UNIT - 4

Marketing Mix- 1

Pricing Decision

Product Definition: A product is the item offered for sale. A product can be a service or an item. It can be
physical or in virtual or cyber form. Every product is made at a cost and each is sold at a price. The price that
can be charged depends on the market, the quality, the marketing and the segment that is targeted. Each
product has a useful life after which it needs replacement, and a life cycle after which it has to be re-invented.
In FMCG parlance, a brand can be revamped, re-launched or extended to make it more relevant to the
segment and times, often keeping the product almost the same.

Product Description:
 A product needs to be relevant: the users must have an immediate use for it. A product needs to be
functionally able to do what it is supposed to, and do it with a good quality.

A product needs to be communicated: Users and potential users must know why they need to use it,
what benefits they can derive from it, and what it does difference it does to their lives. Advertising
and 'brand building' best do this.

A product needs a name: a name that people remember and relate to. A product with a name becomes
a brand. It helps it stand out from the clutter of products and names.

A product should be adaptable: with trends, time and change in segments, the product should lend
itself to adaptation to make it more relevant and maintain its revenue stream.

Product Classification:
Goods or products are classified as either consumer goods or industrial goods. Consumer goods are produced
for the personal use of the ultimate consumer, while industrial goods are produced for industrial purposes.
There are many goods, such as typewriters and stationery can be classified as both industrial and consumer
goods. Marketers have traditionally classified products on the basis of three characteristics – durability,
tangibility and use.

Products can be classified as:-

A. Consumer Products: Some of the types of consumer goods are:-
1. Convenience Goods
2. Shopping Goods
3. Speciality Goods
4. Impulse Goods
5. Emergency Goods.

B. Industrial Products: Some of the types of industrial goods are:-

1. Raw Materials
2. Fabricating Materials and Parts
3. Installations
4. Accessory Equipment
5. Supplies
6. Services.

1. Consumer Products: Consumer products are those products that are bought by the final customer for
consumption.
i. Convenience Products: Convenience Products are usually low priced, easily available products that
customer buys frequently, without any planning or search effort and with minimum comparison and buying
effort. Such products are made available to the customers through widespread distribution channels-through
every retail outlets. This category includes fast moving consumer goods (FMCG) like soap, toothpaste,
detergents, food items like rice, wheat flour, salt, sugar, milk and so on.

ii. Shopping Products: Shopping products are high priced (compared to the convenience product), less
frequently purchased consumer products and services. While buying such products or services, consumer
spends much time and effort in gathering information about the product and purchases the product after a
careful consideration of price, quality, features, style and suitability. Such products are distributed through
few selected distribution outlet. Examples include television, air conditioners, cars, furniture, hotel and
airline services, tourism services.

iii. Speciality Products: Speciality Products are high priced branded product and services with unique
features and the customers are convinced that this product is superior to all other competing brands with
regard to its features, quality and hence are willing to pay a high price for the product. These goods are not
purchased frequently may be once or twice in lifetime and are distributed through one or few exclusive
distribution outlets. The buyers do not compare speciality products.

iv. Unsought Products: Unsought product is consumer products that the consumer either does not know
about or knows about but does not normally think of buying. In such a situation the marketer undertakes
aggressive advertising, personal selling and other marketing effort. The product remains unsought until the
consumer becomes aware of them through advertising. The price of such product varies. Examples of
unsought product are cemetery plots, blood donation to Red Cross, umbilical cord stem cell banking services.

2. Industrial Products: Industrial Products are purchased by business firms for further processing or for use
in conducting a business .The distinction between consumer product and industrial is based on the purpose
for which the product is bought. Like a kitchen chimney purchased by a consumer is a consumer product but
a kitchen chimney purchased by a hotel is an industrial product.

i. Material and parts – Material and parts include raw material like agricultural products, crude petroleum,
iron ore, manufactured materials include iron, yarn, cement, wires and component parts include small
motors, tires, and castings.

ii. Capital items – Capital items help in production or operation and include installations like factories,
offices, fixed equipments like generators, computer systems, elevators and accessory equipments like tools
office equipments.

iii. Supplies – Supplies include lubricants, coal, paper, pencils and repair maintenance like paint, nails
brooms.

iv. Services – Services include maintenance and repair services like computer repair services, legal services,
consultancy services, and advertising services.

Basis of Classification
Broadly speaking, products are divided into two categories – consumer and industrial products.

