vnlue perception of the customer, etc.

, and, at the same time, adhere to the laws of

the Government. The company is also to be projected about it among consumers and
the law makers and is also to be integrated with the policies pertaining to the other
marketing variables. This Unit attempts to explain various inter-related issues
pertaining to the pricingobjectives of a company, factors influencing price
determination and the basic techniques used in pricing a product.

10.2 ROLE AND IMPORTANCE OF PmCE

No other marketing variable is, perhaps, as crucial in influencing the buyer's choice,
as the price of a product. A company's success in a competitive environment is, to a
great extent, dependent on its pricing policy. A sound pricing policy will ensure
desired market penetration and sales volume and proper flow of funds. An
unsuccessful pricing policy, on the other hand, may result in losses and deprive the
company of funds required to continue/develop the business.
As you know, pricing is one of the 4 Ps of marketing mix. Price is the only element in
the marketing mix that generates revenue while the other elements (product,
promotion and distribution), represent costs. Second, price is the most flexible of all
the elements as price adjustments can be quickly made to meet competition, to take
advantage of temporary shortages, etc. Pricing and price competition have been rated
as the number one problem facing marketing executives. Yet, it appears that
sufficient attention is not paid to pricing decisions by most companies. Pricing
decisions taken by many firms are known to be based in intuition, guesswork and
unsubstantiated assumptions.
There is a price for everything though it may be known by different names in
different contexts. Thus, it is known as rent for apartment, tuition for education, fee
for the doctor, fare for air or train or taxi journey, interest on the money borrowed,
toll while passing through a highway, bribe to get certain things done, retainer for
certain services rendered, salary to an employee, commission to an agent, wages to
a labourer and taxes to the authorities.
As discussed above, a number of products and services are exchanged between
producers and consumers daily. Price may be defined as the amount of money
changed for a product or service. Broadly, price representsfhe sum of the values
consumers exchange for the benefit of possessing the product or service.
Since price represents the sum of values the consumers exchange for the benefit of
possessing the prdduct or service, the key to pricing is understanding the set of values
that the consumer perceives the product/service. These values are related not only to
the tangible features of a product, but also to intangible ones. Thus, some consumers
may be happy with "low" price, some with "high" price, some would like to bargain,
and some others will buy only during "sales" or in supermarkets or departmental
stores or at duty-free shops or during weekly fairs.
While price represents the value of the product for the consumer, as perceived by
him, it determines profits for the manufacturer. Arriving at a price that satisfies the
consumer, and at the same time generates the desired level of profits to the company
is the key to success in business.
I

10.3 (IBJECTIVES OF PRICING

Though pricing objectives cantlot be different from company's overall objectives,
yet the management must be clear about those overall objectives of the firm whose
attainment it wants to be furthered by pricing policy. A cpmpany may seek to achieve
one or more objectives by pricing policy. A number of factors, some of which may be
 ---

be internal to the company, and some others external, must be considered while' QBloctlveo an4
formulating the pricing objective(s). Thus, the image it wants to project about it, long Methodo nP A'Icln@
runlshort run profit maximization, maintaininglincreasing market share, sales
maximization, return on investment, social responsibility, adhering to the legal
requirements etc. are some of the factors that a company may have to take into
account while for~nulatingthe pricing objectives. Very often, companies may have to
pursue more than one objective. Therefore, as a marketer you may have no choice
but to strike a balance among a number of objectives, some of which may conflict
with some others.

10.3.1 Protit Oriented Objectives

Current Profit Maximization: A number of companies have the objective to earn
maxirnum profit possible in the immediate future. For this objective, the firm decides
highest possible price for the product. They estimate demand and costs at different
prices and select the unit price that maximizes profits. Charging a high price to earn
maximum profit is possible if the product is a unique product catering to the
requirements of a select group of consumers who are not price conscious, but more
status conscrous. It is also possible to have the pricing objective of current profit
maximization during periods of shortage or if the company is a monopoly supplier of
the product. However, this objective suffers from the drawback that high prices
themselves invite competition in the long run. High price project may also be a
negative image among the consumers and may invite government intervention.
Achieving Desired Return on Investment (ROI): Another revenue oriented
objective could be achieving a pre-determined return on investment. In this case, the
companies first decide on what percentage of return they would like to earn on
investment, and accordingly price the product in such a way that the profit margins
ensure that they achieve the objective. This objective is suitable when the company
would like to recover its investments within a particular period due to various reasons
such as generating resources for investing in new ventures, anticipating the entry of
conipetitors in the near future, proving for cushion against economic and political
uncertainties ill future, etc. However, this strategy may not be suitable under
conditions of intense competition and if the company is a marginal player in the
I

I
10.3.2 Sales Related Objectives
Obtaining Desired Sales Volume: Some companies may fix a target regarding the
volurne of sales they want to achieve and arrive at a price which will give them that
desired s'lles volume. The target may be maximization of sales volume during a
I
particular year in relation to {heprodu~tionlevel of the firm, or market leadership in
sales as far as the particular/industry is concerned or different sales levels for
different years. Though this strategy may not result in profit maximization, a company
may opt for this strategy so long as it does not result in loss. This objective may prove
to be a better strategy in thcllong run to survive in the market and proper in the
I
business, than maximizatio? of profits in the short run. This strategy may, however,
result in loss to the company for the firm may have to resort to heavy promotion,
price discounts and high incentives to salesmen and distributors in order to achieve
the desired sales level. However, since the company has established itself in the
market, it may be able to raise the price.
Achieving Desired Market Share: In case of some companies the pricing
objective may be dominant market share or a desired market share, as they feel that
niarket share is a better indicator of customer support and corporate strength than
sales volume or profits or return on investment. Market share objective may be in
different forms such as obtaining maximum market share or obtaining desired share 7
 Pricing Decisions of the market or increasing the market share from the present level to a higher level
or retalning the present market share in a growing market, etc. The company will fix
the price and design the marketing programme to achieve the market share objective
it has set. However, a high market share may not only invite competition, but may
also invite government action under the laws designed to curb monopolies.

10.3.3 Competition Oriented Objectives

Survival: A company may decide survival as the pricing objective under conditions
of over capacity, stiff competition, frequent changes in consumer tastes, low demand,
unfavourable business environments, etc. In case of survived objective, prices are
kept very low since staying in business for the time being is the only consideration and
it may not be practical to consider factors like profits or return on investment as the
objectives. However, low price itself may spur demand and generate sufficient
returns. The reductions in air fares consequent to the fall in air traffic following the
attack on the twin towers of the World Trade Centre building in New York on
September 11,2001 and following the SARS scare during the first half of 2003 are
instances of pricing for survival.
To Prevent Competition: At times, a company may like to preempt the possibility
of competitors entering the market, rather than earning high or immediate profits.
Hence fix the price of its product at the lowest possible level. This is particularly done
by companies for mass consumed items to get a foothold. Once they establish
themselves in the market and have successfully driven away the competition, the
market becomes almost a "captive" market for the company and subsequent
increases in price becomes easy. The Japanese companies are known to adopt this
strategy in overseas markets.

10.3.4 Other Objectives

Price Stabilisation: Companies which are not rich in resources, particularly financial
resource, normally enter the market lately. Such enterprises are engaged in the
production of standardized products, and are not able to bring about product
differentiation. Therefore, they may choose to avoid price war, and "follow the
leader" in the pricing decisions. It is common among most manufacturers of candies,
biscuits, bread, soft drinks, etc., and among restaurants to price their products at a
particular level accepted by the customers and make adjustments in the other
marketing variables.
Price Leadership: A company may like to be known as producer of high quality
products/innovative products. Since production and promotion of high quality and
innovative products involves substantial expenditure, the price should also be .
correspondingly high. Such companies set very high prices and do not follow other
companies. They succeed in creating a prestige image for their products. ~ h o u ~ h '
they may cater to small sized market segments in terms of number of customers, the
high unit price offers them sufficient margin of profits. Companies like IBM are
known to be price leaders and not market followers.
' , Other pricing objectives may be: (a) to create an image of a socially responsible
!
company engaging in ethical practices (low prices and hence low margins), (b) to
cater to a number of consumer segments with a number of models of the product
with different attributes and different prices (refrigerators and air conditioners of
I different capacities, toothpastes with different attributes, etc.), (c) to promote a high
priced product using the lower price of another version of the same product, etc.
 Check Your Progress A Objectives and
Methods of Pricing
I) Give two reasons as to why "pricing" is considered important over other
marketing mix elements.

2) What are the revenue-oriented objectives of pricing?

......................................................................................................................

3) Are the following statements true or false?

i) Price represents only the values related to the tangible features of the
product.
ii) Pricing is governed by not only the internal factors of a company but also
external environmental factars.
iii) Sales maximisation will automatically lead to profit maximisation.
iv) Companies which want to create a "prestige image" for their products
normally price them high.
v) Price stabilization policy seeks to prevent price wars.

DETERMINATION I
Price is a point at which exchange takes place i.e. a point where demand and supply
rneet. Thus, factors on both demand and supply sides influence price setting. The
rnajor factors influencing price determination are:
I) The "value" of the product, as perceived by the buyer
2) Product costs
3) Competition
4) Company's policies
5) Government regulations
6) Other elements of marketing
Let us now study each of them in detail.

I 10.4.1 'Value' of the Product

As you know, any transaction is an exchange of money for a bundle of utility. For the
consumer, price represents the value of the product as perceived by him. The key to
pricing is, thus, the correct understanding of the value that the consumers perceive in
I
would like to "bargain", some other would buy only during "sales", while some would
buy only during "fairs" or in super markets, departmental stores, or duty-free shops or
Pricing Decisions in shops in specific areas in the city or town. Hence, price determination must be
based on a sound analysis of the consumer behaviour.
The level of demand for a product sets the "ceiling" for the price of that product. It is
not easy to estimate precisely the demand for a product. Hence, demand is taken as
an uncontrollable variable in marketing. According to demand theory, as you know,
price and demand are inversely related (though there are exceptions to this) i.e. a
price decline is associated with rise in demand and a price increase results in fall in
demand. Hence, a marketer must be aware not only of the absolute level of demand
but, more particularly of the sensitivity of demand to price changes. A measure of this
sensitivity is provided by the price elasticity of demand. Price elasticity of demand
is the relative change in the quantity demanded for a given change in price. It
is measured by dividing the percentage change in the quantity demanded by the
percentage change in price. The formula is:

(Qi - Q2) ( Q l + Q2)

+
Price elastic~tyof demand (E) =
(PI - P,l+ (Pl + P2)
Where Q , = Quantity demanded at the original price '

Q2 = Quantity demanded at the revised price

P, = Original price
P, = Revised price
Suppose demand increases by 10% when the price is lowered by 5% or demand falls
by 10% when the price is raised by 5%. the price elasticity of demand is -2 (the
negative sign indicates the inverse relationship between price and demand). In such
cases, the demand is said to be elastic since a certain change (decrease or increase)
in price has been accompanied by a more than proportionate change (increase or
decrease) in demand. On the other hand, demand is said to be inelastic if a certain
change (decrease or increase) in price is accompanied by less than proportionate
change (increase or decrease) in demand. Thus, if the total revenue (quantity sold x
price) remains the same or increases after a reduction in pnce, the demand for that
product is price elastic and if it decreases, the demand is price inelastic. Conversely,
during periods of price increase, if the total revenue remains the same or declines,
demand is price elastic and if it increases the demand is inelastic. Hence, the less
elastic the demand, the more it pays for the seller to raise the price and the more
elastic the demand, the seller gains more by reducing the price. However, while
reducing the price, the manufacturer must take care that the price of the product
covers costs. In general, demand for products such as necessities and those for
which no close substitutes exist is known to be price inelastic, since people have to
buy them irrespective of price. There can also be rare cases where a rise in price is
followed not by a decrease in demand but, on the contrary, by an increase and vice-
verse. This may happen in the case of fad items or prestige or exclusive items where
the customer segment is elitist and high price is associated with high quality and low
price with low quality. This also happens when consumers start stocking items during
periods of shortage (fearing further price increase) and wait in the wings during price
fall (anticipating further fall in price). Therefore, to determine the price of the product,
a marketer must be aware of absolute level of demand, elasticity of demand, and the
value perception of the product by the consumer.

10.4.2 Product Costs

While the level of demand sets the 'ceiling' of price, costs set the 'floor' price since a !
product's price should enable the company to cover the costs and leave some margin
as a fair return for the effort put in and the risk taken by the company. The 'costs'
I0
must.iuclude not only the cost of manufacture but also the costs incurred in
distribution, promotion and administration.
Cosls are broadly divided into two: ) 1 ) fixed costs and (2) variable costs. Fixed
costs are, as the term indicates, those costs which do not increase or decrease with
changes in production or sales level in the short run. Fixed costs are also referred to a
overhead costs. A company will have to incur certain expenses such as rent for the
building, expenditure on machinery, interest on the borrowed capital, salaries for some
staff, etc.. whether it produces to its full capacity or partial capacity or completely
stopsproductio~i.Variable costs vary directly with the level of production. These
include costs of raw materials, power, packaging, etc., whose consunlption is directly
related to the volume produced. They remain the same for each unit produced. Total
costs are the sum of the fixed and variable costs together for a certain production
level. Average total cost refers to the total costs divided by the number of units
produced. Generally a company would like to fix the price of a product to cover the
average cost plus a reasonable profit margin. Thus, if the average cost of the product
produced by n company is more than that of its competitors, it has to charge higher
price or make less profit than its competitors. Since fixed costs remain fixed
irrespective of production level, it is obvious that the average cost of production will
go on decreasing with increase in the production level till the production capacity is

The marketer must know in detail the fixed costs, variable costs, and average costs of
the products before determining their prices.

