The Science Of Pricing

What is Price ?

In general terms price is a component of an exchange or transaction that takes place between two
parties and refers to what must be given up by one party (i.e., buyer) in order to obtain something
offered by another party (i.e. seller). Yet this view of price provides a somewhat limited
explanation of what price means to participants in the transaction. In fact, price means different
things to different participants in an exchange.

Buyers’ View – For those making a purchase, such as final customers, price refers to what must
be given up to obtain benefits. In most cases what is given up is financial consideration (e.g.,
money) in exchange for acquiring access to a good or service. But financial consideration is not
always what the buyer gives up. Sometimes in a barter situation a buyer may acquire a product by
giving up their own product. For instance, two farmers may exchange cattle for crops. Also, as we
will discuss below, buyers may also give up other things to acquire the benefits of a product that
are not direct financial payments (e.g., time to learn to use the product).

Sellers’ View - To sellers in a transaction, price reflects the revenue generated for each product
sold and, thus, is an important factor in determining profit. For marketing organizations price also
serves as a marketing tool and is a key element in marketing promotions. For example, most
retailers highlight product pricing in their advertising campaigns.

Price is commonly confused with the notion of cost as in "I paid a high cost for buying my new
plasma television." Technically, though, these are different concepts. Price is what a buyer pays to
acquire products from a seller. Cost concerns the seller’s investment (e.g., manufacturing expense)
in the product being exchanged with a buyer. For marketing organizations seeking to make a profit
the hope is that price will exceed cost so the organization can see financial gain from the
transaction.

Finally, while product pricing is a main topic for discussion when a company is examining its
overall profitability, pricing decisions are not limited to for-profit companies. Not-for-profit
organizations, such as charities, educational institutions and industry trade groups, also set prices,
though it is often not as apparent. For instance, charities seeking to raise money may set different
“target” levels for donations that reward donors with increases in status (e.g., name in newsletter),

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gifts or other benefits. While a charitable organization may not call it a price in their promotional
material, in reality these donations are equivalent to price setting since donors are required to give
a contribution in order to obtain something of value. 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 also a key variable in microeconomic price allocation theory. Pricing is a
fundamental aspect of financial modeling and is one of the four Ps of the marketing mix. (The
other three aspects are 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.
Pricing can be a 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. Automated systems require more setup and maintenance but may prevent pricing
errors. The needs of the consumer can be converted into demand only if the consumer has the
willingness and capacity to buy the product. Thus, pricing is the most important concept in the
field of marketing, it is used as a tactical decision in response to comparing market situation.

Objectives of Pricing:

The objectives of pricing should include:

a. To achieve the financial goals of the company (i.e. profitability)

b. To fit the realities of the marketplace (will customers buy at that price?)
c. To support a product's market positioning and be consistent with the other variables in
the marketing mix
d. Price is influenced by the type of distribution channel used, the type of promotions used, and
the quality of the product
e. 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
f. A low cost price can be a viable substitute for product quality, effective promotions, or an
energetic selling effort by distributors
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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 economic 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 be which the organization experiences a no-demand situation).

Strategies Specific To Pricing:

a. Line Pricing:

Line pricing is the use of a limited number of prices for all product offered by a business. This is
a tradition started in the old five and dime stores in which everything cost either 5 or 10 cents. Its
underlying rationale is that these amounts are seen as suitable price points for a whole range of
products by prospective customers. It has the advantage of ease of administering, but the
disadvantage of inflexibility, particularly in times of inflation or unstable prices.

b. Loss Leader:

A loss leader is a product that has a price set below the operating margin. This results in a loss to
the business on that particular item in the hope that it will draw customers into the store and that
some of those customers will buy other, higher margin items.

c. Price/quality Relationship:

The price/quality relationship refers to the perception by most consumers that a relatively high
price is a sign of good quality. The belief in this relationship is most important with complex
products that are hard to test, and experiential products that cannot be tested until used (such as
most services). The greater the uncertainty surrounding a product, the more consumers depend on
the price/quality signal and the greater premium they may be prepared to pay. The classic example
is the pricing of Twinkies, a snack cake which was viewed as low quality after the price was
lowered. Excessive reliance on the price/quality relationship by consumers may lead to an increase
in prices on all products and services, even those of low quality, which causes the price/quality
relationship to no longer apply.[citation needed]

d. Premium Pricing:

Premium pricing (also called prestige pricing) is the strategy of consistently pricing at, or near, the
high end of the possible price range to help attract status-conscious consumers. The high pricing
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of a premium product is used to enhance and reinforce a product's luxury image. Examples of
companies which partake in premium pricing in the marketplace include Rolex and Bentley. As
well as brand, product attributes such as eco-labelling and provenance (e.g. 'certified organic' and
'product of Australia') may add value for consumers and attract premium pricing. A component of
such premiums may reflect the increased cost of production. People will buy a premium priced
product because:

