DESIGNING PRICING

STRATEGIES AND PROGRAMS

Pricing is one of the most complex and sensitive areas for the marketing
executive. It is very difficult to set price, particularly when the product is
launched in the market for the first time. The complexities of pricing can
be seen in the way consumers perceive the price of the product.
Consumers may view a price as high or low, denoting superior or inferior
quality, or reflecting prestige or low status. As a result, a variety of
factors go into developing a finite price. The price set today by a company
is not, however, static. It may have to change the price with the elapse of
time to meet varying circumstances and opportunities. No price, how
carefully established-will be appropriate throughout the product’s life.
Competitors may engage in price war with the company. Company
should, therefore, respond to the price changes of the competitors and
this move should be a well-thought one.
 Lesson-1: Setting the Price
Objectives of this lesson
After reading this lesson, you will be able to:
 Understand the meaning and role of price
 Identify different pricing objectives
 Assess target market’s evaluation of price and its ability to purchase
 Determine demand
 Analyze and estimate costs
 Evaluate competitors’ costs, prices, and offers
 Select a pricing method
 Determine a specific price.

Introduction
Price is the sacrifice made by the consumers to get an item. They are very
sensitive to what they sacrifice for a product. In price setting, marketers
should consider consumers' ability to pay, demand of the product that
exists, cost involved in producing the item, as well as the costs, prices,
and offers of their competitors.

The Meaning and Role of Price

The price is what the consumer must give up in order to get the product. It
is a representation of value placed on the product for purposes of
exchange. Partially, this value is established by the marketing executive.
Marketers incur certain costs in making, handling, storing, and selling the
product. These costs are usually covered in the selling price except certain
expectations. Marketers seek some extra compensation over the actual
costs so some profits are made by them. Costs and profit expectations,
then, become the value the marketing executive places on the product.
The value of the product is not always set by the marketer. Buyers as well
help determine value through their purchasing patterns. Buyers allocate
their funds to the goods and services that maximize their short and/or
long-run benefits. Buyers thus, place a trade-off value on the company’s
product by weighing the benefits of having the item against the cost of
foregoing the purchase of other products or retaining their money.
The price of the product, then, will be balanced between the seller’s value
and the buyer’s trade-off value. Where these two are similar, the price will
be appropriate. If they do not match, some change in values must occur or
the product will fail in the marketplace, i.e. it will not sell well.

The nature of the value of the product determines the price related
problems. In addition to the costs, the seller’s expectations of profit and
the buyer’s trade-off values are variables. Not all sellers have the same
profit expectations and not all buyers have the same perception of the
benefits of having the product versus holding money or purchasing
another product.
Generally speaking, a product’s price reflects the personal values of the
seller and buyer. Specically, price has a somewhat different role, acting as
a technical mechanisms for negotiations between individuals and groups
of individuals who have goods, services, or money to trade. Truly
speaking, price is the common denominator allowing sellers and buyers to
make evaluations and complete their exchanges.
You as a marketer should be in mind that, price is a means for allocating
the nation’s scarce resources. Raw materials, products, and services in
relatively short supply tend to be more highly valued than those readily
available. Through the pricing system, sellers and buyers can better
arrange their priorities and better utilize the resources of the economy.
Price is a highly significant marketing variable directly affecting
company’s sales and profits. Price also has considerable symbolic value,
conveying information about the company to potential buyers.
A marketer should realize that his sales and profits are heavily influenced
by the prices of his products. An increase or decrease in price can mean
higher or lower revenues. This assumption is not always realistic since
price changes alter buyer’s cost-benefit trade-off. Generally, when the
price increases, consumer demand falls and vice versa. But total taka sales
can increase even though demand declines. Similarly, total taka sales can
rise when prices decline and consumer demand greatly increases. Though
consumers are sensitive to price changes, but the degree of sensitivity
depends on many factors such as consumer's financial status, availability
of new products and so on.
The price set by marketing executive is also important as consumers relate
a product’s price to such factors as quality, progressiveness, and social
status, psychological satisfaction and so on. They usually equate higher
prices with better quality, modern, and more fashionable products. This
image carries over to a company’s other products as well as to the
company itself affecting the future of the company.
 Stages for Establishing Prices
We have already examined the nature and importance of price. It is now
time to move on to the stages followed in price setting. Setting price for
the first time is a real challenge to a firm and it faces this situation when it
plans to launch a new product, or introduce an existing one into a new
distribution channel, or area, or participates in a bid. In setting its pricing
policy, a firm has to consider quite a number of factors and proceed
following a logical process consisting of seven steps. They are: selection
of pricing objective; assessment of target market’s evaluation of price and
its ability to purchase; determination of demand; analysis of costs;
analysis of competitors’ costs, prices, and offers; selection of a pricing
method; and, determination of a specific price. Following figure shows the
stages involved in price setting.
Figure - 10.1 : Stages Involved in Price Setting

1 2 3 4

Selection of Assessment Determination Analysis of

pricing of target of demand costs
objective market’s
evaluation of
price and its
ability to
purchase

5 6 7

Evaluation of Selection of a Determination

competitors’ costs, pricing method of a specific
prices, and offers price

We shall discuss each of them in turn:

