Unit IV Pricing 8 Hrs

Level of knowledge: Conceptual

Types of pricing, Pricing strategies: New product pricing strategies, Product mix
pricing strategies, Price adjustment strategies, Price changes, Public policy and
pricing.

Introduction

Objectives of Pricing
i. Profit-oriented Objectives:
Include the following objectives:
a. Maximizing Profit:
Implies that prices are set in such a way that they help in achieving
maximum profit. According to Stanton, Etzel and Walker, “The pricing
objective of making as much money as possible is probably followed more
than any other goal.” Profit maximization is more beneficial in the long run
as compared to short run. For instance, an organization selling a new
product tries to build a customer base by selling the product at low prices
in the short run. This helps the organization to gain profit in the long run by
winning loyal customers.
b. Achieving a Target Return:
Refers to earn an adequate rate of return on the investment done by an
organization in manufacturing a product. The main focus of marketers is on
maintaining a specific return on sales or investment. This is done by adding
extra cost to the product for earning a desired profit.

ii. Sales-oriented Objectives:

Include the following objectives:
a. Increasing the sales volume:
Implies sales expansion by giving discounts to customers. In the short run,
an organization might be ready to bear losses by reducing the prices to
increase the sales volume. For instance the hotel industry faces low
demand during off–season; therefore, it prefers to decrease its prices and
offers discounts to increase sales.
b. Increasing or maintaining market share:
Plays a crucial role in the success of an organization. The organization tries
to gain market share by lowering down the prices as compared to its
competitors.

iii. Status quo-oriented Objectives:

Includes the following objectives:
a. Stabilizing the Prices:
Prevents price wars between competitors. The prices are stabilized in
those industries where product is standardized in nature. The stabilization
of the prices helps in maintaining the demand and reducing competitive
threats.
b. Meeting the Competition:
Implies that the changes made in the price of a product help an
organization to gain competitive advantage. Sometimes, the organization
also tries to neutralize competitive pressures by price movement.
c. Determining prices according to consumer’s paying capacity:
Implies that the purchasing power of the consumers should be taken into
consideration while setting prices. The sales of an organization depend
entirely upon the purchasing power of consumers
An organization also adopts pricing objectives to promote developmental
activities in the society. For instance, an organization may reduce the
prices of a product for the low-income sections of the society. Thus, the
pricing objectives play a significant role in the overall growth of the
organization.

Importance of Pricing:
We, the consumers take price for granted. It is something, the seller tells
us, we pay that and forget it, but price is a very important factor.
The following points highlight the importance of pricing:
i. The economy – The entire economy depends on the price. It is the price
which decides trade and the economy depends on the trading activity in
the country. Price of a product influences profit, rent, interest, wages
which are the prices paid to the factors of production-entrepreneurship,
land, capital and labour respectively. Thus price acts as a regulator of
economy, because it influences the allocation of the factors of production.
ii. Determinant of profit – Profit is the basic objective of any commercial
undertaking and the profit directly depends on the price.
iii. Beating competition – Price is a very important weapon which a seller
can use to overcome competition. A seller, by fixing a reasonable price and
by offering value for money can overcome competition.
iv. Demand regulator – It is a simple law in Economics that price and
demand are inversely proportional. Thereby a seller can either increase the
demand or decrease the demand for his products by setting a low or a high
price.
v. Crucial decision input – Price as a factor constitutes a very important
decision. A company has to price appropriately because several factors
depend on the price such as the demand, the profit, the market share, the
competition etc. Factors such as product place and promotion are causes
of expenditure but price is the only factor that brings in revenue to the
seller.
vi. Important Part of Sales Promotion – Many times price adjustments
form a part of sales promotion that a lower price in the short term
stimulates interest in the product.
vii. Trigger of First Impressions – Often, customers’ first perception of a
product is formed as soon as they learn the price
viii. Most Flexible Marketing Mix Variable – For marketers price is the
most adjustable of all marketing decisions. Unlike product and distribution
decisions, which can take months or years to change, or some forms of
promotion which can be time consuming to alter (e.g., television
advertisement), price can be changed very rapidly. The flexibility of pricing
decisions is particularly important in times when the marketer seeks to
quickly stimulate demand or respond to competitor price actions.
ix. Perception of quality – Several customers develop a perception about
the quality of the product based on its price. To such customers, high price
is better quality and vice-versa. Therefore the right price must be fixed for
the product depending on the customer perception desired.
x. Legal aspects – A wrong price may attract legal complications. Therefore
a seller has to consider these factors also while fixing price.
 Types of pricing
In the narrowest sense, price is the amount of money charged for a product or
service. More broadly, price is the sum of all the values that consumers exchange for
the benefits of having or using the product or service.
PRICE – The amount of money charged for a product or service, or the sum of the
values that consumers exchange for the benefits of having or using the product or
service.
“One can define price as that which people have to forego in order to acquire a
product or service.” What does a buyer think? To a buyer, price is the value placed on
what is exchanged. Something of value – usually purchasing power – is exchanged for
satisfaction or utility. Purchasing power depends on a buyer’s income, credit, and
wealth.
Buyers’ concern about price is related to their expectations about the satisfaction or
utility associated with a product. Buyers must decide whether the utility gained in an
exchange is worth the purchasing power sacrificed. Different terms can be used to
describe price for different forms of exchange, (rent, premium, toll, retainer, fee,
interest, etc.).
Historically, price has been the major factor affecting buyer choice. This is still true in
poorer nations, among poorer groups and with commodity products. However, non-
price factors have become more important in buyer-choice behaviour in recent
decades.
Price is also one of the most flexible elements of the marketing mix. Do you agree?
Unlike product features and channel commitments, price can be changed very
quickly. At the same time, pricing and price competition is the number-one problem
facing many marketers.