1. They believe the high price is an indication of good quality

2. They believe it to be a sign of self-worth - "They are worth it;" it authenticates the buyer's
success and status; it is a signal to others that the owner is a member of an exclusive group
3. They require flawless performance in this application - The cost of product malfunction is too
high to buy anything but the best - for example, a heart pacemaker.

e. Demand-based Pricing:

Demand-based pricing is a pricing method that uses consumer demand - based on perceived value
- as the central element. These include price skimming, price discrimination and yield
management, price points, psychological pricing, bundle pricing, penetration pricing, price
lining, value-based pricing, geo and premium pricing. Pricing factors are manufacturing cost,
market place, competition, market condition, quality of product. Price modeling using econometric
techniques can help measure price elasticity, and computer based modeling tools will often
facilitate simulations of different prices and the outcome on sales and profit. More sophisticated
tools help determine price at the SKU level across a portfolio of products. Retailers will optimize
the price of their private label SKUs with those of National Brands.

f. Surge Pricing:

Uber's online ride service uses an automated algorithm to increase prices to "surge price" levels,
responding rapidly to changes of supply and demand in the market, and to attract more drivers
during times of increased rider demand, but also to reduce demand. Customers receive notice when
making an Uber reservation that prices have increased. The company applied for a U.S. patent on
surge pricing in 2013.

The practice has often caused passengers to become upset and invited criticism when it has
happened as a result of holidays, inclement weather, or natural disasters. During New Year's

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Eve 2011, prices were as high as seven times normal rates, causing outrage. During the 2014
Sydney hostage crisis, Uber implemented surge pricing, resulting in fares of up to four times
normal charges; while it defended the surge pricing at first, it later apologized and refunded the
surcharges. Uber CEO Travis Kalanick has responded to criticism by saying: "because this is so
new, it's going to take some time for folks to accept it. There's 70 years of conditioning around the
fixed price of taxis."

g. Multidimensional pricing:

Multidimensional pricing is the pricing of a product or service using multiple numbers. In this
practice, price no longer consists of a single monetary amount (e.g., sticker price of a car), but
rather consists of various dimensions (e.g., monthly payments, number of payments, and a down
payment). Research has shown that this practice can significantly influence consumers' ability to
understand and process price information.

Importance of Price:

When marketers talk about what they do as part of their responsibilities for marketing products,
the tasks associated with setting price are often not at the top of the list. Marketers are much more
likely to discuss their activities related to promotion, product development, market research and
other tasks that are viewed as the more interesting and exciting parts of the job. Yet pricing
decisions can have important consequences for the marketing organization and the attention given
by the marketer to pricing is just as important as the attention given to more recognizable marketing
activities. Some reasons pricing is important include:

1. Most Flexible Marketing Mix Variable

For marketers price is the most adjustable of all marketing decisions. Unlike product and
distribution decisions, which can take months or years to change, or some forms of promotion
which can be time consuming to alter (e.g., television advertisement), price can be changed very
rapidly. The flexibility of pricing decisions is particularly important in times when the marketer
seeks to quickly stimulate demand or respond to competitor price actions. For instance, a marketer
can agree to a field salesperson’s request to lower price for a potential prospect during a phone
conversation. Likewise a marketer in charge of online operations can raise prices on hot selling
products with the click of a few website buttons.

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 2. Setting the Right Price

Pricing decisions made hastily without sufficient research, analysis, and strategic evaluation can
lead to the marketing organization losing revenue. Prices set too low may mean the company is
missing out on additional profits that could be earned if the target market is willing to spend more
to acquire the product. Additionally, attempts to raise an initially low priced product to a higher
price may be met by customer resistance as they may feel the marketer is attempting to take
advantage of their customers. Prices set too high can also impact revenue as it prevents interested
customers from purchasing the product. Setting the right price level often takes considerable
market knowledge and, especially with new products, testing of different pricing options.

3. Trigger of First Impressions

Often times customers’ perception of a product is formed as soon as they learn the price, such as
when a product is first seen when walking down the aisle of a store. While the final decision to
make a purchase may be based on the value offered by the entire marketing offering (i.e., entire
product), it is possible the customer will not evaluate a marketer’s product at all based on price
alone. It is important for marketers to know if customers are more likely to dismiss a product when
all they know is its price. If so, pricing may become the most important of all marketing decisions
if it can be shown that customers are avoiding learning more about the product because of the
price.

4. Important Part of Sales Promotion

Many times price adjustments are part of sales promotions that lower price for a short term to
stimulate interest in the product. However, as we noted in our discussion of promotional pricing
in the Sales Promotion tutorial, marketers must guard against the temptation to adjust prices too
frequently since continually increasing and decreasing price can lead customers to be conditioned
to anticipate price reductions and, consequently, withhold purchase until the price reduction occurs
again.

