MODULE-3

PRICING
Setting the right price is an important part of effective marketing. It is the only part of the
marketing mix that generates revenue (product, promotion and place are all about marketing costs).
Price is also the marketing variable that can be changed most quickly, perhaps in response to a
competitor price change.

DEFINITION
“Price is the amount of money or goods for which a thing is bought or sold”.
The price of a product may be seen as a financial expression of the value of that product. For a consumer,
price is the monetary expression of the value to be enjoyed/benefits of purchasing a product, as compared
with other available items.
The concept of value can therefore be expressed as:
(perceived) VALUE = (perceived) BENEFITS – (perceived) COSTS
A customer’s motivation to purchase a product comes firstly from a need and a want:e.g.
• Need: "I need to eat
• Want: I would like to go out for a meal tonight")
The second motivation comes from a perception of the value of a product in satisfying that
need/want (e.g. "I really fancy a McDonalds").
The perception of the value of a product varies from customer to customer, because perceptions of benefits
and costs vary.
Perceived benefits are often largely dependent on personal taste (e.g. spicy versus sweet, or green versus
blue). In order to obtain the maximum possible value from the available market, businesses try to
‘segment’ the market – that is to divide up the market into groups of consumers whose preferences are
broadly similar – and to adapt their products to attract these customers.
In general, a products perceived value may be increased in one of two ways – either by:
(1) Increasing the benefits that the product will deliver, or,
(2) Reducing the cost.

TYPES OF PRICING POLICIES

There are many ways to price a product. Let's have a look at some of them and try to understand the
best policy/strategy in various situations.

Cost Based Pricing Policies: Setting price on the basis of the total cost per unit. There are four
methods as follows:
1. Cost Plus Pricing- cost plus a percentage of profit
2. Target Pricing- cost plus a pre-determined target rate of return
3. Marginal Cost Pricing- fixed plus variable costs
4. Break-Even Pricing- at break-even point i.e, where total sales=total cost{no profit,no loss point}

Demand Based Pricing Policies: Setting price on the basis of the demand for the product. There
are two methods as follows:
1. Premium Pricing-Use a high price where there is a uniqueness about the product or service. This
approach is used where a substantial competitive advantage exists. Such high prices are charged for
2. Differential Pricing-Same product is sold at different prices to different consumers.
• Competition Based Pricing Policies: Setting price on the basis of the competition for the product.
There are three methods as follows:
1. Going Rate Pricing-Many businesses feel that lowering prices to be more competitive can
be disastrous for them (and often very true!) and so instead, they settle for a price that is
close to their competitors.
2. Customary Pricing- Prices for certain commodities get fixed because they have prevailed
over a long period of time.
3. Sealed Bid Pricing-Firms have to quote less price than that of competitors. Tenders ,
winning contracts etc.
• Value Based Pricing Policies: It is based on value to the customer. The following are the pricing
method based on customer value.
1. Perceived- Value Pricing: This is the method of judging demand on the basis of value
perceived by the consumer in the product. This method is concerned with setting the price on
the basis of value perceived by the buyer of the product rather than the seller’s cost.
2. Value Of Money Pricing: Price is based on the value which the consumers get from the
product they buy. It is used as a competitive marketing strategy.

SKIMMING PRICING:
This is done with the basis idea of gaining a premium from those buyers who always ready to pay
a much higher price than others. It refers to the high initial price charged when a new product is introduced
in the market. For example, mobile phones which when introduced were highly priced.

PENETRATION PRICING:
The price charged for products and services is set artificially low in order to gain market share. Once this
is achieved, the price is increased. This approach was used by France Telecom and Sky TV.

Competitive pricing
The producer of a new product may decide to fix the price at competitive level. This is used when market
is highly competitive and the product is not differentiated significantly from the competitive products.
PREDATORY PRICING:
When a firm sets a very low price for one or more of its products with the intention of driving its
competitors out of business.

ECONOMY PRICING :
This is a low price. The cost of marketing and manufacture are kept at a minimum. Supermarkets often
have economy brands for soups, spaghetti, etc.

