PRICING PRODUCTS

&
PRICING
STRATEGIES
 Define Price

In ordinary usage, price is the quantity of

payment or compensation for something.

Economists view price as an exchange ratio

between goods that are exchanged for each
other.
PRICE=

Quantity of Money received by the Seller______

Quantity of goods and services received by the buyer
 You When you pay College Fees
When you pay Hostel fees
When you pay rent to the PG

Pay a When you pay the Telecom Bills

When you pay for the Birthday cakes
When you pay for the interest of the Loan

Price When you pay charges to your trip

When you pay for the Petrol
Then What is
Pricing????
 Pricing is a fundamental aspect of financial modelling, and is one
of the four P’s of the marketing mix.

Price is the only revenue generating element amongst the four P’s, the rest being
cost centers.
Pricing is the manual or automatic process of applying prices to purchase and
sales orders, based on factors such as: a fixed amount, quantity break, promotion
or sales campaign, specific vendor quote, price prevailing on entry, shipment or
invoice date, combination of multiple orders or lines, and many others.

Pricing is the process of determining what a company will receive

in exchange for its products. Pricing factors are manufacturing
cost, market place, competition, market condition, Quality of
product.
 What a price should do

A well chosen price should do three things:

• Achieve the financial goals of the company

(e.g., profitability)
• Fit the realities of the marketplace (Will
customers buy at that price?)
• Support a product's positioning and be
consistent with the other variables in
the marketing mix .
 Setting Pricing Policy

1. Selecting the pricing

objective

2. Determining demand

3. Estimating costs

4. Analyzing competitors’
costs, prices, and offers

5. Selecting a pricing
method

6. Selecting final price

 Price is Influenced By…………………………….

Price is influenced by the type of distribution channel used, the type of promotions used,
and the quality of the product.

Price will usually need to be relatively high if manufacturing is expensive, distribution is

exclusive, and the product is supported by extensive advertising and promotional
campaigns

A low price can be a viable substitute for product quality, effective promotions, or an
energetic selling effort by distributors

From the marketer's point of view, an efficient price is a price that is very close to the
maximum that customers are prepared to pay.

In economic terms, it is a price that shifts most of the consumer surplus to the producer.
A good pricing strategy would be the one which could balance between the price floor
(the price below which the organization ends up in losses) and the price ceiling (the price
beyond which the organization experiences a no demand situation).
 Maximize
Profit
Margin to
Middlemen Price
Stability

Long-Run Pricing
Welfare Competitive
Objectives
situation

Achieve
Ability to Target
Pay Return
Capture
Market
 Pricing Strategies

Strategies • Types of discounts

– Cash discount
– Quantity discount
• Discount / allowance – Functional (trade) discount
• Promotional – Seasonal discount
• Geographical • Allowances
• Discriminatory pricing – Trade-in allowances
– Promotional allowances
• Product Mix Pricing
• Special Pricing
 Price Adjustment Strategies

Strategies • Temporarily pricing products

below the list price or even
below cost
• Discount / allowance – Loss leaders
• Promotional – Special-event pricing
• Geographical – Cash rebates
– Low-interest financing, longer
• Discriminatory pricing warranties, free maintenance
• Product Mix Pricing • Promotional pricing can have
• adverse effects
Special Pricing
Loss Leader Pricing
Loss Leader Pricing
Special-event pricing
Special-event pricing
Low-interest financing, longer
warranties, free maintenance
 Geographic Pricing
FOB
FOBOrigin
OriginPricing:
Pricing:
The
Thebuyer
buyerabsorbs
absorbsthethefreight
freightcosts
costsfrom
fromthe
the
shipping point (“free on board”).
shipping point (“free on board”).

Uniform
UniformDelivered
DeliveredPricing
Pricing
The
Theseller
sellerpays
paysthe
thefreight
freightcharges
chargesandandbills
bills
the
the purchaser an identical, flat freightcharge.
purchaser an identical, flat freight charge.

