PRICING

MEANING
 Price is the exchange value of goods & service in terms of money.
The term ’Price’ denotes money value of a product. It represents
the amount of money for which a product can be exchanged. In
other word, price represent the money which the buyer pays to
the seller for a product.
 E.g., We pay rent for house, tuition fees, consultant fee to a
doctor, fare for taxi, wages, salary etc.
 It is difficult to decline the price of a product. Because, it doesn’t
mean only the physical aspect but it also includes services &
benefits like warranty, repair facilities, free home delivery, credit
facility etc.
Cont’d…
 More the service, higher the price.
 So, we can define as Price as the amount which is charged by a seller
from a buyer for product & its accompanying service.
 Price of a product has three components:
 Original Cost
 Selling Cost
 Service Expenses
 Marketing Expenses
 Administration Expenses
 Profit Margin
PRICING MEANING
 Pricing is the art of translating into quantitative terms(i.e rupees)
the value of the product or service by the marketing manager
before it is offered to target consumers for sale.
 Pricing is the process of setting pricing objectives, identifying the
factors governing the price, formulating the pricing policies,
setting the prices, implementing them & controlling them.
DEFINITION
 Acc to Prof. K.C. Kite,
“Pricing is a managerial task that involves establishing pricing objectives,
identifying the factors governing the price, ascertaining their relevence &
significance, determining the product value in monetary terms &
formulation of price policies & the strategies, implementing them &
controlling them for the best results”.
IMPORTANCE OF PRICE & MARKETING
MIX
 Means of allocating resources.
 Price regulates demand.
 Price is a competitive weapon
 Determinant of profitability
 Importance for consumers.
 Other advantages are:
 Price is a powerful force in attracting the attention of buyers & increasing
sales.
 Price governs the class & type of customers who intend to use the
product. High priced product are bought by status conscious persons.
CONT’D…
 Price is the most comparable attribute. Sometime the quality of the
product cannot be evaluated by inspection & than consumers judge the
quality with the help of price of the product.
 Promotion & advertisement of a product depends on its price.
 Product are differentiated with one another on the basis of price.
OBJECTIVE OF PRICING DECISION
 Price Stability
 Profit Maximisation
 Survival
 Market Share
 Public image
 Target return on investment
 Cash recovery
 Skimming the market cream
 Market Peneteration
 Preventing Competition
FACTORS AFFECTING PRICING
DECISION

Internal Factors External Factor

Product demand
Pricing Objective
Elasticity of demand
Cost of Production
Competition level
Marketing Mix
Economic conditions
Product FACTORS
Government
Differentiation AFFECTING
regulations
Organisational PRICING
Consumer behaviour
Consideration DECISIONS
Distribution channel
Product life cycle
Suppliers
Market Position o the
company
INTERNAL FACTORS
 Pricing Objectives:
The objectives set for pricing affect the decision regarding
fixation of price for a particular product. Firms may have a
variety of objectives such as: price stability, product
maximisation, target return on investment, meeting the
competition, survival etc. Pricing decision should be made only
after proper consideration of pricing objective.
 Cost of Production:
Cost play an important role in the pricing of the product. It
server as the base for price fixation. Majority of the firms uses
cost plus or target pricing method for price fixation.
CONT’D…
 Marketing Mix:
Price is one of the important elements of the marketing Mix and
therefore, must be coordinated with the other elements:
Production, promotion, distribution. Any change in price will
have an immediate effect on other three elements.

 Product Differentiation:
The price of the product also depends upon the characteristics of
the product. In order to attract the customers, different
characteristics are added to the product, such as quality, size,
color change, attractive package, alternative uses etc.
CONT’D…
 Organisational Consideration:
Pricing decisions occur at two levels in the organisation. It is the
top management which generally has full authority over pricing.
The marketing manager’s role is to assist the top management in
price determination administer the pricing within policies laid
down by the top management.

