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Principles Of Marketing
Unit 4 : Pricing Decision (Part 1)
Meaning of Price :
The term ‘price’ denotes money value of a product. It represents the
amount of money for which a product can be exchanged. In other words, it
is the amount of money which the buyers pay to the seller for a product.

Significance of Price :
 Determines the firm’s success: Price is an important
determinant of the success of a firm. If the price is too high the
business is lost; if the price is too low the firm may loose again.

 Affects the firm’s competitive position and its share of the

market: Since the price of a product is a major determinant of the
market demand for the product, it affects considerably the
competitive position of the firm and its share of the market.

 Influences the firm’s marketing progress: The overall

performance of the marketing managers is greatly affected by the
price of the product.

 Important to the consumer: Price of a product is important to

the consumer in as much as it determines his purchasing power and
thus affects his standard of living.
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 Help to the consumer: Notwithstanding the above, price

mechanism provides help and guidance to the consumer in taking
buying decision aimed at ensuring optimum utilization of his limited
purchasing power among various alternative uses.

 Important to the firm: The price of a product is of crucial

importance to the firm. It influences wages, interests, rents and
profits, regulates production, and channelizes productive resources
into profitable activities.

Factors Affecting Price of a Product :

(i) Cost of the product: Cost of a product is the basic
determining factor of the product’s price. This implies that the
price of a product should be such that recovers the average
total cost per unit. Another point which should be remembered
is that cost should not a ceiling on price; the price is ultimately
determined by market demand for the product.

(ii) Desired public image: While setting product prices the

management must ensure that prices are consistent with the
public image the top management is trying to create for the
company

(iii) Product market factors: The stage in product life cycle has
considerable influence on pricing decision. The management
has a very high (degree of freedom to set a very high price)
(price skimming) or low price (penetration pricing) during
market pioneering stage. Such freedom is, however, not
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available during the periods of growth, maturity or market

decline.

(iv) Distribution strategy: The distribution strategy adopted by

the manufacturers influences price of a product because firstly,
each middleman in the distribution expects gross margin
according to the number of services he performs for the
manufacturer

(v) Promotional Strategy: If the promotional strategy of a

marketer requires middlemen to undertake a larger part of
advertising, sales promotion, etc., they will expect greater than
normal gross margins and vice versa.

(vi) Competitor’s prices: Pricing decisions of a marketers are

also influenced by the competitor’s prices. Ordinarily a
marketer seeks to avoid price competition; rather he uses non-
price competition-product, distribution and promotion, keeping
his price essentially the same as competitor’s price.

(vii) Economic Climate: The ups and downs in business influence

significantly the pricing decisions of a firm and while setting
prices the management must forecast and take account of
impending economic changes.

Pricing Objectives :
(i) Target Return: The pricing objectives of many a firm is to
achieve a certain target Return on Investment (ROI), certain
return on sales, or some targeted amount of profit.
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(ii) Target Market Share: Another major pricing objective of a firm

is to maintain or increase the share of the market held by the
firm. Increase in the market share is the best method of
evaluation as far as efficiency of pricing is concerned.

(iii) Meeting or Preventing Competition: The pricing method

adopted to achieve this objective is referred to as ‘Extinction
Pricing’. It is viewed as long-run strategy and is used as a way of
eliminating competition.

(iv) Profit Maximisation: Profit maximisation is an economically

justifiable goal of pricing because if profits become unduly high
due to short supply of a given product, new capital will be
attracted into the industry thus balancing demand and supply.

(v) Price Stabilisation: Some firms seek to stabilize their prices

over long period, hoping to smooth out possibly even to eliminate,
cyclical price fluctuations. Where price stabilization is the pricing
objective, the firm tries to keep prices from falling too far during
depression and rising too high during (depression and rising too
high during) periods of good business.

Pricing Strategies :
(i) Skim-the-cream pricing: As its name suggests, this strategy is
employed during the introductory stage of the product simply to
skim the “cream” of demand by setting higher prices. Its aim is not
to maximize profits but to recover product development costs
quickly

(ii) Penetration pricing: Penetration pricing is the opposite to

skimthe-cream pricing. In this strategy a low introductory price is
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set to speed up the product’s widespread market acceptance.

Thus, the objective of this strategy is to capture a certain market
share before competitors enters the market.

(iii) Premium Pricing: The prices of goods and services in the

premium pricing strategy are a little bit higher than the average
costs. These are focused mostly on consumers in the premium
market. Some individuals could believe that if a product’s price is
high, then only its quality will remain acceptable.

(iv) Economy Pricing: One of the best pricing strategies that takes
into account the broad category of buyers is economy pricing.
These are very cost-effective and sensible in terms of what they
can offer.

