UNIT-III PRICE DECISIONS: Pricing objectives - Pricing policies and

constraints - Different pricing method - New product pricing, Product Mix

pricing strategies and Price adjustment strategy.

Introduction to pricing:

Meaning of Pricing:
The only component of marketing mix that generates returns is called price,
however, others only generate costs. Price can be easily altered, whereas, other
product aspects like channel obligations and product attributes cannot be
changed so easily. Therefore, price is the most flexible component of the
marketing mix. For a manufacturer, price is that amount of money (or in case
of barter trade, goods or services), which he will receive from the buyer for his
product. For a customer, price is something he sacrifices for owning the
product or service and therefore, it displays his perception for the product
value. It can conceptually be defined as:

Quantity of money received by the seller

Price = ------------------------------------------------
Quantity of goods and services rendered/
Received by the buyer

As per this equation, the numerator as well as the denominator is crucial while
taking price decisions. A product's price is based on the seller's decision
regarding its monetary worth to the buyer. The method used to convert the
worth of a product or a unit of service into quantitative form (i.e., rupees and
paisa) at a given time for customers is called "pricing".

Definition of Pricing:

According to Prof. K.C. Kite:

"Pricing is a managerial task that involves establishing pricing objectives,
identifying the factors governing the price, ascertaining their relevance and
significance, determining the product value in monetary terms and formulation
of price policies and the strategies. Implementing them and controlling them for
the best results".
Pricing can, therefore, be defined as the task of deciding the monetary value of
an idea, a product or a service by the marketing manager before he sells it to
his target customers. In particular, pricing is the process of formulating
objectives, deciding the flexibility that is available, devising strategies, setting
prices, and implementing and controlling the above elements. Pricing is one of
the strongest marketing instruments that the company possesses. Pricing
decision is an important aspect of a marketing plan. Thus, marketers need to
take exact and premeditated pricing decisions.

Factors Affecting Price Determination:

A company has to keep in mind various factors while determining the price of a
product. Some such important factors are given here.

1. Cost of the Product:

The most important factor affecting the price of a product is the product cost. The
same principle also applies in case of services. The product cost will be inclusive
of the cost of production, the distribution costs and the selling and promotion
costs. This cost will act as a benchmark for setting the price.
In the long run, the company will obviously try to cover the entire cost of the
product. And in addition, it will set for itself a profit margin over and above such
cost. But perhaps in the short run, the company may set a price lower than the
cost of the product. This is a marketing strategy to boost sales and capture a
share in the market. But in the long run, no company can survive unless the
prices of the products/services do not even cover their costs.
Let us also learn about the three types of costs of a company

 Fixed Cost: These costs are fixed. They have no relation to the level of
activity or production of the company. Even if there is no production of
goods these costs will occur. For example, the rent of the factory is a fixed
cost.
 Variable Cost: These are the costs that vary in direct proportion to the
production levels of an entity. Higher the production, higher the cost and
vice versa. The raw material is a classic example of a variable cost
 Semi-Variable Costs: These costs also vary with the production levels. But
they are not directly proportional. Say for example the salary of a manager
is 10,000/- a month fixed and then 10% of his sales. This is a semi-
variable cost.

2. The Demand for the Product:

The cost of the product will only give you a benchmark to determine the price.
The upper limit of the price range will depend on the utility the product has and
hence its demand in the market. So the cost of the product is the seller’s
concern. The buyer’s concern is the utility of the product. The demand for the
product will depend on its utility and its price. The law of demands states that
lower the price higher the demand.
Another factor to consider when determining the price is the elasticity of demand.
This means the corresponding change in demand to the change in the price of a
product. If the demand is inelastic then the company can charge a higher price
for their products.

3. Price of Competitors:
One factor that affects price termination is the price the competition charges for
their product. Not only their price but their products, its features and other
factors like distribution channel, promotions etc. should also be studied.
In a market, with free competition, the prices have to be very competitive. You
cannot risk pricing yourself out of the market. But on the other hand, if your
products have special r additional features this must be reflected in the price.

4. Government Regulation:
The government has a duty to protect its citizens from unfair practices and
pricing. So it may impose certain laws and regulations with regards to the pricing
of a product. It can even regulate the prices of goods that it considers essential
goods. This generally happens in the pharmaceutical industries. Manufacturers
charge exuberant prices for life-saving drugs and the buyers have no choice but
to pay. In such cases, the government may step in and regulate the prices of
these essential medicines.

