PRICING

• Pricing is the process whereby a business sets the price at which it

will sell its products and services, and may be part of the
business's marketing plan. In setting prices, the business will take into
account the price at which it could acquire the goods,
the manufacturing cost, the market place, competition, market
condition, brand, and quality of product.
• Pricing is a fundamental aspect of financial modeling and is one of
the four Ps of the marketing mix, the other three aspects being
product, promotion, and place. Price is the only revenue generating
element amongst the four Ps, the rest being cost centers. However,
the other Ps of marketing will contribute to decreasing price
elasticity and so enable price increases to drive greater revenue and
profits.
 Factors Affecting Pricing
Product:
Internal Factors
 Cost
 The Predetermined Objectives
 Image of the Firm
 Product Life Cycle
 Credit Period Offer
 Promotional Activity

External Factors
 1. 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.
 2. The 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.
 3. 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.
 4. 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.
 5. Marketing mix:

• Though price is an important component of marketing mix, other

components cannot be niggard. Any shift or change in any one of
the elements has an immediate effect on the other three elements.
• Therefore, pricing decisions must be seen not in isolation but as a
part of total marketing strategy and should avoid conflict with
other elements namely, product, promotion and place.
• Price as a marketing technique is a big gun in the armoury of
marketing manager that can make, maintain or mar the situation.
However, price change in either way will, not bring expected results
unless such price changes are combined well with other
components that make a total marketing strategy. In many cases,
mere price changes have brought in disastrous doom.
 6. 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.
 7. 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.
 1. Competition:

• While fixing the price of the product, the firm

needs to study the degree of competi­tion 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.
 2. 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.
 3. Government control:

• Government rules and regulation must be

considered while fixing the prices. In certain
products, government may announce
administered prices, and therefore the mar­
keter has to consider such regulation while
fixing the prices.
 4. 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.
 5. 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.
 1. Price Skimming:

• Under this strategy a high introductory price is charged

for an innovative product and later on the price is reduced
when more marketers enter the market with same type of
product for example, Sony, Philips etc. when they
introduce a new technology then a high price is charged
for the product.
• When the same technology is used by other electronic
companies in their product also then the price is reduced.
Generally innovators use price skimming strategy to get
reward for their research and development.
• The price skimming strategy cannot be used by every marketer. For using
this strategy following conditions are must:
• (a) The product must be highly distinctive and demand for that product
must be very inelastic:
• The high introductory price can be charged only for unique products and
the products for which easy substitutes are not available customers pay
high price for the product for its novelty and uniqueness e.g., Rolex
watches, Rolls Royce.
• (b) The company must be able to maintain its uniqueness for some time:
• If the product can be copied easily then price skimming will not bring
revenue for a longer time.
• (c) Presence of class market segment:
• To use price skimming strategy there must be customers in the market
who value the uniqueness of the product and are ready to pay high price.
 2. Penetrating Pricing:

• This strategy means using lower initial price to capture a large market.
These forces the customers to buy the product and company can capture
a very big share and leave very small share for competitors. Penetration
pricing is attractive when following conditions are satisfied:
• (i) The price elasticity of demand is high and easy substitutes of that
product are available.
• (ii) The firm can increase its production capacity with increase in demand.
• (iii) When customers are highly price sensitive which means customers
easily shift to another brand if it is available at low price.
• (iv) When company has to face high competition while launching the
product.
• The Reliance Company followed penetration pricing strategy when it
introduced mobile phone. It offered it at so low price that it captured big
share of mobile phone market.
 Pricing Policies for determining Proper Price of a Product

• Pricing policies for determining proper price of

a product are: 1. Price Skimming or pricing for
market skimming 2. Price Penetration Policy 3.
Price discrimination policy and 4. Re-sale Price
Maintenance!
 1. Price Skimming or Pricing for Market Skimming:

Price skimming involves setting the higher prices of product during the initial stages of its introduction.
The cream of demand may be skimmed. The main aim of this policy is profit maximisation in the
shortest possible time by charging higher prices of the products.
• But such a mechanism works for a very short period and competition in the market for the product
cannot be ignored. This policy is undertaken in order to make quick recovery of the investment made
by the manufacturer. There are certain basic reasons which are responsible for resorting to price
skimming policy.
• Firstly, demand of a new product is likely to be less elastic in the early stages of product, life cycle and
competition is quite low. High prices for the product may be charged.
• Secondly, this policy acts as an important instrument against a possible error committed in setting the
price. If the price fixed originally is quite high and market response towards the product is not
appreciable, it can be easily reduced.
• Thirdly, high prices in the initial stages of the product generate higher profits which are helpful in the
recovery of investment and excess profit can be ploughed back in the concern to provide a sound
financial base to the organisation.
• Finally, higher prices in the initial stages of company’s organisation products are helpful in keeping the
demand within company’s production capacity.
 2. Price Penetration Policy:

• This is just the reverse of the first policy. Some companies want to cover a sizable
portion of the market. A low price is set to reach the market immediately i.e., quick
and rapid penetration in the mass market is the main aim and the motto is ‘get the
business even at a loss’. The company wants to have a strong hold in the market rather
to make a profit in the initial stages.
• The policy can be successfully followed in case of products whose demand is highly
elastic. By undertaking large scale production operations and mass production, cost of
production and distribution can be considerably reduced. Low prices followed under
this policy may give strong hold of the market to the manufacturer and is very helpful
in fighting the competition.
• This is because the new firms will be discouraged to enter the market on account of
higher cost of production and distribution, profits will be small. At the same time,
firms following this policy will have a strong hold in the market which the competitors
cannot easily cut. It can be said that in a highly competitive market and with price-
sensitive consumers, there is no other better way than price penetration policy.
 3. Price Discrimination Policy:

• Under this policy some firms charge different prices from different customers for the same
products, keeping in view the capacity of the customers to pay. Usually market is divided in
various segments by keeping in view the ability of the customers to pay. This policy can be
successfully followed where the elasticity of demand in one segment of the market is lower
than the other segment.
• This type of demand implies imperfect market conditions. This policy is usually followed in
case of services like medicines and law. For example, doctors sometimes charge their fees
from patients by keeping in mind their ability to pay. Similarly, a lawyer can charge different
fees from different clients.
• In business concerns also certain firms may offer quantity discounts or quote different list
prices to bulk buyers &’ institutional buyers as compared to other buyers. Some firms sell
same product, by differentiating the product in packing and after sales services etc., under
different brand names charging different prices.
• This practice may be undertaken to sell the product in home market and export market. On
account of rapid advancement of quick means of transportation and communication, it is
very difficult to divide the market in various segments and this policy cannot be profitably
employed.
 4. Resale Price Maintenance:

• Resale price maintenance is a policy under which a product is not sold below a
particular price to the distributors (wholesalers and retailers) and in turn to consumers
that minimum price is always maintained. A formal agreement is entered into by the
manufacturer with the distributors that the product will not be resold below the
minimum price to the customers.
• There may be informal understanding between the manufacturer and the distributors.
This policy is usually followed in case of consumable articles like cigarettes, wine,
medicines, electric goods and sports equipment etc. The main aim of undertaking this
policy is to protect the interest of manufactures and to establish a product in the
market and to create good reputation of the concern in the market.
• In order to ensure the successful implementation of this policy, a manufacturer must
enter into a written agreement with the distributors, (oral agreement may not be
carried out properly).
• A proper checking from time to time of the prices charged by the distributors must be
done by the manufacturers. If any trader violates the agreement and charges higher or
lower price of the product, he should be checked, penalized and stopped from doing so.
 Cost-based Pricing:

• Cost-based pricing refers to a pricing method in

which some percentage of desired profit margins is
added to the cost of the product to obtain the final
price. In other words, cost-based pricing can be
defined as a pricing method in which a certain
percentage of the total cost of production is added
to the cost of the product to determine its selling
price. Cost-based pricing can be of two types,
namely, cost-plus pricing and markup pricing.
 i. Cost-plus Pricing:

• These two types of cost-based pricing are as follows:

• Refers to the simplest method of determining the price of a

product. In cost-plus pricing method, a fixed percentage, also called
mark-up percentage, of the total cost (as a profit) is added to the
total cost to set the price. For example, XYZ organization bears the
total cost of Rs. 100 per unit for producing a product. It adds Rs. 50
per unit to the price of product as’ profit. In such a case, the final
price of a product of the organization would be Rs. 150.
• Cost-plus pricing is also known as average cost pricing. This is the
most commonly used method in manufacturing organizations.
  Markup Pricing:

• Refers to a pricing method in which the fixed

amount or the percentage of cost of the
product is added to product’s price to get the
selling price of the product. Markup pricing is
more common in retailing in which a retailer
sells the product to earn profit. For example, if
a retailer has taken a product from the
wholesaler for Rs. 100, then he/she might add
up a markup of Rs. 20 to gain profit.
 Demand-based Pricing:

• Demand-based pricing refers to a pricing method in which the price

of a product is finalized according to its demand. If the demand of a
product is more, an organization prefers to set high prices for
products to gain profit; whereas, if the demand of a product is less,
the low prices are charged to attract the customers.
• The success of demand-based pricing depends on the ability of
marketers to analyze the demand. This type of pricing can be seen
in the hospitality and travel industries. For instance, airlines during
the period of low demand charge less rates as compared to the
period of high demand. Demand-based pricing helps the
organization to earn more profit if the customers accept the
product at the price more than its cost.
 Competition-based Pricing:

• Competition-based pricing refers to a method in which an

organization considers the prices of competitors’ products
to set the prices of its own products. The organization may
charge higher, lower, or equal prices as compared to the
prices of its competitors.
• The aviation industry is the best example of competition-
based pricing where airlines charge the same or fewer
prices for same routes as charged by their competitors. In
addition, the introductory prices charged by publishing
organizations for textbooks are determined according to
the competitors’ prices.
 i. Value Pricing:

• Other Pricing Methods:

• In addition to the pricing methods, there are other
methods that are discussed as follows:
• Implies a method in which an organization tries to win
loyal customers by charging low prices for their high-
quality products. The organization aims to become a
low cost producer without sacrificing the quality. It
can deliver high- quality products at low prices by
improving its research and development process.
Value pricing is also called value-optimized pricing.
 ii. Target Return Pricing:

• Helps in achieving the required rate of return

on investment done for a product. In other
words, the price of a product is fixed on the
basis of expected profit.
 iii. Going Rate Pricing:

• Implies a method in which an organization

sets the price of a product according to the
prevailing price trends in the market. Thus, the
pricing strategy adopted by the organization
can be same or similar to other organizations.
However, in this type of pricing, the prices set
by the market leaders are followed by all the
organizations in the industry.
 iv. Transfer Pricing:

• Involves selling of goods and services within

the departments of the organization. It is done
to manage the profit and loss ratios of
different departments within the organization.
One department of an organization can sell its
products to other departments at low prices.
Sometimes, transfer pricing is used to show
higher profits in the organization by showing
fake sales of products within departments.