Paper: 14 Marketing Management

Module: 35, Pricing: Methods and Strategies

Prof. S P Bansal
Principal Investigator Vice Chancellor
Maharaja Agrasen University, Baddi

Prof YoginderVerma
Co-Principal Investigator Pro–Vice Chancellor
Central University of Himachal Pradesh. Kangra. H.P.

Dr. Kulbhushan Chandel

Paper Coordinator Department of Commerce and Management
Himachal Pradesh University, Shimla

Dr. Rajwant Kaur

Content Writer Department of Commerce and Management
D.A.V.College, JalandharSonipat
BPSMV, KhanpurKalan,
 Items Description of Module
Subject Name Management
Paper Name Marketing Management
Module Title Pricing: Methods and Strategies
Module Id Module no.35
Pre- Requisites Basic knowledge of marketing
Objectives To study the pricing methods and strategies
Keywords Pricing , pricing method, price, strategies, firm

QUADRANT-I

Module 35 Pricing: Methods and Strategies

1. Learning Outcome
2. Meaning
3. Types of price
4. Pricing Methods
5. Pricing Policies
6. Pricing Strategies
7. Summary

1. Learning Outcome
After completing this module, the students will be able to:
 Describe the concept of price
 Explain various methods of determining price
 Understand different pricing policies.
 Explain various pricing strategies followed by firms

2. Meaning
Price denotes the value of product or service expressed in monetary terms which a consumer
pays or is expected to pay in exchange of expected utility. Price is the amount charged for
product or service which is inclusive of any warranties, discounts, guarantees, services that are
part of conditions of sale.
Pricing is the act of determining product value in monetary terms by the marketing managers
before it is offered for sale to target consumers.
Price is a powerful marketing instrument. It has a unique role in marketing. It is the only
marketing variable to determine revenues or inflow of funds. It is essential for the firm to
determine a right price to achieve the goal of maximum profits and large market share.
3. Types of Prices
 Administered Price : It is the price set by marketing manager or authorized company
official after considering various factors such as cost, demand, competition, customer
expectation, value of products, image of the company etc. It is the result of conscious and
deliberate managerial action. The administered price does not change frequently and is
fixed for a number of sales transactions or for a certain time period. Different price
structures may be developed to meet market requirements or consumer needs. The
administered prices of homogenous products in the market are more or less similar. In
such cases, companies resort to non-price competition such as after sale services, free
home delivery, liberal credit, sales promotion, money back guarantee, advertising,
 product improvements, personal salesmanship and product innovations, branding or
packaging. Thus, it is the administered price in which the firms or marketers are more
interested to achieve pricing as well as marketing objectives.
 Regulated Price : The administered price may lead to consumer exploitation and harm
national interests. That is why these prices are usually subject to government regulations.
Thus, regulated price is the price set as per government regulations. It may take any of the
two forms. First, setting the price as per the formula or method laid down by the state as
applicable in cotton textile industry. Second, setting the prices as stated by government
agency. In India, for example, it is applicable in steel and aluminium industries.
In real life situation, the administered price is set within the framework of government
regulations and its determination is the major concern for marketing managers. For this,
they can opt for any method as described in further discussion.

