9.

PRICING
Price is the value placed on what is exchanged. In the contemporary market environment, characterised
by increasing inter-firm rivalry, low or no government intervention in corporate decisions, improvements
in communication and media and a growing concern to retain wholesalers and retailers to market the
firm’s products; price decisions appear at the centre stage. If a firm lowers the prices, it tends to incur
losses, as it may not be able to recover the overheads. If it raises the prices, it ends up accumulating an
inventory of finished goods, which may never get sold.
Modifying the price
To a manufacturer, price represents quantity of money received by the firm or seller; to a consumer, it
represents sacrifice and hence his perception of the value of the product. Conceptually, it is:
Qty. of money received by the seller
Price =
Qty. of goods and services received by the buyer
In this equation, both the numerator and denominator are important for pricing decisions. A seller can
change (raise or lower) price in the different ways listed below:
a. Changing the customer’s value perception of the product
b. Change the qty. of money to be paid by the buyer
c. Change the quality of goods and services offered
d. Changes in sales promotion or discounts
e. Changes in any of the following
i. time and place of transfer of ownership
ii. place and time of payment
iii. acceptable form of payment
Pricing Decision Framework (Factors that Influence Pricing Decisions)
An important task in price decision is estimating customer demand at different price levels and measuring
the existence of price sensitivity. This is a customer behaviour that confronts a marketer. At what price
level does the customer become sensitive to price changes? Which are the customers who are highly price
sensitive? How to measure price sensitivity? These are difficult questions that a marketer has to answer.
The price band for any product represents the minimum and maximum price the customer is willing to
pay. Price lower than the minimum limit is as much unacceptable as one above the maximum limit.
There are two broad factors that influence pricing decisions – Internal and External. While costs,
corporate objectives etc. are internal factors, customer demand, government policy etc. are considered as
external factors. Some of the important factors that influence pricing decisions are as follows:
Customer Demand
A marketer for manufactured products needs to assess price elasticity of demand, which is the changes in
demand in response to price changes, by considering the following factors:
a. Availability of substitutes and/or competitor products
b. Customer resistance to change
c. Price-Quality perception
d. Buyers do not perceive or notice the higher price
Costs
It is important for the marketers to estimate the costs of manufacturing and marketing the product.
Different firms, within the same industry, operate at different levels of efficiency, reflecting their cost
structures. If a firm is more efficient than the other, this is likely to get reflected in the price and
profitability of the two firms.
Corporate Objectives
To arrive at a good price strategy, the marketer should be able to decide on the price objectives. A firm
may choose its pricing objectives from any of the following:
a. maximise current profits and return on investment
b. exploit competitive position
c. survival in a competitive market
d. balance price over product line
In reality, a firm may pursue more than one objective at a given point of time.
MB208 Marketing Management 09. Pricing Page - 2 - of 4

Competitors Reactions
Competition affects pricing decisions. Competition can react either by following the leader or deciding to
ignore it and retain or lower its prices.

Government Policy
The Government’s fiscal policy also contributes to pricing decisions. The marketer has to consider
taxation, customs and import duties, if any, on his product and on the inputs used by the firm.

Barriers in the Industry

Entry and exit barriers in the industry not only affect the competition but also the firm’s prices. High
barriers always encourage inefficiency, high costs and high prices.

Pricing Strategies
Choice of a pricing strategy is dependant on corporate goals and objectives, Customer characteristics,
Intensity of inter firm rivalry and Phase of the product life cycle.

1. Skimming Strategy
The firm’s objective is to achieve an early break-even point. It skims the market by selling at a
premium price

2. Penetration Pricing Strategy

The objective is to gain a foothold in a highly competitive market. The firm prices its products
lower than the others in competition.

3. Differential Pricing Strategy

The firm differentiates its price across different market segments.

4. Geographic Pricing Strategy

In markets separated by transportation costs, firms seek to exploit economies of scale by pricing
the product below the competitor in one market and adopting a penetration strategy in the other.

5. Product Line Pricing Strategies

These are a set of strategies which a multi-product firm can usefully adopt. The products have to
be related. Product line pricing strategies can take several forms:

a. Price Bundling
Off-season discounts and Season tickets for music/ film festivals
b. Premium Pricing
Different models of colour TV
c. Image Pricing
Cosmetics, toilet soaps, perfumes etc.
d. Complementary Pricing
Credit Card/ Loan processing fee
e. Captive Pricing
Camera Bag free with purchase of camera.
f. Loss Leader Strategy
Dropping the price on a well known brand to generate demand at the retail outlet.
g. Two Part Pricing
Membership to a Gym.