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Nine Laws Of Price and Consumer Psychology:

1. Reference price effect: Buyer’s price sensitivity for a given product increases the higher the
product’s price relative to perceived alternatives. Perceived alternatives can vary by buyer
segment, by occasion, and other factors.
2. Difficult comparison effect: Buyers are less sensitive to the price of a known / more reputable
product when they have difficulty comparing it to potential alternatives.
3. Switching costs effect: The higher the product-specific investment a buyer must make to
switch suppliers, the less price sensitive that buyer is when choosing between alternatives.
4. Price-quality effect: Buyers are less sensitive to price the more that higher prices signal higher
quality. Products for which this effect is particularly relevant include: image products,
exclusive products, and products with minimal cues for quality.
5. Expenditure effect: Buyers are more price sensitive when the expense accounts for a large
percentage of buyers’ available income or budget.
6. End-benefit effect: The effect refers to the relationship a given purchase has to a larger overall
benefit, and is divided into two parts:

Derived demand: The more sensitive buyers are to the price of the end benefit, the more
sensitive they will be to the prices of those products that contribute to that benefit.
Price proportion cost: The price proportion cost refers to the percent of the total cost of the
end benefit accounted for by a given component that helps to produce the end benefit (e.g.,
think CPU and PCs). The smaller the given components share of the total cost of the end
benefit, the less sensitive buyers will be to the component's price.

7. Shared-cost effect: The smaller the portion of the purchase price buyers must pay for
themselves, the less price sensitive they will be.
8. Fairness effect: Buyers are more sensitive to the price of a product when the price is outside
the range they perceive as “fair” or “reasonable” given the purchase context.
9. Framing effect: Buyers are more price sensitive when they perceive the price as a loss rather
than a forgone gain, and they have greater price sensitivity when the price is paid separately
rather than as part of a bundle.

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Pricing can be approached at three levels.

1. Pricing at the industry level focuses on the overall economics of the industry, including
supplier price changes and customer demand changes.
2. Pricing at the market level focuses on the competitive position of the price in comparison to
the value differential of the product to that of comparative competing products.
3. Pricing at the transaction level focuses on managing the implementation of discounts away
from the reference, or list price, which occur both on and off the invoice or receipt.

Many companies make common pricing mistakes.

1. Weak controls on discounting (price override)

2. Inadequate systems for tracking competitor selling prices and market share
3. Cost-plus pricing
4. Price increases poorly executed
5. Worldwide price inconsistencies
6. Paying sales representatives on dollar volume vs. addition of profitability measures

Methods Of Pricing:

The pricing method you select provides direction on how to set your product price. The way you
set prices in your business will change over time, for many reasons. As you learn more about your
customers and competition, you may decide to change your pricing method. Use changes in the
industry or the development stage of your product as an indicator that it’s time to review your
pricing strategy.

1. Base point pricing

Base point pricing is the system of firms setting prices of their goods based on a base cost plus
transportation costs to a given market. Although some consider this a form of collusion between

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the selling firms (it lowers the ability of buying firms to gain a competitive advantage by location
or private transportation), it is common practice in the steel and automotive industries. It allows
firms to collude by simply agreeing on a base price.

TYPES:

i. Point Pricing (-5 to +5 range)

ii. Rebate Pricing (-5 to +5 range)
iii. Bond Pricing (+95 to +105 range)

A pricing approach that involves designating a particular geographic location as a basing point and
then charging customers as a freight cost from that location to the location of the customer. Or a
pricing method in which customers are charged freight cost from a base point; the base point may
be chosen arbitrarily, but the location of one of the company's manufacturing plant is commonly
used.

2. Cost the limit of price

Cost the limit of price was a maxim coined by Josiah Warren, indicating a (prescriptive) version
of the labor theory of value. Warren maintained that the just compensation for labor (or for its
product) could only be an equivalent amount of labor (or a product embodying an equivalent
amount).Thus, profit, rent, and interest were considered unjust economic arrangements.
As Samuel Edward Konkin III put it, "the labor theory of value recognizes no distinction between
profit and plunder." In keeping with the tradition of Adam Smith's The Wealth of Nations,[3] the
"cost" of labor is considered to be the subjective cost; i.e., the amount of suffering involved in it.

3. Drip pricing

Drip pricing is a technique used by online retailers of goods and services whereby a
headline price is advertised at the beginning of the purchase process, following which additional
fees, taxes or charges, which may be unavoidable, are then incrementally disclosed or "dripped".
The objective of drip pricing is to gain a consumer's interest in an attractively low headline price,
but the final price is not disclosed until the consumer has invested time and effort in the purchase
process and made a decision to purchase. Naïve consumers will purchase based on headline price
and sophisticated consumers will consider total cost when comparing offers. Drip pricing can

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distort competition because it can make it difficult for businesses with more
transparent pricing practices to compete on a level playing field. Many jurisdictions have enacted
legislation to outlaw drip pricing of fees, taxes and surcharges. For example, throughout
the European Economic Area and most of the rest of Europe, retailers must include VAT in prices
given to consumers.