Pricing strategies:
Types of pricing strategies

Pricing strategy Pricing strategy definition Pricing strategy example

Skimming pricing Setting new product prices high Innovative electronics sold
strategy (also called and subsequently lowering the initially at high prices to
pricing skimming or price as competitors enter the attract early adopters and
skim pricing) market later sold at lower prices
 Rental properties that
Pricing products based on the
lower the rental price to
Competitive pricing price of competitive products,
match or beat a
strategy rather than cost or target profit;
competitor’s price and gain
usually cheaper than competitors
market share

Rideshare services with

Dynamic pricing Pricing that varies based on
price surges during periods
strategy marketing and customer demand
of peak usage

A coffee company with

Pricing a product based on how
Value-based pricing
much the customer believes it’s
strategy
worth
strong brand loyalty among
its customer base pricing
coffee higher than
competitors

A media streaming service

Penetration pricing Entering a market at a low price
that offers a low starting
strategy and increasing prices over time
subscription price

Pricing a product low because of

low costs of production, Airlines that offer economy
Economy pricing
marketing, and advertising, and seating at the lowest price
strategy
relying on high sales volume to tier
generate profit

Pricing a product deliberately

Designer eyewear sold at a
Premium pricing high to encourage favourable
premium price that's much
strategy perceptions of the brand based
higher than competitors
on the price

Adding a fixed percentage on top Clothing brands that sell

Cost plus pricing of the cost of producing a garments for 50 percent
strategy product, regardless of consumer more than what it costs to
demand or competitors’ pricing manufacture them

Software as a service (Saas)

Offering a product for free
Freemium pricing and file hosting apps that
alongside paid versions with
strategy offer free (basic) and paid
more features
(premium) versions
 Pricing each finite service or
Wedding and party
project on a case-by-case basis
Project based pricing planners who quote prices
according to the value of the
strategy based on the details of
outcome instead of on the time
individual events
spent to complete it

There are several common pricing strategies to choose from to price products and
services. The first step in choosing a pricing strategy is to examine the different types,
review pricing strategy examples, and understand how they differ.