1. Consumer Products: Products purchased by ultimate consumers or users for satisfying their personal
needs and desires are called consumer products. Examples are – cold drinks, eatables, drinks, textiles,
tooth-paste, shoes, pens, fans etc. Consumer products have been classified on two important basis :
i. Shopping Effort Involved: This refers to time and efforts buyers are willing to spend on buying the
product. On this basis, product is classified into three categories: This classification has been given by M.T.
Copeland.

a. Convenience Product/Goods: These are goods purchased frequently, immediately and with least time
and efforts. Convenience in purchase is the main criterion in purchasing it, for example easy and quick
availability, nearness of shop etc.

Important Characteristics are:

(1) Regular and continuous demand.
(2) Essential for consumers.
(3) Small unit of purchase and low price.
(4) Branded/Standardised products.
(5) No enquiries about quality, price as customers know about them due to regular purchase.
(6) Keen competition among producers.
(7) Large numbers of advertisements.
(8) Increasing role of sales promotion schemes, discount offers, gift offers, etc.

Types of Convenience Goods:

(1) Staples: For purchasing staple goods, consumers do not spend too much time. These items are bought
frequently for immediate use; e.g., milk, bread, grocery items.

(2) Impulse Goods: Desire to buy such goods is aroused suddenly while shopping. They are purchased on
sight without forethought, e.g., magazines, gift items, etc. Window displays are made to draw consumer’s
attention.

(3) Emergency Goods: Purchased on some urgent and compelling need; e.g., handkerchief by a traveler,
umbrella due to sudden rains, pain reliever for headache etc. Customer does not have much time to bother
about price/quality of a product.

b. Shopping Products: Shopping goods are goods bought only after comparing quality, price, suitability and
style in several stores and putting some effort in the process and not buying in haste. Consumers select such
goods only after analysis and evaluation of merits and demerits of all substitutes of product and comparing
the brands as well as stores.

Service and warranty work are often important considerations as well. Examples are – Furniture, clothing.
Readymade Garments, shoes, sarees, major appliances. Shopping goods are durable in nature. They are
purchased less frequently and are of high unit value. A shopping good may not be purchased for a
considerable period after the decision to buy the product is made.

Chief characteristics are:

(1) Durable Nature
(2) High Unit price
(3) Comparison in selection
(4) Gap between decision to buy and actual buy
(5) Persuasive Effects of salesmen/Retailers.

c. Specialty Goods: When consumers search extensively for a product and are extremely reluctant to accept
substitutes for it, it is a Specialty Good. These are products with brand loyalty of highest order Examples are –
expensive stereo, gourmet food products. These goods are of very high unit value and infrequently purchased.
d. Unsought Goods: These are products normally not purchased except when a certain problem arises to be
solved e.g., emergency automobile repair, polio vaccine, cancer treatment. Consumers generally are not aware
of these products or their importance till they realize it.

2. Industrial Goods/Products: Industrial products are primarily goods used as inputs in producing other
goods. Examples are – raw-materials, engines, lubricants machines, tools etc.

Chief characteristics are:

(a) Derived Demand, that is, their demand is derived from demand of other products; e.g., demand for leather
is derived from demand for shoes and other leather products.
(b) Technical Considerations in their purchase include advice from experts like engineers, production
managers cost accountants.
(c) Direct Selling (by manufacturers, and sometimes, according to buyers’ specifications).
(d) Limited Buyers (Compared to consumer products).
(e) Geographically Concentrated i.e., similar production units are located in a particular area.
(f) Reciprocal Buying – (in case of basic industries like. Oil, Steel, rubber, chemicals). For instance, Ashok Ley
land may buy tyres and tubes from Ceat and sell them trucks.
(g) Leasing instead of Buying (this is a growing trend). For example, transport agencies instead of purchasing
public carriers on outright basis, take them on hire basis.

Major Categories of industrial goods are:

(i) Raw-materials e.g., natural rubber, cotton, sugarcane & agricultural products, mines, forestry.
(ii) Component parts and materials e.g., tyres and batteries for cars.
(iii) Accessory items e.g., smaller machines.
(iv) Installations e.g., overhead cranes, Buildings, Machines.
(v) Supplies e.g., fuel, coal, cleaning materials, lubricating oil, electric power etc., nuts, bolts.
(vi) Business Services e.g., consultants, hiring advertising agency.

