Definition of 'Pricing Strategies'

Definition: Price is the value that is put to a product or service

and is the result of a complex set of calculations, research and
understanding and risk taking ability. A pricing strategy takes into
account segments, ability to pay, market conditions, competitor
actions, trade margins and input costs, amongst others. It is
targeted at the defined customers and against competitors.

Price is all around us. We pay rent for our apartment, tuition for
our education, airline, railways, bank charges interest etc.
Traditionally price has been the major determinant of buyer’s
choice and is the only element in the marketing mix that
generates revenue.

Importance of Pricing in Marketing Strategy

 Price and Business Positioning

 Price can increase Sales Volumes
 Price can increase Profit Margins
 Increase Market Share
 Low Competition
 Price regulates demand
 Attract new customers

Description: There are several pricing strategies:

Premium pricing: high price is used as a defining criterion. Such

pricing strategies work in segments and industries where a strong
competitive advantage exists for the company. Example: Porche
in cars and Gillette in blades.
Penetration pricing: price is set artificially low to gain market share
quickly. This is done when a new product is being launched. It is
understood that prices will be raised once the promotion period is
over and market share objectives are achieved. Example: Mobile
phone rates in India; housing loans etc.

Economy pricing: no-frills price. Margins are wafer thin;

overheads like marketing and advertising costs are very low.
Targets the mass market and high market share. Example:
Friendly wash detergents; Nirma; local tea producers.

Skimming strategy: high price is charged for a product till such

time as competitors allow after which prices can be dropped. The
idea is to recover maximum money before the product or segment
attracts more competitors who will lower profits for all concerned.
Example: the earliest prices for mobile phones, VCRs and other
electronic items where a few players ruled attracted lower cost
Asian players.

Factors influencing prices

Internal factors

 Organizational factors
 Marketing mix
 Product differentiation
 Cost of product
 Objective of the firm
External factors

 Demand
 Competition
 Suppliers
  Economic condition
 Buyers
 Government
Approaches / Types of Pricing Methods – Explained!
An organization has various options for selecting a pricing
method. Prices are based on three dimensions that are cost,
demand, and competition.

The organization can use any of the dimensions or combination of

dimensions to set the price of a product.

Figure-4 shows different pricing methods:

Cost-based Pricing:
Cost-based pricing refers to a pricing method in which some
percentage of desired profit margins is added to the cost of the
product to obtain the final price. In other words, cost-based pricing
can be defined as a pricing method in which a certain percentage
of the total cost of production is added to the cost of the product
to determine its selling price. Cost-based pricing can be of two
types, namely, cost-plus pricing and markup pricing.
These two types of cost-based pricing are as follows:
i. Cost-plus Pricing:
Refers to the simplest method of determining the price of a
product. In cost-plus pricing method, a fixed percentage, also
called mark-up percentage, of the total cost (as a profit) is added
to the total cost to set the price. For example, XYZ organization
bears the total cost of Rs. 100 per unit for producing a product. It
adds Rs. 50 per unit to the price of product as’ profit. In such a
case, the final price of a product of the organization would be Rs.
150.
ii. Markup Pricing:
Refers to a pricing method in which the fixed amount or the
percentage of cost of the product is added to product’s price to
get the selling price of the product. Markup pricing is more
common in retailing in which a retailer sells the product to earn
profit. For example, if a retailer has taken a product from the
wholesaler for Rs. 100, then he/she might add up a markup of Rs.
20 to gain profit.
Demand-based Pricing:
Demand-based pricing refers to a pricing method in which the
price of a product is finalized according to its demand. If the
demand of a product is more, an organization prefers to set high
prices for products to gain profit; whereas, if the demand of a
product is less, the low prices are charged to attract the
customers.
The success of demand-based pricing depends on the ability of
marketers to analyze the demand. This type of pricing can be
seen in the hospitality and travel industries. For instance, airlines
during the period of low demand charge less rates as compared
to the period of high demand. Demand-based pricing helps the
organization to earn more profit if the customers accept the
product at the price more than its cost.

Competition-based Pricing:
Competition-based pricing refers to a method in which an
organization considers the prices of competitors’ products to set
the prices of its own products. The organization may charge
higher, lower, or equal prices as compared to the prices of its
competitors.
The aviation industry is the best example of competition-based
pricing where airlines charge the same or fewer prices for same
routes as charged by their competitors. In addition, the
introductory prices charged by publishing organizations for
textbooks are determined according to the competitors’ prices.
Other Pricing Methods:
In addition to the pricing methods, there are other methods that
are discussed as follows:
i. Value Pricing:
Implies a method in which an organization tries to win loyal
customers by charging low prices for their high- quality products.
The organization aims to become a low cost producer without
sacrificing the quality. It can deliver high- quality products at low
prices by improving its research and development process. Value
pricing is also called value-optimized pricing.
ii. Target Return Pricing:
Helps in achieving the required rate of return on investment done
for a product. In other words, the price of a product is fixed on the
basis of expected profit.

iii. Going Rate Pricing:

Implies a method in which an organization sets the price of a
product according to the prevailing price trends in the market.
Thus, the pricing strategy adopted by the organization can be
same or similar to other organizations. However, in this type of
pricing, the prices set by the market leaders are followed by all
the organizations in the industry.
iv. Transfer Pricing:
Involves selling of goods and services within the departments of
the organization. It is done to manage the profit and loss ratios of
different departments within the organization. One department of
an organization can sell its products to other departments at low
prices. Sometimes, transfer pricing is used to show higher profits
in the organization by showing fake sales of products within
departments.

