 lo9 pricing involves charging higher prices on an everyday basis but running fre+uent
promotion to lower prices temporarily on selected items
Value :dded Pricing
Balue*added pricing attaches value*added features and services to differentiate offers and thus
support higher prices, and build pricing power instead of cutting prices to match competitors.
Pricing power is the ability to escape price competition and to "ustify higher prices and margins
without losing market share
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dvantages of Value ;ased Pricing
#he following are advantages to using the value based pricing methodD
(ncreases profits) #his method results in the highest possible price that you can charge,
and so maximizes profits.
-ustomer loyalty) %espite the high prices charged, you can achieve extremely high
customer loyalty for repeat business and referrals, but only if the service or product
provided "ustifies the high price. #his advantage tends to also derive from the nature of
the sales relationship, which needs to be both close and trusting before value based
pricing can even be contemplated.
!isadvantages of Value ;ased Pricing
#he following are disadvantages of using the value based pricing methodD
3iche market) #he very high prices to be expected under this method will only be
acceptable to a small number of customers. (t may even alienate some prospective
customers.
3ot scalable. #his method tends to work best for smaller organizations that are highly
specialized. (t is difficult to apply it in larger businesses where employee skill levels may
not be so high.
-ompetition. Any company that persistently engages in value based pricing is leaving a
great deal of room for competitors to offer lower prices and take away their market share.
)abor costs. Assuming that a service is being provided, you are likely offering such a
high*end skill set that the employees needed to provide the service will be +uite
expensive. #here is also a risk that they may leave to start competing firms.
,valuation of Value ;ased Pricing
#his method is exceptionally profitable in those niche areas where a company can offer premium
services that are highly valued by their customers. .any attorneys and investment bankers have
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engaged in value based pricing for decades, so it is clearly a viable method. !owever, it is not
applicable in most businesses, where normal competitive pressures make it impossible to use
value based pricing.
'# Cost %ased Pricing
-ost*based pricing involves setting prices based on the costs for producing, distributing, and
selling the product plus a fair rate of return for its effort and risk
-ypes of costs
Fi(ed costs are the costs that do not vary with production or sales level . 'xample of fixed cost
are rent, heat, interest and executive salaries to mention but a few. Varia%le costs are the costs
that vary with the level of production. 'xamples of variable cost are packaging nand raw
materials. -otal costs# are the sum of the fixed and variable costs for any given level of
production. verage cost is the cost associated with a given level of output
)# Competion %ased approach
-ompetition*based pricing is pricing that is established specifically to address and respond to the
prices of competitors= products. $usinesses may decide to price either higher or lower or at about
the same levels of the competition, but their decisions are based on an evaluation of what
competitors are doing and how they want to position their product mix.
*) Product Line pricingD &trategy of setting the price for entire product line. .arketer
differentiates the price according to the range of products, i.e. suppose the company is having
three products in low, middle and high end segment and prices the three products say at ,s :1 ,s
01 and ,s 21 respectively.
#he three levels of differentiation create three price points in the mind of consumer. #he task of
marketer is to establish the perceived +uality among the three segments. (f the customers do not
find much difference between the three brands, heEshe may opt for low end products.
0# $ptional Product pricing: this strategy is used to set the price of optional or accessory
products along with a main product. Organizations separate these products from main product so
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that customer should not perceive products are costly. Once the customer comes to the show
room, organization explains the advantages of buying these accessory products.
1# Captive product pricing: &etting a price for a product that must be used along with a main
product. or example, Cillette sells low priced razors but make money on the replacement
cartridges.
3. ;y6product pricing* (t is determining the price for by*products in order to make the main
products price more attractive. or example, ).#. Overseas, manufacturers of %awaat basmati
rice, found that processing of rice results in two by*products i.e. rice husk and rice brain oil. (f
the company sells husk and brain oil to other consumers, then company is adopting by*product
pricing.
4# Product %undle pricingD (t is offering companies several products together as a bundle at the
reduced price. #his strategy helps companies to generate more volume, get rid of the unused
products and attract the price conscious consumer. #his also helps in locking the customer from
purchasing the competitors products. or example, Anchor toothpaste and brush are offered
together at lower prices.
<# !iscount and llo9ance Pricing
.ost companies ad"ust their basic price to reward customers for certain responses, such as early
payment of bills, volume purchases, and off*season buying. #hese price ad"ustments called
discounts and allowances can take many forms.
"=# Segmented Pricing
-ompanies will often ad"ust their basic prices to allow for differences in customers, products,
and locations. (n segmented pricing, the company sells a product or service at two or more
prices, even though the difference in prices is not based on differences in costs.
&egmented pricing takes several forms. 9nder customer*segment pricing, different customers
pay different prices for the same product or service.
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""# Promotional pricing/
-ompanies will temporarily price their products below list price and sometimes even below cost.
Promotional pricing takes several forms. &upermarkets and department stores will price a few
products as loss leaders to attract customers to the store in the hope that they will buy other items
at normal markups. &ellers will also use special*event pricing in certain seasons to draw more
customers. .anufacturers will sometimes offer cash rebates to consumers who buy the product
from dealers within a specified time; the manufacturer sends the rebate directly to the customer.
,ebates have been popular with automakers and producers of durable goods and small
appliances, but they are also used with consumer*packaged goods.
"'# 5eographical Pricing
A company also must decide how to price its products for customers located in different parts of
the country or world. &hould the company take risk of losing the business of more distant
customers by charging them higher prices to cover the higher shipping costsA Or should the
company charge all customers the same prices regardless of locationA $ecause each customer
picks up its own cost, supporters of O$ pricing feel that this is the fairest way to assess freight
charges.
")# Price Skimming
&kimming is a pricing strategy used most fre+uently by new entrants to a market or by
companies who have developed new products that have little to no competition. &kimming
establishes pricing at a high price point to take advantage of sales that will occur before
competitors enter the market**which they ultimately will.
"*# Price Penetration
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. -ompanies using penetration pricing may even price their products at lower than cost to
raise awareness and capture a large share of the market.
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"0# Psychological Pricing
Price says something about the product. or example, many consumers use price to "udge
+uality. An F:111 bottle of perfume may contain only F211 worth of scent, but some people are
willing to pay the F:111 because this price indicates something special.
(n using psychological pricing, sellers consider the psychology of prices and not simply the
economics. or example, one study of the relationship between price and +uality perceptions of
cars found that consumers perceive higher*priced cars as having higher +uality.
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