Pricing Decision

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 Pricing
• Price represents the value of a good or service for
both the seller and the buyer.
• Price is the amount of money charged for a
product or service, or the sum of values
exchanged for the benefits of having or using the
product or service.
• Price is the only element of the marketing mix
which generates revenue other wise all the
elements have cost.

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 Factors Affecting Pricing

Demand
Demand Competition
Competition

Pricing
Pricing

Objectives
Objectives Government
Government
of
of policy
policy
Business
Business

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 Factors Affecting Pricing

Economic
Economic Cost of
Cost of
environment
environment the Product
the Product

Pricing
Pricing

Other Marketing
Other Marketing
PLC
PLC Mix elements
Mix elements

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 Procedure for
Establishing Prices
1. Selecting the pricing
objective

2. Determining demand

3. Estimating costs

4. Analyzing competitors’
costs, prices, and offers

5. Selecting a pricing
method

6. Selecting final price

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 Procedure for
Establishing Prices
1. Selecting the pricing
objective

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1. Selecting Pricing Objective

Possible Status Quo-Based

Sales-Based Pricing
*Volume *Favorable business
Objectives climate
*Market share
*Stability

Profit-Based
*Profit maximization
*Satisfactory profit
*Return on investment
*Early recovery of
cash

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 Procedure for
Establishing Prices
1. Selecting the pricing
objective

2. Determining demand

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 2. Determining Demand
• The different price structures lead to a different level of demand.
• For that marketer has to formulate the demand schedule.
• The demand schedule shows the number of units the market will
buy in the given period of time, at the alternative price that might
be charged during the period.
• In determining demand marketer must consider following aspect
 Price Sensitivity
 Price elasticity of demand.

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 Procedure for
Establishing Prices
1. Selecting the pricing
objective

2. Determining demand

3. Estimating costs

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 3. Estimating Costs

Fixed
Fixed Costs
Costs Variable
Variable Costs
Costs
(Overhead)
(Overhead)
Costs
Coststhat
thatdon’t
don’t Costs
Coststhat
thatdo
dovary
vary
vary
varywith
withsales
salesor
or directly
directlywith
withthe
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productionlevels.
levels. level
levelof
ofproduction.
production.
Executive
ExecutiveSalaries
Salaries Raw
Rawmaterials
materials
Rent
Rent

Total
Total Costs
Costs
Sum
Sumof
ofthe
theFixed
Fixedand
andVariable
VariableCosts
Costsfor
foraaGiven
Given
Level of Production
Level of Production
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 Procedure for
Establishing Prices
1. Selecting the pricing
objective

2. Determining demand

3. Estimating costs

4. Analyzing competitors’
costs, prices, and offers

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 4. Analyzing Competitors
• For the marketer it is necessary to know and
analyze the competitors prices and offers.
• If the firms offer is similar to a major competitors,
often the fir have to price close to the competitors.
• If the firm’s offer is superior, the firm can charge
more than its competitors.

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 Procedure for
Establishing Prices
1. Selecting the pricing
objective

2. Determining demand

3. Estimating costs

4. Analyzing competitors’
costs, prices, and offers

5. Selecting a pricing
method

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5. Selecting Pricing Strategy

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 1. Cost-Based Pricing

A firm sets prices by computing O

R I
merchandise, service, and
overhead costs and then
adding an amount to cover +Profit goals Price
its profit goal. Floor
• It is easy to derive.
• The price floor is the lowest (Merchandise,
acceptable price a firm can service, and
overhead
charge and attain profit.
costs)
• Goals may be stated in
terms of ROI.

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 Cost-Based Pricing Techniques

Traditional Break-
Even Analysis
*Determines sales Price-Floor Pricing
Cost-Plus Pricing quantity needed to *Determines lowest
*Pre-determined break even at a price at which to offer
profit added to costs given price additional units for
sale
Cost-Based
Pricing
Techniques
Markup Pricing Target Pricing
*Calculates *Seeks specified rate
percentage markup of return at a
needed to cover standard volume of
selling costs and production
profit
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 a. Cost-Plus Pricing

Prices are set by adding a pre-determined

profit to costs. It is the simplest form of cost-
based pricing.

e = Total fixed costs + Total variable costs + Projected profit

Units produced

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 b. Markup Pricing

A firm sets prices by computing the per-unit costs of

producing (buying) goods and/or services and then
determining the markup percentages needed to cover selling
costs and profit. It is most commonly used by wholesalers
and retailers.