Importance of Pricing in Business

Effect of Price can increase Profit Margins
The price you set affects your profit margin per unit sold, with
higher prices giving you a higher profit per item if you don’t lose
sales. However, higher prices that lead to lower sales volumes
can decrease, or wipe out, your profits, because your overhead
costs per unit increase as you sell fewer units.
Effect of Price can increase Sales Volumes
One of the most obvious affects pricing will have on your business
is an increase or decrease in sales volume. Economists study
price elasticity, or the response of consumer purchasing to a price
change. Increasing your prices might lower your sales volume
only slightly, helping you make up for decreased volume with
higher total profits generated by higher margins. Lowering your
prices can increase your profits if your sales jump significantly,
decreasing your overhead expense per unit. Test the market’s
response to price increases by changing prices in targeted areas
before instituting an across-the-board price increase.
Price and Business Positioning
The price you set sends a message to some consumers about
your business, product or service, creating a perceived value.
This affects your brand, image or position in the marketplace. For
example, higher prices tell some consumers that you have higher
quality, or you wouldn’t be able to charge those prices. Other
consumers look for low-priced products and services, believing
they’ll get the quality they need at a low price.

Offering sales, discounts, rebates and closeouts can send the

message you can’t sell your products or services at your regular
price, or tell buyers they have a short-term opportunity to get a
bargain.
Market Share and Competition
The price you set makes you more or less competitive in the
marketplace, affecting your share of the market’s volume. Some
businesses lower prices temporarily to gain market share from
competitors, who can’t 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 won’t 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. This is illegal.
The Use of Loss Leaders
Some businesses price products or services at or below cost to
get customers into their businesses, who then spend more money
elsewhere. For example, big-box retailers might buy large
quantities 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. By 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. Restaurants 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.
Importance of Pricing in Marketing Strategy

 Price and Business Positioning

 Price can increase Sales Volumes
 Price can increase Profit Margins
 Increase Market Share
 Low Competition
 Price regulates demand


1. Price is the Pivot of an Economy:

In the economic system, price is the mechanism for allocating
resources and reflecting the degrees of both risk and competition.
In an economy particularly free market economy and to a less
extent in controlled economy, the resources can be allocated and
reallocated by the process of price reduction and price increase.

Price policy is a weapon to realize the goals of planned economy

where resources can be allocated as per planned priorities.

Price is the prime mover of the wheels of the economy namely,

production, consumption, distribution and exchange. As price is a
sacrifice of purchasing power, it affects the living standards of the
society; it regulates business profits and, hence, allocates the
resources for the optimum output and distribution. Thus, it acts as
powerful agent of sustained economic development.

2. Price regulates demand:

The power of price to produce results in the market place is not

equalled by any other component in the product-mix.

It is the greatest and the strongest ‘P’ of the four ‘Ps’ of the mix.
Marketing manager can regulate the product demand through this
powerful instrument. Price increases or decreases the demand for
the products. To increase the demand, reduce the price and
increase the price to reduce the demand.

Price has a special role to play in developing countries where the

marginal value of money is high than those of advanced nations.
De-marketing strategy can be easily implemented to meet the
rising demand for goods and services.

As an instrument, it is a big gun and it should be triggered

exclusively by those who are familiar with its possibilities and the
dangers involved.
It is so because; the damage done by improper pricing may
completely sap the effectiveness of the well-conceived marketing
programme. It may defame even a good product and fame well a
bad product too.

3. Price is competitive weapon:

Price as a competitive weapon is of paramount importance. Any
company whether it is selling high or medium or low priced
merchandise will have to decide as to whether its prices will be
above or equal to or below its competitors. This is a basic policy
issue that affects the entire marketing planning process.
Secondly, price does not stand alone as a device for achieving a
competitive advantage.

In fact, indirect and non-price competitive techniques often are

more desirable because, they are more difficult for the
competitors to copy. Better results are the outcome of a fine blend
of price and non-price strategies. Thirdly, there is close
relationship between the product life-cycle and such pricing for
competition.

There are notable differences in the kinds of pricing strategies

that should be used in different stages. Since the product life span
is directly related to the product’s competitiveness, pricing at any
point in the life-cycle should reflect prevailing competitive
conditions.

4. Price is the determinant of profitability:

Price of a product or products determines the profitability of a firm,

in the final analysis by influencing the sales revenue. In the firm,
price is the basis for generating profits. Price reflects corporate
objectives and policies and it is an important ingredient of
marketing mix. Price is often used to off-set the weaknesses in
other elements of the marketing-mix.

Price changes can be made more quickly than any other changes
in the product, channel, and personal selling and sales-promotion
includes advertising. It is because; price change is easily
understood and communicating to the buyer in a precise way.
That is why, price changes are used frequently for defensive and
offensive strategies. The impact of price rise or fall is reflected
instantly in the rise or fall of the product profitability, thinking that
other variables are unaffected.

5. Price is a decision input:

In the areas of marketing management, countless and crucial
decisions are to be made. Comparatively marketing decisions are
more crucial because, they have bearing on the other branches of
business and more difficult as the decision-maker is to shoot the
flying game in the changing marketing environment.

Normally, profit or contribution is taken as a base for pay-off

conditions. Price can be a better criterion for arriving at cut-off
point because; price is the determinant of profit or contribution.

As pointed earlier, price as an indicator has a special role in the

decision-making process in developing countries because,
consumer response to price changes will be more quick and
tangible as people have higher marginal value of money at their
disposal. For instance, if it is a decision regarding selecting
product improvement possibilities, select that possibility which
gives the highest price as compared to the cost.