Principles of Marketing

Module 11: Pricing Strategies

How Customers View Price
What is Pricing Method?

• Pricing method is a technique that a company apply to evaluate the cost of their products.
This process is the most challenging encountered by a company, as the price should match
the current market structure and also compliment the expenses of a company and gain
profits. Also, it has to take the competitor’s product pricing into consideration so, choosing
the correct pricing method is essential.
There are several methods of pricing & they can be grouped
into few broad categories :-

(1) Cost Based Pricing: Under the cost based pricing, different methods used are :- Mark Up
Pricing ,Absorption Cost Pricing ,Target Rate of Return Pricing
Marginal Cost Pricing (MAT)

(2) Demand Based Pricing :What the Traffic can Bear‘ Pricing ,Skimming
Pricing ,Penetration Pricing.

(3) Competition Oriented Pricing :Parity Pricing ,Discount Pricing , Premium Pricing and
Tender Pricing.
 Cost Based Pricing :
• Mark Up Pricing :This method requires the marketer to approximately calculate the total production or
manufacturing cost of the product and after that adding the mark-up or margin (that firm intends to
earn ) to it. (Fixed or variable cost)
• Absorption Cost Pricing :In absorption/full cost pricing , the unit cost is finalised with reference
to regular production and sales level. The method uses standard costing techniques & works out the
variable & fixed costs involved in manufacturing, selling & administering the product. By adding the
costs of 3 operations, we get the total costs.
• Target Rate of Return Pricing :In this pricing method , the company needs to calculate the desired rate
of return on the capital it has invested in producing the product .This rate of return helps in calculating
the desired quantity of profit .
Demand Based Pricing

• What the traffic can bear pricing :Using this method , the seller charges the customer with
the maximum possible price that they will pay willingly under the present situation.
• Skimming based pricing :In this method the companies by selling at premium prices fulfill
their desire of skimming market.
• Penetration –Based Pricing :This focuses on keeping the prices low as compared to current
competitors , to gain intial market share , when market is large in size and still growing .
Competition Oriented Pricing

• Parity pricing : In this method, the competitors product is taken as the benchmark to set the
price of the product .
• Discount pricing :When the company sets the price of its product lower than the level of
competition i.e below the price that the competitors is charging for the similar product it is
called as discount pricing .
• Premium Pricing :When the company sets the price of its product upper than the level of
competition i.e above the price that the competitor is charging for similar product, it is called
ad premium pricing .
• Tender pricing/bid pricing :The sealed bid is another competitive pricing method followed
by firms .there are numerous project . Govt purchases and industrial marketing activities
where suppliers are called their quotations
Pricing Strategies
New product pricing strategy
• 1)Price skimming :it is defined as a product pricing strategy where a consumer will pay the
highest initial price demanded by a firm .companies select this method who intends to
launch new product in market . A firm charges the highest initial price that customers will
payAs the demand of the first customers is satisfied, the firm lowers the price to attract
another, more price-sensitive segment
2) Penetration Pricing :this strategy is used to enter the market at initial level by offering the
products at quite low prices . The price of a product is initially set low to rapidly reach a
wide fraction of the market and initiate word of mouth to enlarge market.
Price discounts strategy

Price discounts : Quantity Discount : a purchaser is said to get a quantity discount when
consumer tries to acquire many unit of an item and the price charged is comparatively lower
1)Cash Discount :When a consumer . Marketing intermediary or any organisational buyer is
given a discount on price , for immediately paying the bill for the goods purchased it is
called as cash discount .
2)Seasonal discounts :this discounts are provided to buyers for buying off season products
3)Promotional allowances :When a dealer is paid for promoting or advertising the products of
the producer it is called as promotional or trade allowances
4)Zero based financing: buyers are not charged any interest
Psychological pricing strategy :

Psychological pricing :
1)Odd-even pricing : The price of the product ending with an odd or even digit is termed as odd
even pricing
2)Reference pricing :The price of the product is formulated on the basis of comments and
reference of the customer
3)Prestige pricing : creating an image of quality products by offering high priced items is called
as prestige pricing
Differentiated pricing strategy :

• Differentiated pricing strategy :

1)Customer Segment pricing : Different classes of buyers are offered the
same product or services at different prices .
2)Product form pricing : prices of different form or variants of a particular
product are different
3)Channel pricing :different prices are set for selling through different
distribution channels
4)Location pricing : A product is charged differently in various areas despite
the fact the cost incurred at each area are identical .
Discounting Strategies

• Quantity discounts
• Seasonal discounts
• Cash discounts
• Trade discounts (given to middlemen)

• Personal allowances (rewards to salespeople)

• Trade-in allowances (cars)
• Price bundling (cable) package)
Quick Review

• How does price affect the value of the organization’s products or services?
• What are the primary factors to consider in pricing?
• Compare common pricing strategies.
• What is price elasticity and how can it be used to set price?
• What is competitive bidding and how is it used for B2B pricing?