Objectives of Marketing:
Pricing can be defined as the process of determining an appropriate price for
the product, or it is an act of setting price for the product. Pricing involves a
number of decisions related to setting price of product. Pricing policies are
aimed at achieving various objectives. Company has several objectives to be
achieved by the sound pricing policies and strategies. Pricing decisions are
based on the objectives to be achieved. Objectives are related to sales volume,
profitability, market shares, or competition. Objectives of pricing can be
classified in five groups as shown in figure 1.

1. Profits-related Objectives:
Profit has remained a dominant objective of business activities.
Company’s pricing policies and strategies are aimed at following profits-related
objectives:

i. Maximum Current Profit:

One of the objectives of pricing is to maximize current profits. This objective is
aimed at making as much money as possible. Company tries to set its price in
a way that more current profits can be earned. However, company cannot set
its price beyond the limit. But, it concentrates on maximum profits.
ii. Target Return on Investment:
Most companies want to earn reasonable rate of return on investment.

(1) Fixed percentage of sales,

(2) Return on investment, or
(3) A fixed rupee amount.
Company sets its pricing policies and strategies in a way that sales revenue
ultimately yields average return on total investment. For example, company
decides to earn 20% return on total investment of 3 crore rupees. It must set
price of product in a way that it can earn 60 lakh rupees.

2. Sales-related Objectives:
The main sales-related objectives of pricing may include:

i. Sales Growth:
Company’s objective is to increase sales volume. It sets its price in such a way
that more and more sales can be achieved. It is assumed that sales growth has
direct positive impact on the profits. So, pricing decisions are taken in way that
sales volume can be raised. Setting price, altering in price, and modifying
pricing policies are targeted to improve sales.
 ii. Target Market Share:
A company aims its pricing policies at achieving or maintaining the target
market share. Pricing decisions are taken in such a manner that enables the
company to achieve targeted market share. Market share is a specific volume of
sales determined in light of total sales in an industry. For example, company
may try to achieve 25% market shares in the relevant industry.

iii. Increase in Market Share:

Sometimes, price and pricing are taken as the tool to increase its market share.
When company assumes that its market share is below than expected, it can
raise it by appropriate pricing; pricing is aimed at improving market share.

3. Competition-related Objectives:
Competition is a powerful factor affecting marketing performance. Every
company tries to react to the competitors by appropriate business strategies.
With reference to price, following competition-related objectives may be
priorized:

i. To Face Competition:
Pricing is primarily concerns with facing competition. Today’s market is
characterized by the severe competition. Company sets and modifies its pricing
policies so as to respond the competitors strongly. Many companies use price
as a powerful means to react to level and intensity of competition.

ii. To Keep Competitors Away:

To prevent the entry of competitors can be one of the main objectives of pricing.
The phase ‘prevention is better than cure’ is equally applicable here. If
competitors are kept away, no need to fight with them. To achieve the objective,
a company keeps its price as low as possible to minimize profit attractiveness
of products. In some cases, a company reacts offensively to prevent entry of
competitors by selling product even at a loss.

iii. To Achieve Quality Leadership by Pricing:

Pricing is also aimed at achieving the quality leadership. The quality leadership
is the image in mind of buyers that high price is related to high quality
product. In order to create a positive image that company’s product is standard
or superior than offered by the close competitors; the company designs its
pricing policies accordingly.
 iv. To Remove Competitors from the Market:
The pricing policies and practices are directed to remove the competitors away
from the market. This can be done by forgoing the current profits – by keeping
price as low as possible – in order to maximize the future profits by charging a
high price after removing competitors from the market. Price competition can
remove weak competitors.

4. Customer-related Objectives:
Customers are in center of every marketing decision.
Company wants to achieve following objectives by the suitable pricing policies
and practices:

i. To Win Confidence of Customers:

Customers are the target to serve. Company sets and practices its pricing
policies to win the confidence of the target market. Company, by appropriate
pricing policies, can establish, maintain or even strengthen the confidence of
customers that price charged for the product is reasonable one. Customers are
made feel that they are not being cheated.

ii. To Satisfy Customers:

To satisfy customers is the prime objective of the entire range of marketing
efforts. And, pricing is no exception. Company sets, adjusts, and readjusts its
pricing to satisfy its target customers. In short, a company should design
pricing in such a way those results into maximum consumer satisfaction.