4. Methods of Price Determination

There are various methods of price determination. These have been categorised as follows:
(i) Cost based method or cost plus method
(ii) Demand based method
(iii) Hybrid method or cost-demand based method
(iv) Competition based method
(v) Perceived value pricing method
(i) Cost Based Method: In this method, price is determined on the basis of cost of
manufacturing a product. A certain percentage of cost, known as mark up, is added to the
cost. Cost based price is also called as ‘floor price’ as any sale below this price would
mean loss to the organisation. This is simple and a popular method used by many
companies in India.
The cost taken as base may be total cost or incremental cost. Total cost includes fixed
costs and variable costs. Fixed costs are the costs which remain fixed upto a certain level
and do not vary with the level of production. They get distributed more and more among
the units produced as the production rises. Depreciation, rent of building, salary of
administrative staff are few examples of fixed costs. Variable costs, on the other hand,
vary in direct proportion to level of production. These costs include direct wages, cost of
raw material and selling and distribution expenses etc.
Incremental costs are the additional costs which are incurred due to changing the level or
nature of activity such as using new machinery or adding new product. When a firm uses
total cost for pricing a product, it is called full cost pricing while use of incremental cost
as base is referred to as contribution pricing.
Further cost, as mentioned above, may be historical cost (i.e. actual cost incurred),
standard cost (the cost which should be under assumed standard conditions of volume) or
expected cost (forecast of actual cost for the pricing period).
 Cost plus method is simple as cost is comparatively easy to estimate or ascertain. It
assures the recovery of cost of production and is considered best to neutralize the impact
of cyclical shifts in business. The advocates of this method consider it socially fair as the
firms do not try to earn more profit in case of rising demand by charging higher prices.
This method is suitable in case of highly unpredictable future environment.
Cost plus method has certain weaknesses. It is difficult to allocate joint cost among
different products. This method completely ignores demand factor which also influences
price. It is difficult to use this method in case of new products. This method does not take
into consideration the probable competitive reactions. Historical cost base method may
not be relevant to the pricing situation. In some cases, opportunity cost may be more
relevant but it is not available through accounting records. Under this method,
management fails to take initiatives for optimizing product mix (as every product is
profitable) and reducing those inefficiencies which lead to cost increase.
(ii) Demand Based Price
The price can be determined on the basis of demand. Management may ignore cost and allow
demand to determine price. In this method, price can be determined in any of the following
ways :
 Test marketing : For setting the initial price i.e. base price, a firm can place a product
with different prices in different markets under controlled conditions on a trial base and
prepare a demand schedule indicting demand (sales volume or revenue) at different
prices. Management can select that price which is ensuring maximum revenue. Thus, this
method provides a rough estimate of demand which is reliable to some extent.
 Charge what the traffic will bear : Here the idea is to charge that maximum price what
the customer can or may be made to pay depending on skill of seller and demand
intensity. No base price or list price is determined and price varies from consumer to
consumer. With passage of time, it becomes easy to arrive at a price acceptable to
consumer. In India, this method is usually adopted by railways and professionals like
doctors, lawyers etc.
 Forecasting : Price may be determined on the basis of forecast of demand trends by
looking into demand data available from company records or other sources and preparing
demand schedules keeping in mind the possible future trends.
The demand based pricing considers consumers’ price elasticity. It also takes into
consideration consumer preferences. This method removes the weaknesses of cost plus
pricing method as discussed earlier. But it is not socially fair and also ignores the need of
competitive harmony in some cases.
Both cost plus and demand based methods have their own merits and demerits. Hence,
any one method is imperfect as there is consideration of only one factor either cost or
demand. However, for effective pricing both cost and demand should be considered and
thus, a hybrid method can be followed.
(iii) Hybrid method or cost-demand based method : This method considers cost and
demand factors and then determines a realistic price. Cost data is obtained from
accounting records. Management also prepares demand schedules which depict consumer
demand and revenue generation at different price levels. Management carries out break
even analysis i.e. determines the relationship between cost, profit and volume to
determine the base price.
 This method is more realistic in case demand and cost are relatively stable. But it can not
be used if demand estimates are inaccurate and frequent fluctuations occur in cost. This
method also ignores the competition prevailing in the market.
(iv) Competition based method: Management can determine the price of product on the
basis of price charged by competitors selling similar products. It can fix the price of
product more or less same the price of competitors without giving any due consideration
to cost of production/sales and demand situations.
The price prevailing in the market is ascertained first and then middlemen’s margin (as
prevailing) is deducted from this price. This enables management to fix a price ceiling
irrespective of its cost and demand constraints.
This method is suitable when products are homogeneous and their market is highly
competitive. However, in case of differentiated products, this method is not suitable. This
method compels management to exercise cost control methods to increase profits.
Management cannot resort to price increase as it will lead to fall in market share.
