Unit 3 - Pricing

• Pricing

• Price is the amount of money charged for a product or service – Philip

Kotler

• It is the element of marketing mix which produces revenue, whereas the

other elements are costs.

• Easiest element to adjust.

• Communicates the company’s intended value positioning

 Factors affecting Price Decisions

Internal External
Factors Factors

Marketing Nature of the

Objectives market

Marketing Mix Demand of the

Strategies product

Costs

Competition
Organizational
considerations
Other environmental factors
(Economy, Government)
 Possible consumer reference prices
• Consumers compare the mentioned price of a product to an internal
reference price which they remember.

• Fair Price (What consumer feels the product should cost)

• Ex: No one will pay above the MRP

• Typical Price
• Ex: Charges paid for e rickshaw for a distance

• Last Price Paid

• Ex: Prices paid for a hair cut or spa at same saloon or other saloon
• Upper Bound Price (Ceiling Price - Maximum cost consumers would pay)
• Ex: Prices of a 200 liter capacity refrigerator of LG

• Lower Bound Price (Flooring price – Minimum cost consumers would pay)
• Ex: Commodity prices (Salt prices)

• Historical Competitor Price

• Ex: Amazon Prime/Netflix membership

• Expected Future Price

• Ex: Property prices being anticipated to move upwards

• Usual discounted price

• Ex: Sabse Sasta Wednesday in Big Bazaar with defined discounts
 Pricing Process

• Selecting the pricing objective

• Determining demand

• Estimating costs

• Analyzing competitor’s costs, prices and offers

• Selecting the pricing method

• Selecting the final price

 Setting the Price
1. Selecting the
2. Determining 3. Estimating 5. Selecting a
pricing
Demand Costs pricing method
objectives
6. Selecting the
4. Analyzing final price
Price Mark up
Survival competitors’
sensitivity pricing
Types of costs, prices and
costs and offers
Maximum levels of
Estimating production Target return
current
Demand pricing
profit

Maximum Perceived
market share Accumulated value pricing
production
Maximum
market
skimming Target
costing
Product
quality
leadership

Other
Objectives
 Step 1 - Selecting the pricing objectives
• The company first decides where it wants to position it’s market offering.

• Survival –
• If a company has overcapacity, intense competition or changing customer wants. It
is a short term objective to cover variable and some fixed cost.
• Ex: Food delivery apps,
• Online retailers – ebay, Jabong, Myntra, Snapdeal

• Maximum Current Profit –

• A price that will maximize current profit. Demand and cost is estimated and price
with maximum ROI is chosen. Suitable for short term.
• Ex: Newly launched mobile phones (rapidly changing market dynamics and
customer preferences)
• Movie tickets of latest release
• Maximum Market Share –
• Higher sales volume will lead to lower unit costs and higher profits in long run.
Effective for price sensitive market, producer with large production and distribution
capacities.
• Ex: HUL, Brittannia, Reliance Jio

• Maximum Market Skimming –

• When sufficient number of buyers have a high current demand and high prices
communicate the premium image of the product. It is a long term strategy.
• Ex: Royal Enfield Desert Storm, Maruti Baleno, Honda Jazz, Dove by HUL
• Product Quality Leadership –
• Products or services defined by high perceived quality, taste and status with a
price just high enough not to be out of reach of consumers. “Affordable
Luxuries” is the idea in this pricing.
• Ex: BMW, Ananda Spa

• Other Objectives –
• Non profit organizations and universities aim for partial cost recovery and rely on
private gifts and public grants.
• Ex: Subsidized fees in University
• Lower ticket price at museum to attract more tourists/Visitors
 Step 2 – Determining Demand
Each price leads to a different level of demand.

Higher the price lower the demand.

• Price Sensitivity – The reaction of buyers at different prices.