5. Other Objectives:
Over and above the objectives discussed so far, there are certain objectives that
company wants to achieve by pricing. They are as under:

i. Market Penetration:
This objective concerns with entering the deep into the market to attract
maximum number of customers. This objective calls for charging the lowest
possible price to win price-sensitive buyers.

ii. Promoting a New Product:

To promote a new product successfully, the company sets low price for its
products in the initial stage to encourage for trial and repeat buying. The
sound pricing can help the company introduce a new product successfully.
 iii. Maintaining Image and Reputation in the Market:
Company’s effective pricing policies have positive impact on its image and
reputation in the market. Company, by charging reasonable price, stabilizing
price, or keeping fixed price can create a good image and reputation in the
mind of the target customers.

iv. To Skim the Cream from the Market:

This objective concerns with skimming maximum profit in initial stage of
product life cycle. Because a product is new, offering new and superior
advantages, the company can charge relatively high price. Some segments will
buy product even at a premium price.

v. Price Stability:
Company with stable price is ranked high in the market. Company formulates
pricing policies and strategies to eliminate seasonal and cyclical fluctuations.
Stability in price has a good impression on the buyers. Frequent changes in
pricing affect adversely the prestige of company.

vi. Survival and Growth:

Finally, pricing is aimed at survival and growth of company’s business
activities and operations. It is a fundamental pricing objective. Pricing policies
are set in a way that company’s existence is not threatened.

Importance of Pricing:
Following points highlight the importance of pricing decisions:

1. Important Aspect of Sales Promotion:

At times, as a feature of sales promotion, marketers opt for price adjustments.
They decrease the price of their product for a small duration to enhance the
customer's interest in the product. Price adjustments must not be done very
frequently as this may result in customers getting used to anticipating a
reduction in price and withholding purchase until the prices are reduced again.

2. More Flexible Marketing Mix Variable:

Out of all the marketing decisions, pricing is the most elastic one for the
marketers. This flexibility is especially important when the firm intends to
promptly increase the demand of his product or act in response to a price
action taken by the competitor.
 3. Trigger of First Impressions:
The customer may finally decide upon purchasing the product on the basis of
the market offering as a whole (i.e., entire product). The customer might not
judge a product only by its price. In such a case, pricing might become the
most crucial element while making decisions as the marketer can establish
that the customers are not showing interest in the product due to its price.

4. Fixing the Right Price:

If pricing decisions are taken in hurry and the required research, strategic
evaluation and analysis are not undertaken, the organization prone to lose
revenue. A lot of market knowledge is needed to set the exact price level.
Specifically, when the product is new, various pricing options need to be tested.

5. Supply and Demand:

Demand and supply are. Inversely proportional to each other. When one rises,
the other falls. Items like gas, food, etc., that are always in demand experience
this more. If the business regularly reviews the demand and supply of the
products and services, it can adjust its prices consequently.

6. Loss Leaders:
In order to attract customers, certain firms use cost pricing or below cost
pricing strategy. In this way, they drive customers to spend somewhere else the
saved money.

7. Sales Volumes:
The most prominent impact of pricing on business is an increase or decrease in
the volume of sales. Price elasticity and how consumers react to a change in
price are studied by economists.

8. Position:
In simple words, the way the target market perceives a firm's offerings, as
compared to firms selling similar product or service, define its position. There
are firms, whose products or services are perceived to be of a high quality, and
can hence charge more for their offerings.

Pricing policies and constraints:

Introduction to Pricing:

Pricing is a key element of the marketing mix. All the other elements –
Product, Packaging, and Promotion are cost generators, i.e. they cost the
company money. But pricing is an income generator. Let us look at the factors
that determine the pricing of a product.
A price is a value in monetary terms that one party pays to another in a
transaction in exchange for some goods or services. So the definition of price is
the amount of money the buyer will pay as consideration to the seller in
exchange for goods or services.
Pricing isn’t always as easy as setting a price the seller hopes to obtain. It
involves aspects such as demand and supply, cost of the product, its perception
and value for the customer and many such factors.
So while pricing a product, the company has to take immense care and
consideration. If the price is too high or even too low the product will fail in
the market. This is also the reason why the determination of price is not a one-
time event. A company changes the prices according to the market conditions
and other circumstances.