 Pricing objectives
Pricing of goods and services is often a critical factor in the successful
operation of business organizations. Although the basic pricing
ingredients (costs, competition, demand, and profit) are the same for all
firms, the optimum mix of these factors varies according to the nature of
products, markets, and corporate objectives. The manager’s job is to
develop and implement a pricing strategy that meets the needs of a
particular company at a certain point in time.
 Many different ways of handing prices are observed. Prices are often set
by top management rather than by marketing or salespeople in smaller
companies, while, division and product-line managers handle prices in
larger companies following the general pricing policies and objectives set
by the top management. Selecting the pricing objective means deciding in
advance what the company wants to achieve through offering its product.
The marketing mix strategy of a firm including price becomes easier if the
company is able to select its target market and position the product
correctly. A firm can easily set price of its product if it can clearly set its
objectives. Pricing objectives are overall goals that describe the role of
price in an organization’s long-range plans. Pricing objectives will
influence decisions in most functional areas. The objectives must be
consistent with the organization’s overall objectives. Because of the many
areas involved, a marketer often uses multiple pricing objectives. Here we
shall look at some of the typical pricing objectives pursued by the
marketing executives. One of the six major objectives can be pursued by a
firm through its pricing, such as survival, maximum current profit,
maximum sales growth, product quality leadership, maximize current
revenue, or maximum market skimming. We shall now discuss in turn
each of these objectives:
 Survival: A fundamental pricing objective is to survive. Most
organizations will not tolerate short-run losses, internal upheaval, and
almost any other difficulties if they are necessary for survival. Since price
is such a flexible and convenient variable to adjust, it sometimes is used to
increase sales volume to levels that match the organization’s expenses. If
a company is plagued with over-capacity, intense competition, or
changing consumer wants, it can pursue the survival objective. It is a short
run objective pursued by different companies to ensure survival.
Companies here cut prices without considering profit margin in such a
way that covers variable costs and some fixed costs in order to sustain.
 Maximum Current Profit: It is another pricing objective being pursued
by many companies; and they set a price that guarantees maximum
current profit. This objective does not always guarantee maximum profit
particularly in the long run because the company overlooks the effects of
other marketing mix variables, legal restraints on price, and competitors’
reactions. The other problem associated with it is that a company set price
here taking into account the demand and cost functions which can hardly
be estimated accurately.
 Maximum Sales Growth: Pursuing this objective means setting price at
the lowest level to ensure maximum sales in order to lower unit cost thus
maximizing long-run profit. This can also be termed as market-
penetration pricing, and consumers are here thought of as highly sensitive
to prices. In order to pursue this strategy three conditions must prevail.
They are: the market is price sensitive, and market growth is stimulated by
low price; accumulated production experience reduces production and
distribution costs; actual and potential competitions are discouraged by
low price.
 Product-Quality Leadership: A company might have the objective of
product quality leadership in the market. If a company aims to be the
product-quality leader in the market it can pursue this pricing objective.
Here the company sets prices at a higher level (compared to competitors)
to give the market an idea that its product is superior in terms of quality,
durability, functional performance and so on (it obviously produces a high
quality product). The price is also charged high here to cover high product
quality and the high cost of research and development.
 Maximise Current Revenue: Here the price is set based on demand
function with the aim of maximizing sales revenue. It is hoped that market
share growth and profit maximization will be achieved in the long-run if
this objective is pursued.
 Maximum Market Skimming: In this objective, price is set at a high level
. This objective is pursued particularly in case of new or innovative
product with the hope that some segments will buy the product because of
the newness even paying a higher price. When these segments become
sour, the company will lower price to attract new segments and continues
to follow the same method as long as the product is sold and thus skims
the market.
Under the following conditions, market skimming strategy works:
 If a sufficient number of buyers have a high current demand
 If the unit costs of producing a small volume are not so high that they
cancel the advantage of charging what the traffic will bear
 If the high initial price does not attract more competitors to the market
 If the high price communicates the image of a superior product.
Other Pricing Objectives
There are some other pricing objectives some of which are followed by
business organizations, and others by nonprofit, social, or public
organizations. They are: achieve a target market share, achieve a target
 return on investment, maximize cash flow, meet or prevent competition,
stabilize prices, support other products, partial cost recovery (may be
pursued by an educational institution), full cost recovery (may be pursued
by a non profit maternity clinic), and social price geared to the varying
income situations of different clients (may be pursued by a nonprofit
theatre company). Let us now have a short discussion on them:
 Achieve a Target Market Share: Here, the marketing executive will
estimate the total market potential and determine what share the product
should obtain given the competition. The executive will then estimate how
high (or low) the price should be set to achieve that market share.
 Achieve a Target Return on Investment: A more realistic pricing
objective is achieving a target return on investment. Here, the marketer
first determines the total costs of making and selling a certain number of
units, including both the variable costs and the fixed costs. Thereafter, he
decides on desired return on that investment. From that point, the
executive will calculate a price that will yield that level of profitability.
For example:
Total cost to produce and sell = Tk.1,000,0
1,000,000 units = 00
Desired return on investment 15%
Target profits = Tk.1,50,00
0
Selling price per unit (for = Tk.1.15
1,000,000 units)
 Maximize Cash Flow: Under this objective, the marketing executive may
decide to price the product in a manner that maximizes the cash flow. It is
assumed that sales are synonymous with cash. But in many instances,
purchases are made on credit. If a company must pay its supplier before
its customers pay, cash inflows will be slower than outflows of cash. In
order to get rid of this problem, the marketing executive may have to
induce consumers to either pay in cash or pay sooner than they would
otherwise. Here, a marketer can make the cash price more attractive to
buyer than a credit price or what is available from other sellers.
 Meet or Prevent Competition: There are situation where a marketer may
be more concerned about the competition in the marketplace than with the
actual performance of the product. In such situations he may simply price
the product in a manner that nullifies price as a marketing variable, or
discourages potential competition from entering the marketplace.
 Stabilize Prices: Here a marketer tries to create a consistent price for the
product so that both the executive and potential buyers will know what
price to expect and plan for. To stabilize prices, the marketing executive
will generally meet competitive price changes as they occur, reducing the
benefits to price modification, and resulting in a more stabilized price,
which may help him to retain his customers.

