Setting The Prices

SETTING THE PRICE
PRESENTED BY:-
Shashank Khanna
Shiva Talwar
Sugam Mathur
Upasana Khanna
V.Sowmya
Vanisha Chawla
Price Defined...
 The term ‘price’ denotes the money value of a product.
 It is the value which a buyer passes on to the seller in lieu of

the product/service provided.
 In a competitive economy, the price is determined by free

play of demand and supply.
 The firm must efficiently determine the price for its

product/service as the price structure affects the firm’s
competitive position, revenues and profits and its share in
the market.
Setting the Price
 The firm sets a price-
– When it develops a new product or,

– When it introduces its regular product into a new
distribution channel or geographical area, etc.
 The firm must decide where to position its product on

quality and price.
 In setting the pricing policy, the firm observes the
following procedure:
Selecting
Selecting the
the Pricing
Pricing Objective
Objective
Determining
Determining demand
demand &
& estimating
estimating costs
costs
Analyzing
Analyzing competitors’
competitors’ costs
costs &
& prices
prices
Selecting
Selecting aa pricing
pricing method
method
Results lead to the final price

 The company first decides where it wants to position its
market offering.
 The clearer a firm’s objective, easier it is to set price.
 Pricing objectives ideally should follow from company

objectives.
E.g. A company like Rolls Royce or Mercedes Benz competes

in super premium market; they cannot afford to fix low
prices & go into economy segment.
It would hurt the image of the company.

Survival
• Company pursue survival as their major objective if they

are plagued with over capacity, intense competition and
changing consumer wants.
• As long as prices cover variable cost and some fixed costs,

the company stays in the business.
• Survival is a short-run objective; in the long-run the firm

must learn how to add further value.
• Once the situation that initiated the survival pricing has

passed, product prices are returned to previous or more
appropriate levels.
Maximum Current Profit
• Company estimate the demand and cost associated with
alternative prices ; &
• choose the price that produces maximum current

profit.
• This strategy assumes that the firm has knowledge of its

demand & cost functions.
• While focusing on maximizing the current profits, the

company may forgo the long-run performance by ignoring
variables like competitors’ reactions, etc.
Maximum Market Share
• Also called maximum marketing penetration.
• Lowest price is set, on the basis of two conditions :
― The price elasticity of demand is high i.e. market is

price sensitive.
― There is high competition prevailing in the market.
• There are some companies which believe that higher sales

volume will lead to lower unit costs and higher long run
profits.
Maximum Market Skimmimg
• This strategy is also called “Skim the cream pricing”.
• It involves selling at a high price to those who are
willing to pay before aiming at more price-sensitive
consumers.
• Some Companies introduces high prices and slowly drop the
prices over the time.
• Market skimming is mostly done when :
 A sufficient no. of buyers have a current high demand
 The unit cost of producing a small volume is not so high
 There is less competition
 High priced product communicates the image of
superiority
• E.g. Rolex watches

Product Quality Leadership
• Many brands strive to be an affordable luxuries for the
customers; which are expected to provide high quality,
taste and status with a price just high enough and not out
of reach of the customers.
E.g. BMW cars, Café Coffee Day

 Positioned as Leaders in Quality
 Premium Pricing
 Loyal Customer Base
Other Objectives
• Non-profit and public organizations may have other

pricing objectives.
E.g.
 A university aims for partial cost recovery, knowing
that it must rely on private gifts and public grants to
cover its remaining costs.
 A non-profit hospital may aim for full cost recovery in

its pricing.
• Each price will lead to a different level of demand and will
therefore have a different impact on a company’s
marketing objectives.
• Normally, price and demand are inversely related (except

that of luxury goods).
• E.g. Diamonds, perfumes, etc

Price Sensitivity
• The first step in estimating demand is to understand what affects
price sensitivity.
• Price sensitivity means the how the customers responds to the

change in prices of goods and services offered to them.
• Customers are less price sensitive to low cost items or items they
buy infrequently.
• They are also less price sensitive when:
 There are less substitutes in the market.

 They do not readily notice the higher price.
 They are slow to change their buying habits.
 They think the higher prices are justified, etc.
Elastic
Elastic Slight change in prices alters the
Demand demand by a larger magnitude.
Demand
Inelastic
Inelastic An increase or decrease in
price will not significantly
Demand
Demand affect demand.
Estimating Demand Curves
 Surveys- explore how many units consumers would buy at

different proposed prices.
 Price Experiments- can vary the prices of different products

in a store or charge different prices for
the same product in similar areas to
see the affect on sales.
Statistical Analysis- of past prices & quantities sold.

The data can be longitudinal (over time)
or cross-sectional (from different
locations at same time).

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SETTING THE PRICE

 It is the value which a buyer passes on to the seller in lieu of

 In a competitive economy, the price is determined by free

 The firm must efficiently determine the price for its

 The firm sets a price-

– When it develops a new product or,

 The firm must decide where to position its product on

Results lead to the final price

 The clearer a firm’s objective, easier it is to set price.

 Pricing objectives ideally should follow from company

E.g. A company like Rolls Royce or Mercedes Benz competes

It would hurt the image of the company.

• Company pursue survival as their major objective if they

• As long as prices cover variable cost and some fixed costs,

• Survival is a short-run objective; in the long-run the firm

• Once the situation that initiated the survival pricing has

• choose the price that produces maximum current

• This strategy assumes that the firm has knowledge of its

• While focusing on maximizing the current profits, the

• Also called maximum marketing penetration.

• Lowest price is set, on the basis of two conditions :

― The price elasticity of demand is high i.e. market is

― There is high competition prevailing in the market.

• There are some companies which believe that higher sales

• E.g. Rolex watches

E.g. BMW cars, Café Coffee Day

• Non-profit and public organizations may have other

 A non-profit hospital may aim for full cost recovery in

• Normally, price and demand are inversely related (except

• E.g. Diamonds, perfumes, etc

• Price sensitivity means the how the customers responds to the

• They are also less price sensitive when:

 There are less substitutes in the market.

 Surveys- explore how many units consumers would buy at

 Price Experiments- can vary the prices of different products

Statistical Analysis- of past prices & quantities sold.

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