Producer of pricing policy:

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. The firm has
to consider several factors in setting its pricing policy.

A useful 6-step procedure to develop the pricing policy is discussed below.

1. Selecting the pricing objective:

The firm first decides where it wants to position its market offering. The clearer
a firm’s objectives, the easier it is to set price. A firm can pursue any of the
objectives classified under four major groups, viz. profitability objectives,
volume objectives, meeting competition objectives and prestige objectives. This
was discussed in the previous lesson.

2. Determining demand:
Each price will lead to a different level of demand and therefore have a different
impact on a firm’s marketing objectives. The relation between alternative prices
and the resulting current demand is captured in a demand curve. In the
normal case, demand and price are inversely related: the higher the price, the
lower the demand. In the case of prestige goods, the demand curve sometimes
slopes upward. However, if the price is too high, the level of demand may fall.
The demand curve sums the reactions of many individuals who have different
price sensitivities. The first step is estimating demand is to understand what
affects price sensitivity. Generally speaking, customers are most prices
sensitive to products that cost a lot or are bought frequently.

3. Estimating costs:
In the earlier discussion on costs, it was noted that demand sets a ceiling on
the price, whereas costs set the floor. Also, the types of costs and the impact of
economies of scale and learning curve on pricing were explained. To price
intelligently, management needs to know how its costs vary with different levels
of production. It is important to be aware of the risks presented by pricing
based on the experience/learning curve. It assumes that competitors are weak
followers.
It leads the company into building more plants to meet the demand, while a
competitor may be innovating a lower-cost technology. Then the market leader
will be stuck with the old technology. Today’s firms try to adapt their offers and
terms to different buyers. A manufacturer may negotiate different terms with
different retail chains. One retailer may want daily delivery (to keep inventory
lower) while another may accept twice-a-week delivery in order to get a lower
price.

4. Analyzing competitors’ costs, prices and offers:

Within the range of possible prices determined by market demand and
company costs, the firm must take competitors’ costs, prices and possible price
reactions into account. The firm should first consider the nearest competitor’s
price. If the firm’s offer contains features not offered by the nearest competitor,
their worth to the customer should be evaluated and added to the competitor’s
price.
If the competitor’s offer contains some features not offered by the firm, their
worth to the customer should be evaluated and subtracted from the firm’s
price. Now the firm can decide whether it can charge more, the same or less
than the competitor. But competition can change their prices in reaction to the
price set by the firm.

5. Selecting a pricing approach:

Given the three Cs – the Customer’s demand schedule, the cost function and
the competitors’ prices – the firm is now ready to select a price. Figure 3.3.1
summarizes the three major considerations in price setting. Costs set a floor to
the price. Competitors’ price and the price of substitutes provide an orienting
point.

Customers’ assessment of unique features establishes the price ceiling. Firms

select a pricing approach that includes one or more of these three
considerations. The pricing approaches are cost-based or buyer-based or
competition-based. These approaches were discussed at length in the previous
lesson.

6. 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,
including the impact of other marketing activities, company pricing guidelines,
gain-and-risk-sharing pricing and the impact of price on other parties. The
final price must take into account the brand’s quality and advertising relative
to the competition. The price must be consistent with the firm’s pricing
guidelines. When a firm establishes pricing penalties, it must be done
judiciously so as not to unnecessarily alienate customers. Sometimes, buyers
may resist accepting a seller’s proposal because of a high perceived level of
risk. The seller has the option of offering to absorb part or all of the risk if it
does not deliver the full promised value.
 Legal constraints of pricing:

Different pricing method:

Definition: The Pricing Methods are the ways in which the price of goods and
services can be calculated by considering all the factors such as the
product/service, competition, target audience, product’s life cycle, firm’s vision
of expansion, etc. influencing the pricing strategy as a whole.
The pricing methods can be broadly classified into two parts:

1. Cost Oriented Pricing Method

2. Market Oriented Pricing Method

1. Cost-Oriented Pricing Method: Many firms consider the Cost of

Production as a base for calculating the price of the finished goods.
Cost-oriented pricing method covers the following ways of pricing:
 Cost-Plus Pricing: It is one of the simplest pricing method wherein the
manufacturer calculates the cost of production incurred and add a certain
percentage of markup to it to realize the selling price. The markup is the
percentage of profit calculated on total cost i.e. fixed and variable cost.
E.g. If the Cost of Production of product-A is Rs 500 with a markup of 25% on
total cost, the selling price will be calculated as Selling Price= cost of
production + Cost of Production x Markup Percentage/100
Selling Price=500+500 x 0.25= 625
Thus, a firm earns a profit of Rs 125 (Profit=Selling price- Cost price)