New product pricing strategies

What are the best pricing strategies for new products or services?
Pricing strategies and customer value are crucial aspects of marketing management,
especially for new products or services. How do you decide how much to charge for
your offer and how do you communicate its value to your target customers? We will
explore some of the best pricing strategies for new products or services and how they
can help you achieve your marketing objectives.
1. Skimming:
In this strategy the price for new product is set very high initially (at launch). This
ensures getting high revenue from all the segment of buyers.
Perhaps launch of a new highly anticipated Smartphone is an example for this. Price
of the newly launched iPhone or a Samsung flagship phone is always very high
initially and with time we can see the prices fall.
2. Penetrative:
This is the strategy in which the focus is on grabbing maximum market share. Hence,
the price of the product is set very low initially (at launch) so that it can penetrate the
market and attract buyers of all segments.
Reliance Jio is a perfect example for this strategy. The prices of services were zero at
launch, eventually they were set at a fraction of the existent competition’s prices.
Consequently Jio has been able to grab a significant marketshare in spite of being a
new entrant in the industry.
3. High-Low Pricing:
In this strategy the pricing is set high but the product is sold with heavy discounts and
promotions. The high price (list price) signals to the market that there is immense
value being delivered in this product. This is done to ensure an increase in the foot
traffic and ensuring that enough interest is generated in the audience.
This is seen quite frequently in the Xiaomi products sale.
 4. Freemium Pricing:
This is the most common pricing model these days. Freemium in itself has many
different variations to execute. In one of the variants, the product is available for free
for a certain duration only, after which the customer has to purchase the license to
continue using. Another variant is based on usage threshold, the customer can use
the product until a certain usage threshold is hit (number of transactions, number of
users etc.) after which the customer is required to buy.
5. Decoy & Psychological Pricing:
The prices for similar products are set differently to drive more sales for the cheaper
alternative. SAAS companies use this for driving sales to a specific plan. Retail stores
do this at times too, to drive more sales to a new product.
6. Predatory Pricing (can be illegal):
In predatory pricing, the product is given away for free. The company may be making
loss on each sale but this is potentially done to drive the competition out of the
market completely.
One example of this is Uber when they started, they were losing money on each
transaction. Another legacy example is of Internet Explorer. This was provided for
free with the OS by Microsoft. In those days, Netscape Navigator the prominent web
browser in the market was a paid product.
7. Dynamic Pricing:
This is something we have all experienced in case of Uber. The price is changed based
on the demand and/or supply; known as surge pricing in case of Uber. Hotel room
booking, flights booking are other examples where dynamic pricing is widely used.

Source: https://medium.com/@ayushjn/pricing-strategy-for-new-products-
d35262910ae4

Product mix pricing strategies

What is a Product Mix Pricing Strategy?
A strategy that helps in setting the price of products in a way that each of the
products plays a specific role within the product mix, is called a Product Mix Pricing
Strategy. Here, the product mix is the collection of every product line that a brand
owns along with all the products included in those product lines. A product line is the
selection of a brand’s or manufacturer’s similar products that fit into a systematic
category. Many brands, such as Starbucks have many product lines, including coffee,
drinkware, and ice cream.
When a product is part of a product mix, there often arises the need to change the
strategy for setting its price. In such cases, the firm tries to set a price that can
maximise the profits on the total product mix. The major product mix pricing
strategies that can prove to be helpful to the firms are as follows:

1. Product Line Pricing:

It is a strategy where a company sets different prices for different products within
the same product line. It’s like having a menu with various dishes, and each dish has
its own price. Imagine you’re at a restaurant, and they offer different types of
burgers. Each burger has its own price, even though they all belong to the same
burger category. Some burgers might have premium ingredients and extra toppings,
so they are priced higher. On the other hand, there might be basic burgers with fewer
toppings or simpler ingredients, and they are priced lower. The purpose of product
line pricing is to cater to different customer preferences and budgets. It allows
customers to choose a product that aligns with their needs and willingness to pay.
Some customers might be willing to spend more for a burger with fancy ingredients,
while others might prefer a more affordable option. Product line pricing also helps
companies maximise their overall revenue. By offering a range of prices within a
product line, they can capture different segments of the market and attract a broader
customer base. It gives customers options and increases the chances of making a
sale.

2. Optional-Product Pricing:
It is a product mix pricing strategy in which the firm offers to sell optional or
accessory products along with the main product. For example, a mobile buyer may
choose to buy Bluetooth earphones and a back cover for the mobile, or a PC comes
with different options such as docking systems, software options, carrying cases, etc.
Setting a price for these options is a sticky problem. The companies should carefully
decide which item/feature they need to include in the product as default and which
item to offer as optional. For instance, the mobile producer can decide whether to
include a charging adapter in the base price or offer it as an optional item.

3. Captive-Product Pricing:
It is a pricing strategy that involves setting a price for the products that must be used
along with the main product. For example, a razor is the main product, and the razor
blade is a captive product, a printer is the main product, and its cartridge is the
captive product. The main product is often sold at a low price or even at a loss, with
the intention of making a profit from the sale of complementary or related products
or services by keeping their price high. It’s a clever strategy to get customers hooked
on a product or service and then make money from additional purchases.