Price Skimming .
Charge a high price because you have a substantial competitive advantage. However, the advantage is not
sustainable. The high price tends to attract new competitors into the market, and the price inevitably falls
due to increased supply. Manufacturers of digital watches used a skimming approach in the 1970s. Once
other manufacturers were tempted into the market and the watches were produced at a lower unit cost,
other marketing strategies and pricing approaches are implemented.

Psychological Pricing .
This approach is used when the marketer wants the consumer to respond on an emotional, rather than
rational basis. For example 'price point perspective' 99 cents not one dollar.

PRODUCT LINE PRICING.

Where there is a range of product or services the pricing reflect the benefits of parts of the range. For
example car washes. Basic wash could be $2, wash and wax $4, and the whole package $6.
Optional Product Pricing.
Companies will attempt to increase the amount customer spend once they start to buy. Optional 'extras'
increase the overall price of the product or service. For example airlines will charge for optional extras
such as guaranteeing a window seat or reserving a row of seats next to each other.

CAPTIVE PRODUCT PRICING

Where products have complements, companies will charge a premium price where the consumer is
captured. For example a razor manufacturer will charge a low price and recoup its margin (and more)
from the sale of the only design of blades which fit the razor.
Product Bundle Pricing.

Here sellers combine several products in the same package. This also serves to move old stock. Videos
and CDs are often sold using the bundle approach.

PROMOTIONAL PRICING.

Pricing to promote a product is a very common application. There are many examples of promotional
pricing including approaches such as BOGOF (Buy One Get One Free).
Geographical Pricing.
Geographical pricing is evident where there are variations in price in different parts of the world. For
example rarity value, or where shipping costs increase price.
Value Pricing.

This approach is used where external factors such as recession or increased competition force companies
to provide 'value' products and services to retain sales e.g. value meals at McDonalds.
FACTORS INFLUENCING PRICING POLICIES
The factors that businesses must consider in determining pricing policy can be summarized in four
categories:
(1) Costs
In order to make a profit, a business should ensure that its products are priced above their total average
cost. In the short-term, it may be acceptable to price below total cost if this price exceeds the marginal
cost of production – so that the sale still produces a positive contribution to fixed costs.
(2) Competitors
If the business is a monopolist, then it can set any price. At the other extreme, if a firm operates under
conditions of perfect competition, it has no choice and must accept the market price. The reality is usually
somewhere in between. In such cases the chosen price needs to be very carefully considered relative to
those of close competitors.
(3) Customers
Consideration of customer expectations about price must be addressed. Ideally, a business should attempt
to quantify its demand curve to estimate what volume of sales will be achieved at given prices

(4) Business Objectives

Possible pricing objectives include:
• To maximize profits
• To achieve a target return on investment
• To achieve a target sales figure
• To achieve a target market share
• To match the competition, rather than lead the market

STRATEGIES FOR NEW AND ESTABLISHED PRODUCTS

Product pricing strategies frequently depend on the stage a product or service is in its life cycle;
that is, new products often require different pricing strategies than established products or mature products

➢ NEW PRODUCT PRICING STRATEGY.

