PRINCIPLES OF MARKETING (UNIT 3.

2: Pricing Decisions)

Concept of Price

In the words of William J. Stanton, price is the amount of money which is needed to acquire in exchange
some combined assortment of a product and its accompanying services. It is the most flexible element in
the marketing mix as it can be changed easily.

Objectives of Price

The objectives of pricing are discussed as under:

 Survival: Price adjustments are done to enable the company to increase sales volume to meet
company expenses.
 Profit: The company determines the price and cost levels to enable them to realize maximum profits.
 ROI: Companies determine the price levels that allow them to yield targeted ROI.
 Market Share: Brands adjust prices to maintain or increase sales volume relative to rivals.
 Product Quality: Companies set prices to recover R&D expenses and thereby establish a high-quality
image.

Significance of Price

 Flexible Element of Marketing Mix: Price is the most adjustable aspect of the marketing mix. Prices
can be changed rapidly, as compared to other elements like product, place or promotion. Changes in
product design or distribution system would take a long time to be implemented. Bringing about
changes in advertisements or promotional activities is also a time-consuming task. But price is very
flexible and can be changed according to the needs of the situation. Therefore, it is a very important
component of marketing mix.
 Right Level Pricing: The wrong price decision can bring about the downfall of a company. It is
extremely significant to fix prices at the right level after sufficient market research and evaluation of
factors like competitors’ strategies, market conditions, cost of production, etc. Low prices may attract
customers in the initial stages, but it would be very hard for the company to raise prices on a future
date. Similarly, a very high price will ensure more profit margins, but lesser sales. So, in order to
maintain balance between profitability and volume of sales, it is important to fix the right price.
 Price Creates First Impression: Often price is the first factor a customer notices about a product.
While the customer may base his final buying decision on the overall benefits offered by the product,
he is likely to compare the price with the perceived value of the product to evaluate it. After learning
about the price, the customers try to learn more about the product qualities. If a product is priced too
high, then the customer may lose interest in knowing more. But if he thinks that a product is affordable,
then he would try to get more information about it. Therefore, price is a critical factor that influences a
buyer’s decision.
 Vital Element of Sales Promotion: Being the most flexible component of marketing mix, price is the
most important part of the sales promotion. In order to encourage more sales, the marketing manager
may reduce the price. In case of goods whose demand is price sensitive, even a small reduction in
price will lead to higher sales volume. However, prices should not be fluctuated too frequently to
stimulate sales.
 Inter-Firm Rivalry: As the entry and exit barriers in the industry are lowered the intensity in inter-firm
rivalry increases. With an increase in this rivalry, marketers find that a firm’s cost of operation also
increases, as it now has to spend more money to lure customers and middlemen. It has also invested
money in new product development.
Factors influencing Pricing Decisions of a Product (Determinants of Price)

The pricing decisions for a product are affected by internal and external factors.
 Internal Factors:
o Cost: While fixing the prices of a product, the firm should consider the cost involved in
producing the product. This cost includes both the variable and fixed costs. Thus, while fixing
the prices, the firm must be able to recover both the variable and fixed costs.
o Predetermined objectives: While fixing the prices of the product, the marketer should
consider the objectives of the firm. For instance, if the objective of a firm is to increase return
on investment, then it may charge a higher price, and if the objective is to capture a large
market share, then it may charge a lower price.
o Image of the firm: The price of the product may also be determined on the basis of the image
of the firm in the market. For instance, HUL and Procter & Gamble can demand a higher price
for their brands, as they enjoy goodwill in the market.
o Product life cycle: The stage at which the product is in its product life cycle also affects its
price. For instance, during the introductory stage the firm may charge lower price to attract the
customers, and during the growth stage, a firm may increase the price.
o Credit period offered: The pricing of the product is also affected by the credit period offered
by the company. Longer the credit period, higher may be the price, and shorter the credit
period, lower may be the price of the product.
o Promotional activity: The promotional activity undertaken by the firm also determines the
price. If the firm incurs heavy advertising and sales promotion costs, then the pricing of the
product shall be kept high in order to recover the cost.
 External Factors:
o Competition: While fixing the price of the product, the firm needs to study the degree of
competi-tion in the market. If there is high competition, the prices may be kept low to effectively
face the competition, and if competition is low, the prices may be kept high.
o Consumers: The marketer should consider various consumer factors while fixing the prices.
The consumer factors that must be considered includes the price sensitivity of the buyer,
purchasing power, and so on.
o Government control: Government rules and regulation must be considered while fixing the
prices. In certain products, government may announce administered prices, and therefore the
marketer has to consider such regulation while fixing the prices.
o Economic conditions: The marketer may also have to consider the economic condition
prevailing in the market while fixing the prices. At the time of recession, the consumer may
have less money to spend, so the marketer may reduce the prices in order to influence the
buying decision of the consumers.
o Channel intermediaries: The marketer must consider a number of channel intermediaries and
their expectations. The longer the chain of intermediaries, the higher would be the prices of
the goods.