10.4.3 Competition
While costs set the 'tloor' and demand sets the 'ceiling', competition provides the
'I-eferel~ce point' for pricing a company's product. Under market conditions of
perfect competition (many buyers and sellers trading in a uniform commodity,
products tend to be priced low because buyers will not pay a higher price since there
are a number of substitute products at a given price and the sellers need not reduce
the price since there are many buyers at the going price. Under monopolistic
cornpctition, the market consists of many buyers and sellers. Therefore, exchange
takes place over a range of prices rather than a single price because the sellers are
able to differentiate their offers through product differences and/or varied services.
Buyers do not think that the products are perfect substitutes and hence are prepared
to pay different prices and sellers also try to develop differentiated offers for different
customer segments. Under oligopolystic competition, there are a few sellers who
are sensitive to one another's pricing and marketing strategies. Therefore, marketer
has to be very careful about changing the price of his product since any change will
invite retaliatory action by the competitors. A pure monopoly consists of only une
seller. Theoretically, a monopoly producer can price his product as he wishes, but in
practice, it may he difficult to charge a very high price as it may invite competition,
government action and consumer resistance. Thus, a company must be aware of the
co~npetitiveconditions in the market for the product before it decides on a price.

10.4.4 Company's Policies

Product pricing is generally tailored to the company's objectives and policies. If a
company desires to project an image of producer of high quality goods for a quality
conscious high-income group of consumers, then it will charge high prices for its
products. On the other hand, if it wants to project an image of a producer of a
product for the masses, then it will price its products low. Again, if it wants lo be one
of the many players in the market and does not want to influence the market, it will
confine the price of its product to the level acceptable to the mdjority of customers
Pricing Decisions and try to make adjustments in product quality, size, etc. Some companies follow a
policy of taking advantage of the psychology of the consumers to sell their products.
In that case such companies fix prices at a level to make the products appear
cheaper than what they really are (pricing a pair of shoes at Rs.199.99). Some
companies engaged in producing more than one version of the same product, try to
use lower prices of low quality products to promote sales of higher priced high quality
products while some others want to sew up the market by offering different versions
of the same product to different segments and pricing them differently.

10.4.5 Government Regulations

Since price is a sensitive issue, governments all over the world often try to ensure that
marketers do not take undue advantage of factors such as periods of shortage or the
company's monopoly position or financial muscle to drive away competition by
charging high or low prices as the situation warrants. Law enforcing agencies of the
Government are generally very active when it comes to the question of pricing
products used regularly by the poor and vulnerable sections of the society. There are
also consumer movements in many countries which keep a close watch on the
activities of companies.
Nowadays there is a general tendency among industries in almost all countries to lay
down standards of self-regulatory code of conduct for the member companies, and
industry associations ensure that the "member companies" do not violate the self-
imposed rules. Thus, there are government laws prescribing price floors and price
ceilings; almost all products are supposed to carry the selling price or the maximum
retail price (MRP) on the packages; laws against monopoly and restrictive practices
are in place to ensure that the companies do not misuse their monopoly position and
adopt practices which restrict competition. Since this is an external environment
factor, over which a company has no control, the company must adjust its marketing
strategy including pricing strategy to suit the regulations.

10.4.6 Other Elements of Marketing

Your have already studied that price is one of the 4 Ps (marketing mix) of marketing.
Like other three marketing mix elements, price is also influenced by and influences
the remaining elements of marketing mix. Hence, decisions in respect of pricing
cannot be taken in isolation of the decisions regarding the remaining marketing mix
elements. For instance, the customer segment which the company targeted is a
quality conscious well to do segment which also expects good after sales service. In
that case, obviously, the costs incurred in meeting customer requirements can be
recovered only by pricing the product appropriately high. Similarly, a personalized
product such as perfume or soap or garment, which warrants heavy promotion has to
be necessarily priced high. An intensive distribution channels and wide distribution
means costs and the product price should cover the costs. On the other hand, a mass
consumed product of low technology may be able to support only minimum costs.
Hence, price of the product is very much dependent on quality, brand, package,
service, distribution and promotion.

Check Your Progress B

I) What do you understand by "demand for a product is price elastic"?
......................................................................................................................
......................................................................................................................
......................................................................................................................
................................1....................................................................................
 2) Give two reasons as to why a monopoly producer may find it not very easy to Objectives and
Methods of Pricing
raise the price of his product indefinitely.

......................................................................................................................
......................................................................................................................
......................................................................................................................
3")hat is the difference between "fixed costs" and "variable costs"?
......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
4) Are the following statements true or false?
i) The consumer perception of value of a product is related only to the
tangible attributes of the product.
ii) Demand for products considered necessities is, generally known to be

iii) Costs incurred by a company on packaging the product is fixed cost.

iv) Under conditions of perfect competition, it is difficult for a company to
raise the price of its product.

' 10.5 BASIC METHODS OF PRICE DETERMINATION

You have already studied how government regulations and various other factors are
important in price determination. Marketer also has to integrate its pricing policy with
policies pertaining to other marketing mix elements, otherwise, he will not be able to
remain in business. Similarly, the business enterprise cannot follow apricing policy
which is in conflict with or different from its overall policy and the corporate image it
wants to project. Hence, in practice, companies set prices based on one or more of
the remaining three sets of factors i.e. costs, the value of the product as perceived by
the buyer (demand) and competition. The approaches to pricing based on the above
three factors, are refereed to as (a) cost based pricing, (b) buyer based pricing, and
(c) competition based pricing. Let us now study about them in detail.

10.5.1 Cost Based Pricing

As the name indicates, this method pricing refers to the practice of setting the price
of a product on the basis of cost of the product and a certain profit margin. There are
two methods which are based on the product cost. They are: (i) Cost-plus pricing, and
(ii) Break-even-analysis and target profit pricing.
Cost-plus Pricing: This is perhaps the simplest method of pricing aggregating all the
costs of the product (all the costs incurred in producing, distributing, promotion,
branding, packaging, servicing the product, etc.) and adding the standard mark-up for
profit. The following is an illustration of the cost plus pricing method in respect of
Product X whose expected sales volume is 20,000 units.
Pricing Decisions Total manufacturing costs Rs. 90.000
Packaging, branding, servicing, distribution and Rs. 20,000
promotion costs
Administration costs Rs. 20,000
Total costs Rs. 1,30,000
Cost per unit Rs. 1,30,000 + 20,000 = Rs. 6.50
Suppose the company desires Rs. 1.5 profit per unit sold, then the company will
charge Rs. 8.00 per unit to the dealer. If the dealers want to earn 25 per cent profit
then they will mark up the price to Rs. 10 per unit. This method which provides for
taking into account the total costs, can be expressed as:
Selling price per unit = Variable costs per unit + fixed costs per unit + profit margin
per unit.
Cost plus pricing method appears logical and fair to both selIers and buyers. At the
same time, it is easy to comprehend and implement. However, it suffers from the
limitation as it ignores both demand and competition. In the above example, for
instance, the company based its unit price of the product at Rs. 8 on the expectation
that there will be demand for 20,000 units, On the contrary, if there is demand for
10,000 units only, then it has to charge a higher price because the fixed costs will
have to be spread over 10,000 and not 20,000 units. Similarly, if the demand exceeds
20,000 units, the unit costs will decline and if the profit margin remains the same, the
price will have to be lowered. Moreover, if the total capacity of production of the
company is 20,000 units, any excess demand will have to be met by expansion of
capacity, in which case the cost per unit will increase or the market will have to be
left dissatisfied which may lead to the consumers shifting their loyalty to the substitute
brands. Thus, it must be remembered that costs and price are inter-related and price
determines costs as much as costs determine price. Since costs vary with the level of
output, price also have to change with every change in output level caused by
changes in market demand, which is rather impractical. SimilarIy, in the above
example, though costs may justify a unit price of Rs. 8, whether the company will be
abIe to realize this amount will depend, to a great extent, on the nature and extent of
competition in the market, which is totally ignored in cost plus approach.
Bread-even Analysis and Target-Profit Pricing: Break-even analysis or a target
profit pricing, is another cost oriented approach to pricing. Companies, which want to
ensure a certain return on their investment, first decide on the profit they want to earn
and then determine the pricing that ensures them the budgeted profit. To arrive at the
price, break-even analysis concept is used. The break-even point is that level of
production where the total revenue equals total cost. This is the point wl~ere
the firm neither earns profit nor suffers loss. Production above the break-even point
leads to profits and production below the break-even point means the company has to
suffer losses. The formula for arriving at the break-even point is:

Break-even Point (BEP) Total Fixed Costs

in Volume -
Per unit contribution to fixed cos ts

- Total Fixed Costs (F)

-
Selling price per unit (P) - Variable costs per unit (V)

F
BEP = -
P-v
Figure 10.1 is a graphical presentation of the above formula. BEP is calculated in this
paragraph using the earlier example relating to Product 'X' (in section 10.5. in this
 .. .

Objectives and
Methods of Pricing

Sales Volume (Units)

Fig. 10.1: Break-even chart

The total fixed costs (administration costs) are Rs. 20,000; the balance Rs. 1,10,000
are variable costs and tlie company desires to price the product at Rs. 8 per unit.
'Iiien variable costs per unit becomes Rs. 1,10,000 ;20,000 = Rs. 5.50, because the
cl,mpanv is producing 20,000 units. Then
Total Fixed Cost
Selling Price - Variablecost Per Unit

'I'hkil;, if [lie selling price is set at Rs. 8 per unit, the company must sell at least 8,000
nits to break-even. At this point, the sales revenue will enable the company recover
tl!: fixcd costs totally, besides tlie variable costs incurred upto that point. Sales
beyond t1:Is level at the unit price of Rs. 8 will contribute to profit at Rs. 2.5 per unit

'i .. 2,1111 n targetprofit of Rs. 25,000, then the firm should be able to sell 18,000 units
(I!,h::X:t.:i:!iS plus 101000units). If the total capacity of production of the company is
2!i,Oi)O units and if it is able to sell the entire production, it will make a total profit of

Break-even analysis is userul for financial analysis and product pricing since one can
u w this technique to ascertain the profit or loss at different prices if a reasonable
estimate can be made of demand for the product at each price.
Though the break-even analysis is an useful tool for price fixation, it suffers from
certaiii limitations. First, the theory it may be possible to divide costs into fixed and
variable costs, but in practice, it will be difficult to divide costs exclusively as fixed
and variable. There may be certain costs which may not clearly fall into one or the
other categories. For instance, part of costs incurred on labour, power, servicing and
distribution may be fixed and part variable. Fixed costs are assumed to remain
constant till fill1 capacity utilization. But in practice, they may not be. Anyway, all
costs are variable in the long term. Assumption regarding constant unit variable costs
may not also hold true since it is likely that, with bulk purchase of inputs like raw
materials (as tlie demand for the final product increases), the unit price of the inputs
may decline leading to decline in variable costs. Similarly, selling price per unit may
also vary within tlie total quantum sold at a particular level of demand due to bulk
selling. l:ourtli, break-even analysis may enable the company to arrive at the number
ol'!~nitsrequired to be sold to break-even at different price levels, it cannot guarantee
Pricing Decisions that the company can actually sell as many units at those price levels. Finally, the
demand at different price levels is extremely difficult to arrive at with 100%
correctness. It is, at best, an estimate and due to sudden contingencies, the estimate
clan turn out to be even totally incorrect. However, the break-even analysis shows
the likely effect of different prices, costs and demand on the break-even point and,
hence, on profits. Table 10.1 is such an exercise in relation to Product 'X'.

Table 10.1: Break-even Volume and Profit at Different Prices

Price Contri- Sales Demand Total Total:c* Profit

of bution required at the revenue cost (Rs.)
Product per to break given
(Rs.) unit* even price
(Rs.) (units) (units)

12 6.50 3,077 10,000 45,000

"Product Price-Variable Cost per Unit

** Assumes fixed cost of Rs. 20,000 and constant variable cost of Rs. 5.50 per unit.
able 10.1 shows that, with every increase in the price of the product, the break-even
level declines and it is logical to assume that the demand for the product will also
decline with rise in price. It will be noticed that (i) the maximum revenue is not
earned either at the lowest price (highest demand) or at the highest price (lowest
demand) levels but at Rs. 8 per unit, (ii) the total cost declines with every decline in
sales, and (iii) the maximum profits are earned not at the highest or lowest prices, but
at a price of Rs. 10 per unit.
Assume that the manufacturer has invested Rs. 5,00,000 in the business and has
targeted a minimum profit of Rs. 50,000. None of the prices would enable him to
achieve that target. He will have to find out the price demand relationship to arrive at
the break-even point which will give him the targeted profit of Rs. 50,000.
You may learn more about Break-even analysis in MCO-5: Accounting for
Managerial Decisions, under Unit 16.

10.5.2 Buyer Based Pricing

This method of pricing is based on the belief that it is more logical to price a product
not on the basis of seller's cost or the competitors actions, but on the basis of
demand. Two methods of pricing based on demand are: (i) Perceived Value Pricing,
and (ii) Differential Pricing.
Perceived Value Pricing: Since price represents the value perception of the
product by the consumer, it is better to build a perceived value in the buyers' minds
about the product and then match the perceived value by price. For instance, different
restaurants charge different prices for the same product because buyers assign
different values for the same product at different places. For this technique to be
successful, the company must be able to correctly assess the value perception of the
buyers for different offers. Over-pricing or under-pricing will produce less revenue
than planned. Perceived value pricing will succeed more in the case of non-branded
personalized items.
Differential Pricing: This .method acknowledges the fact that the intensity of
demand for the same product differs from person to person, place to place, time to Methods of Pricing
time and product version to product version. Hence, different prices are charged on
the basis of person, place, time and prbduct version. For instance, different prices are
charged in a cinema hall or drama hall or music concert hall for tickets for different
classes of seats (person and place) though the performance is the same. Similarly, the
same product (fruits, candies, soft drinks, etc.) is priced differently depending on the
place of sale, whether it is a shop in the market or railway station or airport or
neighbourhood shop. Telephone rates are different on different days and at different
rimes on the same day. Hotels, lodges, airlines etc. charge different prices for the
same service during peak and off-seasons. Refrigerators and air-conditioners are
cheaper during winter season as compared to summer season and different versions
of the same product (with different packaging, for instance) are priced differently.