• Customers are less price sensitive when

• There are few or no substitutes or competitors (Railways)

• The product is more distinctive (Unique). (Teeth Cap)
• They are slow to change their buying habits (OTC Medicines)
• They believe that higher prices are justified (Versace Perfume, By Pass Surgery)
• Price is a small part of the total cost of obtaining, operating and servicing the
product over it’s lifetime (Total Cost of ownership). (Elevators)
• Estimating Demand Curves

• Surveys exploring how many units consumer would buy at different proposed
prices

• Price Experiments to test the impact of a 5% or 2% increase in price and resulting

purchase response

• Statistical Analysis of Past prices, quantities sold over a period of time at different
locations
• Price Elasticity of Demand

• If demand hardly changes with a small change in price, it is called Inelastic

Demand.

• If demand changes considerably with a price change, it is called Elastic.

• The higher the elasticity, the greater the volume growth resulting from 1% price
reduction.

• There may be a “Price indifference Band” within which price changes have
little or no effect.
• Price Elasticity of Demand

• A 40 year of period of academic research on price elasticity across all

products, markets and time periods has found out following:

• A 1% decrease in price led to a 2.62 percent increase in sale.

• Price elasticity is higher for durable goods than other goods

• Price elasticity is higher for products in introduction and growth stage of

the PLC than in maturity/decline.
 Step 3. Estimating Cost
• Demand sets a ceiling on the price a company can charge for it’s product.

• Cost sets the flooring.

• Types of costs and levels of production

• Fixed Cost – Costs that do not vary with production level or sales revenue.

• Variable Cost – These vary directly with the level of production.

• Total Cost – Sum of the fixed and variable cost at any given level of production

• Average Cost – The cost per unit at that level of production (Total Cost/Production)
• Accumulated Production (Experience) –
• With experience workers gain efficiency, material management is better,
procurement costs fall resulting in to average cost fall with accumulated production
experience.

• Ex: Cost of producing first 1,00,000 bars of soap could be Rs. 10/- and for next 1,00,000 soap
bars, it could further reduce to Rs. 9/- only.

• Target Costing
• The firm must examine each cost element – Design, engineering, manufacturing,
sales and should implement operational excellency to bring down the costs.

• Ex: Jyothy Laboratries took over Henkel AG brand in India

• Manufacturing cost was reduced by starting the in house production instead of contract
manufacturing, Supply chain cost was reduced by 50%, Marketing cost was reduced by 35%

• Ex: Vodafone and Idea merger leading to cost cutting

Step 4. Analyzing Competitor’s Costs, Prices and Offers

• Competitors are most likely to react when

– Firms are few
– Product is homogeneous
– Buyers are highly informed.
– Ex: Telecom Industry, Food Delivery Apps

• A company will need to research the competitor’s

– Current financial situation
– Recent sales
– Customer Loyalty
– Corporate Objectives

Ex: “Indigo airline charging for web check-ins” - Case

 Step 5 : Selecting a Pricing Method

• Three Cs Model for Price Setting

• Customer’s Demand Schedule

• Cost Function

• Competitor’s Price
• 7 Price setting methods:

• Mark up pricing – It is obtained by adding a standard mark up to the product’s

cost.
• Variable cost per unit – 10/-
• Fixed Cost - 3,00,000/-
• Expected unit sales - 50,000

• Unit cost : Variable cost + Fixed cost/Unit sales = 10 + 3,00,000/50,000 = 16/-

• Assuming that manufacturer wants to earn a 20% mark up on sale, the price would
be
• Mark Up price = Unit Cost/(1- Desired return on sale)
• 16/1 - .2 = 20/-

• Drawback - Any pricing which ignores current demand, perceived value,

competition will not be logical.
• Target Return Pricing – The firm determine the price that yields it’s target
rate of return on investment.

• Ex: A manufacturer has invested Rs. 10 lakh and wants to make 20%
return.

• Target Return Price = Unit Cost + Desired return x Capital/Unit sales

• = 16 + .20 x 10,00,000/50,000 = 20/-
• Assuming fixed cost at Rs. 3,00,000/-,

• What if, 50,000 units are not sold

• Break Even Volume = Fixed Cost/ (Price – Variable Cost)
• 3,00,000/(20-10) = 30,000 units

• Drawback – It tends to ignore competitor’s pricing and price elasticity.

• Ex: Acer reduced it’s overheads to 8% compared to 15% of HP.
• Perceived – Value Pricing

• Perceived value is made up of buyer’s image of the product performance,

the channel deliverables, the warranty quality, customer support and softer
attributes such as supplier’s reputation, trustworthiness and esteem.