 Support Other Products: There are situations where a marketer will use a
product as a loss leader in which a loss is taken on the product in order to
enhance sales and profits of other products within the mix of the
company's products. He may do this with the hope of maximizing total
company profits rather than profits for individual items. This objective is
found to be effective when great consistency exists within the product
mix.
 Assessment of Target Market’s Evaluation of Price and Its
Ability to Purchase
Although it is assumed that price is a significant issue for customers, the
importance of price depends on the type of product and the type of market
the company targets. By assessing the target market’s evaluation of price,
a marketer is in a better position to know how much emphasis to place on
price. Information about target market’s price evaluation may also aid a
marketer in determining how far above the competition a firm can set its
prices. Understanding the purchasing power of buyers and knowing how
important a product is to them in comparison with other products help
marketers to assess the target market’s evaluation of price accurately.
  Determination of Demand
Level of demand of a product is dependent on the levels of price set, thus,
having different impacts on the marketing objectives of the concerned
firm. We can understand the relationships between price and demand
through demand schedule. Demand schedule tells us how much quantity
of a product will be demanded (sold) at various prices. It is known that
price quantity relationship is inverse except few exceptions. That is less
will be demanded if price is charged high and more will be demanded if
price is charged less which means that buyers are price sensitive. In case
of specialty or prestige goods, price increase may increase demand
because buyers draw a price quality relationship: they take the higher
price to signify a better or more exclusive item. We shall now discuss the
factors affecting price sensitivity of buyers.
Factors Affecting Price Sensitivity: There are nine factors that affect
price sensitivity as identified by Nagle. They are:
1. Unique value effect: When the product is considered more unique by the
buyers they will usually be less price sensitive.
2. Substitute awareness effect: When buyers are less aware of substitutes
then they are found to be less price sensitive.
3. Difficult comparison effect: When buyers cannot easily compare the
quality of substitutes then they are usually less price sensitive.
4. Total expenditure effect: If the expenditure on the product is less as to the
ratio to buyers’ income then they are found to be less price sensitive.
5. End-benefit effect: The less the expenditure is to the total cost of the end
product the less price sensitive buyers are.
6. Shared cost effect: When part of the cost is borne by another party, then
buyers are less price sensitive.
7. Sunk investment effect: If the product is used in conjunction with assets
previously bought buyers will be less price sensitive.
8. Price-quality effect: When the product is assumed to have more quality,
prestige, or exclusiveness then buyers are less price sensitive.
9. Inventory effect: When buyers cannot store the product then they are less
price sensitive.
Methods of Estimating Demand Curves: Several methods can be used
to measure the demand curve of a company’s product. They are discussed
below:
First, existing data on past prices, quantities sold, and other factors can be
analyzed statistically. Second, price experiments may be conducted either
 by estimating demand curve based on in-store sales data of a product at
various prices or selling product at various prices in various territories and
see their affect on sales. Third, buyers may be asked how much they will
buy a product at various prices
Price Elasticity of Demand: It is the relative responsiveness of changes
in quantity demanded to changes in price. Price elasticity should be taken
into consideration in setting price. If the change in price does not affect
the demand position we can call it inelastic demand situation, and, elastic
demand situation is that where slight change in price considerably affects
demand position. A product, demand of which is elastic, marketers can
ensure increased sales by lowering the prices. Elasticity of demand
depends on number of conditions, and demand of a commodity is likely to
be less elastic if following conditions are present: (a). where number of
substitutes or competitors are few in number; (b). where buyers do not
readily notice the change (increase) in price; (c). where buyers are
relatively brand loyals; and, (d). where buyers consider price increase as
logical.
 Analysis of Cost
In setting price, a company considers its costs of production, distribution,
and other costs as of the elasticity of demand. To stay in business, a
company has to set prices that cover all its costs. Here we shall discuss (i).
types of costs, (ii). cost behavior at different levels of production per
period, (iii). cost behavior as a function of accumulated production, (iv).
cost behavior as a function of differentiated marketing offer, and, (v).
target costing, in understanding how costs are estimated.
 Types of Costs: Costs are associated with the production of any good or
service. Determining costs of production necessitates distinguishing fixed
costs from variable costs. Cost that does not vary with the quantity of
production can be termed as fixed cost such as house rent, executives’
salary and so on. The cost of renting a factory, for example, does not
change because production increases from one shift to two shifts a day.
Variable costs, on the otherhand, are directly related to the quantity of
production. They increase with the increase of production, and, decrease
with the fall of production such as raw material’s cost. These costs are
usually constant per unit. Average variable cost is the variable cost per
unit produced. It is calculated by dividing the variable costs by the
number of units produced. Total costs are the sum of fixed and variable
costs. In price fixation a company normally charges a price that covers at
 least its total cost.
 Cost Behavior at Different Levels of Production Per Period: Costs of
production vary with different levels of production because the rate of
utilization of machinery varies and fixed costs per unit also vary.
Management should find the optimum level of production to keep the
fixed cost per unit at a minimum level.
 Cost Behavior as a Function of Accumulated Production: A company’s
per unit production costs keep reducing as it increases its production up to
a certain level, because it accumulates experience as it progresses. For
example, if the company produces 50,000 units, per unit production cost
may be Tk.15; if it produces 100,000 units, per unit production cost may
come down to Tk.12 and so on. An experienced company may exploit this
experience by reducing its price compared to competitors’ prices in order
to drive few of the competitors out of the race and thus can increase its
market share significantly.
 Cost Behavior as a Function of Differentiated Marketing Offers: Since