 Markup pricing- This pricing method is the variation of cost plus pricing
wherein the percentage of markup is calculated on the selling price. E.g. If the
unit cost of a chocolate is Rs 16 and producer wants to earn the markup of
20% on sales then mark up price will be:
Markup Price= Unit Cost/ 1-desired return on sales
Markup Price= 16/1-0.20 = 20
Thus, the producer will charge Rs 20 for one chocolate and will earn a profit of
Rs 4 per unit.

 Target-Return pricing– In this kind of pricing method the firm set the price to
yield a required Rate of Return on Investment (ROI) from the sale of goods and
services. E.g. If soap manufacturer invested Rs 1,00,000 in the business and
expects 20% ROI i.e. Rs 20,000, the target return price is given by:
Target return price= Unit Cost + (Desired Return x capital invested)/ unit sales
Target Return Price=16 + (0.20 x 100000)/5000Target Return Price= Rs 20.
Thus, Manufacturer will earn 20% ROI provided that unit cost and sale unit is
accurate. In case the sales do not reach 50,000 units then the manufacturer
should prepare the break-even chart wherein different ROI’s can be calculated
at different sales unit.

2. Market-Oriented Pricing Method: Under this method price is calculated

on the basis of market conditions. Following are the methods under this
group:

 Perceived-Value Pricing: In this pricing method, the manufacturer decides the

price on the basis of customer’s perception of the goods and services taking
into consideration all the elements such as advertising, promotional tools,
 additional benefits, product quality, the channel of distribution, etc. that
influence the customer’s perception.
E.g. Customer buy Sony products despite less price products available in the
market, this is because Sony company follows the perceived pricing policy
wherein the customer is willing to pay extra for better quality and durability of
the product.

 Value Pricing: Under this pricing method companies design the low priced
products and maintain the high-quality offering. Here the prices are not kept
low, but the product is re-engineered to reduce the cost of production and
maintain the quality simultaneously.
E.g. Tata Nano is the best example of value pricing, despite several Tata cars,
the company designed a car with necessary features at a low price and lived up
to its quality.

 Going-Rate Pricing- In this pricing method, the firms consider the

competitor’s price as a base in determining the price of its own offerings.
Generally, the prices are more or less same as that of the competitor and the
price war gets over among the firms.
E.g. in Oligopolistic Industry such as steel, paper, fertilizer, etc. the price
charged is same.

 Auction Type pricing: This type of pricing method is growing popular with the
more usage of internet. Several online sites such as eBay, Quikr, OLX, etc.
provides a platform to customers where they buy or sell the commodities. There
are three types of auctions:

1. English Auctions-There is one seller and many buyers. The seller puts the
item on sites such as Yahoo and bidders raise the price until the top best price
is reached.
2. Dutch Auctions– There may be one seller and many buyers or one buyer
and many sellers. In the first case, the top best price is announced and then
slowly it comes down that suit the bidder whereas in the second kind buyer
announces the product he wants to buy then potential sellers competes by
offering the lowest price.
3. Sealed-Bid Auctions: This kind of method is very common in the case of
Government or industrial purchases, wherein tenders are floated in the
 market, and potential suppliers submit their bids in a closed envelope, not
disclosing the bid to anyone.

 Differential Pricing: This pricing method is adopted when different prices have
to be charged from the different group of customers. The prices can also vary
with respect to time, area, and product form.
E.g. the best example of differential pricing is Mineral Water. The price of
Mineral Water varies in hotels, railway stations, and retail stores.
Thus, the companies can adopt either of these pricing methods depending on
the type of a product it is offering and the ultimate objective for which the
pricing is being done.
Pricing policies for New Products:

1. Skimming: In this strategy the price for new product is set very high initially
(at launch). This ensures getting high revenue from all the segment of buyers.
Perhaps launch of a new highly anticipated Smartphone is an example for
this. Price of the newly launched iPhone or a Samsung flagship phone is
always very high initially and with time we can see the prices fall.