(v) Perceived value pricing method : This method suggests that price should be determined
on the basis of consumers’ perception of utility of the product. The argument in the
support of this method is that consumers make comparison of the cost of the product to
them and the benefits (utility, durability, reliability) they will get from the product and
then take a purchase decision. Management should make cost-benefit trade off while
determining price of the product. However, this includes creativity and complex
calculations.
Various methods described above provide the understanding about various ways in which
pricing of the product can be done. Each method has its own merits and demerits. The
selection of appropriate method will depend upon the needs of the management and its
readiness to accept strengths and weaknesses associated with a particular method.
5. Pricing policies
Pricing policies act as guidelines to management to evolve appropriate pricing decisions which
can match prices with market needs. Various pricing policies have been described as follows:
 Leader Price Policy : In this policy, the firm sets the price with an aim that this will be
followed by other firms in the industry. The firms which have a substantial share in
market, take lot of initiative, have good reputation and deal in highly standardized
products use this policy. The non-leading firms i.e. followers have no other option than to
follow the leader in their price fixing.
 Geographic price policy : Under this, management charges different prices from buyers
depending upon their locations and transportation cost involved. Management follows
this policy due to wide geographical distances between manufacturing centres and
consuming centres. This ensures competitiveness of firms’ products and helps in
maintaining market share.
The firm can mention ex-factory price in which the buyer has to bear the cost of
transportation or it can fix price inclusive of freight and other transportation charges.
 Flexible price policy : It is also called as variable or negotiated price policy. In this
policy, seller charges different prices from different buyers for the sale of similar goods in
comparable quantities at a given time under similar conditions of sale.
 Seller may also charge different prices from different group of buyers purchasing in
comparable quantities. He may set one price for wholesalers, one price for retailers and
one price for distributors. Thus, price within the group remains same but it differs among
groups. This policy is also termed as non-variable policy by some authors as price within
the group remains same. This policy provides flexibility but creates dissatisfaction among
consumers due to discrimination by seller.
Flexible price policy is suitable when products are not standardized and individual sale
transaction involves large quantity and sums.
 Single price or one price policy : It refers to setting one price for all buyers irrespective
of their class, quantity ordered or condition of purchase. There is no question of
bargaining. It saves a lot of time of salesman.
This policy secures confidence of customers and helps in maintaining seller’s goodwill.
But it does not provide any incentive for bulk purchases.
 Psychological price policy : It means setting the prices at odd points e.g. Rs. 1999, Rs.
995 etc. to influence the psyche of customer. It is based on the belief that a customer is
mentally prepared to pay a little less than the rounded figure like Rs. 995 instead of Rs.
1000. It can create expected motivation. Thus, more goods can be sold at psychological
odd prices. This policy is followed mostly in consumer goods industry. In India, Bata
India Ltd use this policy for shoe wears.
 Price differentials policy
Under this policy, actual price charged is less than the quoted price and difference is
termed as price differentiation. Price differentials are the tactics used by the marketers to
meet competitive pressures, to allow incentives to buy or to achieve specific financial
objectives. The price differentials are usually designed in following forms:
Discounts: These are allowed to buyers as a result of specific services provided by them
or meeting managerial expectations. Sometimes discounts are given for buying products
in off season. These can be categorized as:
 Trade discount
 Quantity discount
 Cash discount
 Seasonal discount
Trade discount is allowed as deduction from quoted price to buyers occupying specific
position in distribution channels like wholesalers, retailers.
Quantity discount is allowed to all the buyers as a result of purchasing a specific quantity
of goods. They get deduction from quoted price.
Cash discount is allowed to the buyers who pay the price within a stipulated time. They
get deduction from invoice price i.e. quoted price-rebate-trade or quantity discount.
Sometimes, the manufacturer allows seasonal discount of say 15% or 10% to dealer,
wholesaler, retailer or customer for placing order during slack season. It helps in effective
use of plant and manufacturing facilities. It shifts the storing function from manufacturer
to middlemen or customers. For example, manufacturers of woollen garments or heaters
give seasonal discount during summer season.
 Rebates: These are allowed to buyer by way of deduction from quoted price to
accommodate various claims of buyers like defective deliveries of goods , delay in transit
etc.
Allowances : The manufacturer may offer promotional allowances to intermediaries e.g.
window display allowance or advertising allowance. There will be price reduction of an
equal amount of service expected.
Price differentials may raise net price payable in relation to quoted price e.g. a firm may
charge extra price for warranty besides the quoted price. Firm, thus, gets a remunerative
price.
 Dual price policy : It means charging different prices on the principle of usage and
ability to pay e.g. electricity company use different rates for industrial and domestic users.
 Premium pricing policy : This policy is used when the firm has a premium product i.e.
good variety/superior quality. Firm employs premium promotion programmes and
charges higher prices by ensuring customers that they are getting good value for money.
This policy is adopted by established marketers. They have buyers who are willing to pay
higher price for good quality product and wider choice. In India, Reliance adopted this
policy for Vimal fabrics.