this is the era of extreme competition, companies try to satisfy their
customers by fulfilling their requirements. It leads to the idea of offering
different terms to different customers since they vary in their requirements
and as a result marketer’s costs will differ with different customers. Since
marketers’ costs vary here marketers should fix different prices for
different customers and in fixing prices here they should rely on activity
based cost (ABC) instead of standard costing.
 Target Costing: Here a company first determines the price of a product at
which it must sell and from there on it deducts the desired profit margin to
arrive at the target cost. Efforts are taken thereafter to keep the production
cost and other costs limited to the target cost. Target cost for this purpose
is broken down to all of the costs that are involved with the production
and marketing of the commodity so that measures can be taken to keep
the cost of every item limited within the target cost.
 Evaluation of Competitors’ Costs, Prices, and Offers
In order to set prices appropriately, a company should have clear picture
about competitors’ cost, prices, and their reactions against the possible
range of prices determined by market demand and cost. It is also
imperative to know in detail about competitors’ offer in terms of quality,
price and other variables. If the company finds that its offer is more or less
similar to competitors’ offers, it should price close so that it does not lose
sales. If it finds that it is in a superior position, it can charge high price,
 and should charge lower price compared to competitors if its offer is
found inferior to competitors’ offers. Becoming aware of competitors’
prices, particularly, is not always an easy task, especially in producer and
reseller markets. Competitors’ price lists are often closely guarded. Even
if a marketer has access to competitive price lists, these lists may not
reflect the actual prices at which competitive products are sold. The actual
prices may be established through negotiation. It is, therefore, important
for marketers to be very careful in utilizing competitive price information
while reaching price decisions.
 Selection of a Pricing Method
When a company has three Cs in hand it is ready to select price. The three
Cs are: customers’ demand schedule, cost function, and, competitors’
prices. In selecting price, a company has to select a particular pricing
method which includes cost considerations; competitors’ prices and prices
of substitutes; and, customers’ assessment of unique product features. We
shall now discuss different pricing methods any of which may be selected
by a company:
 Markup Pricing: This is the easiest pricing method. Here marketers first
find out various costs and add a standard percentage with it as profit. For
example, a particular item’s fixed and variable costs are in total Tk.20 and
marketer decides to make a profit of 20%, than the product’s price will be
Tk.24/= (Tk.20+4).
 Target-Return Pricing: Here the price is set at that level which will yield
target rate of return on investment made by the company. For example, a
company has invested Tk.10,00,000/- in its business, and expects a sale of
100,000 units, and per unit cost is Tk.10/-. The company wants to achieve
20% rate of return on investment. In this case its target return price will be
Tk.12/-. The formula used to calculate target return pricing is as follows:
Desired Return  Invested Capital
Target Return Price = Unit Cost +
Unit Sales
 Perceived-Value Pricing: This is one of the contemporary pricing method
under which marketers in setting their prices do not take into account their
costs as key consideration, rather they see the buyers’ perception of value.
To build up perceived value in the buyers’ mind, marketers use non price
variables such as durability, reliability, service etc. in their marketing mix,
and perceived value is captured to set price accordingly.
 Value Pricing: This is also a modern method of pricing where high
quality products are priced significantly low i.e. high-value is offered to
customers. Value pricing is not a matter of simply setting lower prices
compared to competitors, rather it is a matter of re-engineering the
company’s operations to truly become the low-cost producer without
sacrificing quality, and lowering one’s prices significantly so that large
number of value conscious customers are attracted.
 Going-Rate Pricing: It is a popular pricing method and used when costs
and competitors’ responses are difficult to measure. Firms here do not
take into account their costs and demand positions in setting prices rather
determine prices based on their competitors’ prices. They can charge
similar, lower, or higher prices than their competitors.
 Sealed-Bid Pricing: This type of pricing method is followed when a firm
wishes to win a contract or job. Pricing here is done keeping in mind the
probability of winning the contract and expected profit, not the cost of the
firm and its demand position. If a firm wants to increase the probability of
winning it has to set lower price.
 Determination of a Specific Price
Final price may be selected easily based on the pricing methods discussed
earlier. In order to select the final price, few additional factors to be taken
into consideration by a company. These are: psychological pricing,
influences of other marketing mix elements on price, company pricing
policies, and the impact of price on other parties. We shall now discuss
them in turn:
 Psychological Pricing: Price sometimes denotes psychological meanings
such as high price means high quality or odd price means lower price
range or may convey the notion of discount or bargain. For example, a
particular product priced at Tk.200/- per unit may contain Tk.150/- worth
of that product but consumer will not mind
paying Tk.200/- for the product because it may communicate an image of
Tk.200/- worth. In case of ego-sensitive products, higher prices may be
charged. Another example could be a product charged Tk.199/- instead of
 Tk.200/-. Customers may see this as a price in Tk.100/- range rather than
Tk.200/- range.
 The Influences of Other Marketing Mix Elements on Price: In selecting
the final price, a company should take into account the influence of other
marketing mix elements such as the quality of the product, the advertising
budget and so on. A particular brand could be priced high if its relative
quality is average but the advertising budgets are high. Brands that are of
high average quality and advertising budgets are high may also be priced
high. If a product is in the later stage of its life cycle and occupies a major
portion of market share may also be priced high.
 Company Pricing Policies: Final price is also the outcome of the pricing
policy being pursued by a company. For example, if a company
emphasizes on the price recommendations of its sales force it may select
the final price based on the price quotes made by the sales people.
 Impact of Price on Other Parties: Final price is also selected considering
the impact of it on other parties such as distributors' reactions, sales
people's objections, government reactions, competitors' policies, and the
effect of legislation on prices.

