PRINCIPLES OF MARKETING (UNIT 4: Price)

Concept of Price

▪ In the words of William J. Stanton, price is the amount of money which is needed to acquire in
exchange some combined assortment of a product and its accompanying services. It is the most
flexible element in the marketing mix as it can be changed easily.

Significance of Price

▪ Pivot of an Economy: In the economic system, price is the mechanism for allocating resources and
reflecting the degrees of both risk and competition. In an economy particularly free market economy
and to a less extent in controlled economy, the resources can be allocated and reallocated by the
process of price reduction and price increase.
▪ Regulation of demand: The power of price to produce results in the market place is not equalled by
any other component in the product-mix. It is the greatest and the strongest ‘P’ of the four ‘Ps’ of the
mix. Marketing manager can regulate the product demand through this powerful instrument. Price
increases or decreases the demand for the products. To increase the demand, reduce the price and
increase the price to reduce the demand.
▪ A competitive tool: Any company whether it is selling high or medium- or low-priced merchandise
will have to decide as to whether its prices will be above or equal to or below its competitors. This is a
basic policy issue that affects the entire marketing planning process. Secondly, price does not stand
alone as a device for achieving a competitive advantage.
▪ Determinant of profitability: Price of a product or products determines the profitability of a firm, in
the final analysis by influencing the sales revenue. In the firm, price is the basis for generating profits.
Price reflects corporate objectives and policies and it is an important ingredient of marketing mix. Price
is often used to off-set the weaknesses in other elements of the marketing-mix.
▪ A decision input: In the areas of marketing management, countless and crucial decisions are to be
made. Comparatively marketing decisions are more crucial because, they have bearing on the other
branches of business and more difficult as the decision-maker is to shoot the flying game in the
changing marketing environment.

Factors affecting Price

A number of internal and external factors accept pricing decisions and this may pose some complexity. In
general, there is uncertainty about how consumers, competitors or resellers would react to prices. Price
considerations are important in market planning and analysis, marketing mix decisions, demand
forecasting, competitive market structure and market structure.
Internal factors influencing pricing decisions
▪ Organizational Objectives: Organizations may pursue a variety of objectives, such as maximizing
sales revenue, market share, customer delight or maintaining a particular image and stable price. The
pricing policy should be established only after proper considerations of the objectives of the firm.
▪ Role of Top Brass: It is the top management which generally has full authority over pricing, given that
pricing activities have a direct and profound impact on sales volumes and profits in the route to
strategy formulation.
▪ Marketing Mix: Price is one of the important elements of the marketing mix and therefore must be
coordinated with the other elements such as production, promotion and distribution. In some
industries, a firm may use price reduction as a marketing technique, while others may raise prices as a
deliberate strategy to build a high-prestige product line.
▪ Product Differentiation: Generally, customers pay more prices for the product which is of the latest
trend, design and better package, thus accounting for product differentiation.
▪ Cost of the Product: Cost and price of a product are closely related. The most important factor is the
cost of production. In deciding to market a product, a firm should also try to decide which prices are
realistic, considering current demand and competition in the market.
External factors influencing pricing decisions
▪ Demand: The market demand for a product or service has big impact on pricing. If the demand for
the product is inelastic, high prices may be fixed. On the other hand, if demand is elastic, the firm
should fix flexible prices in contrast to its competitors.
▪ Competition: An organization having virtual monopoly in its product or service category will definitely
set high prices. In case of stiff competition, the firm is bound to set competitive prices of its products
or services.
▪ Buyers: The nature and the behaviour of the consumers and users, for the purchase of a particular
product or service, do affect pricing particularly if their number is large.
▪ Suppliers: The suppliers of raw materials and other inputs can have a significant effect on the price of
a product. For example, if the price of cotton goes up, the increase is passed on by suppliers to
manufacturers, who in turn, pass it on to consumers.
▪ Economic Conditions: To meet shortage or rising pricing and decreased demands several pricing
decisions are available such as: (i) Prices can be boosted to protect profit against rising costs. (ii) Price
protection systems can be linked with the price on delivery to current costs as done by most of
automobile sector like Maruti, Bajaj, Tata etc., or (iii) The emphasis can be shifted from sales volume
to profit margin and cost reduction.
▪ Government Regulations: The regulatory pressures, anti-price rise and control measures effectively
discourage companies from cornering too large a share of the market and controlling prices.

Pricing Strategies

A pricing strategy is a course of action framed to affect and guide price determination decisions, which
help realizing pricing objectives and answer different aspects of how price will be used as a variable in the
marketing mix such as new product introductions, competitive situations etc.
▪ New Product Pricing: It includes:
o Price Skimming: It refers to charging the highest possible price that a sufficient number of
most desirous customers for the product will pay
o Penetration Pricing: It requires the price to be set less than the competing brands and aims
at market penetration to capture large market share quickly
o Economy Pricing: It is a volume-based pricing strategy wherein goods are priced low and
revenues are gained, based on the number of customers who purchase the product. It is
typically used for commodity goods, like generic-brand groceries or medications, that do not
have the marketing and advertising costs of their name-brand counterparts.
o Premium Pricing: It is a strategy that involves tactically pricing a company’s product higher
than the immediate competition. The purpose of pricing products at a premium is to cultivate
a sense in the market of such products being just that bit higher in quality than the rest. It works
best alongside a coordinated marketing strategy designed to enhance that perception.
[Note: Premium pricing is closely related to the strategy of price skimming. However, unlike
skimming, it involves setting prices high and keeping them there. Luxury brands have often
implemented premium pricing.]
▪ Psychological Pricing: This approach is suitable when consumer purchases are based more on
feelings or emotional factors rather than rational. It is apt for jewellery, perfumes etc.
o Odd/ Even Pricing: Marketers sometimes set their product prices that end with certain
numbers, the assumption being that if the price is Rs. 499, consumers view it as close to Rs. 400
rather than Rs. 500. Even prices favour exclusive or upscale product image and consumers view
the brand as a premium quality offering.
▪ Promotional Pricing: Firms can use several pricing techniques to stimulate early purchase:
 o Loss-Leader Pricing: It is a tactical and aggressive strategy used to get rid of slow-moving
merchandize, or build a brand as a low-cost provider in the market. (e.g.: Apple reducing price
of iPhone 7 to gain more sales of iPhone 8).
o Psychological/ Superficial Discounting: It involves setting an artificially high price and
offering the product at a highly reduced price. (e.g.: Earlier Rs. 499; Now Rs. 199)
o Special Event Pricing: It involves coordinating price cuts with advertising for seasonal or
special situations to attract consumers by offering special reduced prices.

Pricing Methods

▪ A pricing method is a systematic procedure for setting the prices on a regular basis. It structures the
calculation of actual price of a product based on considerations of demand, costs and competition.
▪ Cost-based Pricing: It includes:
o Mark-up Pricing: Here, a certain predetermined percentage of producer’s costs, called cost-
plus, is added to the cost of the product to determine the price.
o Target Return (Cost-Plus) Pricing: It is used to find out the price that would ensure a certain
fair rate of ROI.
▪ Competition-based (Going-Rate) Pricing: Here, the focus is on the competitors’ prices. It acquires
more importance when different competing brands are almost homogeneous and price is the major
variable in the marketing strategy, such as cement or steel.
▪ Demand-based Pricing: This method of price-setting involves balancing demand of customers with
the cost to determine the best price for profit maximization. This approach is fairly common with hotels,
telephone service providers (12am-6am) etc.

Select Sources:

Kotler, P., & Keller, K. L. (2009). Marketing management. Upper Saddle River, N.J: Pearson Prentice Hall.