4. By-Product Pricing:
It refers to the process of determining the price of a secondary or incidental product
that is generated during the production of a main product. It’s like getting a bonus
product along with the one the company actually wanted. Imagine you’re running a
bakery, and your main product is delicious bread. However, during the bread-making
process, you also end up with some leftover dough that can be used to make smaller
rolls or buns. These rolls are considered by-products. By-product pricing involves
deciding how to price these additional rolls. When setting the price for the by-
product, there are a few options you can consider. One approach is to assign a price
based on the cost of production. This means taking into account the ingredients,
labour, and other expenses involved in making the rolls. Alternatively, you can price
the by-product based on its market value. This involves looking at the price that
similar rolls are being sold for in the market and using that as a benchmark.

5. Product Bundle Pricing:

It is a strategy where companies offer a group or bundle of products or services
together at a discounted price compared to the price charged if they are purchased
individually. It’s like getting a package deal where you can buy multiple items or
services as a bundle instead of buying each item separately. Imagine you’re at a fast-
food restaurant, and they offer a combo meal that includes a burger, fries, and a
drink at a lower price than buying each item separately. A company combines
different products into a bundle and offers them at a more attractive price to
encourage customers to buy more and increase sales. The idea behind product
bundle pricing is to provide customers with added value and convenience. By
bundling products together, customers can save money compared to buying each
item individually.
Source: https://www.geeksforgeeks.org/5-product-mix-pricing-strategies/

Price adjustment strategies

In the case of existing products, the following strategies can be used by a business to
price its products:
1. Discount and Allowance Pricing:
Most businesses change their base price to give discounts to consumers who pay
their bills early, buy in bulk, or shop off-season.
Discounts are incentives given to customers, usually in an effort to get them to buy
something from the business repeatedly.
Allowances are the price reduction or discount given by a manufacturer to a member
of the marketing channel in exchange for special promotion of a specific product.
Discounts and allowances, often known as price adjustments, can take different
forms:
Quantity Discounts: This discount is offered to customers who buy multiple units, at
a discounted rate. A reduction from the list price for the buyer’s total purchases done
during the specified time period is known as a cumulative quantity discount. A
reduction in list price that applies to a single order, not to the total amount of orders
placed over the course of a given time period is known as a non-cumulative quantity
discount.
Cash Discounts: A cash discount is a price reduction given to buyers who pay their
bills on time. For instance, the seller can subtract 5% from the bill if the payment
which is due within 30 days, is paid within 15 days. A cash discount is a price decrease
for buyers who purchase in large quantities. Such discounts encourage customers to
purchase more from a single seller rather than from a number of different sellers.
Functional Discounts: The seller provides a functional discount (also known as a
trade discount) to trade-channel attendees who carry out certain tasks including
selling, storage, and record keeping.
Seasonal Discounts: A price reduction for customers who buy goods or services out
of season is known as a seasonal discount. For instance, to encourage early buying
ahead of the busy spring and summer selling seasons, air conditioner manufacturers
provide seasonal discounts to stores during the winter. Seasonal discounts enable the
manufacturer to maintain consistent output throughout the year.
Promotional Allowance: It is an incentive given to a dealer for marketing the goods
of the manufacturer. It serves as a pricing tool as well as a marketing tool. For
instance, A manufacturer is required to cover half the cost of advertisements that
retailers run for their products.

2. Segmented Pricing:
The basic prices of the companies are frequently adjusted to allow for variances in
consumers, products, and locations. In segmented pricing, a business offers a
product or service at two or more prices, even if the price variation is not based on
cost differences. There are various types of segmented pricing.

Customer-Segment Pricing: Different customers pay different prices for the same
product or service when using customer-segment pricing. For instance, senior citizens
pay half the regular ticket price on the railways, and Spotify charges less from
students on its subscription.
Product-Form Pricing: It refers to how different product variants are priced
differently, which is not based on their respective cost differences. For instance,
different colours of smart phones are priced differently according to differences in
demand, not cost.
Location Pricing: A business uses location pricing to set different prices for various
locations, even when the cost of providing each location is the same. For instance,
different prices are charged for tickets in a movie show which are based on the
preferences of customers for different locations.
Time pricing: A company adjusts its prices according to the time of year, the month,
the day, and even the hour. Some public utilities have different rates for business
customers depending on the day of the week and the weekend. For instance, A
Water Park charges ₹1500 from a customer on weekdays, but it charges ₹1800 from
a customer on weekends. This is called time-based pricing.