Lesson - 2: Adapting the Price

Objectives of this lesson
After reading this lesson, you will be able to:
 Trace the goals of price adaptation
 Know the concept of geographical pricing
 Identify different price discounts and allowances offered by companies to
reward customers
 Understand different promotional pricing methods followed by companies
 Know how prices can be discriminated
 Describe product-mix pricing
Introduction
Prices set by a company do not always remain same . Over time, the
original price established for almost any product will have to be adjusted.
The marketing executive will find it necessary to change the product’s
price several times during the course of its life cycle. They are changed or
adapted depending on the needs or situations. A company needs to adapt
its prices to different situations i.e. it may charge different prices
depending on geographic variation, variations in segments, purchase
timing, order levels, delivery frequency, guarantees, service contracts, and
 some other factors.
Goals of Price Adaptation
Price adaptations are made to pursue number of goals. They are: change
of purchase patterns; market segmentation; market expansion; utilization
of excess capacity; implementation of channel strategy; and, to meet
competition. We shall now discuss in brief these goals in the following
paragraph :
 Change of Purchase Patterns: Marketers may adapt their prices to
influence or change patterns of purchase. Lower prices may be granted to
induce customers to buy in larger quantities, to buy in anticipation of
future needs, or to concentrate their purchases among fewer sources of
supply. Higher prices may be charged from certain customers to
discourage them from carrying the line, thus reducing the intensity of
competition in certain markets.
 Market Segmentation: Marketers can also adapt their prices to tap
segments of a market which differ in price elasticity of demand. These
differences in sensitivity to price may come about because of differing
values in use among various classes of buyers and/or differing competitive
situations facing the seller.

 Market Expansion: By offering lower prices to customers who have

lower values in use, the market for a given product or service may be
expanded. Such expansion may also be accomplished by offering lower
prices to present customers to gain new applications of the product or
service where prior price levels made such applications uneconomic.
 Utilization of Excess Capacity: Price adaptations can also be made to
utilize excess production or marketing capacity. If such capacity exists,
adaptation makes a sale possible which covers direct costs and will
contribute to the total profits of the firm.
 Implementation of Channel Strategy: Price adaptation is a major device
by which a firm attempts to implement its marketing strategy with regard
to channels of distribution. Price variations may reflect differences in
marketing tasks performed by various types of resellers or differences in
the competitive environments in which they operate. Adaptation may
encourage certain channels to engage in various promotion of the line, or
they may be used to gain representation of the line in diverse channels.
 To Meet Competition: Adaptation in price is also a device which can be
used to meet competition. The price ceiling for a given product or service
 is set by the value in use or utility offered to the buyer as well as by the
alternatives open to the buyer with respect to other sources of supply.
Where the seller is disadvantaged because production facilities are located
far from the potential buyer, a price adaptation may be made to make the
delivered price attractive compared to competition.
Price-Adaptation Strategies
Price of a company may be adapted following a number of adaptation
strategies. A company may choose one or more of these strategies
depending on the policies it decides to pursue. Different price-adaptation
strategies to be discussed here are: geographical pricing; price discounts,
allowances, and promotional pricing; discriminatory pricing; and product-
mix pricing.
 Geographical Pricing:
A marketer, in addition to deciding what price to set for the product, may
also have to decide whether to charge different prices in different
geographic areas. The basic issue confronting the executive here is
recognizing that market conditions and consumer sensitivities to price
vary by geographic area. Difference in price occurs not only on wide
territorial bases, but also between districts and even in different parts of
the same district. Though such an exercise is very costly, the executive
could segment the overall market into very small geographic areas and set
unique prices in each. In geographic pricing a company may charge
variable price depending on the customers living at different locations or
countries. A company may charge a higher price to distant customers to
cover higher shipping and other costs or it may even charge a lower price
to increase sales. A company may follow different techniques with regard
to realize the money. They are: barter, compensation deal (receives some
percentage in cash and rest in products), buyback arrangement (accepting
partial payments through products manufactured by the buyer), and offset
(receives full payments in cash but agrees to spend a substantial portion in
that country or region in buying products produced there).
 Price Discounts, Allowances, and Promotional Pricing:
The standard price established for the product by a marketer is list price.
But it is not always the actual price charged the customer. Basic prices are
here modified to reward customers for such acts as early payments,
volume purchases, and off-season buying and called together discounts
and allowances.
 Marketers sometimes offer a discount or allowance to the buyers,
effectively reducing the product’s list price, making it more competitive in
the marketplace, stimulating short-term demand, or creating product
awareness. In order to attain any of these objectives, a marketer can
choose from a variety of discount and allowance methods. Some of the
most commonly used strategies are:
 Quantity discounts
 Cash discounts
 Trade discounts
 Seasonal discounts
 Promotional allowances - loss-leader pricing, special-event pricing, cash
rebates, low-interest financing, longer payment terms, warranties and
service contracts, psychological discounting
 Forward dating
 Other allowances
 Quantity Discounts: Here a marketer reduces the list price based on the
number of units purchased. It can be very effective at both consumer and
middleman levels. This type of discount is allowed to buyers who buy in
bulk volume. This discount again may vary with the quantity purchase. A
marketer can use two forms of quantity discounts, viz. noncumulative and
cumulative. A noncumulative quantity discount applies to the number of
units purchased in a single transaction at a single point in time.
Two forms of quantityFor
discounts can be used:
example, a “3 for Tk.1.00” noncumulative and
price is actually a quantity discount since the buyer will pay Tk.0.50 for
cumulative.