10.5.3 Competition Based Pricing

Since competition provides a reference point, pricing a product with reference to the
price of a similar or substitute product charged by the competitor is another pricing

Going-Rate Pricing: Under this method the company bases the price of its product
largely on competitor's prices for the same product or similar products without
bothering much about the product costs or the value perception of the product in the
consumer's mind or the differences in the intensity of demand for the product among
different consumer groups. Though the basis for pricing in this case, is the "going-
rate" in the market for the same product or similar products, it does not necessarily
mean that the price charged by a company would exactly be the same as the one

'I'he main logic behind this method of pricing is that, the "going rate" represents the
c,ollrctive wisdom of the industry regarding the demand conditions and the price so
decided will yield the optimum return under such demand conditions, Moreover, it is
not easy to exactly measure the consumers' value perception or demand elasticity or
consumer reaction to price differences. This approach also avoids unnecessary price
wars and heart burning among member firms of the industry. Going-rate pricing is
widely prevalent among sellers of homogeneous products involving low technology in
~ r o d u c t i oand
~ ~are bought frequently.
Sealed-bid Pricing: As you know, organisational buyers procure goods and services
by tender method. In this method, buyer gives the technical description of the product
1-eq11ired(to be bought) and invites bids by sellers. Each seller submits a sealed cover
containing the technical description of the product he would like to sell, its price and
terms of sale. The buyer opens all the bids (sealed covers) on a specified date in the
presence of the bidders. Then the buyer decides to buy from the seller who had
quoted the lowest price, if the technical specifications of that product matches his

When the company bids for contracts, it quotes a price which is generally based on its
~~ssessment of what the competitors prices would be for the same bid, rather than on
its own cost or demand. This is referred to as sealed-bid pricing. Since the main
objective in bidding is winning the contract, pricing is deployed as the main weapon to
achieve the objective.
!'r.!l.:~:o IIccisions When a co~npanybids for a contract, it has to balance two opposite pulls; on the one
hand it should quote the price as low as possible to win the contract, on the other
hand the price so quoted should be high enough to cover the costs and yield desired
profit margin. Price quotation under a a sealed bid is quite a difficult job. Firms which
bid only occasionally or for whom winning a bid is a question of survival, generally
quote the lowest price. On the other hand, firms which participate in bids regularly
and are not deficient in resources try for lone term profits rather than win every bid
by'quoting the lowest price or make money in every bid.

10.6 LETUSSUMUP
Pricing objectives inust be decided in accordance with the company's overall
marketing objectives. Pricing objectives may be broadly classified under thrce heads:
( I ) profitability objectives (including profit maximisation and target return on
investment), (2) sales volume objectives (including sales maximisation and market-
share maximisation), and (3) other objectives (including price stabilisation, survival,
market penetration for prevention of competitor's entry into the market, and building
image as a supplier of quality goods). 1

I
Whlle determining the basic price of the product, marketer must keep in mind several
factors such as the perceived value of the product to the buyer, costs of production of
the product, competitors' products and their prices, Government regulations,
company's own policies and the other three elements of marketing mix.
j
While deciding selling prices of goods and services, business enterprises may adopt i1
any one of the following three approaches: ( I ) cost-oriented approach, (2) demand- i
oriented approach, and (3) competition-oriented approach. 1
i
In cost-or~entedapproach, cost is the ma-jor basis of fixing price. In this approach
there are two methods: (1) 'cost-plus' pricing, and (2) target-profit pricing. Cost plus
p ~ i c eis arrlved at by aggregating the relevant costs and adding to it a margin of profit.
Target profit pricing is based on the break-even analysis.
I
i
1
Major consideration in price setting under demand-oriented approach is the buyer's
demand intensity and perception of the product's value and utility, rather than the
product costs. There are two distinctive methods under this approach: ( I ) differential
i
or discriminatory pricing, and (2) perceived-value pricing.
I

The decisions and actions of competitors, rather than the company's product costs or
demand levels, form the basis for setting the price under competition-oriented I
approach. Thc firm neither maintains it\ own cost records nor seeks to measure the
demand intensity nor buyer's perceplions towards the product. Going rate price
I
comes i~ndcrthis approach. I

10.7 KEY WORDS

Break-even Point: The point of sales at which a companj's total revenue equals
total cost\.
Contribution: The difference between per unit price of the product and the variable
cost per unit.
Fixed Costs: Costs that do not vary with the level of production or sales.
Monopolistic Competition: A market condition where there are many buyers and
sellers trading over a range of prices.
Oligopolistic Competition: A market condition where there are a few sellers who
are sensitive to one another's pricing and marketing strategies.
Price: Amount of money charged for a product or service.
Price Elasticity: A measure of the sensitivity of demand to price changes.
Pure Competition: A market condition where mariy buyers and sellers trade in a
unifoim commodity.
Pure Monopoly: A market in which only one seller operates.
Variable Costs: Costs that vary with the level of production.

10.8 ANSWERS TO CHECK YOUR PROGRESS

A . I ) (a) Price is the only marketing mix element that generates revenue.
(b) Price is the most flexible of all marketing mix elements.
2) (a) Current profit maximisation.
(b) Achieving desired return on investment.
3) i) False ii) True iii) False iv) True v) True
B. 1) A certain change in price has resulted in a more than proportionate change in
demand in the opposite direction.
2) (a) High price itself may invite competition.
(b) High price may invite government intervention andlor consumer
resistance.
3) Fixed costs remain fixed irrespective of the level of production or sales while
variable costs vary with production level.

1) Discuss, in detail, the objectives of pricing.

2) What are the different methods in price determination? Explain them in detail
listing out the advantages and limitations of each method.
3) Write brief notes on the following:
i) Perceived-value pricing
ii) Differential pricing
iii) Sealed-bid pricing
iv) Price-demand relationship
4) Explain the various product-price adjustment strategies.
5 ) A company manufacturing a product 'X' has the following costs:
Variable cost = Rs. 10 Fixed cost = Rs. 3,00,000
The company expects to sell 50,000 units and wants to earn 25% profit on
average cost of production.
i) What will be the break-even point in terms of volume of production?
ii) In case the demand at break-even point is 42,000 units, calculate the total
revenue, total costs and the profit.

Note: These Questions will help you to understand the unit better. But do not
hubmit your answers to the University. These are for your practice only.
 identify different types of discounts and allowances offered to customers and Price Adjustment
distributors;
explain various pricing methods relating to price adjustment according to
geographic-locations of the buyers;
discuss various terms'of delivery used in international marketing contracts and
their implications on price quotations;
describe alteinative pricing strategies for new products;
identify the advantages and disadvantages of fixed pricing vis-a-vis flexible
pricing; and
state the concept of unit pricing and its utility.

11.1 INTRODUCTION
i The job relating to pricing does not end once the basic price of a product has been
i1 ~irrivedat (as discussed in Unit 10 earlier). In fact the job has only begun. The
conipally has to decide as to how it is going to recover the costs incurred in ,

i transporting the product from the production point to each one of the customers.
Charging the entire transportation cost in the product price may push the price to
u~lcompetitivelevels, while not charging the transportation cost at all will definitely eat
I
into pn~fitsor even it may incur losses. Another decision pertairis to the incentives to
be offered to consumers and distributors for loyalty, service, bulk purchase, cash
purchase, off season purchase, etc.

i While the'above pose a particular set of challenges, pricing a new product poses a
1 different type of challenge. Should the product be priced high or low? What will be
1I the reaction of the customers and competitors to a high price and low price? How a
high price or a low price impact the image of the company?
j Companies in multi product business have to sort out another problem, i.e., the
I problem related to pricing of the product-mix. Finally, should the company provide
i some margin in the product price for bargaining by customers or should it stick to a
t
Fixed price?

There may be situations like change in the prices of raw-materials, government taxes,
distribution costs, etc., where it may be necessary to increase or decrease price of
the product. Similarly, the competitors may change the prices of their products, where
you are forced to change the price of your product too. How to respond in such
situations?
This unit discusses all the above aspects of pricing in marketing management.

11.2 WHY PRICE ADJUSTMENT?

You have studied in the previous unit various methods of fixing basic price of your
products. After arriving at a basic price for the product, you have to make
adjust~nentsin that basic price. Price adjustments may be brought about aspart of a
deliberate marketing strategy or due to factors beyond the control of the company.
For instance, increasing competition in airline and telecommunication industries has
forced price reduction in the sectors. Similarly, fal.lingdemand has brought about price
reduction in the tourism and hotel sectors. Marketers may be compelled to make
adjustment in product prices due to increase or decrease in costs. Sometimes price

margin.
Pricing Decisions To make your product available to the ultimate consumers, you engage several
middlemen such as distribution agents, wholesalers, retailers, commission agents, etc.
You have to decide how much margin you give to each of them. Therefore, you have
to decide how you adjust the basic price to provide margin to each of the middlemen
in the distribution channel. Marketers may have to make adjustment in prices to
reward customers and distributors for their loyalty, prompt payment, bulk purchase,
off season purchase, promotion of the product, product support services provided, etc.
For example, you know that less price is charged in the case of cash purchases, price
of a product is less in the off season, price is less when purchased in large quantities.
These are all price adjustment strategies adopted by marketers. To promote the latest
models of their products, a number of companies offer "trade in" facility to the
customers i.e. reduction in the price of a new model in exchange for an old model.
Price adjustment also becomes necessary when a company moves up from a single
product producer to a multi-product producer because the objective is to maximize
profits of the product-mix and not a particular product.
Thus, as a marker you have to adjust the basic price to change in the costs, provide
margins to middlemen, discounts and allowances to customers and middlemen for
various services they provide, geographical variations in transport and other incidental
costs, etc. You will study various methods of such price adjustments in the succeeding
sections in this unit.

11.3 DISCOUNTS AND ALLOWANCES

The price of a product is generally indicated on the packagellabel. Companies also
prepare a list of prices which indicate the prices to be paid by the customer for the
listed products. However, in practice, most companies adjust the listed prices to
reward customers for certain responses such as on the spot payment, bulk purchase,
off season purchase, etc.

11.3.1 Cash Discount

Cash discount refers to the reduction in price when bills are settled promptly, i.e.,
payments are made timely. It is normal practice among many retailers to charge
different prices for the same product depending on whether it is purchase on credit or
on down cash payment basis. Normally, price is lesser for cash payment than the
credit sale. When sales are made on credit and if the buyer settles the bill sufficiently
earlier than the due date,it is a general practice to allow a discount in the price. For
instance, if it is indicated in the bill as "2110 net 30" it means that although the buyer is
given 30 days to settle the bill, he can deduct 2 per cent of the bill if the payment is
made within 10 days. For example, Municipal Corporation of Delhi (MCD) gives in
House Tax if it is paid in advance within a specified time period. Cash discount does
not discriminate among buyers, and all those who meet the t e n s get the same benefit
of the facility.
From the marketer (seller) point of view, there are certain benefits of cash discount.
It improves the liquidity position of the seller and reduces the risks involved in credit
sales, such as bad debts, late payments, etc. It also reduces the costs associated with
keeping accounts, employing collection staff and borrowing to finance the credit.
From the buyer's point of view, a cash discount means money saved and the saving
will be substantial for large purchases. The rate of cash discount is normally
moderate and comparable to bank interest rates, it is neither too high nor very low. A
company may not be able to afford a high cash discount without cutting into its own
profits. Moreover, by nature, a cash discount should not be too high since it will then
lose its relevance. A very low discount, on the other hand, may not be enough to
motivate the buyers to settle the bill in advance promptly. Cash discount has become
customary in many industries.
11.3.2 Quantity Discount Price Adjustment

Discount given on price on the basis of the number of units of the product (quantity)
purchased is called quantity discount. For instance, "Rs. 10 per unit upto 100 units and
Rs. 9 per unit for every unit purchased over 100" is an instance of quantity discount.
In this case, a discount of Re. 1 per unit is given for the quantity purchased over and
above 100 units. The logic behind offering quantity discount is that sales in huge
quantities means less unit cost of sale. It is common practice among places of tourist
interest such as museums, parks and zoological parks to charge less per ticket for
visitors in groups. Similarly, airlines also offer, though not discount in price per ticket,
some free tickets is there is bulk booking of tickets. It is a common experience where
retailers offer 'Buy One Get One Free', '3 for 2', 'Buy One & Get 50% Discount on
the Second', etc.
Quantity discounts are of two types: (1) non-cumulative, and (2) cumulative. Non-
cumulative discount refers to the discount given on each purchase of a specified
quantity of the product at a time from the same seller. The example in Table 11.1 is
an Instance of non-cumulative discount.

Table 11.1: Non-CumulativeDiscount on Shampoo

No. of Shunlpoo Bottles (100 ml) Discount from List Price

Bought at a lime
upto 5 Nil
6- 10 2%
11-15 3%
16-20 4%
21 andabove 5%

Above is an illustration where the discount is expressed in terms of percent from list
price. Alternatively, the same may be expressed in terms of reduced price per unit of
purchase as the number of units bought goes up as shown in Table 11.2.