(v) Psychological pricing is one of the three main pricing

strategies. This pricing strategy is very popular to induce middle
class. For instance, Bata has a new style of shoe that costs 1,999
rupees. Human psychology is prepared to tolerate 1999 rupees,
but it is not prepared to accept 2,000.

(vi) Product Line Pricing: It is one of the strategies for differential

pricing. The size of the product may affect the prices in this case.

Distribution Decision ( Part 2 )

Channels of Distribution :
Channels of distribution, also called marketing channels or trade channels,
are used to provide consumers with a convenient means of obtaining the
products and services they require.
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Channels of distribution refer to various marketing institutions

(middlemen) and the interrelationships engaged in effecting the physical
and title flow of goods and services from producers to consumers or
industrial users.

Thus, the route or path through which goods move from the place of
production to the place of consumption is called channel of distribution.

Types of Channels of Distribution :

1. Direct Channel (Zero level channel)  Producers sell their
goods and services directly to consumers through this channel.
There is no intermediary between the producers and the
consumers. Producers may sell to consumers directly through
door-todoor salesmen and their own retail establishment

2. The Indirect Channel  If the manufacturer manufactures

things on a huge scale, he may not be able to sell them directly to
customers. As a result, he sells things via middlemen. These
intermediaries could be wholesalers or retailers. A wholesaler is
someone who buys items in big numbers from producers, whereas
a retailer is someone who buys goods from wholesalers

(a) Single Level Channel: An intermediary is used in this

procedure. Instead of selling via agents or distributors, a
manufacturer sells directly to the retailer. This method is
utilized for high-end watches and other similar items.

(b) Two Level Channel: In this method, a manufacturer sells the

material to a wholesaler, the wholesaler to the retailer and
then the retailer to the consumer. Here, the wholesaler after
purchasing the material in large quantity from the
manufacturer sells it in small quantity to the retailer.
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(c) Three Level Channel: This adds one more level to the two
level channel in the form of an agent. An agent helps to bridge
the gap between the manufacturer and the distributor. The
material is then sold by the agents to wholesalers, who in turn
sell it to retailers, who in turn sell it to consumers.

Importance of Channels of Distribution :

 It creates utility: The channel of distribution creates three types
of utilities namely time, place, and possession. Time utility is created
when channel of distribution makes products or services available
for sale when the consumer wants to purchase them, place utility is
created by making goods and services available in a convenient
location and possession utility is created when channel of
distribution facilitates passing of the title of the goods from the
producer or middleman to the purchaser.

 u It entails cost: The cost involved in the use of distribution

channel enters the price of the product that the ultimate consumer
has to pay.

 It affects other marketing decisions: Distribution of channel is

an important element of the marketing mix of a firm and the channel
selected affects other marketing decisions like pricing, promotion
and physical distribution.

 It determines the availability of the product: The usefulness

of a product to consumers lies in the fact that it is available to them
at the right time and right place.
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 It performs marketing functions: The real importance of

channel decision lies in the fact that distribution channel performs
several functions in the overall marketing system. First, it facilitates
exchange process. Secondly, it enables the producer to adjust
discrepancies in assortment via a process called ‘sorting’

 It entails firm’s commitment: The channel decision entails long-

term commitment of the firm. The relations between the
manufacturer and the middlemen depend largely upon the choice-of
appropriate channels of distribution.

 It facilitates control: The choice of a suitable channel ensures

continuous and effective distribution thereby reducing fluctuations
in production.

Factors affecting the choice of channels of distribution :

1. Market Consideration: An important factor influencing the choice

of channel is the nature of market – type of consumers, size of
demand, geographical location of market, order size, customer
buying habits and preferences, etc.:
2. Product Consideration : Perishability, Size, Units Value, Technical
nature
3. Company Considerations : Age, Size, Resources, Desire for control
of channel
4. Middlemen considerations: Since middlemen constitute a
channel of distribution, their nature and role exert considerable
influence on channel selection.
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Wholesalers :
“Wholesalers are the merchants who buy products from producers or other
wholesalers and release them to retailers, organizational buyers or to
other wholesalers.”

Wholesalers provide an important link between the producers and the

retailer.

Types of Wholesalers :
 Pure Wholesaler: A pure wholesaler, also called a proper
wholesaler or distributor, is engaged in only buying and selling of
goods in large lots and does not engage himself in such activities as
manufacturing or retailing as other wholesalers do
 Retail Wholesaler: Such wholesalers combine retailing with their
wholesaling function. Thus, they purchase goods in-large lots from
manufacturers and sell them to retailers as well as consumers.
 Manufacturer Wholesaler: A manufacturer wholesaler engages
himself in the manufacture of goods besides undertaking
wholesaling functions. He may also deal in goods of other
manufacturers with the purpose of meeting the retailer’s demand,
increasing his turnover and thus reducing overhead expenses.