one unit, but Tk.1.00 for three, a savings of Tk.0.50. At the middleman
level, the marketing executive will use a noncumulative discount. Usually,
larger purchases allow for economies of scale in both processing the
orders, and in transporting them to the middleman.
On the otherhand, the cumulative discount reduces the price based on the
number of units purchased within some time period. Whether used at the
consumer or middleman levels, its purpose is to encourage buyer loyalty
to the seller, rather than gain large purchase orders from them.
 Cash Discounts: Cash discount is a reduction in the list price based on the
buyer’s early payment in cash. Though it is not used extensively at the
consumer level, but is a widely adopted practice at the middleman level.
Its basic purpose is to stimulate rapid payment and draw in precious cash
to the company. It is paid to customers who pay their bills promptly. For
example "5/15, net 30," means a customer has to pay his bill within 30
 days but will get a discount of 5% if he pays within 15 days. The biggest
problems in offering cash discounts center on the administrative burdens
and potential for abuse. Some of the buyers may take the facility of
discount but not pay within the stipulated time causing financial trouble
for the company.
 Trade Discounts: Reducing the product’s list price to a middleman is
called a trade or functional discount. It is basically offered to the channel
members by the manufacturers if they (channel members) perform certain
functions such as selling, storing, and record keeping. It may vary from
channel member to channel member depending on the type and magnitude
of functions performed by them.
 Seasonal Discounts: Here the product’s list price is reduced in order to
stimulate sales during a particular time period. Such discount may be
given to the buyer to induce earlier than necessary purchases of seasonally
used products, or to build sales during traditionally off- peak periods. If a
buyer buys a manufacturer's product in off-season he may be offered
seasonal discount by the manufacturer. This type of discount allows the
seller roll his product round the year as a result of which he can keep his
production going on throughout the year.
 Promotional Allowances: To encourage middlemen to promote or
otherwise display a product, a marketer can offer a promotional
allowance. If the buyer allows a reduction on the list price to the seller it
can be termed as allowance. To ensure dealers' participation in advertising
and sales support programs, sellers normally offer allowances. In practice,
this allowance can take one of several forms. Some of the commonly
practiced ones are discussed below.
i. Loss-Leader Pricing: More legitimate pricing
techniques are known as loss-leader selling whereby the price is set below
invoice cost in order to reduce inventory size. To stimulate additional
traffic to store, supermarkets and department stores normally drop the
price on well- known brands. Leader pricing, on the otherhand, is merely
a reduction from the going price, also intended to reduce inventory.
ii. Special-Event Pricing: Special-event pricing involves advertised sales
or price cutting to increase revenue or lower costs. To attract more
customers, sellers establish special prices in certain season such as
beginning of the month or beginning of the year. Special event pricing
entails coordination of production, scheduling, storage and physical
distribution. Whenever there is a sales lag, a special sales event may be
 launched.
iii. Cash Rebates: To clear their inventories, manufacturers normally
offer cash rebates if products are purchased within a specified time period.
iv. Low-Interest Financing: A company can offer low interest financing
to customers instead of cutting price of its product and thus can increase
sales.
v. Longer Payment Terms: Here, buyers are offered the opportunity to
buy the product in installments by charging a higher price of the product.
vi. Warranties and Service Contracts: By offering free or a reduced price
warranty or service, a company can promote its sales.
 Forward Dating: Such discount are offered to middlemen. The
marketing executive will offer the products to the buyer and not charge
for the goods until a later date. For example, the product may be shipped
to a buyer in December, but he won’t be billed until April. The advantage
to buyers of this type of price offer is that they can have the products and
possibly sell them before having to make the payment. Thus, they do not
tie up their funds in inventory. For the company, sales are guaranteed, and
production can be scheduled more effectively.
 Other Allowances: In addition to the above, marketers can also offer
some other discounts to their customers. Some of them are discused here.
Rebates are cash refunds for buying the product. They have been very
popular at the consumer level. Trade-ins can also be used by the
marketing executive to discount the product’s list price. It is a price
reduction given for used goods when similar new goods are bought. By
giving fair market value, or even more on a trade-in, the executive can
effectively change the actual price charged to the buyer. Push money
(PM) can sometimes be used by the marketer to support the sales of
particular products. Push money is funds passed down to retail sales
clerks to encourage them to emphasize the company’s product instead of
his competitors' ones.