Common
Common Zone
ZonePricing:
Pricing:
Methods
Methodsof of The
TheU.S.
U.S.isisdivided
dividedinto
intozones
zonesand
andaaflat
flatfreight
freight
Geographic
Geographic rate is charged to customers in a given zone.
rate is charged to customers in a given zone.
Pricing
Pricing
Freight
FreightAbsorption
AbsorptionPricing:
Pricing:
The
Theseller
sellerpays
paysfor
forall
allor
orpart
partof
ofthe
thefreight
freight
charges
charges and does not pass them on tothe
and does not pass them on to thebuyer.
buyer.

Basing-Point
Basing-PointPricing:
Pricing:
The
Theseller
sellerdesignates
designatesaalocation
locationasasaabasing
basing
point
point and charges all buyers the freightcosts
and charges all buyers the freight costs
from that point.
from that point.
18
 Discriminatory Pricing

Customer Segment

Product-form

Location ,Image

Time , Channel
Customer Segment
Product-form
Time , Channel
Location ,Image
 Product Mix
Pricing Strategies

• Product Line Pricing

– Setting price steps between product line items.
Eg. Suits at three price levels- Rs.800,1500,4500.
Product Line Pricing
 Optional-Product
Pricing

– Pricing optional or accessory products sold with

the main product.
 Product Mix
Pricing Strategies
• Captive-Product Pricing
– Pricing products that must be used with the
main product
High margins are often set for supplies
Eg: Blades are costlier than razors
Two-part pricing
strategy
Fixed fee plus a
variable usage
rate.
Eg.Wonderla
charges entry fees
+ fees for the food
is separate.
 Product Mix
Pricing Strategies
• By-Product Pricing
– Pricing low-value by-products to get rid of them
Molasses can be used as:
•The principal ingredient in the distillation of rum
•In beer styles such as stouts or porters
•An additive in tobacco smoked in a hookah shisha, or narghile (found in
the brands "Cedars Tobacco", Mazaya, Al-Fakher, Nakhla, Tangiers,
Salloum and Hookafina Blak )
•In dark rye breads
•An additive in livestock feeds
•An ingredient in fishing groundbait
•A source for yeast production
•An iron supplement
•The main ingredient in the production of Citric acid
•In certain cookies
•As a humectant in jerky processing
• Product Bundle Pricing
– Pricing bundles of products sold together.
Psychological Pricing
 Psychological Pricing

 Most Attractive?
A Rs.219  Better Value?
.
 Psychological
reason to price this
way?
B Rs.199

Assume Equal Quality

 Special Pricing
Single-Price
Single-PriceTactic
Tactic All
Allgoods
goodsoffered
offeredat
atthe
thesame
sameprice
price

Flexible
FlexiblePricing
Pricing Different
Differentcustomers
customerspay
paydifferent
differentprice
price

Professional
Professional Used
Usedbybyprofessionals
professionalswithwithexperience,
experience,
Services
ServicesPricing
Pricing training or certification
training or certification

Price
PriceLining
Lining Several
Severalline
lineitems
itemsat
atspecific
specificprice
pricepoints-
points-lxi/vxi/zxi
lxi/vxi/zxi

Leader
LeaderPricing
Pricing Sell
Sellproduct
productat
atnear
nearor
orbelow
belowcost
cost

Lure
Lurecustomers
customersthrough
throughfalse
falseor
ormisleading
misleading
Bait
BaitPricing
Pricing price
priceadvertising
advertising
Odd-number
Odd-numberprices
pricesimply
implybargain
bargain
Odd-Even
Odd-EvenPricing
Pricing Even-number
Even-numberprices
pricesimply
implyquality-
quality-499
499
Combining
Combiningtwo twoor
ormore
moreproducts
productsin
inaa
Price
PriceBundling
Bundling single
singlepackage
package
Two
Twoseparate
separatecharges
chargesto
toconsume
consumeaasingle
singlegood-
good-
Two-Part
Two-PartPricing
Pricing mobile tariff
mobile tariff
 Factors Influencing Pricing Decisions
Internal Factors
•Organizational Factors
•Marketing Mix
•Product Differentiation
•Cost of the Product
•Objectives of the Firm
Pricing Decision