3. Psychological Pricing:
The purpose of psychological pricing is to create a special appeal for consumers.
When customers can determine the quality of a product by investigating it or drawing
on previous experience, they use price less to judge quality. Price plays a key role in
indicating quality when customers are unable to assess it because they lack the
knowledge or expertise.
Reference pricing, which refers to the costs that consumers hold in their minds and
use while considering a particular product, is another component of psychological
pricing. The reference price can be determined by recording current prices, recalling
prior prices, or appraising the purchasing situation. When determining pricing, sellers
can have an impact on or use the reference prices of these customers. The different
types of psychological pricing are as follows:
 Pricing that ends in either an odd or even number is known as odd/even
pricing.
 Reference Pricing refers to the idea of what a product’s price should be based
on the frame of reference of the consumer.
 Prestige Pricing refers to selling products at a premium in order to establish a
reputation for quality.
4. Promotional Pricing:
Companies use promotional pricing to temporarily reduce the list price of their
products, sometimes even below the cost, in an effort to increase consumer
demand and a sense of urgency. There are various variations of promotional pricing.
Several products are sold at a loss at supermarkets and department stores to draw
customers in with the intention that they will purchase other items at regular
markups.
Under this strategy, a business uses the following price strategies to encourage early
purchases:
Complementary Pricing: A company that sells one or more of its goods to customers
who have high transaction costs can adopt complementary pricing. Transaction costs
include all costs incurred by a customer in order to purchase a product, such as the
registration fees that a flat buyer must pay in order to become a legal owner or the
processing fees that the bank may charge to provide the customer with a credit card.
Loss Leader Strategy: This is a further example of the complimentary pricing strategy.
According to this strategy, a well-known brand’s price will be reduced in order to
increase demand or traffic at the store. Supermarkets and department stores
frequently reduce the prices of well-known brands in order to increase store traffic.
For example, Vishal Mart offers customers products (from groceries to electronics) at
a low price.
Pricing for Special Events: During specific seasons, sellers set special prices in order
to attract customers.
Cash Refunds: Automobile manufacturers and other consumer goods manufacturers
give cash refunds to encourage the purchase of their items within a certain time
period. Rebates allow sellers to clear inventories without lowering the stated list
price.
Low-interest Financing: The business could provide low-interest financing to
customers rather than lowering prices. For instance, to attract customers,
automakers have even introduced zero-interest financing.
Warranties and Service Contracts: Businesses can increase sales by including a free
or low-cost warranty or service contract.

5. Geographical Pricing Strategy:

This strategy aims to take advantage of economies of scale by pricing the product at
a lower price than the competition in one market and using a penetration strategy
in the other. The former is referred to as second-market discounting. It is a part of
the differential pricing strategy, in which the company either dumps or sells below its
cost in the market to make use of its current surplus capacity. Accordingly, a
company may use a global pricing strategy where it charges a premium in one
market, a penetration price in another, and a discounted price in a third.
It includes:
FOB-origin Pricing: In the FOB practice, goods are placed free onto a carrier at a
specific location, which is why it’s called FOB (Free on Board). The customer takes
responsibility and ownership of the items and also pays the transportation costs from
the factory to the destination. Those who support this pricing approach consider it a
fair way to calculate freight expenses since each customer covers their own costs.
However, it can be costly for customers who are far away, which is a disadvantage.
Uniform-delivered Pricing: This pricing method is the inverse of FOB pricing. Under
this, regardless of the customer’s location, a business charges the same amount for
all customers plus freight fees. The freight fee is determined by the average freight
rate. The benefits of uniform-delivered pricing include the fact that it is relatively
simple to implement and allows businesses to advertise their prices nationally.
Zone Pricing: The zone price lies between the FOB-origin price and the uniform
delivered price. Under this, a business creates multiple zones with a consistent price
for all the customers in each zone. The farther the zone, the higher the cost. As an
example, a paper product company could set up three different zones: the East,
where all customers are charged ₹25,000 for goods; the Midwest, where ₹15.000 is
charged; and the West, where ₹10,000 is charged.