6. Pricing Strategies
Strategy is a competitive policy. There are various strategies available to firm to face market
competition and achieve pricing objectives. At different times, it can use different strategies as
per market requirements and its own need. The various pricing strategies are described as under:
 Skimming pricing strategy: In this strategy, higher prices are charged to fully exploit the
product distinctiveness by offering product to consumers in high income level group. It
provides huge profits in short time. Marketers use skimming strategy at the initial stage of
product which is distinctive and has price inelastic demand in the high income customer
group.
 Penetration pricing strategy: It refers to charging low initial price of product with a view
to stimulate rapid and wide spread market acceptance. Once the product is accepted, the
prices are increased. Penetration strategy is used in the initial stage of product if the
product is not much innovative and its demand is highly elastic.
 Pre- emptive pricing strategy: This strategy is also called stay out pricing strategy and is
represented by very low price with a purpose of restricting entry of competitors.
 Extinction pricing strategy: Under this strategy, a very low level of price is fixed to
eliminate the existing competitors in the industry. The remaining inefficient firms will
break even.
However, these strategies can be grouped as high price strategies and low price strategies. A
firm can choose high price strategy or low price strategy as per the prevailing conditions.
Conditions favouring High Price Strategy
This strategy can be preferred under following conditions :
 Goods are durable.
 It is possible to make income based market segmentation and serve high income market
segment first.
 Demand is price inelastic due to product distinctiveness.
  There is need for a cushion against possible adverse impact of initial pricing error.
 Many ancillary services are required.
 Production is as per order of customer.
 High sales promotion expenditure is required.
 Firm desires to keep demand within the limits of its production capability.
 Firm prefers small market share at the initial stage.
 Product package is unique.
 Firm wants to generate more profits.
 Firm needs funds for research and development expenditure to face competition in future.
 Low stock turnover is expected.
Conditions favouring Low Price Strategy
This strategy can be preferred under following circumstances:
 Firm desires a large market share.
 There is high degree of price elasticity of demand.
 Less sales promotion expenses are required.
 High stock turnover is expected.
 Tough competition is expected soon after the introduction of product in the market. In such
case, low price will discourage entry of competitors.
 Less additional services are required.
 Goods are perishable.
 High income market segment is not large enough to follow high price strategy.
 Product is not highly distinctive.
 Low price can generate more sales volume and help in realizing economies of large scale.
Thus, a firm can follow high price strategy or low price strategy depending upon the above
mentioned conditions. However, the basic criterion usually remains product differentiation. As
long as, there is no fear of loss of product distinctiveness, high price strategy (skimming price)
can be followed. But if there is fear of high level of competition after product’s entry in the
market, low or penetration policy can be followed.
In the introduction stage of product life cycle, a high price strategy and high expenditure on
promotion will be beneficial. But at later stages of product life cycle low price strategy and
normal promotion expenditure will be beneficial.
7. Summary
Price denotes the value of product or service expressed in monetary terms which a consumer
pays or is expected to pay in exchange of expected utility. Pricing is the act of determining
product value in monetary terms by the marketing managers before it is offered for sale to
target consumers. Price can be categorized as administered price and regulated price.
Administered price is the price set by marketing manager or authorized company official after
considering various factors such as cost, demand, competition, customer expectation, value of
products, image of the company etc. Regulated price is the price set as per government
regulations. In real life situation, the administered price is set within the framework of
government regulations and its determination is the major concern for marketing managers. For
this, they can opt any method of price determination such as (i) Cost based method or cost
plus method (ii) Demand based method (iii) Hybrid method or cost- demand based method (iv)
Competition based method and (v) Perceived value pricing method. The price is determined as
per the pricing policies and strategies of the firm. Pricing policies act as guidelines to marketing
managers to evolve appropriate pricing decisions which can match prices with market needs.
Pricing policies can be (i) Leader Price Policy (ii) Geographic price policy (iii) Flexible price
policy (iv) Single price or one price policy (v) Psychological price policy (vi) Price differentials
policy or (vii) Dual price policy.
Strategy is a competitive policy. There are different strategies available to firm to face market
competition and achieve pricing objectives. At different times, it can use different strategies as
per market requirements and its own need. These pricing strategies are skimming pricing
strategy, penetration pricing strategy, pre-emptive pricing strategy and extinction pricing
strategy. However, these strategies can be grouped as high price strategies and low price
strategies. At the introductory stage, if product is distinctive, high price strategy can be
followed. Otherwise, low price strategy is preferred to penetrate the market. A firm can choose
high price strategy or low price strategy as per the nature of product, its distinctiveness and
other prevailing conditions.