Pricing Methods

A pricing method is a systematic procedure for setting the prices on a regular basis. It structures the
calculation of actual price of a product based on considerations of demand, costs and competition.
 Cost-based Pricing: Cost-based pricing is the practice of setting prices based on the cost of the goods
or services being sold. A profit percentage or fixed profit figure is added to the cost of an item, which
results in the price at which it will be sold.
o Market Pricing: Here, a certain predetermined percentage of producer’s costs, called
mark-up, is added to the cost of the product to determine the price.
 o Target Return (Cost-Plus) Pricing: It is used to find out the price that would ensure a
certain fair rate of ROI.
 Competition-based (Going-Rate) Pricing: Here, the focus is on the competitors’ prices. It acquires
more importance when different competing brands are almost homogeneous and price is the major
variable in the marketing strategy, such as cement or steel.
 Demand-based Pricing: This method of price-setting involves balancing demand of customers with
the cost to determine the best price for profit maximization. This approach is common with hotels,
telephone service providers (12am-6am) etc.
 Differential Pricing: Differential pricing is a two-price system that focuses on segmented price
management, allowing your company to charge different prices for the same product. The purpose is
to streamline your business operations and increase revenues based on customers’ demands for the
product. It allows for a free-market system based on the market demand and supply. In addition, it
focuses on a fluctuating price system, leading to optimized price tracking, price matching, and price
scraping.
 Geographical Pricing: It is a business strategy that helps companies price their items or services
differently based on a consumer's geographical location. Organizations might adjust the prices based
on a range of factors related to geographic location, including shipping costs, taxes, manufacturing
expenses or the amount a consumer in that region might be willing to pay. For example, a company
may offer its products or services at a lower price in one geographic area if the shipping costs are less
expensive or if other businesses sell similar goods in that region at a higher pricing point. There are
several distinct types of geographical pricing techniques, including:
o Freight-absorption pricing: With a freight-absorption pricing strategy, the companies
selling the products pay for the shipping cost. Although the warehouse or manufacturing
plant most likely handles the shipping arrangements, the product creators or retailers cover
the shipping expenses. This strategy can help customers feel satisfied with their free or low-
cost shipping options. Businesses might also offer express shipping options that allow
customers to pay more if they want to receive their goods faster.
o Zone pricing: Businesses that use a zone pricing strategy charge higher shipping costs to
customers in geographic areas where shipping is more expensive. These companies often
develop distinct prices for the various zones they ship to by drawing concentric circles on a
map and placing the warehouse, factory, or plant in the middle. After they create these
concentric circles, businesses can create boundaries on the map that represent different
geographic pricing zones. A range of factors that affect prices in disparate geographic
locations may influence these boundaries, including shipping costs, population density and
transportation infrastructure.
o Basing point pricing: Companies that use a basing point pricing strategy calculate two
different costs related to shipping their products. One cost is their base price, which refers
to a uniform expense that all consumers ordering products from a specific manufacturing
plant or warehouse pay. The second cost is the freight or shipment price, meaning an
expense that fluctuates based on the customer's location. Customers nearer to the base
point pay lower shipping fees, as they have reduced freight or shipment costs.
 Perceived Value Pricing: Here, the price is based on the customer’s perceived value of a product/
service. It depends on the company image, trustworthiness, reputation, after-sales service etc.
Marketers must deliver the promised value proposition it communicates to its target customers.
 Product Range Pricing: Many companies sell a range or line of products, and the price of each
individual item should consider the prices of other products in the range.
 Bid Pricing: It involves submitting either a sealed or open bid price from the marketers for the buyer’s
consideration. Usually, central and state governments and construction companies use this method.
 Allowance Policies: They are like discounts and are offered to consumers or channel members either
to do something or accept less of something.
 o Advertising Allowance: Given to resellers to encourage them to advertise producer’s
products in the local market)
o Stocking/ Slotting Allowance: Offered to resellers to get shelf space
o Push money/ Spiffs: Given to salespeople of a wholesaler or retailer for aggressively
selling the company’s products
o Trade-in (Exchange) Allowance: Given when customers bring in used durable products
and buy similar new products of the company.