6. Dynamic Pricing:
Dynamic pricing, also known as surge pricing, demand pricing, or time-based pricing,
is a business tactic that adjusts prices based on fluctuations in demand. This approach
can often benefit customers by aligning prices with market forces. However,
marketers need to be cautious not to misuse dynamic pricing to take advantage of
certain customer groups or harm valuable relationships with customers.

For instance, Indian railways may adapt seat rates based on seat type and the
availability of seats. In certain situations, customers may need to obtain a ticket
urgently, such as one or two days before the scheduled travel date. The ticket
booked on these days is known as a ‘tatkal ticket’ and booking it may require an
additional fee.

7. International Pricing:
Companies that sell their goods around the world have to figure out the prices to
charge in the various markets where they operate. A business may in some cases set
a uniform global price. However, the majority of businesses modify their prices
according to cost factors and local market conditions.
The price that a business should charge in a particular country is determined by a
variety of factors, including economic conditions, competitive situations, rules and
regulations, and the growth of the wholesale and retailing system. Additionally,
customer perspectives and preferences may differ from country to country, which
requires different prices. Alternatively, the business can have different marketing
objectives in various worldwide markets, which demand changes in its pricing
strategy.

For instance, Samsung might launch a new product in a highly developed market with
the aim of fast capturing mass-market share; which necessitates using a penetration-
pricing strategy. On the other hand, it might enter a market that is less developed by
concentrating on smaller, less price-sensitive sectors using a market-skimming pricing
strategy.
Source: https://www.geeksforgeeks.org/price-adjustment-strategies/

Price changes
Companies are bound to face market situations where they are required to initiate
price changes. It means, either they are to cut the prices or increase the present
prices to survive, maintain status quo or further growth. Initiating price changes
involves two possibilities of price cuts and price increases.

What is Price Change?

In marketing, when the various internal and external factors force business
organizations to make changes in their products or services prices, it is called price
change. In other words, the price change is an alternation of the previous price of any
product or service.

In general concept, the price of a product or service remains stable but due to factors
such as customers’ demand, customers’ change preferences, competition,
government regulations, profit objectives, cost of raw materials, and so on, the price
asks to change.
It is obvious that the forces of business firms are inevitable either they are internal or
external, however, the internal ones are controllable. These are the forces that
compelled firms to play with their price.
Price Initiators (Circumstances that Lead Price Changes)
The following circumstances can lead to price changes to the firm’s offerings.

1. Initiating Price Changes

Several circumstances lead a firm to initiate price change. It may be of two ways
wherein one hand it has to cut off the prices of its offerings and on the other hand
increases prices. They are as follows:

i. Initiating Price Cut: A firm often faces where it is compelled to initiate a price cut of
its offerings (products and services). The major events that lead to price cut are
mentioned below:
 Excess capacity,
 Vigorous price competition triggering a price war,
 Drive for dominance through lower costs,
 Demand for the product is price elastic,
 Consumers assume the low quality of product,
 Reduction in service level.
ii. Initiating Price Increment: Increment in the price of a product is an attractive
scenario for a firm as it brings a positive windfall in revenue and profit. However, it
must be ensured that sales volume is not affected.
The major circumstances that are crucial to the increment of price are listed as
follows:
 Cost inflation
 Over demand of the product
 Adding free service delivery or installation facility to the consumer
 Reduction in discounts
 Scarcity of the product
 Anticipation of further inflation and change in government policies.

Response To Price Change Initiated by Competitors

A firm faces a crucial strategic decision when its competitors change the price of
products and services. Responding to price cuts as well as price increments is a
difficult proposition.

It is thus extremely important that the firm understands the two crucial aspects
related to the price change by competitors. They are:
  The objective of price change – Reasons behind the change in price.
 Time frame – How longer the price changes will last?
Once the firm clearly gets the answers to the above-mentioned two aspects, it will be
able to respond better.