Table 11.2: Non-CumulativeDiscounton Shampoo in terms of Price per Unit

N o . of Shampoo Bottles (100 ml) Selling Price Per Shampoo

Bought at a Eme Bottle (100 ml)
Rs.
Upto 5 50.00
& 10 49.00
11-15 48.50
15-20 48.00
21andabove 47.50

When discount IS given in the form of a reduction in the price of a product or a group
of products based on the quantum of purchases made by a buyer from the same
seller during a spec~fiedperiod, it is called "cumulative discount" or "deferred or
patronage discount" signifying that discount is given as a reward for patronizing a
particular seller for a reasonably long period. The more a buyer buys during a
specified period, the more he will get as discount. An illustration of cumulative
quantity discount is provided in Table 11.3.
Pricing Decisions Table 11.3: Cumulative Quantity Discount

Annual Purchase Discount from List Price

(No. of units of the product)
Unto 10,000 Nil
10,001-20,000 2%
20,001-30,000 3%
30,00140,000 4%
40,001-50,000
Above 50,000

Cumulative quantity discounts are given to attract and retain buyers who make
repeated purchases of a product over a long period. Generally, cumulative quantity
discount is aimed at buyers of industrial goods who use the goods as inputs in the
production of consumer goods and distributors of consumer goods since the demand
for any consumer goods from a single consumer is not expected to be of high order.
This type of discount is usually given at the end of a specified period.

11.3.3 Functional Discount or Trade Discount

Discount offered by the seller to trade channel members (intermediaries) such as
wholesalers and retailers for performing certain functions like storing, sorting,
information collection, record keeping, customer servicing, etc., is called functional
discount or trade discount. The rate of discount given depends on the type of
channel member and the nature, extent and the quality of services provided. Different
types of middlemen may be allowed different rates of discount depending upon the
functions and services they provide in the distribution of the product. Thus, the
discounts offered to wholesalers, retailers, distributors, stockists are different.
However, the discount will be the same for all channel members of the same level for
a particular service provided. For example, all the wholesalers may be offered the
same discount and all the retailers receive the same discount.

11.3.4 Seasonal Discount

It is normal practice among most companies to offer discount from the list price
during certain seasons. For instance, manufacturers of air-conditioners, air-coolers,
refrigerators and fans offer price discount during the winter season which is the off
season for these products. Similarly, woolen garment makers offer discounts during
the summer season. During major festival seasons such as Diwali, Dashera, Pongal
and New Year, a number of sellers offer price discounts on almost all durable
consumer goods. The strategy behind seasonal discounts is that during periods when
there is less demand for products (seasonal demand) or when consumers are in a
mood for shopping, they may be motivated to buy your product more by offering
discounts even though the product may not be put to use immediately. Such discounts
help the company to reduce mismatch between production and sales from one period
to another, reduce inventory costs and avoid keeping labour idle during off seasons.
Hotels and airlines offer seasonal discounts to attract tourists during off-season.
Seasonal discounts are also offered to wholesalers and retailers to encourage them to
place orders and keep stocks during off season. At times, middlemen pass on whole
or part of such discounts to customers.

11.3.5 Allowances
There are discounts given for other functions/reasons to dealers and customers,
known as allowances. Promotional Allowance is a price reduction to reward
 dealers for undertaking promotion of the product such as adverttsing, product display Price Adjustment
and demonstration, participation in trade fairs and exhibitions, word of mouth publicity, Strategies
etc. A Trade-in-Allowance is price reduction given to the customer for trading in,
that is, turning in an old item when buying a new one. Nowadays it is common for
companies to trade-in durable consumer goods such as refrigerators, television sets,
washing machines, mixers etc. Such an allowance is an incentive for customers to go
in for the latest model of these products although they may have, with them, the
earlier models. Trading-in offers to the customer the double advantage of price
reduction in the latest model of the product and, at the same time, finding a way to
dispose of the old model.

Check Your Progress A

I) Differentiate between functional discount and promotional allowance.
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
2) Differentiate between cash discount and quantity discount.
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
3) State whether the following statements are correct or incorrect?
i) When a buyer settles the bill promptly, the reduction in price that is offered
to him is called cash discount.
ii) Deferred or patronage discount is given when the buyer buys the same

in substantial quantity.
iii) Cumulative quantity discount is generally aimed at the consumer rather than
the distributor.
iv) Seasonal discount enables the manufacturer to meet seasonal demand.
V) Trade-in offers practical solution to the customer's problem of disposal of
the old model of the product.

1 . 4 GEOGRAPHICAL PRICING
b
i
You have studied the methods of deciding the basic price of the product. Then you
have studied how to adjust.the price through discounts and allowances for seasonality,
intermediaries,quantum purchased, rewarding intermediaries for their additional
services, etc. Another major pricing decision to be taken by the marketers relates to
the policy in pricing its product to customers located in different parts of the country1
world. When the product is transported from one place to the other place, you have to ,

incur costs like labour charges for loading and unloading, transportation, insurance,
storage and warehousing, customs and excise, etc. Some of these costs increase with
the increase in distance. Since the cost of carrying of the product from the factory to
a distant customer will be definitely more than that of carrying it to the customer in
the nearby location, the company has to devise a carefully thought out method to
ensure that it does not lose business from distant customers by loading the entire
transportation cost on to the price charged to them or alternatively annoy the nearby
1 Pricing Decisions customers by making them share a high proportion of the cost of transporting to
distant customers. Therefore, you have to decide the policy whether you charge all
customers uniformly irrespective of their location or charge differently as per the
distance or location. Following are some of the methods available to marketers to sort
out this problem.

11.4.1 FOB-OriginPricing
Under the FOB (Free on Board) Origin Pricing method, the customer has to bear the
entire transportation cost and other incidental costs like unloading, insurance, etc.
from the first point the product is loaded on to the truck, shiplboat, airline or train. The
seller bears only the cost upto loading the merchandise (goods) on the carrier, while
the buyer bears all the remaining expenses. This obviously means that the return to
the seller will be constant while the product price will differ from one group of
customers to others depending on their location in relation to the point of production.
In the case of movement of the product by rail, this method is referred to as FOR
(Free on Rail) Origin pricing.
Since each customer is expected to bear the expenses involved in moving the product
to the place where he wants it, it appears that FOB-Origin Pricing is a fair and
equitable way to allocate freight charges as per the distance of buyers. It is also easy
for the seller to comprehend and implement. The advantage of this method is that the
product will be highly priced to a distant customer and quite cheap to a nearby
customer. Therefore, customers may like to buy from the nearby suppliers in order to
avoid high costs. In case you adopt this method of geographical pricing, the distant
customers may gradually shift to competitors nearer to their locations. It means that
all companies may have to contend with selling their products only to nearby
customers and no company can perhaps hope to capture a distance market. This, in
fact, will create geographic monopolies, each company enjoying a monopoly in the
closeby markets and the consumer being denied the benefit of choice.

11.4.2 Uniform Delivered Pricing

Unifonn Delivered Pricing refers to the practice of charging the same price to all the
customers, irrespective of their location. This is done by averaging out the freight cost
and distributing it equally on each unit of the product. This method of pricing is, at
times, referred to as "postage stamp pricing" since postage rates are the same within
a country for all destinations. The advantage of uniform delivered pricing is that it
does not discriminate among customers based on distances and easy to administer. A
company may advertise its price nationally and project a national image of the
company. Many products of common use such as soaps and toothpastes are priced
the same all over the country. However, the risk you face in following this strategy is
that a competiting company which adopts the FOB-Origin Pricing technique may
price out your company's product in locations close to that company, because under
FOB-Origin pricing method the costs would be lesser for short distances.

11.4.3 Zone Pricing

. Zone pricing is a compromise or a middle path between FOB-Origin Pricing and
Udiform Delivered Pricing. Under this method, the entire market is divided into a
number of geographical zones and each zone has a separate price fixed on the basis
of the average freight cost to the zone. The product is sold at one price within the
zone, irrespective of the location of the customer in that zone. For instance, India may
be divided into four zones, say, North, South, East and West, and all the customers in
the north zone will pay the same price for a product which will be different from the
prices charged to the customers in each one of the other three zones and vice-versa.
The advanrage of this method of geographical pricing is that it is a fairly equitable
method of allocation of freight charges since it avoids the extremes of the earlier two Price Adjustment
methods and it is also easy to administer. However, customers living in one side of the
border of two zones will find that they have to pay a higher price than those on the
other side just because their place did not fall on the other side when the line dividing
the nlarket into zones was drawn. Second, it also suffers from the same disadvantage
as uniform delivered pricing in that customers located in distant zones may find a
competing company's price offer more ~ L L ~ ~ : : ! Y Psince
, the company is located
nearby and is following the FOB-Origin Pricing strategy.

11.4.4 Basing-Point Pricing

In this method of pricing, the company selects a particular city or town as the "basing
point" and the price of the product includes the transportation costs from the selected
"basing point" to the location of the customer irrespective of the place from which the
product is transported. For example, a company might set New Delhi as the "basing
point" and charge all customers the cost of moving the product from New Delhi to
their location. In this example, if the product is manufactured at Kanpur, a Kanpur
customer is charged the transportation cost from New Delhi (basing point). Though
close to the actual product point, Kanpur customer has to pay a price higher than the
one paid by a New Delhi customer. Thus, using a place, other than the place from
which the goods are actually transported as "basing point" raises the product price to
customers near the production point and lowers the to those close to the "basing
point" even if the latter are located far away from the place of production as
compared to the former. One way of getting over this anomaly is to set up multiple
"basing points" and charge the customer for transportation from the nearest "basing
point". This is almost like zone pricing. Actually, to overcome the disadvantages of
zone pricing, basing point pricing is deployed.
-
11.4.5 Freight Absorption Pricing
There may be instances like "free home delivery" where a company charges only
sale price and does not charge anything additional from any customer as freight
charges. The price of the product includes the freight charges and all customers are
charged the same price irrespective of their locations. Since the freight expenses are
mostly borne by the seller, this method is referred to as "Freight Absorption Pricing".
This method of geographical pricing is suitable in the following situations:
a) when the competition in the market is very severe and the company has no
choice but to keep the price of its product as low as possible, or
b) when the company wants to penetrate into a new market, or
C) when it expects large business to be generated due to its product price being
low, which in turn will have the effect of lowering average costs.

11.4.6 Price Quotations in International Markets

Price quotations for exports depend on the terms of delivery. There are several well-
accepted standardized terms in regular use in international marketing. These terms
known as "INCO Terms" have been evolved by the International Chamber of
Commerce, Paris. Each price quotation (term) carries with it the rights and
obligations of the sellers and buyers. As a marketer involved in exports and imports,
you must familiarize yourself with all such price quotations and the associated rights
and obligations. Some of the popularly used international price quotations are as
follows:
EXWEX Works (....Named Place): Under this quotation, the seller delivers the
goods at his premises (works, factory, warehouse, etc.) and the price he quotes
includes all expenses upto that designated premises. It is the buyer's responsibility to
Pricing Decisions meet the costs and risks associated in moving the goods from that seller's designated
premises.
FCA-Free Carrier (....
Named Place): This quotation means that the seller has to
hand over the goods into the charge of the carrier named by the buyer at the named
place. The price quoted by seller will cover the expenses upto the point when the
goods are handed over to the carrier.
FAS-Free Alongside Ship (....Named Port of Shipment): Here, the seller has to 1
ensure that the goods are placed alongside the vessel on the quay or in lighters at the
port of shipment and the price includes the expenses upto that point.
I

FOB-Free on Board (.... Named Port of Shipment): Price quotaticn under an

FOB contract should include dl the costs till the goods have passed over the canier
at the port of shipment named by the importer. 1

C&F-Cost and Freight (.... Named Port of Destination): Under a C&F

contract, the seller has to incur all costs and freight charges necessary to bring the
goods to the named port of destination. This means that the price includes the freight
element but any additional costs due to events occurring after the goods have been
delivered on board the vessel have to be borne by the buyer.
CIF-Cost, Insurance and Freight (.... Named Port of Destination): CIF
contract means that the seller, in addition to meeting his obligations under a C&F
contract, has also to procure marine insurance against the buyer's risk of loss or
damage to gbods during carriage. This implies that the seller's price should include
the cost incurred by him on marine insurance premium besides the costs incurred
under C&F contract.
The above are some of the widely used quotations in international business. Besides,
there are other quotations such as CPT (carriage paid to), CIP (carriage and
insurance paid to), DAF (delivered at frontiers), DES (delivered ex-ship), DEQ
(delivered ex-quay, duty paid), DDU (delivered duty unpaid), and DDP (delivered
duty paid). Each one of the above quotations has implications on product pricing and
on the rights and obligations of the seller and buyer.

11.5 PRICE CHANGES

Once a company decides on the price for its product, it does not mean that it can
hope to maintain the price at the same level indefinitely. In fact, there may be
occasions where the companies are forced to increase or decrease prices due to
changes in marketing environment. It is generally known that marketing is an
integrated function and decision in respect of any one of the market~ngmix elements
influences the decisions in respect of others and, in turn, is influenced by decisions in
respect of the others. However, product and price share a special relationship and
often adjustments are made in the product to meet some problems cropping up in the
pricing area. Following are some such product-price adjustment strategies. As far as
price changes are concerned, companies often face two types of situations:
a) Initiate price change
b) Respond to price changes by competitors.
Now let us discuss these issues in detail.