BY INDUSTARY SECTOR:

i. Airlines:

Drip pricing of unavoidable additional charges on air fares is outlawed in the European Economic
Area. Article 23 of Regulation (EC) No 1008/2008 requires that "The final price to be paid shall
at all times be indicated and shall include the applicable air fare or air rate as well as all applicable
taxes, and charges, surcharges and fees which are unavoidable and foreseeable at the time of
publication". In the early 2010s, many budget airlines sought to circumvent this requirement by
adding surcharges for the most common means of payment. For example, Ryanair surcharged £6
per passenger per flight segment to process a single debit card payment whose cost was only a few
pence. Article 19 of Directive 2011/83/EU on Consumer Rights has limited such payment
surcharges to "the cost borne by the trader" since 13 June 2014, but because of the prevalence of
these surcharges, the United Kingdom enacted the legislation earlier than required with effect from
6 April 2013 under the Consumer Rights (Payment Surcharges) Regulations 2012.

In mid-2014, the Australian Competition and Consumer Commission took legal action
against Virgin Australia and Jetstar Airways in respect of drip pricing.

After being faced with increasing regulation of the types of surcharges that may be drip-priced,
airlines have created new types of drip-priced surcharges. For example Spirit Airlines from August
2010 and Wizz Air from October 2012 [10] started surcharging passengers who travel with
conventionally-sized hand luggage. Following Ryanair's introduction of allocated seating in
February 2014, it and other UK-based airlines have been accused of seating young children far
away from their parents unless a surcharge is paid. This is despite the UK's Civil Aviation
Authority guidelines stating that airlines' seat allocation procedures should aim to seat children
close to their parents.

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 ii. Event ticketing:

The primary and secondary ticketing industry has faced considerable scrutiny in the United
Kingdom. Many event organizer’s and secondary ticketing agencies, in addition to any published
markup contained within the headline price, add unavoidable delivery fees for tickets later in the
purchase process, even when customers print their own tickets or collect them from a box office.

iii. Hotel booking agents:

Cities in many southern European countries, such as Greece, Italy and Spain, impose a city tax on
guests staying in hotels. Booking agents often exclude the city tax from the quoted headline price,
leaving the hotel guest to pay the tax locally upon check-out. Article 5(1)(c) of Directive
2011/83/EU on Consumer Rights requires all taxes to be included in the total price quoted to the
consumer.

4. Group buy

Group buying, also known as collective buying, offers products and services at significantly
reduced prices on the condition that a minimum number of buyers would make the purchase.
Origins of group buying can be traced to China where team buying was executed to get discount
prices from retailer when a large group of people was willing to buy the same item. In recent times,
group buying websites have emerged as a major player in online shopping business. Typically,
these websites feature a "deal of the day", with the deal kicking in once a set number of people
agree to buy the product or service. Buyers then print off a voucher to claim their discount at the
retailer. Many of the group-buying sites work by negotiating deals with local merchants and
promising to deliver a higher foot count in exchange for better prices. Group buys usually
happened when dealing with industrial items such as single-board computers. China had over
1,215 group-buying sites at the end of August 2010 compared with only 100 in March of the same
year. English-language group-buying platforms are also becoming popular. Online group buying
gained prominence in other parts of Asia during 2010 with new websites
in Taipei, Singapore, Hong Kong, Thailand, Malaysia and the Philippines. In Iran the first group
buy website was launched in summer 2011, only six months later in January 2012 eighteen group
buy websites were operative. Google launched their own daily deals site in 2011 called "Google
Offers" after its $6 billion acquisition offer to Groupon was rejected. Google Offers functions

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much like Groupon as well as its competitor LivingSocial. Users receive daily emails with local
deals, which carry some preset time limit. Once the deal reaches the minimum number of
customers, all the users will receive the deal. The business model will remain the same. Facebook's
'Facebook deals' application was launched in five European countries in January 2011. The
application works on a similar group buying model.

5. Options pricing:

In finance, a price (premium) is paid or received for purchasing or selling options. This price can
be split into two components.

These are:

1. Intrinsic value
2. Time value

The intrinsic value is the difference between the underlying spot price and the strike price, to the
extent that this is in favor of the option holder. For a call option, the option is in-the-money if the
underlying spot price is higher than the strike price; then the intrinsic value is the underlying price
minus the strike price. For a put option, the option is in-the-money if the strike price is higher than
the underlying spot price; then the intrinsic value is the strike price minus the underlying spot
price. Otherwise the intrinsic value is zero.