Some probable reasons a competitor might be changing price is listed as follows:

 A price may be cut to utilize the excess capacity of the firm or to cover the
increasing operating costs,
 A price cut may be just temporary to clear old stocks,
 A price change may be long-term and with an objective to dominate the
market.
It is all firms’ compulsory task to respond to price changes. A firm can prefer the
following four primary strategies to respond to the price change done by
competitors.
i. Maintaining the Price: The first strategy is that the company may maintain its price.
The company adopts this strategy because it thinks that:
The reduction of price may reduce profit margin,
Reduction of price does not affect the market share of the company,
By maintaining its price the company may regain the market share in the future.

ii. Price Maintaining with Non-Price Counter-Attack: In the next strategy a firm may
maintain its offerings price by proving non-price services to the customers such as
quality good or service, warranty, after-sales service, good hospitality, good
communication, etc. which may attract customers more efficiently.

iii. Price Reduction: In the third strategy a company may reduce its offerings price
because it may think that now the market is more price-sensitive, or its costs will fall
with rising in volume, or it would be difficult to rebuild its market share once it is lost,
and so on.
iv. Price Increase with the Product Counter Attack: In the fourth strategy, the
company instead of lowering or maintaining its price, the company may raise its price
along with introducing some brands, redesigning the product, or adding new utilities
to the product, or providing quality services than competitors, etc.
However, the best implementation and selection of these four strategies depend
upon the depth of study of the particular situation.

Reaction To Price Change

When the price of a product or service is changed, it is sure to affect buyers,
competitors, distributors, and suppliers, and may interest the government as well.
The success of the move depends critically on how major parties, particularly buyers
and competitors’ respond to it.

A. Buyer’s Reaction To Price Changes

Buyer’s reaction or response to price change can be analyzed from two angles – price
elasticity of demand and perceptual factors in buyer’s response.

i. Price Elasticity of Demand: This is a traditional analysis of buyer’s reactions. This

term refers to the ratio of the percentage change in demand caused by a percentage
change in price. In another word, it measures the change in demand due to a change
in the price of the product.
This concept analyses that price is too high if demand is elastic and too low if demand
is inelastic. This concept is analyzed from the viewpoint of revenue maximization.

ii. Perceptual Factors in Buyer’s Reaction: It means bringing people closer to an

understanding of the correct price would be tantamount to a price reduction.
Perceptual factors constitute an important intervening variable in explaining market
response to price changes.
Different customers respond differently to price reduction. Some customers react
positively while some may react negatively. Similarly, different customers may react
differently to price increases also. They are more price-sensitive to products that cost
a lot and are frequently bought, whereas they hardly notice higher prices on small
items that they buy infrequently.
In addition, buyers are normally less concerned with the product’s price than its total
cost, where the costs include obtaining, operating, and servicing the product. A seller
can charge a higher price than a competitor and still get the business if he or she is
able to convince the customer that the total costs are low.

B. Competitor’s Reactions to Price Changes

Competitor’s reactions are of particular importance where the number of firms is
small, the product offering is homogeneous, and the buyers are discriminating and
informal. There may be one or more competitors reacting in a similar or different
way.
In such a case, a question may arise as to how to estimate the likely reaction of its
competitors? This is a crucial question for analysis and is analyzed in two scenarios:

i. When there is only One Large Competitor: When there is only one large
competitor, the likely behavior of this competitor can be approached from two quite
different starting points; first, to assume that the competitor treats each price change
as posing a fresh challenge and the second is that each assumption has different
research implications.
ii. When there is more than One Competitor: When there is more than one
competitor, the company must estimate each competitor’s likely reaction. If all
competitors behave in a similar way, this amounts to analyzing only a typical
competitor. If the competitors cannot be expected to react uniformly because of
critical differences in size, market shares, or policies, then separate analyses are
necessary. If it appears that a few competitors will also match the price change, then
there is good reason to expect the rest will also match it.

Source: https://tyonote.com/price_changes_initiation_and_reaction/

Public policy and pricing

What is public policy pricing?
Major public policy issues in pricing include unfair pricing practices within distribution
channel levels such as price-fixing and predatory pricing, and across distribution
channel levels such as retail price maintenance, deceptive pricing, and discriminatory
pricing.
Companies set dynamic pricing and high prices for products to cover distribution
costs, advertising and promotion costs, and excessive mark-ups. Companies try
adopting fair pricing policies. Nevertheless, laws and regulations are enforced to
ensure that the policies are followed and customers are benefited.