• Ex: Volvo us in India costing 80 Lakhs

– Premium for Volvo 5 year extended warranty 5 lakhs
– Premium for Volvo road side assistance 5 lakhs
– Premium for Volvo free service upto 3 lakh kms 5 lakhs
– Premium for Volvo assurance on damage prone parts 5 Lakhs
• Normal price with additional services on Volvo 100 Lakhs
• Discount 10 Lakhs
• Net price 90 Lakhs

• Price of Tata Marcopolo (Competitor) 66 Lakhs

• Value Pricing – Companies that adopt value pricing win loyal customers
by charging a fairly low price for a high – quality offering.

• It is a matter of re-enginnering the company’s operations to become a low

cost producer without sacrificing quality to attract a large number of value
– conscious customers.

• Ex – Maruti Alto, Parle G Glucose Biscuits, Neelkamal Furniture

• EDLP Pricing (Every Day Low Pricing)

• A retailer using EDLP charges a constant low price with little or no price
promotion or special class.
• Ex – Best Price by Wal Mart, Metro Cash & Carry

– High Low Pricing – The retailer changes higher prices on an every day basis
but runs frequent promotions with prices temporary low than EDLP.
• Going Rate Pricing – The firm bases it’s price largely on competitor’s
prices. When cost is difficult to measure or competitive response is
uncertain, firms find it good to go by industry’s collective wisdom.
• Ex: Oil companies, Telecom companies

• Auction Type Pricing

– English Auction (Ascending Bids) : One seller and many buyer. A seller puts
up an item and bidders raise their prices until the top price is reached. The
highest bidder gets the item.
– Ex: eBay

– Dutch Auction (Descending Bids) : One buyer and Many sellers. The highest
price is announced and then potential sellers compete to offer the lowest price.
– Ex: Wholesale Market

– Sealed Bid Auctions – Tenders to get the best deal.

– Ex: Government organizations
 Selecting the Final price
• 4 points are to be considered before final price.

• Impact of other marketing activities

– Price is not necessarily as important as quality and other benefits of product.

• Company pricing Policies

– Companies may put up penalties. Ex: Cancellation charges in airlines ticket, Bank
charges fees for excess withdrawals in a month

• Gain and Risk Sharing Pricing

– Indigo using a lease model for 6 years

• Impact of price on other parties

– Dealers, Distributors, Sales Force & Suppliers reaction to the prices.
• ..\VIDEOS\Da Da Ding.mp4
 Pricing Strategies
• Companies develop a pricing structure that reflects variations in demand
and costs, market requirements, purchase timing, order levels, delivery
frequency, guarantees, service contracts and other factors.

• Different types of pricing and relevant strategies

• Higher Pricing – To reflect product exclusivity & gain higher profits

• Midrange Pricing – To manage a mix of Sale and profits

• Lower Pricing – To increase sales and market share

 Pricing Strategies

Higher Midrange Lower

Pricing Pricing Pricing
Skimming Pricing (Initial Competition Pricing
Penetration Pricing
High Price, Then reduce (Match current market
(Lower prices to increase
for more market share) price range)
sales) Ex: Reliance Jio
Ex: Mobile Phones Ex: Zomato, Swiggy

Position Pricing
Bundle Pricing (Club a
Premium Pricing (Selling (Selling Image and reflect
group of products at
exclusively) Ex: Apple, consumer views)
reduced prices) Ex: Buy
Rolex Ex: Royal Enfield, Dove by One Get One offers
HUL
 Initiating and Responding to Price Changes

• Initiating Price Cuts

• Initiating Price Increases

• Anticipating Competitive Responses

• Responding to Competitor’s Price Changes

 Initiating Price Cuts

• If a firm needs additional business and it can’t be generated through sales

efforts, product improvement or other measures, “Price Cut” is initiated in
hope of gaining market share.