Functions of Wholesalers :
 Buying: The wholesalers anticipate customer demands gather
information regarding alternative sources of supply and purchase
and assemble goods from these sources.
 Selling: The wholesalers sell goods in large lots to retailers and
industrial users.
 Storing: Wholesalers provide warehousing services at lower cost
than most individual producers or retailer could provide.
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 Transporting: The wholesalers transport goods from the place of

manufacture to their own godowns from where they further move
the goods to retailers.
 Grading and Packaging: The wholesalers perform grading of the
assembled goods according to certain standards, often give a brand
name and undertake packaging of goods to convince the buyers of
the quality of goods being purchased.
 Pricing: The wholesaler fixes the price of the goods he sells to
retailers/industrial users. This price often forms the basis on which
the retailer fixes the price that he will charge from customers.
 Financing: The wholesaler provides financial accommodation to
both manufacturers and retailers. He purchases from the
manufacturers on cash and at time gives advance to the
manufacturer.

Retailers :
“retailing includes all activities directly related to the sale of goods or
services to the ultimate consumers for personal, non-business use.”
Although the bulk of all retail sales occurs in retail stores, the definition of
retailing also includes several forms of non-store retailing.

Thus, a retailer is a middleman who sells primarily to ultimate consumers

for non-business use.

Functions of Retailers :
(i) Buying and assembling of goods from favour wholesalers and
manufacturers with a view to meeting the needs of ultimate
consumers.
(ii) Selling of goods in retail to the ultimate consumers.
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(iii) Storing of goods to hold stocks so as to maintain uninterrupted

supply of products demanded by the consumers.
(iv) Transporting goods from wholesalers
(v) Dividing, packaging and pricing of goods purchase from
wholesalers.
(vi) Risk-taking against possible loss of goods due to fire, theft,
determination, etc.

Concept of Marketing Logistics :

The term “logistics” refers to the complete process of bringing raw
materials and component parts into an organisation, then moving to next
stage of work-in-progress through the organisation and transporting
finished goods out of the organisation. To carry out this logistics task,
effective marketers establish and nurture long-term partnerships with
suppliers, companies, partners, customers, wholesalers, etc

Importance of Marketing Logistics :

1. Improving customer experience: Logistics management helps to
provide faster and quality service.
2. Accessibility: Ensures access to the right product at right time.
3. Creates time and place utility: The company uses time utility so
that all the components and materials are available when they are
needed, and the manufacturing line is unaffected. Place utility
denotes that all necessary commodities and services are accessible
where and when they are needed.
4. Boosting Profits: When goods are manufactured on time and
delivered to the end user on time, wastage tends to be very low
which tends to increase the profits of the firm.
5. Helps to align with the changing work environment: As we
all know business trends are changing rapidly and involvement of
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information technology has increased in every sector, so is the case

with the logistics.

Stages in Marketing Logistics :

(a) Inbound Logistics: These are logistics that flow from the supplier
to the manufacturing unit. These are basically the raw materials
needed by the firm to manufacture a certain good

(b) Outbound Logistics: They flow from the manufacturer to the point
of consumption. Shipments of items to other firm facilities, such as
temporary warehouses, physical stores, suppliers, and production
facilities, are also included in this logistics step.

(c) Reverse Logistics: Reverse logistics is the process of sending goods

back to the supply chain from end users to either the producer or the
retailer. Reverse logistics begin with the end user and end at the
producer of the good

Components of Marketing Logistics :

1. Order Processing : Processing consumer orders serves as the
foundation of marketing logistics. The customer orders should be
completed as quickly as possible in order to give a better customer
service. Order processing starts from receiving a order, recording it,
filling it, processing it and assembling all received orders for further
transportation.

2. Transportation : transportation means the movement of goods

from one place to another. Transportation is a necessary function of
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marketing because most of the markets are geographically

separated from the areas of production. A firm’s ability to transport
undamaged products to appropriate distributors in a timely fashion
effects the firm’s success in satisfying consumer’s needs and wants.

3. Storage and Warehousing : Storage involves holding and

preserving of goods between the time of their production and the
time of their use. A warehouse is a place where goods are stored or
accumulated. The storage function is thus made effective through
the establishment of warehouse. And warehousing is the design of
operation of storage facilities, i.e., warehouses.

4. Inventory Control : Inventory means the stock of goods held by a

firm in anticipation of sales. Inventory may be of two types: in-transit
inventory which is moving through the distribution system, and
warehouse inventory, i.e. stock of goods lying in the factory and/ or
warehouses.

5. Information Monitoring : The marketing logistics managers

constantly want the most recent data on stock, shipping, and
warehousing. For instance, information regarding the current stock
position, future engagements, and replenishment capabilities are
constantly needed in relation to inventory