Price- Definition

• the amount of money charged for a product or

service
• the sum of all the values that consumers
exchange for the benefits of having or using
the product or service

• Examples of “price?”
• – Tuition, rent, fare, retainer, toll, salary/wage, dues
 Price
• The only element in the marketing mix (4Ps)
that produces revenue.
• All other Ps are costs
• Very flexible P as compared to other 4 Ps. Price
can be changed easily and quickly but not
other Ps
• Price competition is the biggest problem the
marketers face among all 4ps
Factors in Setting
Price
Factors affecting pricing
Pricing policy and strategies
 Pricing Objectives

Meet
Business
Objectives

Other Pricing Objectives

 Status Quo
 Image
 Social & Ethical Considerations
 Pricing objectives
• Survival – Short Run objective covering fixed and variable costs to stay in
business

• Profit Maximization – based on demand estimation maximising profits/ ROI/

Cashflow

• Market Share Maximization – Market-Penetration Pricing

• Maximum Market Skimming – if sufficient customers buy at higher prices

• Product-Quality Leadership –Affordable luxuries. Positioning products with

high quality at premium prices

• Other Objectives – to keep resellers happy & loyal, to avoid government

intervention to prevent competition to enter etc.
 Elasticity of Demand
measure of the sensitivity of demand to changes in prices

Inelastic Demand
Price

Electricity
P2
P1
Elastic Demand

Price
Q2 Q1 Quantity
Fast food
P2
P1

Q2 Q1
Quantity
not price sensitive - no real change in demand price sensitive - changes in demand
Demand curve
 Estimating costs
• Cost sets a floor/benchmark on the price a
company can charge customers
•
• Fixed Cost / overhead cost (FC): Costs that
don’t vary with production/sales levels

• Variable cost (VC): Costs that vary directly

with production/sales levels

• Total cost (TC): FC+VC at a particular

production level
 Analyzing competitors cost, prices and offers

• Within the range of possible prices determined by market

demand and company costs, the firm must take competitors’
costs, prices, and possible price reactions into account.

• If the firm’s offer contains features not offered by the nearest

competitor, it should evaluate their worth to the customer
and add that value to the competitor’s price.

• If the competitor’s offer contains some features not offered

by the firm, the firm should subtract its value from its price.

• Now the firm can decide whether it can charge more, the
same, or less than the competitor.
Selecting pricing methods
Pricing methods
 Cost-based Pricing (Cost-Plus)
1. Cover costs
 Material
 Labor variable costs
 Capital resources
 Marketing fixed costs

2. Mark-up
 Targeted return for shareholders
 Costs + mark-up = Sales price
$1.00 + $0.50 = $1.50 (50% markup)
 Mark-up Calculation –
Exercise
1. Price per product
2. Less the cost per product (what you paid
the supplier, e.g. total cost paid / # of items
purchased)

Dollar Mark Up

% MARK  UP 
Sales Price
Breakeven Analysis

TC = TR
 Breakeven Point
Formula

Fixed Costs
BREAKEVEN QUANTITY 
Price/unit – Variable cost/unit

(Contribution Margin)
Markup pricing
Target return pricing
 Market-based Pricing
Pricing Existing Products/Services - 3 options
 Pricing below market prices  price wars
 EX: airlines, store brand vs. manufacturer’s brand
 Dumping
 Pricing above prevailing market prices for
similar products
 EX: Sony  higher price = higher quality?
 Pricing at or near market prices
 Perceived value pricing
• Perceived value is made up of a host of inputs, such as the buyer’s image of
the product performance, the channel deliverables, the warranty quality,
customer support, and softer attributes such as the supplier’s reputation,
trustworthiness, and esteem.

• Companies must deliver the value promised by their value proposition, and
the customer must perceive this value.

• Firms use the other marketing program elements, such as advertising, sales
force, and the Internet, to communicate and enhance perceived value in
buyers’ minds.

• Even when a company claims its offering delivers total value, not all
customers will respond positively.
 Value Pricing
• Many companies win loyal customers by charging a
fairly low price for a high-quality offering. Value pricing
is thus not a matter of simply setting lower prices; it is
a matter of reengineering the company’s operations to
become a low-cost producer without sacrificing
quality, to attract a large number of value-conscious
customers.
 Going rate pricing
• In going-rate pricing, the firm bases its price largely on competitors’
prices.

• In oligopolistic industries that sell a commodity such as steel, paper, or

fertiliser, all firms normally charge the same price.

• Smaller firms “follow the leader,” changing their prices when the market
leader’s prices change rather than when their demand or costs change.

• Some may charge a small premium or discount, but they preserve the
difference.

• Thus minor gasoline retailers usually charge a few cents less per gallon
than the major oil companies, without letting the difference increase or
decrease.
Auction type pricing
 Selecting the final price

• Following factors need to be considered before you arrive at

the final price:

• Impact of other marketing activities

• Company Pricing Policies

• Gain-and-risk- sharing Pricing

• Impact of price on other parties

•
Adapting the price

Why?
 Price Discounts and Allowances
• • Cash Discount: Price reduction for prompt payment. 2/5, net 30

• • Quantity Discount: Buy 100 units, Rs 20 off, Buy ten units and 1
unit free

• • Functional Discount: Also called as ‘Trade Discount’. To channel

partners/retailer for selling, stocking, new product sales etc.

• • Seasonal Discount: Offseason discounts - Hotels, Airlines,

Umbrellas etc.

• • Allowance: ‘Trade-In allowances ‘ - an old product with new

product

• Promotional allowances: participating in advertising, sales promotion

 Geographical pricing
• • FOB-Origin Pricing: Same factory prices. But different shipping prices.
Title and responsibility gets transferred to buyers at factory board.

• • Uniform-delivered Pricing: Same freight charges for all location

customers. Freight charges @ Average
• Cost

• • Zone Pricing: Falls between FOB and Uniform delivered pricing methods.
Each Zone to have different
• Pricing

• • Basing Point Pricing: City is chosen as “Basing” – from which freight is

charged. Basing City may or may
• not be factory point

• • Freight Absorption: Company absorbs part of it

 Cash, Countertrade and Barter
• • Barter: Buyer and Seller exchange goods directly, with no
money

• • Buy-back arrangement: Seller receives some % in cash

and rest in products

• • Offset: Seller supplies full amount in cash but agrees to

spend a good amount of money in that country
 Promotional Pricing
• • Loss-Leader Pricing: to attract customers, assuming customers will
buy other products at normal prices

• • Special Event Pricing: Festivals, School re-opening time

• • Special Customer Pricing: HNI Vs. non-HNI – SBI Platinum Credit Card

• • Cash Rebates: to encourage purchase within a specific period

• • Low-Interest financing and Long term payment terms: EMI facility,

Low down payment, Longer payment periods

• • Warranty and Service Contracts: Extend warranty or AMC facilities

• • Psychological Discounting: Price revised from Rs 359 to Rs 299

 Differentiated Pricing
• • Customer Segment Pricing: Diff pricing for students in museums, Diff
Pricing for Senior Citizens

• • Product-Form Pricing: Bisleri 1L bottle is not two times of 500 ml bottle

price

• • Image Pricing: Same perfume at different prices at different bottle shapes

• • Channel Pricing: Coca Cola at airport/cinema halls is different than in

retail outlets

• • Location Pricing: Gold Class Vs. Normal seats in cinema halls.

• • Time Pricing: Prices vary by season, day, and time or even hour. (Ex:‘
Happy Hours!’)
Initiating and responding to price changes
Responding to price changes
Pricing Strategies for new products
Price quality grid
Product mix pricing