Public Policies and Pricing Strategies

Most firms are not free to charge whatever prices they want for their products and
services. There are restrictions and regulations put in place by the government to
protect consumers from unethical pricing practices.
 A. Pricing Within Channel Levels
1. Price-fixing
Price-fixing is the practice of working with a competitor to set agreed-upon prices on
products with the intention of controlling the supply and demand in the market. This
practice is an infraction of federal law which restricts companies from communicating
with competitors prior to setting prices.
The practice is also illegal in many international markets, as Proctor and Gamble and
Unilever found out when the firms attempted it. They were fined a combined total of
$456 million.

2. Predatory Pricing
The practice of predatory pricing is when a firm sells its products or services at a price
that is lower than its costs with the intention of pushing competitors out of the
market.
This practice is also prohibited federally, but it is very difficult to file formal charges. It
is not illegal to sell at prices below costs to move inventory, but it is illegal to sell
below costs with the intention of driving competitors out of the market. This is what
makes it so difficult to prove when a firm engages in this practice, because one must
determine the intent of the firm.

B. Pricing Across Channel Levels

1. Price Discrimination
Charging different price terms to customers at a specific level of trade is known as
price discrimination. It is federally illegal unless a firm can prove that it is justified by
a different level of costs associated with selling to various different retailers. The
practice can also be acceptable if a firm is selling the same product at a different level
of quality to different retailers.
An example of price discrimination would be charging less for a child’s movie ticket
than an adult. There is no cost difference associated with the price difference.

2. Retail Price Maintenance

Laws prohibiting the practice of retail price maintenance prevent firms from requiring
dealers to charge a specific price for their products. The firm has every right to
suggest a retail price, but no right to require it.
For example, in the case of the iPhone K, Apple could not legally require resellers like
Best Buy and Walmart to sell the phone at a specific price. This was made apparent
when the iPhone 5C was released and Walmart decided to sell it for less than the
price suggested by Apple.

3. Deceptive Pricing
The practice of deceptive pricing involves a seller stating a misleading discount or
price that is not, in fact, available to consumers.
The most common example of this practice is when firms advertise an extremely high
“original” price to make a “sale” price seem more attractive, but it can also be as
simple as advertising one price and charging another. Earlier this year, Walgreens was
sued for this very practice after charging customers a higher price at the register than
was advertised in their stores. This particular form of deceptive pricing is known as
scanner fraud.

Maximum Retail Price Laws & Rules in India

MRP price stands for maximum retail price as per the MRP law India. Maximum retail
price is the highest price labelled on the product which can be charged by the seller
of that product. In India all the products have the MRP price stated on them which
enables the customer to know the highest price that can be charged from them. It is
compulsory for all the sellers to mark the MRP price which must be as per MRP label
rules in India. The concept of MRP was introduced in India in 1990 after the
amendment of Standards of Weights and Measures Act, 1997. Before the
introduction of the MRP rules in India amendment, the retailer was allowed to either
mark the local price on the product or MRP India should be according to the MRP Law
in India. This made the retailer charge more than the expected and real price from
the consumers. After looking into the increased corruption at the price the
amendment was introduced to ensure that the consumers are further not cheated.
What is the MRTP Act?
MRTP Act was introduced to check monopolies. The MRTP Act was relaxed in 1991.
This Act was enacted to prevent the concentration of economic power to common
detriment, control of monopolies, and prohibition of monopolistic and restrictive
trade practices (MRTP) and matters connected therewith.

There are three types of trade practices regulated by the MRTP act:
Monopolistic Trade Practices - This refers to the misuse of one’s hold in the market
to abuse the market with respect to the production and sale of commodities and
services. As part of this practice companies:
  Eliminated or prevented competition
 Took advantage of their monopoly by charging consumers with unreasonably
high prices.
 Deteriorated the quality of products
 Limited technical development
 Adopted unfair trade practices

Restrictive Trade Practices - In order to gain power in the market and maximize their
profits traders often indulged in activities that blocked the flow of capital into
production. These traders also affected supply by bringing in conditions for delivery
which in turn gave rise to unjustified costs.

Unfair Trade Practices - Unfair trade practices are comprised of:

 A false representation of second-hand goods and new goods.
 Misleading representation of the quality of goods, their style, usefulness, need,
standard, etc.
 False claims or representation on the price of goods and services
 False warranties and guarantees on goods and services without performing
adequate testing on the product.
 False facts are given regarding affiliation, sponsorship, etc.