The option premium is always greater than the intrinsic value. This extra money is for the risk
which the option writer/seller is undertaking. This is called the Time value.

Time value is the amount the option trader is paying for a contract above its intrinsic value, with
the belief that prior to expiration the contract value will increase because of a favourable change
in the price of the underlying asset. The longer the length of time until the expiry of the contract,
the greater the time value. So,

Time value = option premium – intrinsic value

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6. Pay what you want:

Where buyers pay their desired amount for a given commodity, sometimes including zero. In some
cases, a minimum (floor) price may be set, and/or a suggested price may be indicated as guidance
for the buyer. The buyer can also select an amount higher than the standard price for the
commodity. Many common uses of PWYW set the price prior to a purchase, but some defer price-
setting until after the experience of consumption (much like tipping). PWYW is a buyer-centered
form of participatory pricing, also referred to as co-pricing (as an aspect of the co-creation of
value).

7. Price elasticity of demand:

It is a measure of responsiveness of the quantity of a raw good or service demanded to changes in

its price. It is a measure used in economics to show the responsiveness, or elasticity, of the quantity
demanded of a good or service to a change in its price, ceteris paribus. More precisely, it gives the
percentage change in quantity demanded in response to a one percent change in price (ceteris
paribus, i.e. holding constant all the other determinants of demand, such as income).

Price elasticities are almost always negative, although analysts tend to ignore the sign even though
this can lead to ambiguity. Only goods which do not conform to the law of demand, such
as Veblen and Giffen goods, have a positive PED. In general, the demand for a good is said to
be inelastic (or relatively inelastic) when the PED is less than one (in absolute value): that is,
changes in price have a relatively small effect on the quantity of the good demanded. The demand
for a good is said to be elastic (or relatively elastic) when its PED is greater than one (in absolute
value): that is, changes in price have a relatively large effect on the quantity of a good demanded.

Revenue is maximized when price is set so that the PED is exactly one. The PED of a good can
also be used to predict the incidence (or "burden") of a tax on that good. Various research methods
are used to determine price elasticity, including test markets, analysis of historical sales data
and conjoint analysis.

Two alternative elasticity measures avoid or minimize these shortcomings of the basic elasticity
formula: point-price elasticity and arc elasticity.

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 i. Point-price elasticity of demand:

Point elasticity of demand method is used to determine change in demand within same demand
curve, basically a very small amount of change in demand is measured through point elasticity.

ii. Arc elasticity:

A second solution to the asymmetry problem of having a PED dependent on which of the two
given points on a demand curve is chosen as the "original" point and which as the "new" one is to
compute the percentage change in P and Q relative to the average of the two prices and
the average of the two quantities, rather than just the change relative to one point or the other.
Loosely speaking, this gives an "average" elasticity for the section of the actual demand curve—
i.e., the arc of the curve—between the two points. As a result, this measure is known as the arc
elasticity.

8. Price system:

A price system is a component of any economic system that uses prices expressed in any form
of money for the valuation and distribution of goods and services and the factors of production.
Except for possible remote and primitive communities, all modern societies use price systems to
allocate resources, although price systems are not used exclusively for all resource allocation
decisions.

A price system may be either a fixed price system where prices are administered by a government
body, or it may be a free price system where prices are left to float "freely" as determined by supply
and demand uninhibited by regulations. A mixed price system involves a combination of both
administered and unregulated prices.

9. Price umbrella:

A price umbrella, also known as the umbrella effect, is a pricing effect often created by a dominant
company, in which competing firms can find buyers as long as they set their price at or below the
level of the dominant one. This may not apply if the competing firm's products are inferior. Cartels
can generate a price umbrella effect, enabling less efficient rivals to charge higher prices than they
might otherwise be able to.

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10. Product life cycle management:

Used by business management as a product goes through its life-cycle. The conditions in which a
product is sold (advertising, saturation) changes over time and must be managed as it moves
through its succession of stages. The goals of Product Life Cycle management (PLM) are to reduce
time to market, improve product quality, reduce prototyping costs, identify potential sales
opportunities and revenue contributions, and reduce environmental impacts at end-of-life. To
create successful new products the company must understand its customers, markets and
competitors. Product Lifecycle Management (PLM) integrates people, data, processes and
business systems. It provides product information for companies and their extended supply chain
enterprise. PLM solutions help organizations overcome the increased complexity and engineering
challenges of developing new products for the global competitive markets.

11. Product sabotage:

In marketing and retail, product sabotage is a practice used to encourage the customer to purchase
a more profitable product or service as opposed to cheaper alternatives. It is also the practice where
a company attempts to aim different prices at different types of customer. There are several
methods used in achieving this:

1. Cheap packaging: This method is commonly used in supermarkets, where the cheapest
products are packaged in cheap and basic packaging. These products are normally
displayed alongside the more attractively packaged and expensive items, in an attempt to
persuade customers to buy the more expensive alternative instead.