Another Classification:
(i) Raw-Materials e.g., agricultural products, mines and forests.
(ii) Semi-finished-goods, supplied by one industrial unit to another; these goods are further processed by
receiving unit.
(iii) Fabricating Goods used by receiving unit without processing e.g., speaker/cabinet of TV, Tyre and Tube
of Cycle, Tyre, Tube, Light, Horn, Plug of Scooter.
(iv) Production Supplies necessary for operating industrial units e.g., Coal, Gas, Fuel, Diesel etc.
(v) Production Facilities & Equipment e.g., Buildings, Machines, Equipment, Furniture, Fixtures etc.
(vi) Managerial Materials used in management/administration of an enterprise, e.g., Stationery, Accounting
Machines, and Data Processing Machines.

Classification of Product – Durability and Tangibility Classification and Consumer Goods

Product has many tangible as well as intangible attributes. With this view in mind, it is appropriate to
consider products in identifiable groups. This can be done formally using a classification system which aids
market planning.

Producers and marketers have traditionally classified products on the basis of characteristics such as
durability, tangibility and use. Each product type has an appropriate marketing – mix strategies.

Products can be classified as follows:

1. Durability and Tangibility Classification:
i. Tangible Products: These are the products that can be touched, felt or seen. These products can be further
classified as:
a. Durable Goods – These are goods that are used or consumed over a long period of time, usually at least 3
years. For example – Television, Clothing, Washing Machine etc. Durable products normally require more
personal selling and service, command a higher margin and require more seller guarantees.

b. Non- Durable Goods – These are goods that are used or consumed over a short period of time, say one or
few uses. For example – Soap, Tooth Paste, etc. The appropriate strategy for these goods is to make them
available in many locations, charge only a small markup and advertise heavily to induce trial etc.

ii. Intangible Products / Services: These are goods that cannot be touched, felt or seen. These products are
considered as services. Services are intangible, inseparable, variable and perishable products. As a result, they
normally require more quality control, supplier credibility and adaptability. For example haircuts,
transportation, repairs, etc.

2. Consumer Goods: The vast array of consumer goods can be classified on the basis of shopping habits and
variables like time, effort and risk. Consumer goods can be sub-categorized into the following:

i. Convenience Goods: These products are relatively inexpensive products that buyer or users choose
frequently with a minimum of thought and effort. Examples includes soaps, tooth paste, newspaper etc. The
decision process is complicated by the existence of brands, which force the consumer to make comparison
and choices. Convenience goods can be further classified into:

a. Staple Convenience Goods – Staple goods are those goods that are consumed by most people every or on
regular basis. For example milk, bread, vegetables etc. Product differentiation for staple items tends to be
minimal.

b. Impulse convenience Goods – As the name implies there is no preplanning involved with the purchase of
impulse convenience goods. For example – chocolates, magazines etc. The decision to make an impulse
purchase is made on the spot.

c. Emergency Convenience Goods – These goods are purchased when a need is urgent. Examples include
umbrellas during a rain storm, medicines etc. Manufacturers of emergency goods will place them in many
outlets to capture the sale.

ii. Shopping Goods: These goods are more costly and involve more risk than convenience goods, thereby
causing buyers and users to invest more time and effort when making the selection. In the process of
selection and purchase, characteristically compares on such bases as suitability, quality, price and style. For
example furniture, clothing, appliances etc. Shopping Goods can be further divided as:

a. Homogeneous Shopping Goods- These goods are similar in quality but different enough in price to justify
shopping comparisons.
b. Heterogeneous Shopping Goods- These goods differ in product features and services that may be more
important than price.
c. Speciality Goods- These are the unique or specialized products that are most costly and that are unique or
so specialized that buyers and users are willing to expand great effort to seek out and acquire them. The
market for such goods is small but prices and profits are high. Consumers of specialty goods pay for prestige
as well as the product itself. Examples include cars, stereo, cameras etc.
d. Unsought Goods- These goods are those the consumer does not know about or does not normally think of
buying like life insurance. These goods require advertising and personal selling support.
e. Industrial Goods- Industrial goods can be classified in terms of how they enter the production process and
their relative costliness.
Major product decision
A product is an item produced or procured by the business to satisfy the needs of the customer. It is
the actual item which is held for sale in the market. A company usually sells different types of
products. For e.g. Coca-cola has around 3500+ product brands in its portfolio. These different
product brands are also known as product lines. Combination of all these product lines constitutes
the product mix.

Product Mix in Marketing

Product mix, also known as product assortment, is the total number of product lines that a
company offers to its customers. The product lines may range from one to many and the company
may have many products under the same product line as well. All of these product lines when
grouped together form the product mix of the company. The product mix is a subset of
the marketing mix and is an important part of the business model of a company. The product mix
has the following dimensions

Width
The width of the mix refers to the number of product lines the company has to offer. For e.g., If a
company produce only soft drinks and juices, this means its mix is two products wide. Coca-Cola
deals in juices, soft drinks, and mineral water and hence the product mix of Coca-Cola is three
products wide.