Procedure for price setting

A firm must set a price for the first time when it develops a new product, when it introduces its regular
product into a new distribution channel or geographical area, and when it enters bids on new contract
work.
When setting the price of a new product, marketers must consider the competition’s prices, estimated
consumer demand, costs, and expenses, as well as the firm’s pricing objectives and strategies.
Here are the steps on how to set a price for a product:

Selecting the Pricing

Objective Determining

Demand Estimating Costs

Analyzing Competitors’ Costs, Prices and

Offers Selecting a Pricing Method

Selecting the Final Price

Pricing Objectives
Profit: The price should cover all production costs and yield a reasonable profit margin.
Profit maximisation: The price should give total revenue as large as possible in relation to cost
so as to maximise profits.
Market share: The price should be able to attract many customers and encourage them to
develop brand loyalty. In case of widely available products, mainly staples, and in a very
competitive market situation, low pricing of the product helps the firm to gain and retain its
market share.
Sales growth: A low price or discounts, as a form of sales promotion, can increase the effective
value of the product, which leads to higher sales growth.
Return on investment: A firm may price its products to achieve a specific percentage of target
return on its sales or investment.
Status quo: In a saturated market condition, the price helps in maintaining the levels of
profitability.
Product-quality: Price also may reflect the quality and image if the product in the minds of the
consumer.

Determining Demand
Each price will lead to a different level of demand and have a different impact on a company’s
marketing objectives. The normally inverse relationship between price and demand is captured in
a demand curve. The higher the price, the lower the demand.
Most companies attempt to measure their demand curves using several different methods like
Surveys, Price Experiments, Statistical Analysis etc.

Estimating Costs
For determining the price of a product, the company should estimate the cost of the product.
Variable and Fixed Cost: Price must cover variable & fixed costs and as production increases
costs may decrease. The firm gains experience, obtains raw materials at lower prices, etc., so costs
should be estimated at different production levels.
Differential Cost in Differential Market: Firms must also analyze activity-based cost
accounting (ABC) instead of standard cost accounting. ABC takes into account the costs of
serving different retailers as the needs of differ from retailer to retailer.
Target Costing: Also the firm may attempt Target Costing (TG). TG is when a firm estimates a
new product’s desired functions & determines the price that it could be sold at. From this price the
desired profit margin is calculated. Now the firm knows how much it can spend on production
whether it be engineering, design, or sales but the costs now have a target range. The goal is to get
the costs into the target range.
Analyzing Competitors’ Costs, Prices and Offers
The firm should benchmark its price against competitors, learn about the quality of competitors
offering, & learn about competitor’s costs.

Pricing Methods

Costs, demand and competition underlie different pricing methods that a firm may adopt.

Cost Oriented Methods

1. Full Cost or Mark up Pricing

The marketer estimates the total cost of producing or manufacturing the product and then
adds to it a mark up or margin that the firm wants. This approach ensures that all costs are
recovered and the firm makes profit. But, this method ignores customer’s value perception
and also the competitor’s reactions. It is not necessary that the firm is able to sell its entire
merchandise at this price.

2. Marginal Cost or Contribution Pricing

The company may work on the premise of recovering its marginal cost and getting a
contribution towards its overheads. This method works well in a market already dominated
by giant firms or characterised by intense competition and the objective of the firm is to
get a foothold in the market.

Competition Oriented Method

1. Going Rate or Follow the Crowd

The firm prices its products at the same level as that of the competition. It assumes that the
leader firm is operating efficiently.

2. Sealed Bid Pricing

In industrial marketing and marketing to the Government, suppliers are asked to submit
their quotations as a part of a tender. The price quoted reflects the firm’s cost and its
understanding of competition.

Customer Oriented or Perceived Value Pricing

There is an increasing trend to price the product on the basis of the customer’s perception
of its value. This method takes into account all other elements of the marketing mix and
the positioning strategy of the firm.

Selecting the Final Price

Pricing methods narrow the range from which the company must select its final price. In selecting
that price, the company must consider additional factors.

 Impact of other marketing activities

 Company pricing policies
 Gain-and-risk-sharing pricing
 Impact of price on other parties