11.5.1 Initiating Price Change

Due to changed market conditions you may decide to reduce the price or even
increase the price. However, while you initiate price cut or price increase, you must
keep in mind how the buyers, middlemen and competitors react to it. Now, let us
briefly discuss these issues.
Price Cuts: For instance, a firm may reduce the price of its product when there is Price Adjustment
declirw in raw material prices, since it makes sense to pass on the benefit of lower
costs to the consumers. However, if the reduction in costs is likely not to last long,
then it would not be advisable to reduce the product price, as you have to increase the
price again consequent to increased raw material prices. This may lead to consumer
resentment and resistance. Sometimes you may decide to reduce price as part of a
deliberate strategy to increase sales and, thereby, market share. For instance, the
reduction in airfares which have become quite frequent now in India is an example of
price reduction for raising market share. Same is the case with the steep fall in cell
phone tariffs. Sometimes you may reduce prices in response to price cuts by
competitors to piotect your market shares. This is what is happening in the airlines
business and the cell phone business today and what happened in the daily newspaper
business some years back.
Better utilization of the manufacturing capacity may be yet another reason for price
reduction. If the company is not operating its manufacturing capacity to full extent, it
may decide to reduce the price with an anticipation of increase in sale. A reduction in
price may result in demand increase leading to higher capacity utilisation, lower unit
cost of production, increased sales, greater market share and higher profits.
Some companies may, as a strategy, not like to adopt "follow the'leader" policy in
pricing. Hence, opt for price reduction rather than charge the same price as the
leader though the other companies may not like to price their product lower than that
charged by the leader.
In times of cost increase, if it is felt that corresponding price increase should be
avoided or not possible, the product may be adjusted in terms of quality andlor
quantity and the price may be left undisturbed at the earlier level. Conversely, if costs
decline, rather than reducing the price, the company may offer a better quality or
higher quantity of the product at the old price and may gain a better image and higher

Whatever may be the reason for price reduction by a company, this strategy hides the
danger of snowballing into price-wars which may not ultimately benefit any company.
Price Increase: Price increase may be caused by rising costs. Rising costs squeeze
profit margins and companies may be forced to raise product prices in order to
maintain the profit margin. Companies generally would not like to raise the prices
frequently every time the costs go up but, they may increase the price more than the
increase in cost thus providing a cushion for further cost increases in the near future.
There have also been instances of price increase to curb excess demand when the
company finds it difficult to meet the requirements of all its customers. A company
may increase the price of its product just to make more profits when it finds that
there is not much of competition in the market or if the company happens to be the
"leader" in the market.
Price increases are generally resented by customers and even by dealers. To some
extent. the adverse reactions of the customers may be softened by communicating
the reasons for price increase to the customers. Instead of raising prices directly, a
company may adopt indirect methods such as reducing discounts, adding higher
priced units lo the line, curtailing production of low margin product items, etc., are
some examples. It is important that you communicate the customers reasons for
increase in prices. If you increase the prices frequently, customers may perceive that
you charge excessive prices. You must be careful about this factor.
Similarly, to accommodate rising costs, rather than increasing the price, the product
form andlor packaging may be changed to reduce costs. For instance, introducing
refill packages and offering beverages in powdered mix form rather than as liquids
Pricing Decisions (thus avoiding the cost of water and container) as earlier or in small unit packs for
one serving (pan masalas) which have the effect of reducing costs/increasing price
are some examples of this technique.
To accommodate rising costs, certain facilities that wzi-c hitherto part of the price
charged, such as free home delivery or free after sales service may be given up or
may be provided on payment only. Thus the bundle of utility, earlier provided to the
customer, is unbundled. Conversely, during periods of decline in costs, rather than
reducing the product price, new features can be added to the bundle without charging
anything extra for the added utilities.
When rise in costs make it unavoidable to raise prices, certain additional facilities
such as providing credit, arranging finance for purchase of a high unit value item and
supplying products on instalment basis are offered by firms to persuade the customers
and dealers to purchase the higher priced product.
Customer Reactions to Price Changes: Price revisions, both downwards and
upwards, provoke different types of reactions from buyers, competitors, distributors
and even government. An excessive price reduction might be interpreted by
consumers as an attempt by the company to dispose off defective rroducts or
products of poor quality. Sometim~scustomers may also get the impression that the
company is in financial trouble and may close down the operations soon. They may
think that the companyWill shortly introduce newer models of the product and hence
is disposing of the old models at reduced prices. Some consumers, in anticipation of
further price reduction, may postpone purchases. There may also be consumers who
may consider price reduction as reflective of the ethical standards of a company.
A price increase may have positive meanings for some buyers and negative meanings
for some others. When a company raises the price of its product, some buyers may
take the price increase as an indication of better quality of the product or it is the
latest model and a "hot" item. Such customers may rush to buy it fearing further price
increases in future or the "hot item" may run out of stock soon. On the other hand,
some other customers may feel that the company is greedy and is trying to exploit the
consumer.
Competitors Reactions to Price Change: Just as consumer reaction to price
changes, your competitors may also react to a price change by your company. Each
competitor will generally react according to his self interest. However, majority of the
competitors may react in a set way. Under market conditions of pure competition, if
the company initiating the price change is not a marginal player, the competitors are
likely to match the price change. On the other hand, if the company initiating the price
change is a marginal player and/or there is evidence available to prove that the
company is performing poorly, the competitors are unlikely to match the price change.
Some companies, instead of matching the price change, may compensate the
consumer in other ways through sales promotion, discounts, product service,
packaging. incentives, etc.

11.5.2 Responding to Price Changes by Competitors

We have discussed that a company must be ready with strategies to take proper care
of the customers' and competitors' reactions to the price change that it may initiate.
In the same way, the company also be ready to respond to price change initiated by a
competitor. First of all, it should try to find out the reasons behind the competitor's
price change strategy; whether it was caused by changing cost conditions or it was
prompted by excess capacity or a desire to gain more market share or lead an
industry wide price war? It should also try to find out the possible responses of the
other competing firms to the change in price and whether the price change was going
to be a long term revision or a temporary reaction to some unforeseen developments.
 Internally, the company must consider its own costs, the product's stage in life-cycle, Price Adjustment
'
its strengths and weaknesses vis-a-vis competitors, how important is the particular
product in its product mix, etc. Since a company may not always find time to
undertake such a detailed analysis of the factors mentioned above, it may have to
react ~mmediately.The only way to cut down on the response time is to be ready with
alternative responses to possible price changes by competitors.

11.6 PRICING A NEW PRODUCT

One of the greatest challenges a company may face relate to the pricing strategy it
should adopt when it introduces a "new product" into the market. The "new product"
need not necessarily be a real product innovation but the market should consider it
"new'' In the sense that the majority of customers must feel that no close substitute is
available i n the market at that point of time. Two approaches are available as regards
pricing a new product:
a) Market-Skimming Pricing Strategy
b) Market-Penetration Pricing Strategy
Now let us discuss these two strategies in detail.

11.6.1 Market-SkimmingPricing
Setting high prices for the product initially is referred to as market-skimming
pricing strategy. As the name indicates, the objective is to "skim" the market, for
high revenues, as much as possible. Companies like Polaroid Corporation are known
to follow skimming pricing policy. The strategy is to set a high price for the product,
skim the creamy segments of the market, generate as much revenue as possible and
[hen, as competition develops, bring out lower priced versions of the product to draw
in new segments.
The advantage of this pricing strategy is that high price helps recover initial
investment fast. This I S particularly necessary for products which involve high
research and development (R&D) expenditure and high marketing costs. The funds
so realized by skimming the market can be utilized to finance entry into other
segments of the market, if and when necessary. Also, it has become necessary for
companies to recover as much finances as early as possible in the present days of
shorter product life cycles. Skimming pricing strategy generally creates a high quality
image for the product and helps build up strong brand loyalty among status conscious
segment of customers. In iiny case, it may be easier and advisable to start at high
price, ~undif need be, reduce the prlce subsequently rather than start at low price and
find it difficult to raise the price subsequently, even if it is just~fied.
The r ~ s kassociated with skimming-pricing strategy is that high price normally tends to
attract competltlon and limits market size in due course. Besides, it projects a poor
image of the company as a soc~allyand ethically irresponsible one.
Market skimming makes sense under certain conditions. Firstly, the product must be
constdered "new" by the target segment and it should take time and substantial
rebources for competitors to develop substitutes. Secondly, the demand for the
product should be inelastic. Though the size of the segment may be small in terms of
the number of customers and the sales volume (in terms of units) the value of the
sales should be high and profits also high. The small segment should comprise elitist
buyers such as trend setters but the demand (measured in terms of value of
purchase) should be sufficiently high to justify production for such a small sized
segment and the costs of producing a small volume should not be high enough to
cancel the advantage of producing for a limited number of buyers.
Pricing Decisions 11.6.2 Market-Penetration Pricing
Rather than setting a high initial price and skim a small segment, market-penetration
pricing strategy advocates setting as low an initial price as possible in order to
penetrate the market as fast and as much as possible. Companies like Texas
Instruments are known to be users of this strategy. Low price is expected to attract
high volume of business which, in turn, will have the effect of lowering the costs
further. The advantage of penetration-pricing strategy is that low price generally
discourages competition and hence gives substantial market share to the company
practicing this strategy.
It suffers from the disadvantage that charging low price may leave considerable
consumer surplus in the sense that, if the market is prepared to pay a higher price,
then the company charging a lower price stands to lost revenue. Moreover, low price
may generate very high demand and, if the company if not able to match supply with
demand, its'reputation may be affected. Low price also tends to be associated with
low quality of the product and poor service.
The conditions favouring deployment of penetration-pricing strategy are the opposite
of those favouring deployment of skimming-pricing strategy i.e. the product does not
involve much of investment for R&D and marketing. It should be relatively easy for
competitors to come out with substitutes. The demand is elastic and the market is a
mass market in terms of number of buyers, sales volume and value and the unit profit

Check Your Progress B

1) List the different geographical pricing strategies.
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
2) Why does a company initiate price changes?
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
* Differentiate between market skimming pricing strategy and penetration pricing
3)
strategy.
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
4) Stite whether the following statements are correct or incorrect.
i) Freight absorption pricing means that the buyer has to absorb the
transportation cost.
ii) Under an FOB contract, the buyer has to incur the freight costs.
i Penetration pricing strategy is advocated for selling low unit value low
technology items.
iv) Zone pricing is of great advantage to customers living in distant zones.
 V) Market skimming pricing strategy means that the company is not bothered Price Adjustment

11.7 PRODUCT-MIX PRICING STRATEGIES

It is not often that a company manufactures only one product and hence has to
formulate pricing strategies taking into account only one set of relevant factors. Even
if a company, at the time of its establishment, may begin only with one product, over
the years it may grow into a multi-product firm. The strategy for setting price to one
product may not work for another product or most of the other products. In fact, at
times, what works for one product, may turn out to be counter-productive for a
number of other products. Hence, there may be a need for pricing strategy, when a
product is part of a mix, which is different from the strategy when the company is a
single product company. In a product-mix pricing strategy, the firm has to look for a
\et of prices that maximizes the profits on the total product mix.

11.7.1 Product-LinePricing
Co~npaniesmanufacturing a product-line (different versions of the same product such
as different capacities of refrigerators, various models of cars, all varieties of toilet
soaps, etc.) may decide on the price steps to be set between the various versions of
the product by taking into account the cost differences, differences in consumer
perception and competitors' prices. For instance, your company is manufacturing
colour TVh of various models of 14" TV, 21 " TV, 25" TV and 29" TV. Normally the
pnce of 14" TV would be the lowest and 29" TV price would be the highest. Here
you have to decide the price of each of these four models in comparison with each
other taking into account cost factors, technical features, consumer segments,
consumer perceptions about the models, prices of comparable models of competitors'

11.7.2 Optional-Product Pricing

In this strategy, the buyer is given the option to buy accessory products alongwith the
main product. For example, along with the television set you may sell other
accessories like TV stand, TV cover, remote, voltage stabilizer, etc. Similarly, central
locking system, car stereo, gear lock, seat covers, perfume, etc. are optional products
you may or may not buy alongwith the car. There will be a base price for the main
product and each of the options offered will have separate price. The company has to
decide which items to build into the base price and which to offer as options. The
pricing strategy should be carefully worked out in such a way that most of the options
should not remain unsold. At the same time, the buyer should not feel that he is
forced to pay unnecessarily for the options separately while the accessories should
have come free with the main product.

fl.7.3 Captive-ProductPricing
There are certain products, which cannot be used without certain other products.
Examples of such products are safety razor with razor blades and shaving cream,
toothpaste with tooth brush, cameras with films, computers with software, fountain
pen with ink, etc. Manufacturers of such complementary products may use captive
product pricing strategy where the main product is priced low while the supplies can
be priced relatively high. Companies which are in the business of only the main
product will then find themselves priced out from the market. This is also the strategy
being followed by companies in the business of durable consumer goods (such as
cars, television sets, refrigerators; etc.) where the spares, components and servicing
Pricing Decisions are charged relatively high while the relatively low prices of the main products make
them competitive.
In the case of services, the strategy is called two-part pricing. The price of the
service comprises two parts, a fixed fee and a variable usage fee. For example,
telephone companies charge a fixed monthly rent plus charges for calls made during
the period over and above the minimum number of free calls. The service company
must make the basic service fee low enough to attract customers and profits should
mainly come from the variable usage fee.

11.7.4 By-Product Pricing

In a number of industries, production of main products throws up by-products which
also find usage. For instance, a number of by-products emerge in petroleum refining.
The same is the case in many chemical industries. In the cashew industry, extraction
of cashew kernel throws up cashew-nut-shell liquid, cashew apple. The famous drink
"Feni" (popular in Goa) is extracted from cashew apple. Using by-product pricing, a
company can keep the price of the main product competitive. At the same time,
company also finds a way of disposing of the by-products.