 Product Life Cycle:

Pricing decision are affected by the stages of product life cycle.
The price which is relevant in one stage may not necessarily be
relevant in the next stages & therefore it requires price
administration during each stages.
EXTERNAL FACTORS
 Product demand:
Product demand has a great impact on pricing. Since, demand is
affected by many factors, such as: number of prospective buyers,
their preferences, their capacity & willingness to pay, number of
competitors, what they are charging for similar products etc.
Therefore, these factors must be taken into consideration while
fixing the price.

 Elasticity of demand:
Price elasticity of demand also affect the pricing decision. Price
elasticity means a relative change in demand due to certain
percentage change in price of the commodity.
CONT’D…
 Competition:
Competitive conditions affect the pricing decision. No
manufacturer is free to decide his prices without considering
competition unless he has monopoly. It is a crucial factors in
price determination. While deciding the price, the marketer must
know the pricing objectives, policies & strategies, strengths &
weakness of the competitors. This also helps to know the
possibilities for raising or lowering the prices.
 Economic Conditions:
Economic Environment of the country is an important factors
affecting the pricing decisions. Inflationary & deflationary
conditions affect the pricing. In the recession period, the price
are reduced to a sizable extent to maintain the level of turnover.
CONT’D…
 Government Regulation:
The government of the nation influences the pricing policies in a
number of ways. It regulates the price of the products it makes
available & service it rendered to the community like electricity,
transport, railway, postal etc. Government interference in the
form of taxes & fixation of prices influence the pricing decisions.

 Consumer Behaviour:
The behaviour of the consumers & users for the purchase of a
particular product, do affect pricing, particularly if their number
is large. In other words, the composition & behavior of
consumers have great impact on pricing decision.
CONT’D…
 Distribution Channel:
A number of intermediaries exist between the manufacturer &
the final consumer. Each of them chargers for their services,
which ultimately add up to the cost . Therefore, longer the
distribution channel, higher will be the price of the product &
vice-versa.

 Suppliers:
Suppliers of inputs, especially raw materials & fabricated parts
have great impact on the price of a product. If the suppliers raise
the price, it will lead the manufacturer to increase the price of
the product, which will ultimate affect the consumers.
CONT’D…
 Market Position of company:
Market position or the image of the company in the minds of
consumers regarding its product mix, quality, technology,
durability, usefulness, after sale service etc. may also influence
the pricing decisions of the company.

 Other Factors:
There are number of factors which directly or indirectly
influence the pricing decisions. Such as: Social & ethical
considerations, Consumer’s reactions towards rising prices, wage
rates, productivity, trade customs etc.
PROCEDURE FOR PRICE
DETERMINATION
After formulating the pricing objective & deciding the pricing
policy, the next step is to determine the price of the product.
There is no specific procedure equally applicable to all firms for
price determination.
Steps are:
Identify the
Select the Target Estimate the
potential
Market demands
customer

Establish Anticipate
Select pricing
expected share of competitive
strategy
market reactions

Consider
company’s Select the specific
marketing price
policies
PRICING POLICIES
Policies are guideline for achieving the objectives. Therefore,
different policies are framed & adopted for achieving different
objectives. Thus, price policy is framed & adopted for achieving
the pricing objectives. Pricing policies provide the framework &
consistency needed by the company to make reasonable,
practicable & effective pricing decisions. It helps the company to
attain its pricing objectives.
There are number of pricing policies are:
 On the Basis of Cost & Demand
 On the Basis of Price-Level
 On the Basis of Flexibility
 On the Basis of Geographical Condition
 On the Basis of Specialty
ON THE BASIS OF COST & DEMAND
 Cost-Oriented Pricing Policy