Price = Product cost

(100 – Markup
percent)/100
Some firms use a variable markup policy, whereby
separate categories of goods and services receive
different percentage markups.

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 c. Traditional Break-Even
Analysis

Break-even point
(units)
= Total fixed costs
Price - Variable costs (per unit)

Break-even point Total fixed costs

(sales dollars)
= Price - Variable costs (per unit)
Price

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 d. Target Return Pricing

Seeks specified rate of return at a standard

volume of production.

TRP = Unit cost + Desired Return X Invested

Capital
Unit Sales

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 2. Demand Based Pricing
• A firm sets prices after studying consumer
desires and finding a range of prices
acceptable to target market.
• It begins with selling price and works backward
to cost variables.
• It identifies a price ceiling or maximum
customer will pay for a good or service.

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 a. Skimming Pricing
• This strategy is aimed at the segment
interested in quality, uniqueness, and/or
status.
• Goals are profit maximization, return on
investment, and early recovery of cash.
• In this method firm skims the market in the
first instance through high price, and
subsequently settles down for a lower price.

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 Situations give rise to
Skimming
• There are no competitors or they are rather
weak; there for buyers are willing to pay a
premium price for a unique price.
• Pricing objectives are aimed at rapid return on
investment.
• If segments are relatively insensitive to price,
firms fix initial high prices to skim the market.
• The firm holds a monopoly or patent protection
can fix the higher price in the market.

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 b. Penetration Pricing
• This approach aims toward the mass market to
gain high sales volume.
• Goals are volume and market share.
• In this case marketer sets a low initial price in
order to penetrate the market quickly and
deeply.

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 Situations give rise to
Penetration
• Buyer are sensitive to price.
• Significant economies of scale in production
and distribution.
• No buyers to pay a premium price for the
newest or best product.
• Intensive competition.

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 3. Competition – Oriented
Pricing
• Premium Pricing
• Discount Pricing
• Parity Pricing/ Going Rate Pricing

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 4. Buyer Based Pricing
• Perceived Value Pricing
• Perceived value pricing is based on the basis
of value perceived by the buyer of the product
rather than the seller cost.
• If the seller charges more than the buyer
perceived value, then the seller sales would be
suffered.

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 5. Differentiated /
Discriminatory Pricing
• Some firms charge different prices for the
same product in different zones/areas of
market.
• Some times, the differentiation in pricing is
made on the basis of customer class rather
than market territory.
• Some times, the differentiation is on the basis
of volume of purchase, which is the most
commonly used method in this category.

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 Discriminatory Pricing

Customer Segment

Product-form

Location

Time
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 6. Psychological Pricing
• In this type, the marketer attempts to influence
buying decision by setting prices that are
emotionally pleasing to buyers.
 Prestige Pricing
 Leader Pricing
 Odd Pricing
 Bait pricing
 Price Lining

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 7. Dual Pricing
• When the manufacturer sells the same product
at two or more different prices in the same
market , it is dual market pricing.

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 8. Negotiated Pricing
• Usually followed in Industrial Market.

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 Procedure for
Establishing Prices
1. Selecting the pricing
objective

2. Determining demand

3. Estimating costs

4. Analyzing competitors’
costs, prices, and offers

5. Selecting a pricing
method

6. Selecting final price

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 6. Selecting the Final Price
• After analyzing the all pricing method and
strategies company has to select the final
price.
• In selecting final price company should
consider additional factors like risk, other
marketing mix elements, company objectives
etc.

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 Pricing of New Products
• Penetration Pricing
• Meet the Competition Pricing
• Skimming Pricing Approach

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 Product – Mix Pricing
– Product-Line Pricing
– Optional-Feature Pricing
– Captive-Product Pricing
• Captive products
– Two-Part Pricing
– By-Product Pricing
– Product-Bundling Pricing
• Pure bundling
• Mixed bundling

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 Product – Mix Pricing

– Cash discount
– Quality Discount
– Functional Discount
– Seasonal discount
– Allowance

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