2. Penetrative: This is the strategy in which the focus is on grabbing maximum

market share. Hence, the price of the product is set very low initially (at
launch) so that it can penetrate the market and attract buyers of all
segments. Reliance Jio is a perfect example for this strategy. The prices of
services were zero at launch, eventually they were set at a fraction of the
existent competition’s prices. Consequently Jio has been able to grab a
significant market share in spite of being a new entrant in the industry.

3. High-Low Pricing: In this strategy the pricing is set high but the product is
sold with heavy discounts and promotions. The high price (list price) signals
to the market that there is immense value being delivered in this product.
This is done to ensure an increase in the foot traffic and ensuring that
enough interest is generated in the audience. This is seen quite frequently in
the Xiaomi products sale.

4. Freemium Pricing: This is the most common pricing model these days.
Freemium in itself has many different variations to execute. In one of the
variants, the product is available for free for certain duration only, after
which the customer has to purchase the license to continue using. Another
variant is based on usage threshold, the customer can use the product until
 a certain usage threshold is hit (number of transactions, number of users
etc.) after which the customer is required to buy.

5. Decoy & Psychological Pricing: The prices for similar products are set
differently to drive more sales for the cheaper alternative. SAAS companies
use this for driving sales to a specific plan. Retail stores do this at times too,
to drive more sales to a new product.

6. Predatory Pricing (can be illegal): In predatory pricing, the product is given

away for free. The company may be making loss on each sale but this is
potentially done to drive the competition out of the market completely. One
example of this is Uber when they started, they were losing money on each
transaction. Another legacy example is of Internet Explorer. This was
provided for free with the OS by Microsoft. In those days, Netscape Navigator
the prominent web browser in the market was a paid product.

7. Dynamic Pricing: This is something we have all experienced in case of Uber.

The price is changed based on the demand and/or supply; known as surge
pricing in case of Uber. Hotel room booking, flights booking are other
examples where dynamic pricing is widely used.

In the Product Development Lifecycle, defining and deciding the Pricing strategy
at launch is one of the crucial decisions that paves the way for high product
adoption.

Product Mix pricing strategies:

What is a Product Mix Pricing Strategy?