Entrants often rely on pricing strategies that allow them to capture market share quickly. When
there are several competitors in a market, entrants usually use lower pricing to change consumer spending
habits and acquire market share. To appeal to customers effectively, entrants generally implement a
simple or transparent pricing structure, which enables customers to compare prices easily and understand
that the entrants have lower prices than established incumbent companies.
Complex pricing arrangements, however, prevent lower pricing from being a successful strategy in that
customers cannot readily compare prices with hidden and contingent costs. The long-distance telephone
market illustrates this point; large corporations have lengthy telephone bills that include numerous
contingent costs, which depend on location, use, and service features. Consequently, competitors in the
corporate long-distance telephone service market do not use lower pricing as the primary pricing strategy,
as they do in the consumer and small-business markets, where telephone billing is much simpler.
Another example is the computer industry. Dell, Fujitsu, HP, and many others personal computer
makers offer bundles of products that make it more difficult for consumers to sort out the true differences
among these competitors.
➢ ESTABLISHED PRODUCT PRICING STRATEGY
Sometimes established companies need not adjust their prices at all in response to entrants and
their lower prices, because customers frequently are willing to pay more for the products or services of
an established company to avoid perceived risks associated with switching products or services.
However, when established companies do not have this advantage, they must implement other
pricing strategies to preserve their market share and profits. When entrants are involved, established
companies sometimes attempt to hide their actual prices by embedding them in complex prices. This tactic
makes it difficult for customers to compare prices, which is advantageous to established companies
competing with entrants that have lower prices. In addition, established companies also may use a more
complex pricing plan, such as a twopart pricing tactic. This tactic especially benefits companies with
significant market power. Local telephone companies, for example, use this strategy, charging both fixed
and per-minute charges.
Competition and Potential Competition
Although the product has been well positioned there will always be competitors and it goes without
saying that the threat of the competition should be carefully considered. In a situation of high competition
it is important to note that competing purely on price is counterproductive. The business should consider
all elements of the marketing mix and how they interact to create demand and value for the product should
be considered in setting the overall competing strategy.
Some firms launch new products at high prices only to find that they have made the market attractive to
competitors who will launch similar products at much lower prices. A lower launch price might make
diffusion in the market quicker and allow for greater experience and the margin for a competition enter
the market will be reduced.
COSTS
Another key variable in pricing is costing – this is not only the business cost but also the cost to
competitors. There are many cost concepts but the two main concepts are marginal cost pricing and full
absorption costing.
The conventional economists model of product pricing indicates that pricing should be set at the
point where marginal cost is equal to marginal revenues i.e. where the additional cost of production is
equal to the additional income earned. The theory is undisputed but considers only price as variable. In
the real world there are many more variables than only price.
In practice the cost of production provides key guidelines to many businesses in setting price. This
is called the ‘cost plus method of pricing where a fixed mark up is added to the price.
CHANNELS OF DISTRIBUTION

The standard product pricing theory does not provide insight to what should be one’s policy
toward distributor margins. The distributor performs a number of functions on behalf of the supplier which
enables which enables the exchange transaction between the producer and the customer.
There are a number of devices available for compensating the trade intermediaries, most of which take
the form of discounts given on theretail selling price to the ultimate customer.
• Trade discount – This is the discount made on the list price for services made available by the
intermediary. e.g. holding inventory, buying bulk, redistribution etc.
• Quantity discount – A quantity discount is given to intermediaries who order in large lots

• Promotional discount – This is a discount given to distributors to encoutage them to share in the
promotion of the products involved.
• Cash discount - In order to encourage prompt payments of accounts, a small cash discount on
sales price can be offered.

Gaining Competitive Advantage

It is possible to use price as a strategic marketing tool. The aspects of competitiveness have been listed
below:
• Reduce the life cycle/ alter the cost mix – customers are often willing to pay a considerably higher
initial price for a product with significantly lower post-purchase cost.
• Expand value through functional redesign. E.g. a product that increases customers production
capacity or throughput, product that improves quality of the customers product, product that
enhances end-use flexibility.
• Expand incremental value by developing associated intangibles. For example service, financing,
prestige factors etc.

PREPARING THE PRODUCT PRICING PLAN

We have considered some of the factors that affect the pricing decision. We now have to
amalgamate all these decisions into one framework. It has been demonstrated that as a firm develops
expertise in producing a particular product the cumulative cost of producing every additional unit falls.
This is demonstrated by the learning curve. The effect of the learning curve should be considered in
pricing of new products.
There are in principle only two main pricing policies they are price skimming policy and price penetration
policy. The factors that should be considered before implementing either policy are given below.

The factors that favour a price skimming policy are:

1. Demand is likely to be price inelastic;

 2. There are likely to be different price market segments, thereby appealing to those buyers first who
have a higher rage of acceptable prices.

3. Little is known about the cost and marketing the product

The variables that favour a price penetration policy are:

1. Demand is likely to be price elastic;

2. Competitors are likely to enter the market quickly;

3. There no distinct price-market segments;

4. There is possibility if large savings in production and marketing costs if large sales volumes can
be generated.