For example, the Tesco supermarket chain sells a "value" range of products in garish (red, blue,
and white) packaging to make them appear unappealing and inferior to their regular brand.

2. Omitting products: From menus not promoting cheaper alternatives. An example of this
method is coffee companies who hide or downplay cheaper drinks in the hope that
customers will buy something pricier. Starbucks and Coffee Republic, who both have a
product called "short cappuccino", are known to use this practice. The staff know the
product, the tills have a button for it, but the product is not listed on the menu boards.

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 Customers who are not aware of it are likely to purchase one of the more profitable items
listed on the menu.

3. Duplicate manufacture: Manufacturing two versions of the same product at different

prices. In the hi-tech world it is common for companies to produce a high-specification
product, sold at a premium price, and then sell the same product more cheaply with some
of the functions disabled. IBM did this with a printer in the 1990s, where an economy
version for a home user was the top-of-the-range model with a microchip in it to slow it
down.

All versions of Microsoft Vista and Microsoft Windows 7 shipped on an identical DVD and
installs the same software regardless of the version purchased by the consumer. However, certain
features are hidden or unusable by the user depending on the installation code entered. Upon
attempting to use such features, the software will offer an "upgrade" and take an immediate
payment from the customer before the features are instantly unlocked without any further
installation being required.

12. Psychological pricing:

Based on the theory that certain prices have a psychological impact. Retail prices are often
expressed as "odd prices": a little less than a round number, e.g. $19.99 or £2.98. Consumers tend
to perceive “odd prices” as being significantly lower than they actually are, tending to round to
the next lowest monetary unit. Thus, prices such as $1.99 are associated with spending $1 rather
than $2. The theory that drives this is that lower pricing such as this institutes greater demand than
if consumers were perfectly rational. Psychological pricing is one cause of price points.

13. Purchasing power:

Purchasing power (sometimes retroactively called adjusted for inflation) is the number of goods
or services that can be purchased with a unit of currency. For example, if one had taken one unit
of currency to a store in the 1950s, it is probable that it would have been possible to buy a greater
number of items than would today, indicating that one would have had a greater purchasing power
in the 1950s. Currency can be either a commodity money, like gold or silver, or fiat money emitted
by government sanctioned agencies. Most modern fiat currencies like US dollars are traded against

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each other and commodity money in the secondary market for the purpose of international transfer
of payment for goods and services. As Adam Smith noted, having money gives one the ability to
"command" others' labor, so purchasing power to some extent is power over other people, to the
extent that they are willing to trade their labor or goods for money or currency. If one's monetary
income stays the same, but the price level increases, the purchasing power of that income falls.
Inflation does not always imply falling purchasing power of one's money income since it may rise
faster than the price level. A higher real income means a higher purchasing power since real
income refers to the income adjusted for inflation.

14. Suggested retail price:

The manufacturer’s suggested retail price (MSRP), list price or recommended retail price (RRP)
of a product is the price at which the manufacturer recommends that the retailer sell the product.
The intention was to help to standardize prices among locations. While some stores always sell at,
or below, the suggested retail price, others do so only when items are on sale or closeout/clearance.
Suggested pricing methods may conflict with competition theory, as they allow prices to be set
higher than would otherwise be the case, potentially negatively affecting consumers. However,
resale price maintenance goes further than this and is illegal in many regions.

Much of the time, stores charge less than the suggested retail price, depending upon the actual
wholesale cost of each item, usually purchased in bulk from the manufacturer, or in smaller
quantities through a distributor. Suggested prices can also be manipulated to be unreasonably high,
allowing retailers to use deceptive advertising by showing the excessive price and then their actual
selling price, implying to customers that they are getting a bargain. Game shows have long made
use of suggested retail prices both as a game element, in which the contestant must determine the
retail price of an item, or in valuing their prizes. Additionally, the use of MSRP and SRP (suggested
retail price) have been confused. In certain supply chains, where a manufacturer sells to a
wholesale distributor, and the distributor in turn sells to a reseller, the use of SRP is used to denote
suggested reseller price. In that case MSRP is used to convey manufacturer suggested retail price.

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Concepts similar to the MSRP exist in many countries, however, the equivalents of the MSRPs
often cannot be compared directly internationally as products and services may differ in order to
meet different legal requirements, and price figures communicated to consumers must include
taxes and duties (for example) in the European Union, while they do not in the USA.

15. Target pricing:

Target costing is a pricing method used by firms. It is defined as "a cost management tool for
reducing the overall cost of a product over its entire life-cycle with the help of production,
engineering, research and design". A target cost is the maximum amount of cost that can be
incurred on a product and with it the firm can still earn the required profit margin from that product
at a particular selling price. In the traditional cost-plus pricing method, materials, labor and
overhead costs are measured and a desired profit is added to determine the selling price.