Pricing Strategies

A pricing strategy is a course of action framed to affect and guide price determination decisions, which
help realizing pricing objectives and answer different aspects of how price will be used as a variable in the
marketing mix such as new product introductions, competitive situations etc.
 New Product Pricing: Business owners must study the market and competition before setting a price
for new products.
o Price Skimming: It refers to charging the highest possible price that a sufficient number of
most desirous customers for the product will pay
o Penetration Pricing: It requires the price to be set less than the competing brands and aims
at market penetration to capture large market share quickly
o Economy Pricing: Economy pricing is a volume-based pricing strategy wherein you price
goods low and gain revenue based on the number of customers who purchase your product.
It's typically used for commodity goods, like generic-brand groceries or medications, that don't
have the marketing and advertising costs of their name-brand counterparts.
o Premium Pricing: Premium pricing is a strategy that involves tactically pricing your company’s
product higher than your immediate competition. The purpose of pricing your product at a
premium is to cultivate a sense in the market of your product being just that bit higher in quality
than the rest. It works best alongside a coordinated marketing strategy designed to enhance
that perception. Premium pricing is closely related to the strategy of price skimming. However,
unlike skimming, it involves setting prices high and keeping them there. Luxury brands have
often implemented premium pricing.
o 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.
o Freemium Pricing: 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.
o 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.
o 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 bookings, flights bookings are examples where dynamic pricing is widely used.
 Psychological Pricing: This approach is suitable when consumer purchases are based more on
feelings or emotional factors rather than rational. It is apt for jewellery, perfumes etc.
o Odd/ Even Pricing: Marketers sometimes set their product prices that end with certain
numbers, the assumption being that if the price is Rs. 499, consumers view it as close to Rs. 400
 rather than Rs. 500. Even prices favour exclusive or upscale product image and consumers view
the brand as a premium quality offering.
 Promotional Pricing: Promotional pricing is defined as a pricing strategy intended to attract interest
and increase sales in the short term. Getting maximum sales in minimum time is the primary intent
behind promotional pricing.
o Loss-Leader Pricing: It is a tactical and aggressive strategy used to get rid of slow-moving
merchandize, or build a brand as a low-cost provider in the market. (e.g., Apple reducing price
of iPhone12 to gain more sales of iPhone 13).
o Special Event Pricing: It involves coordinating price cuts with advertising for seasonal or
special situations to attract consumers by offering special reduced prices.
o Cash Rebates: Auto companies and other consumer-goods companies offer cash rebates to
encourage purchase of the manufacturers’ products within a specified period. These help
retailers in clearing inventories without affecting the stated list price.
o Low-interest Financing: Instead of cutting its price, the company can offer customers low-
interest financing.
o Longer payment terms: Sellers, especially mortgage banks and auto companies, stretch loans
over longer periods and thus lower the monthly payments.
o Warranties and service contracts: Companies can promote sales by adding a free or low-
cost warranty or service contract.
o Psychological/ Superficial Discounting: It involves setting an artificially high price and
offering the product at a highly reduced price. (e.g., Earlier Rs. 499; Now Rs. 199)