11.7.5 Product-BundlePricing
Under this strategy, sellers can combine a number of their products and offer the
bundle at attractive price. For example, it is a common experience during festive
seasons, retailers offer durable goods like refrigerator, washing machine, TV as a
bundle at a single price which is much lower than the total price you pay for each of
them separately. Tour operators often offer package tours which include air travel,
hotel and food, sight-seeing, insurance, visa fee, airport taxes, local travel etc. The
price of the total package has often been found much lower than the sum total of the
prices of each item separately. If the product bundle is priced attractively, it will
stimulate the sales of all items in the bundle.

11.8 FIXED PRICE AND FLEXIBLE PRICE

It is common practice in countries like India to find some products being sold at the
same price to all customers and some others being sold at different prices to different
customers. In the latter case, prices may vary according to the quantity of sale (bulk
purchases being offered price concession) or the loyalty of the customer to the shop
(frequent buyer of the same product getting price concession) or familiarity of the
customer with the seller or hard bargaining may bring in price concession. A
company should take into account the nature of the product, the profile of the
customer segment, the margin of profit, etc., in deciding about the pricing policy. It is
common practice in India to sell products at prices less than the Maximum Retail
Price (MRP) indicated on the package and high unit value durable consumer goods
such as refrigerators, air-conditions and television sets being offered at different
prices to different customers. In fact, one of the industries where flexible pricing
policy is being followed aggressively is the travel and tourism sector, tourist operators
offer same package tours to different customers at different prices depending on
familiarity with the customer, customer loyalty and relative bargaining power. While
flexible pricing policy offers the seller flexibility in dealing with different customers
and, at the same time, leaves consumer surplus among the customers, it has the
danger of some customers doubting any price quoted by the seller. Fixed pricing
policy, on the other hand, builds customer confidence and the seller and the company
and saves the time of both the buyer and seller, which would have been spent if they
were to bargain.
 It I \ nornmal to ilnd products l ~ k tooth
e p l \ , v prftrme\, vegetable oils, b ~ s c u ~ tetc., s,

one k~logram,f ~ v k~lograms,

e
-
being offered In p,lckage\ of d~fferrnt,\I . \uc17 3.. SEji 1 :iii, 1 OO 17~1.50 gms. 150 gms,
etc P r ~ d u c t ,01., cs,:. .. 11.1 tlrbtergent cakes al\o
come 111 cllfferent we~ghtssucli i ~ 75 s trrll' ' 1 0 L ~ I I I . :C
I ., -. ja ;ck,i~esciury
d~fferentp r ~ c e sand often tt bvcctrneb clltt cult tu , , . ,\f d~fferentbrands
became the quantltles offered 1;1.1yd ~ t t t 11, ~(>In r ~ i , ~ n u i ~ c tc, t ~ ,~,ii:~~lhi:tircr
,rt~~ and

11.10 LETUSSUMUP
Companies often have to adjust the price of' ~ i r e i lpn i l l i.c..!x:lnse to changes in
l*l~ri:;

costs and demand and competitive and environmei7\al ccl~c!il:clis.Similarly, companies

also resort to ad-justment in listed prices, reward custurners a r ~ ~iistributors
l in the
fornl ctf discounts and allowances. While discounts to clrc.i:,nil,rsare related to the
qu:untuln of one time purchase, quick settlernent of payrrrg:ill and :>I'f-seasonpurchase.
distributors are rewarded for the services provided by them. In t h ~ context, s the firm
has to decide the adjustment in base price for cash discount, quantity discount,
functional discount, seasonal discounts and viirious allowances.
One of the areas relating to which a company should have a clea -cut pricing strategy
pertains to recovering the cost of transporting the product from the product point to
the consuming point. A nu'mber of alternative strategiqs are available in this regard,
varying from one extreme of loading the entire freight cost on to the proriizict to the
other extreme of the company completely absorbing the freight c o ~ tin ; hetween.
there are other alternatives of distributing thc t r a n s p o r t a t : ~cost
~~ ~~l~iformonl ythe
entire sales volume, or zone-wise or basing-poitlt wise. While cproting for exports cr
while importing, a company must not only use the internationally acccl~tedquotations
but also be familiar with the implications of the cluotaticm?:on pricing as well as the
I-ightsand obligations of the seller anti buyer under each of tlic quotations.
Oicasions may arise when a rompany finds that the prcduct price warrants revision.
What is important is not that much revising the p;ice but, more importantly,
. anticipating the reactions of customers: distributors and competitors to price change

111 pric~ngw ~ l lbe when a new product has to he p c e d : a company rnay charge a h ~ g h I
conyetit ive conclitions.
While pr~cinga s ~ n g l eproduct h I.11 own ch,ilit:J~sek.p-lc~rigsctrateyy i'or a rnlx ot
11roduct\ paws another set of chnii,.i1~e~:itlatt.p~i:s such as prod:~~i-line pricing,

\el ler may follow a polir.\~ l ; h , ~ I pl-lc<or tht ,tlit 1 . 1 + 11 :dx ,his p i c e ~
61i ' ~ g
' ~ - 1 ~ l i '

on the nature of product and rna,ket d1kJ cost L c 1s1< + ;S~-~TIUT;.,.

Allowance: Reward or prIc,e ~t'Juctrl~n g ~ i t113

' ~(.l1~!'.1Dutor4
~ cv~torne-5,or
;i~~(!/i~r
prornot~nga product or huy~ngthtl i . l ~ h : . ' ivr-io:, oECic qrt~du,-t-r!place nf the old
vel \ I on.
where the main product is priced low and the secondary product is priced high.
Cash Discount: Reduction in list price given to a buyer when a bill is settled within a
specified time period.
CIF Contract: Contract between an exporter and importer, where the exporter has
to incur all the costs, including the freight and marine insurance premium costs, upto
the port of destination.
Geographical Pricing: Pricing strategy adopted to accommodate the freight
expenses incurred in moving the product from the point of product to the consuming
point.
Market Skimming Pricing: Setting a high price for a new product and thus
skimming the cream of the market.
Market Penetration Pricing: Setting a low price for a new product and thus
gaining a large niarket share.
Quantity Discount: Reductio~!in list price given on the basis of the quail~ityof
purchase.
Seasonal Discount: Reduction in list price given for purchases made during certain
seasons.
Two-part Pricing: A pricing strategy for services in which price is broken into a
fixed price plus a variable usage rate.

11.12 ANSWERS 'TO CHECK YOUR PROGRESS

A. 1) Financial discount is the discount offered to the trade channel members by a

reduction for undertaking promotion of the product such as advertisement,

display, demonstration, etc.
2) Rs. 20,000
3) i) Correct ii) Correct iii) Incorrect iv) Incorrect v) Correct
B. I ) FOB-Origin Pricing, Uniform-delivered pricing, Zone pricing, Basing-point
pricing, Freight absorption pricing.
2) Due to change in costs, to increase saleslmarket sharelprofits, to meet
competition, for better utilisation of manufacturing capacity, to follow a
strategy different from that of the "market leader", to curb excess demand.

customer segment should be elitist, the value of sales and profits should be
high, cost of a small volume of production should not be high.
4) i) Incorrect ii) Correct iii) Correct iv) Incorrect v) Incorrect

11.13 TERMINAL QUESTIONS

I) List and explain the various geographical pricing strategies.
i
2) Distinguish between: 1
i) FOB-Origin pricing and FOB contract pricing i
 ii) Zone-Pricing and Basing-point pricing
iii) Cumulative discount and non-cumulative discount
iv) Fixed pricing and flexible pricing.
3) Examine the conditions under which "Market-Skimming Pricing" and "Market-
Penetration Pricing" can be deployed and also analyse the advantages and
disadvantages of each of the above pncing sii~tegies.
4) Write short notes on the following:
i) FAS (Named Port of Shipment)
ii) C a h discount
iii) B y-$roduct pricing
iv) "Trade-in" allowance. L
Note: These questions will help you to understand the unit better. Try to write
answers for them. But do not submit your answers to the University for
assessment. These are for your practice only.
Structure
0bjec"Lji-s
Introduct ail
Regul:~tionof Prices u n d ~ the r MKW Act
12.2.1 T;'r,.+le Price hlaintenancf
i? 2.2 PI-il.ci !~jci:inination
i2.2.3 C'ollective Pric: : ' t > . :;r,;- Kno ~ : - i Agreement
)~t
y:.,
:7
iL
!I
i ".iL1t<>ry
.. ,
t Ft-i,:ia.g
~

, .,..;.. ;:,! :::: ,.,.~ii'i8.;:;;,..:k'jl~l~;~

i2..i.i: :. l,.,; $:;;st ,.a i.~.~:->,jndblyHigh Prices

Kegl!lat~i;rr ;I ~ ' :rpg
i 11ilil ,-i.he Consumer Protection Act

12.3.1 E,;~(XS,: ~:-fi:, :.$

12 3.3 f{,lr&,31,i 2tt.d 1 ',*: :.

K e0~ *~ ti:.^
l : (:f l'ricing ljn,.;i. ...
/
. , .. % .
'

12.4.1 Thc I:~.~cnliiil

Conlrrrii.!I:!;. >L (, l!j:>.i
12.4.2 The D i ~ ~ (Control)
gs Acl. 1950
12.4.3 The Industrie:; (Development ni?d Kcgi11. , .*.I; Act, 195 1
12.4.4 Bure;lu of Industrial Costs and Pricing
12.4.5 l'hc Standards of Weights and hfcasures (PacC:rycd Co~nnioditics)Ralzs, 1977
Let Us Sum Up
Key Words
Answers to Check Your Progress
Terminal Questions

After studying this unit, you should be able to:

o identify various legislations which regulate pricing policies in India
o explain how various legislations regulate prices in India.

You havc aliendy studied variol~s,pricing policies and strategies. But while deciding
pricing s!rai!:~ies il is also important for you to keep in mind the legislative provisions
regarding price.. Regulation of prices is consid~redas orie of the important means of
a(:h~cvinpthe socio-ec.onomic goals in many countries. The irrlportant factors that call
for !vice control and regulation in countries like India are short supply of goods and
services, i~nrcasonablelevel of prices, unfair trade practices and black-marketing. low
levcls of in:ome of a large nunher of people, etc. h~ India. a number of legislations
seek Ln regalate pricing policieu a n d practices. They 11icl11dc the Monopolies ;md
Kcctrjct~veI'rade Practices Act, 1969 (Soon likely to br replaccd !JY Competition Act,
20021, the Consumer Protection Act. 1986, thi: Essential Comnloditics Acr, 1955, the
Prevention of Black-Marketing and Maintenance of Supldies of Essential
Coml-nodities Act, 1980, the DI-LIES (Corltrol) Act. 1950. the industries (Develo~ment
and Regulation) Act, 1951, and the Star~d~~rrls ~f IXsights & h9easures (Packaged Regulation of PIices
Commodities) Rules. 1977. In this unit we ~;.l,:illdis.:iis.; t ! i~:ni:?r
~ provisions of these
legislations reg:trding the regulation of pticss ciCgti.!ods an::l \.:I iires i l l India. The

--,-

12.2.-- REGULATION OF PRICES UNDER THE hIR'L'Y ACT

- U
p
-
s

The prevention of certain trade practices that are detrimental to the ct nsu,i;i::s'
interest is one of the major objectives of price regulation. In India, the Monopolies
a ~ i dRestrictive Trade Practices Act, 1969 seeks to prevent the mc~nopolies,
restrictive and unfair trade practices since these are prejudicial to the public. interest.
The provisions relating to the regulation of trade practices also covcr-pricing practicc~
indulged in by the sellers including manufacturers, wholesalers and the retailers. .Llic
practices regulated under this Act are: resale price maintenance, price discri~ninati:.:).
collective price fixing, predatory pricing, bargain and deceptive pricing, and ch3igir;;:
of unseasonably high price. Let us discuss these aspects in detail.

12.2.1 Resale Price Maintenance

With a view to exercise control over the price to be chargeti cn tht. te-srtli. of the
products, a manufacturer stipulates the price to be charged hy the dealers, thcieby
not permitting them to sell below the suggested price, I.r~si>~ence by the n~nnut.actntr:-
that his product should not be sold below the price indic;ded by hirn may eli~iai:late
competition among the distributors of the product. This may tend tc.) keep the p~ic:c
paid by thc consurner at a level higher than what it would have becu c~11.1.rr\;,ire.
Thus, the practice of re-sale price maintenance nlay benefit the manolacmr-er arid tile
dealers. It may, however, deprive the consumers of the benef'its that m : t j accrue tu
them because of price conlpetition anlong the sellei-s. I'lires ;:IC lived at a i,jg! :i,
level under re-sale price maintenance because of wllic.11cui1ramet.s have t o 1 : ~ j '

What exactly amounts to re-sale price maintenance?