 Demand- Oriented Pricing Policy

ON THE BASIS OF PRICE LEVEL
 Meeting competition policy

 Under the market policy

 Above the market policy

ON THE BASIS OF FLEXIBILITY
 One Price Policy

 Flexible pricing policy

ON THE BASIS OF GEOGRAPHICAL
CONDITIONS
 Uniform delivery pricing policy
 Production point pricing policy
 Zonal delivery pricing policy
 Base point pricing policy
 Freight absorption pricing policy
 Home delivery pricing policy
ON THE BASIS OF SPECIALITY
 Skimming pricing policy
 Penetration pricing policy
 Price lining policy
 Full-line pricing policy
 Unit pricing policy
 Bait pricing policy
 Psychological pricing policy
 Odd pricing policy
 Customary pricing policy
 Prestige pricing policy
CONT’D…
 Captive pricing policy
 Loss leader pricing policy
 Leader pricing policy
 Monopoly pricing policy
 Discriminating pricing policy
 Dual pricing policy
 Administrated pricing policy
 Sealed bid pricing policy
 Break-even pricing policy
 Promotion pricing policy
PRICING METHOD

Cost-Based
Pricing

Demand-Based
Pricing

Competition-
Based Pricing
A) COST BASED PRICING METHOD
 Cost of production is the most important variable & most
important determinant of pricing the product. The cost includes
the cost related to production & distribution of goods & service
like payment for materials, labour, overheads etc. Methods of
determining price on the basis of cost are:
 Cost-plus pricing method or Mark-up pricing method
 Marginal cost pricing method
 Break-even pricing method
 Target return pricing method
1) COST-PLUS PRICING METHOD
 It is a simplest & ideal method for price determination. The price
of a product is determined by adding desirable profit with total
cost per unit of product. Formula is:

Price per unit = Total cost + Total estimated profit

Number of units

The cost of manufacturing (i.e. Total Cost) acts as a base for price
fixation. Selling price is determine on the basis of (i) Cost of
production, (ii) Selling expenses, (iii) Interest, (iv) Expected
profit margins.
2) MARGINAL COST PRICING
METHOD
 It also known as Incremental Cost Pricing Method. First method are
based on total cost which comprise fixed cost & variable cost.
This method, the fixed cost is ignored & the price is determine
on the basis of additional variable cost associate with an
additional unit of output. The cost of producing & selling one
more unit i.e. the last unit is taken as the base for the pricing.
3) BREAK-EVEN PRICING METHOD
 This methods helps in knowing the level of output where the
revenues will be equal to cost, assuming a certain selling price.
This point is known as Break-Even Point. At this point costs are
fully covered. Thus, it considers both fixed costs & variable costs.
Sales above this point results in profit where as sales below it
gives losses to the seller. Break-Even Point represents that level
of production at which there is no profit & no loss.
Total Fixed cost
 BEP(in units) =
Selling price per unit-Variable cost per unit
4) TARGET RETURN PRICING
 It also known as rate of Return Pricing Method. Under this method
first of all, an arbitrary desired rate of profit on the capital
invested is determined. After that total desired profit is calculated
on the basis of this rate of return. Total desired profit is then
added to the total cost of production & thus the price per unit of
the product is determined.
Total cost of production+ Total desired profit at desired rate of return