16. Time-based pricing:

Time-based pricing is a pricing strategy where the provider of a service or supplier of

a commodity, may vary the price depending on the time-of-day when the service is provided or
the commodity is delivered. The rational background of time-based pricing is expected or observed
change of the supply and demand balance during time. Time-based pricing includes fixed time-of
use rates for electricity and public transport, dynamic pricing reflecting current supply-demand
situation or differentiated offers for delivery of a commodity depending on the date of delivery
(futures contract). Most often time-based pricing refers to a specific practice of a supplier.

17. Value pricing:

Value-based pricing (also value optimized pricing) is a pricing strategy which sets prices
primarily, but not exclusively, on the value, perceived or estimated, to the customer rather than on
the cost of the product or historical prices. Where it is successfully used, it will improve
profitability due to the higher prices without impacting greatly on sales volumes. The approach is
most successful when products are sold based on emotions (fashion), in niche markets, in shortages
(e.g. drinks at open air festival on a hot summer day) or for indispensable add-ons (e.g. printer
cartridges, headsets for cell phones). Goods that are very intensely traded (e.g. oil and other

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commodities) or that are sold to highly sophisticated customers in large markets (e.g. automotive
industry) usually are sold using cost-plus pricing.

Value-based pricing in its literal sense implies basing pricing on the product benefits perceived by
the customer instead of on the exact cost of developing the product. For example, let’s consider
the pricing of a painting. A painting is priced much more than the price of canvas and paints. The
price in fact depends a lot on who the painter is. Painting prices also shoot up with variables like
age, cultural significance, and, most importantly, how much benefit the buyer is deriving. Owning
an original Dali or Picasso painting elevates the self-esteem of the buyer and hence elevates the
perceived benefits of ownership. Alue-based pricing is predicated upon an understanding of
customer value. In business-to-consumer markets, sellers should understand the impact their
products or services have on end user utility. In the business-to-business environment, companies
must know how their offering helps customers that is other businesses, become more profitable.
In many settings, gaining this understanding requires primary research. This may include
evaluation of customer operations and interviews with customer personnel. Survey methods are
sometimes used to determine the value a customer attributes to a product or a service. Purchase
intent, win/loss analysis and financial value measurement are examples of basic research methods
that can unearth customer insights during the pricing process. The results of such surveys often
depict a customer's 'willingness to pay.'

The principal difficulty is that the willingness of the customer to pay a certain price differs between
customers, between countries, even for the same customer in different settings (depending on his
actual and present needs), so that a true value-based pricing at all times is impossible. Also,
extreme focus on value-based pricing might leave customers with a feeling of being exploited
which is not helpful for the companies in the long run.

Long term, by definition, prices based on value-based pricing are always higher or equal to the
prices derived from cost-based pricing (if they were lower, it would mean that the actual value
perceived by the customer is lower than the costs of producing the good plus a profit margin,
meaning that companies would not be interested to produce and sell at that price in the long term).

Frameworks for value-based pricing include amongst others Economic Value Estimation, Relative
Attribute Positioning, Van Westendorp Price Sensitivity Meter and Conjoint Analysis.

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However, despite being difficult in implementation, any production and any market positioning
should have a consideration of the value the product brings to the customer at the very early stages
of product development and is, in fact, employed by many companies.

What is the Difference between Method and Strategy?

A method typically involves a set of actions that can be followed in a given situation.
A strategy involves a plan for how to solve a problem. While methods tend to be fairly constant,
strategy can be updated depending on the circumstances or the actions of others. For example,
there is a method to ship-building. There is a strategy to winning a game. If you follow the correct
procedure to build a ship, you will end up with a correctly built ship. The outcome of a game, on
the other hand, depends on the other players and your response to them, so your actions will be
part of a strategy. A method will not work because the same actions on your part will not always
result in the same outcome. In short, strategy is how you plan to do something, and methods are
how you actually do it.

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Summary:

A product’s price influences wages, interest, rent and profits. Price is a regulator of the economy
because it regulates allocation of the factors of production. Pricing methods are the combination
of different marketing decision variables being used by the firm to market its goods and services.
A break-even point is that quantity of output at which total revenue equals to total costs, assuming
a certain selling price. Another method of pricing is marginal analysis, which calculates demand
as well as costs to determine the suitable price of the product. After identifying the market and
gathering the basic information about it, the next step is the direction of market programming, is
to decide upon the instruments and the strategy to meet the needs of the customers and the
challenge of the competitors. It offers an optimum combination of all marketing ingredients so that
companies can realize goals for example profit, sales volume, market share, return on investment
etc. Product’s price is an important factor in determining its market demand. Some firms use higher
prices to transmit an image of superior quality and it is most likely to work well in the case of
services and certain goods for which consumers have difficulty in judging quality. Pricing should
be aimed toward a goal. Basically pricing objectives are to achieve a targeted return, to profit
maximization, to increase market shares, to stabilize prices and to meet the competition. The
marketing manager has to take into account the impact of different factors which are categorized
under the 4 P’s to decide pricing methods for a product. The pricing method or strategy means the
route taken by the firm in fixing the price. Apparently, the method must be appropriate a product
or service. It includes tangible goods like furniture; garments, grocery items etc. and intangible
products like services are purchased by consumers. The product is the key element of any pricing
methods. The Pricing methods are conjuration and it can only be implemented by marketing
managers. Pricing methods is a greatest strategy for attaining competitive advantage for any firm.
The customer is king thus it is mandatory to employ excellent pricing methods by marketing
manager is essential as these key elements will satisfy the customer needs and demands. It is highly
necessary to plan and implement appropriate Pricing methods in 4P’S for competitive advantage.
Marketing management is about placing the right product, at the right price, at the right place, at
the right time. After deciding on pricing goals and deciding the price, Marketers must establish
pricing methods to attain maximum market share. Price is the primary basis for attracting and

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retaining customers. It is a strategic activity. It is the biggest challenges before the Marketing
professionals in today’s world is to design an optimum pricing strategy which takes care of both
customer’s satisfaction and organizational goals. All the four variables help the firm in formulating
strategic decisions necessary for competitive advantage. All the elements of pricing need careful
alteration and minute study with complete concentration. The price which will be charged for the
product and the procedure through which it would reach to the customer furthermore while
deciding the price of product; the important things to consider are manufacturing cost of the
product, promotion cost and amount incurred on distribution channels. All the four variables of
pricing methods are related to the different circumstances and type of industry. By increasing the
price of the product, the demand of the product will be lessened and lesser distribution points will
be required. On the other hand, the product USP can be such that maximum concentration is on
creating brand cognizance hence better pricing for a product. Finally, the overall pricing methods
can result in dynamic modelling based on customer feedback for improving a product and the same
can be launched as the upgraded product. Price is one of the most important variables in the
marketing mix. Its importance has increased substantially over the years because of environmental
factors like recession, intensity of inter firm rivalry, and the customer becoming aware of
alternatives. In order to arrive at the mot acceptable price level, the marketer needs the information
on customers, competition, and the firm’s cost structure. Marketing manager should be an expert
in deciding pricing strategy as it is significant for market entry methods of an organization.
Marketing manager should meet the demand from different markets and also match the
competition in the market by delivering satisfaction to the customer as far as the pricing strategy
is concerned. This is only possible by an accurate blend of all the elements pricing strategy as it
helps in achieving organizational goals of profit maximization by high sales volume, attaining
higher market share and satisfied customers.

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References:

1. Bagavati, R.S.N Pillai. Modern Marketing principles and practices (second edition
2000), S. Chand & Company Ltd, Ram Nagar, New Delhi.
2. Kotler, Philip. Principles of Marketing, (14 edition), Pearson Prentice Hall.
3. Stanton, Walker. Marketing (14 edition) McGraw Hill Publishers.
4. http://www.knowthis.com/pricing-decisions/what-is-price
5. https://en.wikipedia.org/wiki/Pricing
6. https://en.wikipedia.org/wiki/Base_point_pricing
7. https://en.wikipedia.org/wiki/Cost_the_limit_of_price
8. https://en.wikipedia.org/wiki/Drip_pricing
9. https://en.wikipedia.org/wiki/Group_buying
10. https://en.wikipedia.org/wiki/Valuation_of_options
11. https://en.wikipedia.org/wiki/Pay_what_you_want
12. https://en.wikipedia.org/wiki/Price_elasticity_of_demand
13. https://en.wikipedia.org/wiki/Price_system
14. https://en.wikipedia.org/wiki/Price_umbrella
15. https://en.wikipedia.org/wiki/Product_life-cycle_management_(marketing)
16. https://en.wikipedia.org/wiki/Product_sabotage
17. https://en.wikipedia.org/wiki/Psychological_pricing
18. https://en.wikipedia.org/wiki/Purchasing_power
19. https://en.wikipedia.org/wiki/List_price
20. https://en.wikipedia.org/wiki/Target_costing
21. https://en.wikipedia.org/wiki/Time-based_pricing
22. https://en.wikipedia.org/wiki/Value-based_pricing
23. http://www.agmrc.org/media/cms/8452_b4c31e4164d0a.pdf
24. http://www.economicsdiscussion.net/price/4-types-of-pricing-methods-
explained/3841
25. http://www.stat.fi/voorburg2005/kenessey_1.pdf

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