Lel it not he understood that re-sale price maintenance involves only insistence on the
part 01' the manufhcturer or wholesaler that the goods shall not be sold below the
stated price. As per E.rplmnafion I of Section 40 of the MRTP Act, 1969, thr:
practice of re- ale price maintenance in relation to sale of goc?c!l;irei:lu&e:;:
(i) suk~gestinga minimum price;
,;)I' -
(ii) recom~nerldinga particular price without specifically pe:!~i-(?ij: ..&r te ~ 1 1
at it lower price:
(iii) though suggesting the price to be maximum retail price. hut inciutir~pthnr the
goods shall not he sold for a price less than the suggestetl m:.!?-irfillir,rts\aiI ~ r i r . ! .
T h u . apparently the price suggested is lo be maximcrn rrtzi!.>:;-1.! J! \. irtv.~lly
becolnes the minimum price to be charged.
Furthel; under sub-section (2) c?f'Sectiorz 39 of MRTP Arr. I(i69, the p~.ai-.iiceo'
re-sale price maintenance shall include a notification to dealers ar otfnr~wice
publicnt~onon, 01 ii; relation to, any goods, a price stated or inzended s o kc utr&:.;..:.r~md
as the minimum price which may be charged on the resale of goids i;-i Lr::'i.:.
Thus, under the practice' of re-sale price maintenance, the wii,,~z.~lerLr rd:.i!k.: < . ;77)r
given the freedoll1 to sell the goods below the r.eco~n~nendecii-c sale prici,. Poi.
Pricing Decisions example, in a reported case relating to RRTA vs. Bata India Ltd. (1976!, Bata India
Ltd, had sales organization throughout India and uniform sale prices were fixed by it
all over India. The price lists circulated to wholesalers, dealers, etc., contained
wholesale price per pair and retail price per pair for each type of footwear and the
retail prices were embossed on the footwear. Such a clause fixing uniform sale price
of respondent's footwear throughout India amounted to re-sale price maintenance.
Held, that the trade practice of re-sale price maintenance as complained of in the
application would cease if the respondent conspicuously stated on the price lists
issued by it that the wholesalers and retailers were free to charge a price lower than
those specified therein and if it embossed on the footwear the words and figures
'price not to
exceed Rs ...'
The above discussion shows that, in certain cases, re-sale price maintenance is highly
detrimental to the interests of the consumers. To regulate the practice of re-sale price
maintenance in India, the MRTP Act prohibits the fixation of minimum re-sale price.
The Act provides that any agreement of sale between a person and a wholesaler or
retailer shall be void if its objective is to provide for the establishment of minimum
price to be charged on the re-sale of goods in India.
The Act further lays down that no supplier can withhold supply of any goods to any
wholesaler or retailer if that wholesaler or retailer refuses to or fails to abide by the
suggested resale price. Likewise, such wholesaler or retailer cannot be treated less
favourably than the other dealers in terms of discount', credit terms, etc.
The situations where a supplier is allowed to intervene and insist that goods be not
sold below a certain price are:
(a) Where a re-seller is selling those goods at a loss, i.e., below his cost and,
thereby, using the goods as a loss leader. A re-seller is said to use goods as loss
leader when he resells them otherwise than as a genuine seasonal or clearance
sale not for the purpose of making profit, but for the purpose of attracting
customers for his other goods or advertising his own business.
In Tri-ad Trading Services Limited vs. State of Tamil Nadu (2000) 36 CLA 62
(Mad.), it was held that to substantiate the claim that the dealer is using his
product as a 'loss leader', it has to be established that the dealer is incurring
losses.
(b) If the MRTP Commission makes an order of exemption, MRTP Commission
may grant exemption, that is, allow the practice of re-sale price maintenance, if
it is satisfied that in the absence of a minimum re-sale price system:
(i) the quality of the goods or their variety would be substantially reduced to
the detriment of the public as consumers or users; or
(ii) the retail prices, in general and in the long run, would be increasing to the
detriment of the public as such consumers or users; or
(iii) the necessary services actually provided with the sale of the goods by
retail would cease or be reduced substantially to the detriment of the public
as consumers or users, for example, newspapers.
Contravention of provisions relating to the prohibition of maintenance of minimum
re-sale prices shall invite punishment with a fine upto Rs.5,000/- or imprisonment for
a period upto three months, or with both.

12.2.2 Price Discrimination

When a manufacturer or supplier of goods charges, for the same or similar product, a
higher price from one dealer and a lower price from another, the practice is referred
to as price discrimination. The discrimination in price can be made either through
 fixing and charging different prices from different buyers or by granting discount, Regulation of Prices
commission, allowance or rebate at different rates to different buyers. The practice
has an adverse effect on the competition since the dealer who has paid a higher price
for the product cannot compete effectively with the one who has paid a lower price
for the same product. Moreover, by allowing quantity discount or favourable terms of
sale or delivery in excess of what is justified by cost-saving in bulk supply, the seller
is, in effect, charging a lower price to a bigger dealer. This enables that bigger dealer
to re-sell the product at a price lower than that charged by the smaller dealer. 1I
Furthermore. discrimination through the grant of a turnover bonus (often termed as
'aggregate rebate') has the effect of binding the buyer to the seller for a certain
!
period. This will strengthen the seller's control in the market.
Price discrimination has an adverse effect on competition in as much as buyers of the
product will suspect the smaller dealer for overcharging and may thus shift to the
t bigger buyer. After competition is eliminated, bigger buyer may not pass the additional
discounts to the ultimate consumer.
Price discrimination is a restrictive trade practice under the MRTP Act. Such a
practice is regulated through the mechanism of an inquiry conducted by the MRTP
Commission which is empowered to pass a cease and desist order against the party
indulging in this practice. The Commission's "cease-and-desist" order has the
statutory backing like that of a civil court. Apart from passing the 'cease and desist'
ordel; the MRTP Co~nmissionis also empowered to award compensation against the
loss or injury suffered by any person or class of Ijersons as a result of such trade
practice.

12.2.3 Collective Price Fixing or Knock-out Agreement

I
Sometimes manufacturers and suppliers of goods and services enter into an
agreement or understanding to eliminate competition among themselves, by fixing
common prices and other terms of sale for their products or services. Such an
agreement (or arrangement) leads to a formal or informal cartel, which can envisage
unifonnity in the price fixation of competing firms. Collective price fixing can also
take the form of collusive tendering and collusive biding or bid rigging.
Collusive Tendering: You may be knowing in the construction work, installation of
plant and machinery, procurement of materials by industrial/commerciaI users,
procurement by Government Departmentsflnstitutions, etc., adopt tendering method.
, There are two types of tendering: (a) open tendering where it is advertised in the
media and sealed bids can be submitted by any supplier (b) limited tendering where
bids are invited from few bidders. The first approach is followed normally when the
* amount involved is more and time is sufficient. The second method is followed when
the amount is small and need is urgent. The buyer provides specifications of the work
or materials in the tender document while the suppliers provide specifications and
price of the materials he would supply by filling the tender:All the tenders are opened
on a pre-decided day in the presence of all bidders. Then the bidder whose
specifications match with buyer's requirements and offers the lowest price will get
the contract. This is brietly tendering.
Thus, it is a practice whereby sellers (or buyers) of goods or services secretly agree
on the prices, or other terms or conditions of sale or purchase, to be quoted in
response to a tender. They would quote such rates and terms as would make the
offer of only the pre-decided tenderer acceptable. This practice results in unduly high
prices of products or services offered for supply. The opposite will be the situation
when the tenders invited are for the 'disposal of any product'. In that case the rates
quoted will be too low.
Pricing Uecisioas Collr, .i,r Uipci~!;nlcl,; or Bid R;;;,,giurg: Collusive bidding is the counterpart of collusive

The system ;.
tendel i i i C ' : ,rn - * " i IS where I :goods are s,,:.~htto be disposed of through auction.
-+?( - i : ~ namong
t certain cr m.,lislions which dispose of surplus goods
throuz" ,:-::?tcr,, \31rha view to get 1 1 h::~ ~i-.,c possible price In the auction system,
poducr I R L ~ Lilvailabl;:
~Z for physical L ..t~~iinationand all thc buyers publicly offer
r k p LC.The buyer whoever offers the highest price will get the product. However,
tltc 'u,!,2, i ;!:ld it a convel~:citt I f ccci .qa.tiilg the seller's effort to raise the

price of the pro,luct. 1hey agrec 'ir,t,siig diu:il,el\es on the price or other terms (or
conditions) of sale, or purchase of goods cr services, to be offered at the auction. The
collusive agrement, arrangement or ~ll~desstanding, a.rlong the bidders, leads to the
manipulation of' prices of tl;c products or services offered for sale t!>rough auction.
Thus, collective price fixing. collusive tendering and collusive bidding have the effect
of restricting and eli:;.inatii~gCL npetition whiilt amounts to a restrictive trade
practice, The provisions for the ~egulationof these prxtices are t h s,,r ~ a those
for other restrictive trade pra~ticesdescribed in PI ;i.: dr ,criminatio~~.

12.2.4 Predatory Pricing

Anothe: way to elimii.,,:e or educe competition in the ri~,z.btr-tis to charge a slashed-
d o ~ r,..,e
n \\:~ic!~can be ev::l below the cost i::cult cd the Ut-anufactureror
.+I.

supp:i,: ufti:, !:.uriig,:. I i ~ i is

s often done with the i~lter~titora,Iving out a smaller
cornpetilor a d c\ e1,tl.,lt making profit by the ~nonopolj: > ~ t ~ a so l i ~created.
n Such a
trade practice i , I., :i,:d
~ ; t l i n RS prcdltory pl;ii!:g,

In Motlern Food I~~r,,..r;.tt~.s "EL,);, :. k.,., ;.eld t , ~ ;r: require; 1:) be established that
the pricing below cost c,i; .:.h in:c.:l r ~3 d.iGeCL;: ~ 2 : :i .r cut C T business.or to
a

eliminate compc-tition. Mere (.ffer ^ e ~ ' c : ; .-:e7 lu,tcr I ; , : , : c a d t.! production cannot
automatit nlljs l e ~ i dto ' l r l i ~ r c i ;if),,
~ : (.,' :I ..,.
lcl:.; .... zg.
Again, in Britrnlzr~icrblcl'rutries Lzi, tri. I / . * , ! r , t ~ - (1986), the q ~ ~ t s t i owas
r ! whether
MIS. Johnson and Johnso:? !,tL was pr<:<u.ti18predatory pricir:g with aview to
throwii~gsmall n i a r l u f a e ~ ~ ~2: eti~ of
a t i i ~ i lJc;:nson
~. and Johnson L-td., the respondent,
were ~nanufacturingnearly 300 ~ a r i e t i e s l s i ; .oP ~ ~sutures using modern technology
and expertlse and qual~tycontrol under the te.;:,,ii:al gi~idanceof world famous
'Ethicons' On the other hand, the petitioner MIS. SMB b e r e a small-scale unit
manufacturing ol~lynon-absorbable sutures with 100% indigenous technology having
a nomlnal share in the market. The petitioner's complaint was that the respondent
indulged in predatory pricing In their qwtations of their product to the Director
General, Armcd Forces Medical Se, vices Depot, Delhi Cantt., Mgith a view to
eliminating competition from .i'L,~anufacturerslike the complainant. The question
before the Commission was fir.i;rp:er t!.e quoting of lower prices than the prices
charged from dealers amounted lo predatory pricing. The Commission had already
ruled in Trl Szire Indin Ltrl, Bornbuy tnat the essence of predatory pricing was
pricing below one's cost with a vicw to eliminating a trade rival. An attempt was,
therefore, made to arrive at the cost of production of the respondent on the basis of
the material cost, excise duty and expenses allocated on the basis of the proportion of
sale of each item to total sale. The cmerglng ~;-1t:,reshowed that in no case quotation
had been given at a price below the cost price. 111:,I, ; I . \ V.E-:aiices, it was held that
to sell a small portion in public interest to Governttlrnt call i3rl,t be treated as restrictive
trade practice of predatory pricing, particularly, when the rates are above cost of

Predatory pricing, as noted above, if intended essentially to eliminate competition, it

amounts to a restrictive trade ptactice and invites the same regulatory measures
under the MRTP Act discussed under price discrimination.
12.2.5 Bargain Sale and Deceptive Pricing Regulation of Prices
Sellers often attract buyers on false promises. A particular product is offered on a
slashed-down price, but the intention of the advertiser is only to lure the buyer so that
he may buy some other products. For example, a dealer advertises a particular brand
of 21 inches television set at Rs.8000/-. Once the intending buyer is lured to the
show-room for buying the television set, the dealer would avoid the sale of that
television set, disparage its features, den~otl;Lz*ss, defective one, or impose an
unreasonable delivery date. Instead, the seller may persuade the same buyer to buy
another brand of television or any other product.
Since the bargain pricing and deceptive pricing tend to mislead the consumers, such
pricing practices amount to an unfair trade practice under the MRTP Act. Unfair
trslde prilctices are sought to be regulated by the MRTP Commission which is
empo*ered to conduct an inquiry into the said practice. If the Commission is satisfied
that the practice amounts to an unfair trade practice, it passes prohibitory order
("cease and desist order)" against the party concerned. Besides, compensation may
also be awarded to the aggrieved buyer.
12.2.6 Charging of Unreasonably High Prices
In order to maximize the profit and market power, businessmen often charge
unreasonably high price. This happens when a company is in a monopoly position to
control production, supply or distribution of goods or services, hecause of their
dominant position in the market. Charging of unreasonably high price amounts to a
monopolistic trade practice under the MRTP Act. Such practice is sought to be
regulated through the instrumentality of the MRTP Commission and the Central
Government. While the inquiry is conducted by the MRTPCommission which is a
statutory body enjoying many powers of the civil courts, the final order is passed by
the Central Government (Department of Company Affairs). Apart from passing a'
prohibitory ('cease and desist') order, the Central Government enjoys wide powers of

Check Your Progress A

1) List the pricing practices by the seller which attract the provisions of the MRTP

......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
2) , Distinguish between predatory pricing anp price discrimination.
......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
3) Distinguish between collusive tendering and collusive bidding.
......................................................................................................................
.......................................................................................................................
......................................................................................................................
......................................................................................................................
Pricing Decisions 4) Match the pricing practices given in Column A with the names given in
Column B.

Column A Column B
i) Pricing is slashed-down below the a) Re-sale price
cost with a view to eliminate competition maintenance
ii) Sellers havea secret agreement on the b) Collusive tendering
price to be quoted in response to a
tender notice
iu) A price charged on the re-sale of a C) Price discrimination
product by a retailer
iv) A manufacturer of goods charged d) Predatory pricing
different prices from different dealers
for the same products
/

12.3' REGULATION OF PRICING UNDER THE

CONSUMER PROTECTION ACT
The Consumer Protection Act, 1986, as amended by the Consumer Protection
(Amendment) Act, 2002, provides some measures for regulating two types of pricing
practices: 1) excessive pricing, and 2) bargain and deceptive pricing. Let us study the
relevant provisions in detail.