• Possible traps as an outcome of Price cutting could be:

• Low quality trap – Consumer perceives low price as low quality

• Fragile market share trap – Low customer loyalty
• Shallow pockets trap – Rich competitors will lower the prices to drive you
out of business.
• Price war trap – Competitors bring prices further down leading to a war
 Initiating Price Increases

• In the example, calculate the % of price increase and resulting

% in profit increase.

• 1% Price increase
• 33.33% Profit increase
 Anticipating Competitive Response

• If competition has a Market Share objective

• It is likely to match the price change

• If competition has profit- maximization objective

• It may react by increasing advertising budget or improving product
quality.

• Key Variables to keep in mind

• Competitor’s current financials, recent sales, customer loyalty, corporate
objectives
 Responding to Competitor’s Price Change

• Before responding to price change, a company needs to understand

• Objective of the competitor’s price change (To steal the market, utilize
excess capacity, changing input cost, industry wide price change)

• Is the price change temporary or permanent?

• What will happen to my market share if I do not respond?

• What is going to be the reaction of other competitors?

 Place Decision

• Every marketing activity starts with the customer and ends with the customer.
The customer is the ultimate target for a marketer.

• Once the product is developed and priced, the marketing manager should now
plan to develop distribution strategy and design distribution channel to reach
customers.

• Management of distribution involves processes to place the finished goods from

a manufacturer to a customer for final consumption and usage. This
encompasses flow of goods and ownership from manufacturer to the customers.
 Distribution Management

➢ The management of resources and processes used to deliver a product from

a production location to the point-of-sale, including storage at warehousing
locations or delivery to retail distribution points.

➢ Distribution management also includes determination of optimal quantities

of a product for delivery to particular warehouses or points-of-sale in order
to achieve the most efficient delivery to customers.
 Marketing Channel
• “Distribution Channel is a set of interdependent organization involved in the
process of making a product or service available for use or consumption by
consumer or business use”. ---Phillip Kotler

➢ Wholesalers and Retailers- Buy, take title to and resell the merchandise; they are
called Merchants.

➢ Other-brokers, manufactures’ representatives, sales agent-Search for customers and

may negotiate on the producer’s behalf but don’t take title to the goods; they are
called Agents.

➢ Still others- Transportation companies, ware houses, banks, advertising agencies

assist in the distribution process but neither take title to goods nor negotiate
purchases or sales; they are called Facilitators.
 Marketing Channel alternatives
(Channels for Consumer Products)

Producer Producer Producer

Distributor Distributor

Wholesaler

Retailer Retailer Retailer

Customer / Customer/ Customer/

consumer Consumer Consumer

37
 Marketing Channel alternatives
(Channels for Industrial Products)

Direct Direct Industrial Agent/Broker Agent/Broker

Channel Channel Distributor Channel Industrial
Channel
Producer Producer Producer Producer Producer

Agents or Agents or
Brokers Brokers

Industrial Industrial
Distributor Distributor

Industrial Govt. Industrial Industrial Industrial

User Buyer User User User
Service Channels
PRODUCERS OF SERVICES

Agents

ULTIMATE CONSUMERS OR BUSINESS USERS

 Need for Marketing Channels

• Quantity – Quantity of product required may be different for different customers

• Ex: Rural population may go for sachet of a product compared to larger quantity
requirement in urban area.

• Assortment – Variety required by different customers

• Ex: All the variants of a toothpaste should be available at store for customers to choose
from.

• Location – Product needs to be available across the geography

• Ex: A TV commercial will appeal all across the target segment irrespective of
geographies they are located at.

• Timing – Different preference of time for shopping at different places

• Ex: North India fasts whereas Gujrat and West Bengal celebrates Navratri.
• Monte Corlo jackets demand in Manali and Delhi will vary throughout the year.
 Importance for Marketing Channels

• Channel Creation – Role/ need of a marketing channel is not limited up to just

serve the market, they must make them.
• Ex: A channel partner will have to serve existing and create new retailers/customers
for end consumption of product/services.