Discriminatory Pricing
To accommodate differences in customers, products, locations, and so on,
a company often modifies its basic price. Price can be discriminated in
many ways which we shall discuss in the following paragraphs:
 Customer-Segment Pricing: A same product may be sold at different
prices to different customer groups though the production costs are same.
For example, students and freedom fighters may be charged half fare by
 transport companies.
 Product-Form Pricing: Product of a company may have different
versions or sizes. In such a situation it may charge different prices for
different versions or sizes but not proportionately with respect to the cost
of the product.
 Image Pricing: Based on image differences, price of the same product
may be fixed at different levels. For example, a particular brand of one
liter soybean oil in tetra pack may be charge Tk.45/-, and same quantity of
same brand in glass bottle may be charged Tk.70/- thus the company is
trying to develop two different images of the same product.
 Location Pricing: Different prices may be charged for the same product
sold in different location (geographic or other) though the cost of offering
the product is same. A cinema hall, for example, charges different prices
for front stall, rear stall or other types of seats.
 Time Pricing: If prices are varied by season, day, or hour, it may be
termed as time pricing. Hotels, airlines, public utility companies such as
DESA, T&T etc. normally practice time pricing.
Product-Mix Pricing
The logic of setting or charging a price on an individual product has to be
modified when the product is a member of a product mix. Six situations
may be distinguished involving product-mix pricing. They are: product-
line pricing, optional-feature pricing, captive-product pricing, two-part
pricing, byproduct pricing, and product-bundling pricing which we shall
discuss in turn:
 Product-Line Pricing: If a company maintains a product line instead of a
single product it may set various prices for a single product in the line to
develop different images in the minds of the buyer. For example, an
electronics company may carry 21 inches color television at three price
levels. Customers will thus associate three price levels with three types of
quality.
 Optional Feature Pricing: If a company offers optional products or
features along with its main products it can go for optional-feature
pricing. For example, a hotel can charge low price for accommodation and
charge high for car rental service being offered by it since guests require
transport service in addition to accommodation facilities.
 Captive-Product Pricing: There are some products which require
ancillary or captive products to be used properly, such as battery for
battery operated toys or films for cameras. Producers of main products
 may charge high prices for the captive products and warning customers
not to use ancillary products manufactured by other companies for
guaranteed performance.
 Two-Part Pricing: This type of pricing is practiced most by the service
firms. They charge a fixed price for the basic service and variable usage
fee for other services. For example, a museum may charge a fixed entry
fee and variable fees for seeing different objects or events. Normally fixed
fee is charged low to encourage purchase of the basic fee which in turn
induce buyers to purchase other services.
 Byproduct Pricing: Byproducts are sometimes an automatic outcome of
the production of certain items such as petroleum from a paint
manufacturing plant. A company can price byproducts low to increase its
revenue and support its main operation.
 Product-Bundling Pricing: A seller may offer its bundle of products at a
reduced price than the individual prices added together. For example, a
tool manufacturer may combine a number of tools together and price the
bundle low compared to the total price of the individual gadgets. It will
induce buyers to by the bundle instead of buying a particular one or two
items and thus saving money.

Lesson - 3: Initiating and Responding to Price Changes

Objectives of this lesson
After reading this lesson, you will be able to:
 Understand the circumstances that lead a company to cut prices
 Identify the circumstances that lead a company to initiate price increases
 Understand the common price adjustments made by a company
 Know how price change affects customers, competitors, distributors,
suppliers, and government
 Understand how a company respond to competitors’ price changes.
Introduction
In a dynamic business world, price administration cannot end with the
setting of an initial price. Changing marketplace conditions often require
the organization to cut or increase prices to stop making changes.
Companies very often face situations where they may need to reduce or
increase their prices even after the development of pricing strategies and
structures. In the following few paragraphs we shall discuss circumstances
leading a firm to cut or increase price; how customers, competitors,
distributors, suppliers, and government react to price changes; and, how to
respond to competitors’ price changes.
Initiating Price Cuts
Tradition holds that any competitor can lead prices down, but only
dominant competitors can lead prices up. Prices may be cut temporarily
either to introduce a new product, or to sell excess inventory.
If a company’s market share is declining, the marketing executive can
decide to cut price to revive sales. A small competitor may institute price
cuts to gain market share; however, a large competitor will follow price
reductions only if a greater amount of profit will be lost by not doing so.
Price reduction or cut occasionally occurs even in oligopoly. The reason is
that no mechanism can control all of the companies operating in the
marketplace.
In the growth stage of the product, the marketing executive may cut the
price on an incremental basis, because competition becomes greater and
supply of competing items grow. The executive may also wish to tap a
larger share of the target market - those who cannot or will not pay the
higher price. To successfully compete during the maturity stage, the
marketing executive will have to cut the price significantly since the
intensity of competition peaks and the target market becomes an
extremely price sensitive group at this stage.