A strategy that helps in setting the price of products in a way that each of the
products plays a specific role within the product mix, is called a Product Mix
Pricing Strategy. Here, the product mix is the collection of every product
line that a brand owns along with all the products included in those product
lines. A product line is the selection of a brand’s or manufacturer’s similar
products that fit into a systematic category. Many brands, such as Starbucks
have many product lines, including coffee, drinkware, and ice cream.
Product Mix Pricing Strategies
When a product is part of a product mix, there often arises the need to
change the strategy for setting its price. In such cases, the firm tries to set a
price that can maximize the profits on the total product mix. The major
product mix pricing strategies that can prove to be helpful to the firms are as
follows:
1. Product Line Pricing:
It is a strategy where a company sets different prices for different products
within the same product line. It’s like having a menu with various dishes, and
each dish has its own price. Imagine you’re at a restaurant, and they offer
different types of burgers. Each burger has its own price, even though they all
belong to the same burger category. Some burgers might have premium
ingredients and extra toppings, so they are priced higher. On the other hand,
there might be basic burgers with fewer toppings or simpler ingredients, and
they are priced lower. The purpose of product line pricing is to cater to
different customer preferences and budgets. It allows customers to choose a
product that aligns with their needs and willingness to pay. Some customers
might be willing to spend more for a burger with fancy ingredients, while
others might prefer a more affordable option. Product line pricing also helps
companies maximize their overall revenue. By offering a range of prices within
a product line, they can capture different segments of the market and attract
a broader customer base. It gives customers options and increases the
chances of making a sale.
2. Optional-Product Pricing:
It is a product mix pricing strategy in which the firm offers to sell optional or
accessory products along with the main product. For example, a mobile
buyer may choose to buy Bluetooth earphones and a back cover for the
mobile, or a PC comes with different options such as docking systems,
software options, carrying cases, etc. Setting a price for these options is a
sticky problem. The companies should carefully decide which item/feature
they need to include in the product as default and which item to offer as
optional. For instance, the mobile producer can decide whether to include a
charging adapter in the base price or offer it as an optional item.
3. Captive-Product Pricing:
It is a pricing strategy that involves setting a price for the products that must
be used along with the main product. For example, a razor is the main
product, and the razor blade is a captive product, a printer is the main
product, and its cartridge is the captive product. The main product is often
sold at a low price or even at a loss, with the intention of making a profit from
the sale of complementary or related products or services by keeping their
price high. It’s a clever strategy to get customers hooked on a product or
service and then make money from additional purchases.
Suppose a printer company is selling printers at a very affordable price. But,
the printer requires a specific type of ink cartridge that can only be purchased
from the same company, and these cartridges are quite expensive. In this
case, the printer is the main product being sold at a low price or sometimes at
a loss to attract customers. The company knows that once customers have
the printer, they will need to buy the ink cartridges regularly, which is where
the profit is made. They have a captive market because customers are
“captured” by the printer and compelled to buy the associated products or
services. The purpose of captive-product pricing is to create customer loyalty
and generate ongoing revenue through the sale of complementary or related
items. The initial low price of the main product entices customers, but the
company recoups its profits by selling the supporting products or services
that are necessary for the main product to function properly. This strategy is
commonly used in various industries, such as printers and ink, gaming
consoles and video games, razors and razor blades, and even in the case of
some software and services. By offering a compelling deal on the main
product and then making money from the additional products or services,
companies can establish a long-term relationship with customers and secure
a steady stream of revenue.
4. By-Product Pricing:
It refers to the process of determining the price of a secondary or incidental
product that is generated during the production of a main product. It’s like
getting a bonus product along with the one the company actually wanted.
Imagine you’re running a bakery, and your main product is delicious bread.
However, during the bread-making process, you also end up with some
leftover dough that can be used to make smaller rolls or buns. These rolls are
considered by-products. By-product pricing involves deciding how to price
these additional rolls. When setting the price for the by-product, there are a
few options you can consider. One approach is to assign a price based on the
cost of production. This means taking into account the ingredients, labor, and
other expenses involved in making the rolls. Alternatively, you can price the
by-product based on its market value. This involves looking at the price that
similar rolls are being sold for in the market and using that as a benchmark.
By-product pricing is important because it helps a company make the most
out of its production process. It allows the company to monetize resources
that would otherwise be discarded or underutilized. However, it should be
kept in mind that by-product pricing can vary depending on factors like
market demand, production volume, and the overall profitability of the main
product. Additionally, by-product pricing can also be influenced by ethical
considerations and sustainability goals. For example, if your bakery aims to
reduce food waste, you might choose to price the by-product more affordably
to encourage customers to purchase it and prevent it from going to waste.
5. Product Bundle Pricing:
It is a strategy where companies offer a group or bundle of products or
services together at a discounted price compared to the price charged if they
are purchased individually. It’s like getting a package deal where you can buy
multiple items or services as a bundle instead of buying each item separately.
Imagine you’re at a fast-food restaurant, and they offer a combo meal that
includes a burger, fries, and a drink at a lower price than buying each item
separately. A company combines different products into a bundle and offers
them at a more attractive price to encourage customers to buy more and
increase sales. The idea behind product bundle pricing is to provide
customers with added value and convenience. By bundling products together,
customers can save money compared to buying each item individually.
Product bundle pricing is commonly used in various industries, such as
technology, telecommunications, entertainment, and travel. For example, a
technology company might offer a bundle that includes a laptop, a printer,
and software at a discounted price. Or a telecommunications company might
offer a package that combines internet, TV, and phone services for a lower
overall cost. This pricing strategy benefits both the customers and the
company. Customers get a better deal and a simplified purchasing process,
while the company can increase sales volume and encourage customers to try
different products or services within the bundle.

Price adjustment strategy:

Experts typically consider seven alternative price adjustment strategies.
Depending on the specific market, product segment, customer profile and
macroeconomic situation, one of the seven strategies will be the best choice for
 a given price change. Let’s go through each of the seven strategies to adjust
prices effectively.

The 7 Price Adjustment Strategies:

Price Adjustment Description

Strategy

Discount and allowance Reducing prices to reward customer responses such as paying
pricing early or promoting the product

Adjusting prices to allow for differences in customers, products

Segmented pricing
or locations

Psychological pricing Adjusting prices for psychological effect

Promotional pricing Temporarily reducing prices to increase short-run sales

Adjusting prices to account for the geographic location of

Geographical pricing
customers

Adjusting prices continually to meet the characteristics and

Dynamic pricing
needs of individual customers and situations

International pricing Adjusting prices for international markets