Pricing Decision:-

Organizations producing goods and services need to set the price for their product. Setting the
price for an organization's product is one of the most important decisions a manager faces. It is one
of the most crucial and difficult decisions a firm's manager has to make. Pricing is a profit planning
exercise. Cost is one of the major considerations in price determination of the product. It is one of
the three major factors which influence pricing decision. The two other factors are customers and
competitors.

Customer:- In a situation where the product has many substitutes, customers decide the price.
That is, the demand of customers are the paramount importance in setting the price of the product.
In such a situation, the firm should try to deliver the value, in the form of product and/or service,
at the target cost so that a reasonable profit can be earned. Similarly, under competitive condition,
price is determined by market forces and an individual firm or an individual customer can not
influence the price.

Competitors:- When there are only few players in the market, competitors usually, react to the
price changes and, therefore, pricing decisions are influenced by the possible reaction of
competitors. As such management must keep watchful eye on the firm's competitors. That is,
knowledge of competitors' strategy is essential for pricing decision in an oligopoly situation.

Cost:- Cost is the third major factor. Its role in price setting varies widely among industries. Some
industries determine price by market forces and in some industries, managers set prices a on the
basis of production costs. Firms want to charge a price that covers its costs like production costs,
distribution costs and costs relate with selling the product and also including a fair return for its
effort.

Objectives of Pricing Policy:- Formulation of pricing policy begins with the classification of the
basic objectives of the firm. Pricing objectives have to be in conformity with overall organizational
objectives. In most of the situation, profit maximization is the main objective of price policy, but it
is only one objective. Following may be other objectives of pricing policy in an organization:-

1. Pricing the goods based on reasonable costs.

2. Increase the market share or growth rate at the expense of immediate profits.
3. Avoid adverse public reaction consequent on charging high price.
4. Ethical consideration not to reap high profit.
5. Immediate survival of the firm.
6. Charge reasonable price so as to have good relations with government and public at large.
7. Maximization of prestige of the firm rather than profit, and
8. To safeguard against the emergence of new producers in same line.

Although its importance varies from firm to firm, pricing is one of the tools that a firm has at its
disposal in its attempt to reach the stated objectives.

Factors influencing Pricing:- The factors influencing the price can be divided into two heads –
Internal Factors and External Factors.

Internal Factors:- Talking about the internal factors means the factors that work from within the
organization. The factors are:-

 Organizational Factors:- Two management levels decide the pricing policy, one is the price
range and the policies are decided by the top-level managers while the distinct price is
fixed by the lower-level staff.
  Marketing Mix:- For implementing a price, the marketing mix needs to be in sync, without
matching the marketing mix, consumers will not be attracted to the price. The marketing
mix should be decisive for the price range fixed, meaning the marketing mix needs to
maintain the standard of the price of the product.
 Product Differentiation:- In today’s market, it is uncommon to find a unique product,
hence the differentiation lies in the nature, feature and characteristic of the product. The
added features like quality, size, colour, packaging, and its utility all these factors force the
customers to pay more price regarding other products.
 Cost of the Product:- Cost and Price are closely related. With the cost of the product, the
firm decides its price. The firm makes sure that the price does not fall below the cost else
they will run on losses. Cost of the price includes the input cost that a company spends on
raw materials, wages for labourers, advertisement cost, promotion cost and salaries for the
employees

External Factors:- External factors are not under the control of the firm. These factors affect the
whole industry group uniformly. Yet, a company tries to estimate any upcoming problems in the
external environment and also makes up a backup plan in advance. This is done by forecasting the
market trend. The factors are:-

 Demand:- The market demand of a product has an impact on the price of the product, if
the demand is inelastic then a higher price can be fixed, if the demand is highly elastic then
less price is to be fixed. When the demand for the goods is more and the supply of the
goods is constant, the price of the goods can be increased and if the demand for the goods
decreases the price of the goods should be decreased to survive in the market.
 Competition:- The prices are required to be competitive without any compromise on the
quality of the product. While in a monopolistic market, the prices are fixed irrespective of
the competition. Thus, the manufacturer tries to estimate the price of his competitor. When
the price of the supplementary goods is high, the customers will buy the manufacturer’s
product.
 Supplies:- If the supplies condition, the easy availing option of the raw materials are
available, then the price of the product can be moderate. Once, the raw materials supply
price heightens then the price also rises.

In the period of recession, price is lowered so that easy purchase is guaranteed. While in boom
periods, prices shoot up high as now they can earn profit.

Types of Pricing Strategies:- The different pricing methods and price strategies with an example
of each pricing strategy is as follows:-

1. Penetration Pricing:- Here the organisation sets a low price to increase sales and market
share. Once market share has been captured the firm may well then increase their price.
Example:- A television satellite company sets a low price to get subscribers then increases
the price as their customer base increases.
2. Skimming Pricing:- The organisation sets an initial high price and then slowly lowers the
price to make the product available to a wider market. The objective is to skim profits of the
market layer by layer. Example:- A games console company reduces the price of their
console over 5 years, charging a premium at launch and lowest price near the end of its life
cycle.
3. Competition Pricing:- Setting a price in comparison with competitors. In reality a firm has
three options and these are to price lower, price the same or price higher than competitors.
Example:- Some firms offer a price matching service to match what their competitors are
 offering. Others will go further and refund back to the customer more money than the
difference between their price and the competitor's price.
4. Product Line Pricing:- Pricing different products within the same product range at
different price points. An example would be a DVD manufacturer offering different DVD
recorders with different features at different prices e.g. A HD and non HD version.. The
greater the features and the benefit obtained the greater the consumer will pay. This form
of price discrimination assists the company in maximising turnover and profits.
5. Bundle Pricing:- The organisation bundles a group of products at a reduced price.
Common methods are buy one and get one free promotions. This strategy is very popular
with supermarkets who often offer BOGOF strategies.
6. Premium Pricing:- The price is set high to indicate that the product is "exclusive" Examples
of products and services using this strategy include Harrods, first class airline services, and
Porsche.
7. Psychological Pricing:- The seller here will consider the psychology of price and the
positioning of price within the market place. The seller will charge 99p instead Rs.1 or
Rs.199 instead of Rs.200. The reason why this methods work, is because buyers will still say
they purchased their product under Rs.200.
8. Optional Pricing:- The organisation sells optional extras along with the product to
maximise its turnover. This strategy is used commonly within the car industry as it
was found out while purchasing car.
9. Cost Plus Pricing:- The price of the product is production costs plus a set amount ("mark
up") based on how much profit (return) that the company wants to make. Although this
method ensures the price covers production costs it does not take consumer demand or
competitive pricing into account which could place the company at a competitive
disadvantage. For example a product may cost Rs.100 to produce and as the firm has
decided that their profit will be twenty percent they decide to sell the product for Rs.120 i.e.
Rs.100 plus (100/100 x 20)
10. Cost Based Pricing:- This is similar to cost plus pricing in that it takes costs into account
but it will consider other factors such as market conditions when setting prices. Cost
based pricing can be useful for firms that operate in an industry where prices change
regularly but still want to base their price on costs.
11. Value Based Pricing:- This pricing strategy considers the value of the product to
consumers rather than the how much it cost to produce it. Value is based on the benefits it
provides to the consumer e.g. convenience, well being, reputation or joy. Firms that
produce technology, medicines, and beauty products are likely to use this pricing strategy.