• Push Strategy – this refers to use of manufacturer’s sales force, trade promotion
money, or other means to induce intermediaries to carry promote and sell the
product to end users. It is used more in low brand loyalty products, brand choice is
made at point of sale (POS) and impulse items.
• Ex: Vadilal, Kwality Walls, Amul

• Pull Strategy – Manufacturer using advertising promotion and other forms of

communication to persuade customers to demand the product form POS. High
brand loyalty, high involvement, perceivable difference between the brands exist.
• Ex: Nike, Converse

• Top companies skillfully employs both the PUSH and PULL strategy.
 Channel Design Decisions

Analyze Customers’ Needs and Demands

Establish Objectives and Constraints

Identify Major Channel Alternatives

Evaluate the Major Alternatives

 1. ANALYZING CUSTOMER NEEDS AND DEMANDS

DESIRED LOT SIZE - The number of units the channel permits a typical customer to purchase
on one occasion.
Ex: A bulk dealer will discourage you from buying a single unit at Chandni Chowk.

WAITING & DELIVERY TIME - The average time customers of that channel wait for receipt
of the goods.
Ex: Assured time bound delivery of goods by online channels

SPATIAL (Location and Space) CONVENIENCE:

The degree to which the marketing channel makes it easy for customers to purchase the product.
Ex: Maruti over Fiat will be chosen due to ease of availability

PRODUCT VARIETY
The assortment breadth provided by the marketing channel.
Ex: Higher the choices by a brand, greater the chance of purchase (Shampoo Range)

SERVICE BACKUP
The add-on services (credit, delivery, installation, repairs) provided by the channel.
 2. Establishing Objectives and Constraints

The objectives of channel design are heavily dependent upon the marketing
and corporate objectives. The broad objectives include:

1. Availability of product in the target market.

2. Smooth movement of the product from the producer to the customer.

3. Cost effective and economic distribution.

4. Information communication from the producer to the consumer.

Ex: Apple wanted to create a dynamic retail experience for consumers, which
was not met by existing channel, hence, they opened own stores.
 3. Identification of Major Channel Alternatives

• Type of Intermediaries

• Exclusive Distribution – Limited number of intermediaries, intermediary

should me highly knowledgeable and dedicated efforts by reseller as well
• Ex: Land Rover, LVMH, Kashi Jewelers for RADO

• Selective Distribution – More than exclusive but still few selected channel
partners to carry the product.
• Ex: Reliance Digital, Value Plus - IFB front loaded Washing Machine

• Intensive Distribution – Placement of products in as many as possible

outlets
• Ex: FMCG, Confectionery
• Terms and responsibilities of Channel Members

• Price Policy – Producer will establish a price list, discounts applicable and
allowances that will be allowed for channel partners to follow.

• Conditions of Sale – Payment terms and guarantees defined by producer to

be followed including defective returns and price protection.

• Distributor territorial rights – Allowed to do sale in territory allotted to

them and sub channel partners can be appointed in the same location only.

• Mutual Service and Responsibilities – These must be carefully defined

and carried out.
• Ex: HUL provides technical and administrative assistance, promotional
support, record keeping system and training. CPs (Channel Partners) have
to abide by payment terms, territorial rights, infrastructure and market
intelligence. (I, I, I)
 4. Evaluating Major Channel Alternatives
ECONOMIC CRITERIA

Company needs to estimate the costs of selling different volumes through each channel
and the next step is comparing sales and costs.
Ex: A furniture company in Delhi has to sell in South India. It can either hire a staff of 10 or
can go with a sales agency having staff of 50.
Step 1 – Estimating sale with each alternative
Step 2 – Estimating the cost of selling different volume through each channel
Step 3 – Compare Sales and Costs

CONTROL & ADAPTIVE CRITERIA

Using a Sale Agency may pose a control problem. They will be interested in just selling the
product without mastering the product technical details and handling the promotional
material.