12.3.1 Excessive Pricing

Charging of high prices from the consumers shall invite action under the Consumer
Protection Act where the price charged by a trader or service - provider is in excess
of the price -
a) fixed under any law;
b) displayed on the goods;
c) displayed on any package or container;
d) displayed on the price list exhibited by him by or under any law for the time
being in force;
e) agreed between the parties.
Such pricing is sought to be regulated through the instrumentality of the law
enforcement agencies set up under the Act. This machinery consists of District
Consumer Disputes Redressal Forum set up in each district, State Consumer
Disputes Redressal Commission set up in each State and Union Territory and the
National Consumer Disputes Redressal Commission at New Delhi.
Consumer Protection (Amendment) Act, 2002 further provides for constitution of the
State Councils for every State to be established by the respective State Governments.
The object of every State Council shall be to promote within the State the rights of
the consumers including the right to competitive prices. It may be noted that the
requirement of establishment of StateCouncils is in addition to the Central Council
already established by the Central Government under Section 4 of the Act which is
also responsible for promoting and protecting the rights of consumers.
Action is initiated on the complaint received from any consumer, any recognized and
registered consumers' association, the Central Government or State Government.
'
The redressal forums at the District, State or National level serve as quasi judicial Regulation of Prices
bodies (special courts) set up fbr the redressaf of grievances of consumers against
the seller in relation to supply of defective goods, deficient services, charging of
excessive prices, and indulging in any restrictive or unfair trade practice. They enjoy
wide powers of ordering replacement of goods, return of the excess amount charged
and awarding of compensation for any loss or injury suffered by any consumer or
groups of consumers. ''. _.

12.3.2 Bargain and Deceptive Pricing

The meaning attached to bargain and deceptive pricing under the Consumer
Protection Act is the same as under the MRTP Act.
If the suggestion or indication of the price of a product or the charges for any service
materially misleads the public, it will attract punitive action under the.Consumer

excessive pricing.

Check Your Progress B

1) List the circumstances under which a pricing practice may attract legal
provisions of the Consumer Protection Act.
...................................................................................................................
'1.

...........
..................................................................................,........................
.......................................................................................................................
......................................................................................................................

......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
3) State whether the following statements are True or False.
i) Deceptive pricing is sought to be regulated under the provisions of both the
MRTP Act and the Consumer Protection Act.
ii) Any consumer can make a complaint regarding charging of price indicated on
the label of the product through the Consumer Protection Forum.

12.4 REGULATION OF PRICING UNDER OTHER ACTS

There are some other legislations which seek regulation of pricing policies and
practices in India. These include:
1) The Essential Commodities Act, 1955
2) The Drugs (Control) Act, 1950
3) The Industries (Development and. .Regulation) Act, 1951
4) The Standard of Weights and Measures (Packaged Commodities) Rules, 1977
Now let us study the provisions of these Acts in detail.
Pricing Decisions 12.4.1 The Essential CommoditiesAct, 1955
As you know, hoarding and black-marketing have become very serious problems
during periods of shortage. An effective system of control should prevent the creation
of artificial scarcity by the unscrupulous businessmen for profiteering. Other major
problems in India are the spiraling prices and continuous shortage of certain essential
commodities such as edible oil, vanaspati, petrol, kerosene, sugar, tea, cement, paper,
etc. The legislative measures for overcoming these problems are incorporated in the
Essential Commodities Act, 1955. Under this Act there are two important provisions:
1) fixing the prices of essential commodities, and 2) regulation of prices of food-
stuffs. Let us study these two provisions in detail.
Fixing the Prices of Essential Commodities: The broad principle governing the
payment of the prices for the commodities acquired by the Central Government or
any State Government are spelt out under Section 3(3) of the Act. The Government
concerned has the discretionary powers in matters relating to the fixation of prices of
an essential commodity acquired by it. In such cases, the seller shall be paid the price
of the commodity determined in the following manner:
1) Agreed Price: Where the prices can be agreed upon, by the Government and
the seller, the agreed price is to be pard.
2) Controlled Price: Where no agreement as to the price is reached, the price
calculated with reference to the controlled price, if any, is to be paid.
3) Market Price: Where there is neither an agreed price nor a controlled price,
the plice calculated at the prevailing market rate is to be paid.
Regulation of Selling Prices of Foodstuffs
The Central Government has been empowered by the Act to regulate the selling
prices of foodstuffs in any locality. The term 'foodstuff' is used Clnder the Essential
Commodities Act, 1955 not only for the material which is immediately fit for human
consumption but also applies to materials which can be used as food after subjecting
it to process like grinding, cleaning, etc. The following have been held to be foodstuff
and accordingly an essential commodity under the Act:
(i) Sugarcane
(ii) Paddy
(iii) Linseed Oilseeds

(v) Turmeric
(vi) Milk
Wherever the Central Government finds it necessary to control the rise in prices or
prevent the hoarding of any foodstuff, it may regulate their selling price. The prices
shall be determined in accordance with the relevant provisions of Section 3(3A) of
the Act. The Act also provides for the method of fixation of price for foodstuffs of
edible oils acquired by the Government. Similarly, the criteria for the fixation of fair
price of sugar payable to the producer have been provided in the Act.
The provisions of the Essential Commodities Act have been further strengthened and
reinforced by the Prevention of Black Marketing and Maintenance of Supplies of
Essential Commodities Act, 1980.
Stringent measures have been provided under this Act to prevent black marketing and
ensuring equitable supply of essential commodities.
12.4.2 The Drugs (Control)Act, 1950
Though the Essential Commodities Act, 1955 covers drugs under its scope, the Drugs
(Control) Act was passed way back in 1950 which prclvided for the control of the
sale, supply and distribution of drugs. The Act incorporates certain provisions for the
regulation of the prices of drugs in India. Under Section 4(1), the Government is
empowered to fix the maximum price or rate which may be charged by a dealer or
producer in respect of any drug. Further, Section 5 imposes restrictions on the sale,
price, etc., where maximum price is fixed under Section 4. That means no dealer or
producer is permitted to sell, agree to sell, offer for sale or otherwise dispose of, to
any person any drug for a price exceeding the maximum fixed under Section 4.

12.4.3 The Industries (Development & Regulation) Act, 1951

The Industries (Development & Regulation) Act (IDRA), 1951 also aims at securing
an equitable distribution and availability at a fair price of any article or class of articles
relating to any scheduled industry. By scheduled industry, we mean industries lisled in
the First Schedule to the IDRA. It includes consumer goods industries like cotton and
woollen textiles, sugar and salt, pharmaceuticals and drugs; capital goods and
producer goods like iron and steel.
The Central Government may, by a notified order, provide for regulating the supply
and distribution thereof and trade and commerce therein, notwithstanding anything
contained in any other provision of this Act. The Central Government may make
notified order for price and distribution controls. A notified order made in respect of
price may provide for:
1) Controlling the price at which any such article, or class of articles thereof, may
be bought or sold;
2) Regulating any person manufacturing, producing or holding in stock such article
or class of articles thereof to sell the whole or a part of the article so held in
stock by such person or class of persons and in such circumstances as may be
specified in the order;
i) where the price can, consistently with the controlled price, if any, be fixed
by agreement, the price so agreed upon;
ii) where no such agreement can be reached, the price calculated by
reference to the control price, if any, fixed under this section;
iii) where neither clause (i) nor clause (ii) applies, the price calculated at the
market rate prevailing in the locality at that date.

12.4.4 Bureau of Industrial Costs and Pricing

The Bureau of Industrial Costs and Pricing (BICP) functions under the administrative
control of the Department of Industrial Development of the Union Ministry of
Industry. The BICP was established by the Government of India, on the
recommendation of the Administrative Reforms Commission, through a Resolution in
1970, to advise on a continuing basis on industrial costs and pricing of manufactured
products.
The BICP performs a number of functions like energy audit and industrial efficiency,
water and material audit, industrial monitoring and has also been entrusted with the
task of ilifrastructure pricing. Under infrastructure pricing, the BICP monitors the
price policy for strategic sectors of the economy by suggesting measures for reducing
costs and increasing productivity. The Government determines the prices of a number
of commodities on the basis of the recommendations of the BICP.
12.4.5 The Standardsof Weights and Measures (Packaged Commodities)
Rules, 1977
One of the persistent demands of the consumer activity has been that the prices of all
packaged commodities, inclusive of all taxes, should be displayed on each package.
In order to have a proper control of pricing and certain other aspects of packaged
commodities, provisions have been made under the Standards of Weights and
Measures (Packaged Commodities) Rules, 1977. These Rules require the
manufacturers and packers of all commodities sold in packaged form to provide the
following particulars, conspicuously marked on every package:
I) name and address of the manufacturer/packer;
2) common or generic name of the commodity contained in the package;
3) the net quantity in terms of the standard unit of weight or measure;
4) the month and the year of manufacturerlpacking;
5) the selling price (inclusive of all taxes as per the amendment effective from
November 1999)
6) the dimensions of the commodity, if relevant.
Thus, it is now obligatory on the part of each manufacturer, packer to display the
maximum retail price of all the packaged commodities offered.for sale to
consumers.

Check Your Progress C

1) Name any six commodities which have been declared as essential commodities
under the Essential Commodities Act.
......................................................................................................................

.......................................................................................................................

......................................................................................................................

. ' Essential Commodities Act?

......................................................................................................................

......................................................................................................................
......................................................................................................................

......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
4) State whether the following statements are True or False:
i) Central Government enjoys absolute powers in controlling the price of
commodities under IDRA.
 Regulation of Prices

iii) Drugs also come under the scope of Essential Commodities Act.
iv) Government can fix the prices of food items and enforce the same.
V) Retailer can sell the drugs at a price exceeding the maximum fixed price.

12.5 LETUSSUMUP
While fixing pnces of goods and services or making any modifications, the
manufacturers and sellers have to be conscious of the relevant provisions contained in
various statutory regulations. While the practice of minimum retail price is absolutely
prohibited, practices like price discrimination, predatory pricing, bargain and deceptive
pricing and excessive pricing attract action under the Monopolies and Restrictive
Trade Practices Act, 1969. The Consumer Protection Act, 1986 provides measures
for regulating excessive prices, and bargain and deceptive prices. The Essential
Commodities Act, 1955 empowers the government to regulate the distribution and
prices of essential~commodities.The marketing managers of drugs and essential
commodities have to be extra vigilan) since their pricing practices are subject to
add~tionalregulatory measures unde? the Drugs (Control) Act, 1950. Moreover,
pricing of products manufactured by scheduled industries under the Industries
(Development and Regulation) Act, 195 1. Products sold in packaged form also attract
additional measures of statutory price regulations under the Standards of Weights and
Measures (Packaged Commodities) Rules, 1977.

12.6 KEY WORDS

Collective Pricing : A pricing policy where manufacturers or sellers of a product
enter into an agreement or understanding and fix a common price and/or terms of
sale for the product.
Collusive Tendering : A practice whereby sellers or buyers of goods or services
secretly agree on the prices, on other terms or conditions of sale or purchase, to be
quoted in response to a tender.

Price Distribution : A pricing policy where a seller charges different prices to

different buyers for the same product.
Re-sale Price Maintenance A priving p o k y whereby the t;nanlifacprer sets b
re-sale-price for his p d u c t below which the dealer is not allowed to sell.

A 4) i) d ii) b iii) a iv) c

i ) True ii) True
C i) True ii) False iii) True iv) True v) False
Pricing Decisions
12.8 TERMINAL QUESTIONS
1) Explain the provisions relating to following pricing policies:
i) Price discrimination
ii) Predatory pricing
iii) Deceptive and bargain pricing
2. Explain the meaning of re-sale price maintenance. Discuss briefly the legal
provisions for its regulation in India.
3. Describe the provisions of the ~ssentialCommodities Act in so far as they relate
to regulation of price.
4. Briefly explain the regulatory measures of the Drugs (Control) Act.
5. Explain the rules relating to display of retail prices.
6. Discuss the role of the Industries (Development and Regulation) Act and the
- BICP in the regulation of price.

Note: These questions will help you to understand the unit better. Try to write
answers for them. But do not submit your answers to the University for
assessment. These are for your practice only.

SOME USEFUL BOOKS

Indira Gandhi National Open University, School of Management Studies, 1989, MS-6:
Marketing for Managers (Unit 14).
Gulshan S.S. and Kapoor G.K. 2003, Economic, Labour and Industrial Laws,
Sultan Chand & Sons, New Delhi (Chapters 1, 3 & 8).
Gupta, C.B., Nair Rajan N. 2002. Marketing Management, Sultan Chand & Sons,
New Delhi
Kotler, Philip, Gary Annstrong, 1987. Marketing - An Introduction, Prentice Hall:
Englewood Cliffs, (Chapters 11 & 12).
Neelamegham, S. 1988. Marketing in India - Cases and Readings, Vikas
Publishing House: New Delhi. (Chapters 42-45)
Sherlekar, S.A. 1984, Marketing Management, Himalaya Publishing : New Delhi.
(Chapter 14)
Stanton, William J., and Charles Futrell, 1987. Fundamentals of Marketing,
McGraw Hill : New York (Chapters 12 & 13)
Varshney, R.L.and Gupta, S.L., 2000. Marketing Management :An Indian
Perspectives, Sultan Chand & Sons, New Delhi
Verma, D.P.S., 1985. Monopolies Trade Regulation and Consumer Protection
(Text and Cases), Tata McGraw Hill: New Delhi.
(And also read the Bare Acts discussed in Unit 12).