 Price( per unit) =

Total number of units produced
B) DEMAND-BASED PRICING
METHODS
 The relationship of demand & supply have a considerable affect
on price level. Under this method, the demand for the product is
the pivotal factors for pricing. A high price is charged when or
where the demand is intense & a low price is charged when the
demand is low. Price is fixed by simply adjusting it to market
conditions.
 Pricing based on market conditions.
 Perceived value pricing method
1) PRICING BASED ON MARKET
CONDITIONS
 The price of a product must be determine keeping in view the
conditions prevailing in the market. Pricing varies according to
market conditions. They are:
a) Price under perfect competition.
b) Price under monopoly condition.
c) Price under oligopoly condition.
d) Price under monopolistic condition.
2) PRECIVED VALUE PRICING
METHOD
 Many firms determine the price on the basis of perceived value
of their product. It is the buyer’s perception of value & not the
seller’s cost which is the key to the product pricing.
 E.g., buyer’s having own perception value for zodiac ties, Rado
watches etc. the buyers are ready to pay premium price for the
product having perception value. The price of cosmetics,
fashionable products, gift items are determine on the perceived
value method.
C) COMPETITION BASED PRICING
METHOD
 In these methods, the nature & extent of competition are taken
into account before pricing a product. Some competition based
pricing method are:
 Going-rate pricing method.
 Sealed bid pricing method.
1) GOING-RATE PRICING METHOD
 Going rate pricing is the method of setting the price in relation
to the prices of competitors. The firm bases its prices of
competitor's price with less attention paid to its own cost &
demand.
 Meeting the competition pricing
 Above the competition level pricing
 Below the competition level pricing
2) SEALED BID PRICING METHOD
 It is a competition based pricing method. The firm fixes its prices
on the estimation of how the competitors price their product. It
means if the firm wants to win a contract or job, it should quote
less than the competitors. But the firm cannot set its price below
the cost or a certain level.
NEW PRODUCT PRICING POLICIES &
STRATEGIES
 Pricing policies constitute the general framework within which
pricing decisions are taken. While the pricing policies provide the
guidelines within which pricing strategy is formulated &
implemented. Pricing policy means a policy determine for
normal conditions of the market. & Pricing strategy is a policy
determined to face a specific situation & is of temporary nature.
 When a competitive firm enters in the market, a new price
strategy is required to face the competition.
 Strategy are:
 Skimming the cream price strategy
 Low penetration price strategy
 Pricing strategies over the PLC.
SKIMMING THE CREAM PRICE
STRATEGY
 It is also known as ‘ High Initial Price Strategy’. Under this strategy,
the price of a new product is determined very high. Such price
continue to be high till the competitors begin to enter the
market. As soon as competitors enter the market, the pioneer
producer reduces the price of his product. By this strategy the
investment made for the development of the product may be
quickly realised. This pricing strategy is useful in the case of
innovative & specialty products. The manufacturers of
computers, mobile phones, calculators, electronic watches etc
used in this strategy.
MAIN REASONS FOR ADOPTING
SKIMMING STRATEGY
 To recover the heavy amount of expenditure incurred by the firm
on the research, development, production, advertising & sales
promotion of the new product.
 To get the highest possible return on capital invested till the
competitors enter into the market.
 To get the advantage of monopoly situation in the market.
 To attract the consumer of high income group.
 To try the market for the product at high rate, because it is easy
to reduce it than to raise it.
 Suitable for pricing luxury products, because it creates social
status.
LOW PENETRATION PRICING
STRATEGY
 Under this strategy, the price of a new product is determined low
to speed up its sales & therefore widening the market base. Low
price is used as a major tool for rapid penetration into market to
hold a position. This strategy aims at capturing the market at the
very outset. And if there is already a competing product, It aims
at capturing the major share of the market.
MAIN REASONS FOR ADOPTING LOW
PENETRATION STRATEGY
 Less cost of research, development & production.
 To avoid the competition or to face the competition successfully.
 To avoid government interference.
 To get the economies of large scale production by increasing the
sales.
 To attract the customers of low income group, which are large in
number.
 The demand for new product is highly elastic even in
introductory stage.
 To expand the market.
 To obtain large profit.
PRICING STRATEGIES OVER THE
PLC
 Pricing Under Introductory Stage.
 Pricing Under Growth Stage.
 Pricing Under Maturity Stage.
 Pricing Under Decline Stage.
DISCOUNT POLICIES
 All customers do not pay list prices. Marketers usually modify
prices for different customers under different circumstances. This
policy of the marketer is known as ’Price Differential Policy’.
Under this policy some price concessions are given to customers
according to mode of payment, quantity sold, geographical
location, season etc. Such concessions reduce the basic price
quoted. There are many forms:
 Discounts
 Rebates
 Premiums
These are offered by manufacturers to make their products attractives.
DISCOUNTS
 Discounts reduces the quoted price. It is a special concession in
price which many companies offer to their middlemen & also to
the users. Almost all the companies uses several discount policies
in order to bring price difference. The most common discounts
are:

Cash Seasonal
Discount Discount

Quantity Trade
Discount Discount
CASH DISCOUNT
 Cash discount is most commonly used & allowed by
manufacturers as well as traders with a view to encouraging their
customers to make the cash payments. It is granted to all such
buyers who pay their bills in cash or within a specified period of
time. Cash discount is given on the net amount payable after
deducting trade & quantity discounts. On account of cash
discount, the customer receives the product at less price (sale
price-cash discount) & seller receive payment immediately.
 Advantages are:
 It encourages timely payments
 It reduces the risk of bad debts.
 It improves liquidity position of the manufacturer.
TRADE DISCOUNT
 Also known as ‘Functional Discount’. Trade discount is allowed in
the form of deduction from the list price. Manufacturers give this
type of discount to wholesalers & retailers as a consideration for
the remaining marketing function to be performed by them.
 E.g., the wholesalers keeping excess stock of goods with them
receive more discount. Similarly, such firms are given additional
discount who provide the customers a facility of credit & finance.
 Advantages are:
 It makes price structure flexible.
 It is provides for marketing services rendered by the retailers.
 It helps in adjusting the list price & the current market price until the
new price list is printed.
QUANTITY DISCOUNT
 Quantity discount is allowed to encourage a customer to
purchase the commodities in bulk quantity or to concentrate his
purchase with a particular seller.
 Quantity discount is termed as patronage discount because the
more business a buyer gives to a seller, the greater is a discount.
 Quantity discount may be allowed in different form:
 In percentage form
 In rupee value
 In physical units
CONT’D…
 Advantages are:
 Slow moving products can be sold faster.
 It stabilizes orders irrespective of changes in season.
 It encourages bulk purchases, thus helping the firm to get large-scale
economies.
 On account of this discount the number of transactions reduced & sale
problem are solved.
 The real price could have reduced through quantity discount & the seller
can take the benefit of price elasticity.
SEASONAL DISCOUNT
 It is allowed on those products, which have seasonal demand.
 E.g., refrigerator, Air conditioners, coolers, woolen garments,
blankets, heaters etc. it is allowed on purchases during slack
season. This enable the manufacturer or seller to level out his
production schedule & reduce production & inventory cost.
REBATES
 Rebates are deductions of the quoted prices. Rebate is a
concession given to the buyer to compensate him of the loss of
value satisfaction suffered by him. Such dissatisfaction may be
because of defective goods supplied to him, delay in delivery,
goods damaged in transit, possible deterioration in quality on the
shelves etc.
CONT’D….
 Advantages are:
 It has psychological elevation of granting at a time too many concession s,
thus boosting the sales.
 It acts as an instrument of clearing the stock.
 It also act as an instrument of wiping off the tears by compensating the
value dissatisfaction suffered.
PREMIUMS
 There are occasions, where the actual price paid is higher than
the quoted price. The manufacturer at many occasions add
premium to the price quoted for say warranties, extra durability,
special after sale service etc. It doesn’t mean that discounts are
not allowed. Premiums are generally charged on the products
which require costlier after sale services.
 E.g., Tractor, generating set, boiler, air cooling plant etc
Original price of Television Rs.12,000
Less:5% Cash Discount Rs. 6oo
Rs. 11,400
Add: Warrantee on picture tube Rs. 1,000
Add: Extra for sale services Rs. 100
Net price payable Rs. 12,500
CONT’D…
 Advantages are:
 Buyer is guaranteed for repair, replacement & maintenance.
 Seller is compensated for his expenditure on sale services &
replacements.
ALLOWANCES
 There may be special types of allowances offered to retailers,
who are expected to perform promotional activities to push up
the sales.
 E.g., Advertisement allowance, window display allowance, free
sample allowance, free display material etc.