Price cut may also be initiated to achieve more widespread distribution of

the product, or for special promotional efforts, or to move out excess
inventory. A company, then, cuts price under several circumstances of
which excess plant capacity, declining market share and drive to dominate
the market through lower costs are important.
Initiating Price Increases
You know that changing marketplace conditions often require the
organization to increase prices. You should note that only dominant
competitors can lead prices up. This rule of thumb holds true some of the
time. Only companies with relatively large market shares are likely to be
successful in leading price increases. One of the most frequent causes of
initiating price increases is a change (rise) in the cost of producing or
selling the item.
The impetus for a price change, thus, first comes from increased costs.
Price increases may also be initiated anticipating increased future labor
costs, basic supplies, and many of the fix expenses.
 The decision to initiate price increases is also influenced by general
sensitivity of demand to price and by the possible reactions of
competitors. For a firm with highly differentiated product, a move to a
higher level of price may reflect product superiority. Such upward moves
are, of course, easier to sustain when non price promotional efforts have
created a strong selective demand for the product. With the increase in
costs, marketing executive may decide to increase price rather than to
maintain it.
Overdemand is another variable which may motivate the marketing
executive to initiate a price increase. There may be a situation when a firm
may not be able to meet the demand of all who desire the product. To
discourage certain segment of buyers in order to cope up with the
overdemand situation, firm may initiate the price increase. Number of
circumstances then, may lead a firm to increase its price, of which cost
inflation, general sensitivity of demand to price, and overdemand are
notable.
A company can also deal with the above two situations without raising
price. One of the following techniques may be adopted by a company to
face cost inflation and overdemand without price increase:
 It may shrink the amount of product.
 Less expensive materials and ingredients may be used.
 It may reduce or remove some of the product features.
 It may also remove or reduce product services such as warranty, free
delivery, and free installation.
 Less expensive packaging materials may be used or larger sized package
may be promoted.
 Number of sizes and models may be reduced.
 New economy brands may be developed.
Reactions To Price Changes
Price change of a company’s product may affect many parties such as
customers, competitors, suppliers, distributors, and government. We shall
now discuss reactions of different parties to price change in the following
sections:
Reactions of Customers
Customers may react differently to price cuts such as: the item may be
abandoned; it is faulty or not selling well; the firm may quit from this
business; the quality of the item has been reduced; or price may come
down further.
Customers may equally react to the price increase of an item. Price
increase, though, normally reduce sales, may carry some positive meaning
as well. Customers may consider the item as “hot” and may rush to buy it
anticipating that it may not be available in future, or they may consider the
item worth even if the price is raised. Customers are normally price
sensitive to costly items or items frequently bought compared to less
costly and less frequently bought items.
Reactions of Competitors
Marketing executives must have a clear idea of the competitive
environment in which they operate so that they can estimate the extent of
pricing flexibility available to them.
Same as the customers, competitors also react to price change of a
company’s product, and this reaction is inevitable if there are few
competitors, if buyers are highly informed, and if product is
homogeneous.
Like customers and competitors, the distributors, suppliers, as well as
government may also react to price changes brought by a company.
Distributors may find it less profitable dealing with a product the price of
which is raised, or they may find it less prestigious selling a product
whose price is cut. The suppliers may ask for higher price if the product’s
price is increased. In addition to knowing about customers’, competitors’,
distributors’, and suppliers’ reactions, one needs to recognize the legal
restraints that limit freedom of pricing action.
Responding to Competitors’ Price Changes
Following price changes is usually less risky than leading. If a dominant
firm increases its prices, smaller competitors can hold steady and hope to
gain market share. If they follow the leader’s increases, they are likely to
at least hold their current shares. They may even improve their profits
with little risk.
What if relative market shares are fairly even among number of
competitors? In this case, the firm that leads with price increases takes the
greatest risk. Customers obviously favor price cuts, but they have to be
educated about increases. It is, therefore, always safer to follow, but this is
not always an option. A firm’s survival may hinge on leading with a price
increase at the right moment.
In case of homogeneous product, a company can either cut its price as
soon as the competitors cut their prices or it may augment product to
compete. If the price is increased by the competitors in case of
homogeneous product, a company can match its price accordingly if it
thinks that price increase will benefit the industry as a whole.
In case of non-homogeneous product, a company can react to competitors
price in many ways such as maintaining price, raise perceived quality,
reduce price, increase price and improve quality, and launch low-price
fighter line.
Competitors’ pricing actions are sometimes impossible to predict, but they
can have devastating effects. Marketers face difficult pricing decisions
and must make them quickly. What the marketing executive should
exactly do depends on the situation. Like so much else in marketing, price
administration is only part science; much depends on intuition,
preparedness, and art.