Company also looks for a long term commitment and channel which is flexible to learn
and willing to grow with new changes in policies and procedures.
 Channel Management Decisions

• Selecting Channel Members

– Number of years in the business
– Other companies channel is working for
– Growth and Profit record
– Financial Strength
– Cooperativeness and Service reputation
– Infrastructure

• Training and Motivating Channel Members

– Imparting of Training Module to Sales force
– Updating with the latest development in field
– Ex: IRDA and AMFI exams for keep updated Sales Force
 Channel Management Decisions
• Channel Power – Manufacturer need to exercise power to obtain
cooperation from channel partners.
Coercive Power - Threatening to withdraw relationship/agency Ex: Patanjali
Reward Power – Giving extra benefit for performing well Ex: Mahindra
`Legitimate Power – Behavior as per the contract Ex: McD franchisee
Expert Power – Special knowledge of manufacturer about the product Ex: Biocon
Referent Power – Channel Partners are proud to associate with Ex: Reliance Jio

• Channel Partnership – Creating a long term relationship with clearly defined market
coverage, inventory levels & marketing development
• Ex: Philips Lighting Dealers

• Evaluating Channel Members – A periodic audit and evaluation for target

achievement, inventory levels, customer delivery time, cooperation in promotion

• Modifying Channel Design and Arrangements – Introducing new policies as per the
market dynamics
• Ex: Introduction of Sub-distributor concept by Vodafone
Retailing – a set of business activities that adds value to the products and
services sold to consumers for their personal or family use.
 Types of Retailers

• Store retailers – retailers meet widely different consumer preferences for

service levels and specific services.

• Specialty stores – Tanishq

• Supermarket – Big Bazaar
• Convenience Store – Easy Day
• Drug Store –
• Discount Stores – V Mart
• Extreme Value or Hard Discount Stores – Dollar Stores
• Off – Price Retailers – Factory Seconds outlet
 Types of Retailers

• Non store retailers

• Direct Selling (multilevel Selling/Network Marketing) – Herbal Life

• Direct Marketing – Homeshop18

• Automatic Vending – Airport lounges, Railway Stations

 Wholesaling

Wholesaling includes all the activities in selling goods or services to those who buy for
resale or business use. It excludes

- Manufacturer
- Farmers
- Retailers

Wholesalers pay less attention to promotion, atmosphere and location since they deal
with business customers rather than end users.

Wholesalers transactions are usually larger than retail transactions and they usually
cover large trade area compared over a retailer.

Wholesalers are subject to different legal regulations and taxes.

 Types of Wholesalers

• Merchant wholesalers – take title to product and sell it Ex: KSB pumps

• Full-service wholesalers – Carry stock, inventory management, carrying

sales force, giving deliveries, giving credit Ex: FMCG distributors

• CNF agents Ex: Pharmaveutical Industry, P & G

• Brokers and Agents – Property brokers, Insurance agents,

• Manufacturers’ & retailers’ branches & offices

• Specialized Wholesalers – Auction Dealers

 Multichannel Marketing

➢ Multichannel marketing refers to the practice of interacting with customers using a

combination of indirect and direct communication channels – websites, retail stores,
mail order catalogs, direct mail, email, mobile, etc. – and enabling customers to
take action in response – preferably to buy your product or service – using the
channel of their choice.

➢ In the most simplistic terms, multichannel marketing is all about choice.

➢ The goal of multichannel is to give consumers a choice, and allow them buy when
and where they want to.

Ex: SBI Yono, Online Communication, SMS, Website, Hoardings, POP at ATM,
Brochures at Bank premises, Kiosk of SBI at Airport or Railway platforms
 Vertical Marketing Systems
• VMS consists of producers, wholesalers and retailers acing as a unified group to
serve the customer.

• Corporate VMS – One member of the distribution channel owns all the other
member channels having all the elements of production and distribution channel
under a single ownership.
• Ex: Amway

• Contractual VMS – Every member in the distribution channel works

independently and integrate their activities on a contractual basis. Franchising is the
most common form.
• Ex: Mc – Donalds, Pizza Hut, Dominos
• Administered VMS – Any powerful and influential member of the channel
dominate the activities of other channel members.
• Ex: HUL, ITC
 Horizontal Marketing Systems
• Horizontal Marketing System (HMS) is a form of distribution channel wherein two
or more companies at the same level unrelated to each other come together to gain
the economies of scale.

• Ex: Nike and Apple having a partnership for Nike+ footwear range in which the
iPOD can be connected with shoes to play music and display information about
time, distance covered, calories burned and heart pace on the screen.

• Yes Bank ATM inside Big Bazaar at Z Square

•