External factors
•Demand
•Competition
•Suppliers
•Economic Conditions
•Buyers
•Government
 Cost
Customer
Oriented Demand
Pricing Oriented
Pricing Policy
Policy

Methods Of
Pricing

Competition Other
Oriented Pricing
Pricing Policy
Policies
 Cost
Oriented
Pricing
Policy
 1.Cost Oriented Policy

Mark-Up/ cost plus Full cost/Absorption

pricing Pricing

Marginal/Incremental Rate on return/Target

Pricing Pricing
 1.Full cost /Mark up Pricing / Cost + Pricing Method

In this pricing method the marketer estimates the total cost of

production and then adds a mark up or a margin which the
firm wants. To arrive at a mark up price the following formula
is used:

Mark Up price = ____α_____

(1-r)
Alpha= fixed cost + variable cost
R= expected return on sales expressed as a percent

Eg. If the fixed cost of making 10,000 shirts is Rs.1,50,000

and the variable cost per shirt is Rs.30/= and the firm expects
a return of 30% on its sales. Find out the mark up price.
Did you get the Mark Up cost
as Rs.64.28/Shirt.

This is also called as “Sum of

Margin Method
2. Marginal cost/Incremental cost pricing method
Here the firm works on the premise of recovering its marginal
cost and getting a contribution towards its overheads.

This method works well for the market which is dominated by

giant firms or characterized by intense competition and the
objective of the firm is to get a foothold in the market.

This pricing method works when the firm has inventory of

finished goods and wants to liquidate it.

The prime concern being to recover the Direct Costs.

 3.Rate of return / Target Pricing Method

A firm invests Rs.50,00,00,000/= as Capital for an

enterprise and the owner says that he wants a return of
minimum 10% on the Capital and profit margin of
minimum 15%.

This is the Target Pricing method.

This method is possible only when there is No

Competition at all in the Market for this
firm/enterprise /product
 Customer
Demand
Oriented
Pricing Policy
 Market-Skimming Pricing

Setting a high price for a new

product to skim maximum
revenues layer by layer from
segments willing to pay the high
price.
 Price Skimming
Inelastic Demand

Situations Unique Advantages/Superior

when
Price
Skimming Legal Protection of Product
Is Successful
Technological Breakthrough

Blocked Entry to Competitors

 Market-Penetration Pricing

Setting a low price for

a new product in
order to attract a large
number of buyers and
a large market share.
 Penetration Pricing
Huge market Size

Situations Customer Loyalty very High

when
Market
Penetration Intense Competition
Pricing
Is Successful
Entry Strategy

Price quality association weak

 Competition
Oriented
Pricing Policy

Pricing above the

Parity Pricing OR
competition
Going Rate Pricing
Or
Premium Pricing
Pricing Below
Competition Level
Or
Discount Pricing
 Other Pricing Policies

Price Bundling
Sealed Bid Pricing
Customer Oriented Pricing
Break Even Point Pricing
Value Based Pricing
Market & Demand based
Affordability Pricing
Prestige Pricing
 Break Even Point Pricing

B.E.Point (in Units)= ______________Fixed Costs_____________

Selling Price per unit – Variable Costs per unit

B.E.P (in Rs.) = _____Fixed Costs X Total Sales______

Total Sales – Total Variable Costs

Break Even price= Fixed Cost + Variable costs

Quantity
 Q1. The Fixed Costs=100000
Selling Price per unit= Rs.4/unit
Variable Costs= Rs.2/unit
Sales= 50,000 units.
Required Profit = Rs. 50,000

FIND OUT THE BREAK EVEN POINT IN UNITS,

BREAK EVEN PRICE.