Length
Length of the product mix refers to the total number of products in the mix. That is if a company has
5 product lines and 10 products each under those product lines, the length of the mix will be 50 [5 x
10].

Depth
The depth of the product mix refers to the total number of products within a product line. There can
be variations in the products of the same product line. For example – Colgate has different variants
under the same product line like Colgate advanced, Colgate active salt, etc.
Consistency
Product mix consistency refers to how closely products are linked to each other. Less the variation
among products more is the consistency. For example, a company dealing in just dairy products has
more consistency than a company dealing in all types of electronics.

Product Mix vs Product Line

A product mix is a group of everything a company sells. However, the product line is a subset of the
product mix. A product line refers to a unique product category or product brand a company offers.
For example, Patanjali deals in different categories of products which include shampoo, flour,
toothpaste, etc. Shampoo, here, forms a different product line, flour forms a different product line as
well, and so does toothpaste. However, when they all are grouped together, they form the product
mix of Patanjali.

Product Mix Example

Coca-Cola has product brands like Minute Maid, Sprite, Fanta, Thumbs up, etc. under its name.
These constitute the width of the product mix. There are a total of 3500 products handled by the
Coca-Cola brand. These constitute the length. Minute Maid juice has different variants like apple
juice, mixed fruit, etc. They constitute the depth of the product line ‘Minute Maid’. Coca-Cola deals
majorly with drinking beverage products and hence has more product mix consistency.
Product Mix depends on many factors like
 Company Age
 Financial Standing
 Area of Operation
 Brand identity, etc.
Many new companies start with limited width, length, depth and high consistency of the product
mix, while companies with good financial standing have wide, long, deep and less consistency of the
product mix. Area of operation and brand identity also affects its product mix.

Branding, packaging and labelling decisions.

Branding.
Introduction : Since several centuries, brands are around us. Origin of the word brand is from
brand which means to burn. According to the American marketing Association, brand is name, sign,
design or a combination of them intended to identify the products and services from one seller or
group of sellers and to differentiate them from those of competitors. But can anybody think in
today's environment that brand is only for differentiation of the products? The answer obviously
would be "no". But brand gives you some idea of some design and some picture some meaning of
something called perception. Here, name, term, sign, symbol, design or distinguishing feature – all
are known as brand elements.
Importance of branding: Importance of branding can be from different angles i. e. from
consumers’ point of view and from producers point of view. For consumers brands provide
important functions brand means the identification of producer, the thoughts of past experiences
with the producer, the identification of product designer from various products lying down in the
same array or needs or wants matching with the products or not.
Branding also provides a symbol of quality and promises by the producer. In this way
branding is reducer of risk and uncertainty. For producers, brands provide an identity. It gives the
loyalty of consumers and competitive edge.

Criteria for choosing brand elements: Several criteria are there to choose brand elements as
given below.
1. Memorable.
a. Easily recognized.
b. Easily recalled.

2. Meaningful.
a. Descriptive.
b. Persuasive.

3. Likable.
a. Fun and interesting.
b. Aesthetically appealing.
c. Rich visual and verbal imagery.

4. Transferable.
a. Within and across product categories.
b. Across geography.

5. Adaptable.
a. Updatable.
b. Flexible.

6. Protectable.
a. Competitively.
b. Legally.

Packaging
The package is a vital part of the total product. Packaging is a part of product decision and consists
with activities concerned with design and production of the container and wrapping of the product.
Packaging is so effective that the returns on the investment on them are very high in the form of
increase in sales turnover and better price realization.
Successful localization of packaging involves cultural research as some graphics, such as
pictures, icons, and other non verbal elements, may look different in different cultures. What looks
familiar to one person may be unrecognizable to someone else. Product packaging can come in
many forms, from bags and boxes to tins and bottles. The most suitable packaging for your product
will depend on what you are selling and how it is transported and stored. Ideally your packaging
should reinforce the brand image of your company or product. This can be done through the use of
color, shape, logos, illustrations or slogans.
Packaging is defined as "all products made of any materials of any nature to be used for the
containment, protection, handling, delivery and preservation of goods from the producer to the
user or consumer.” If you produce food or drink products, another important consideration is food
safety. It is possible for harmful chemicals to migrate from labels and packaging into your food
products so you must choose your packaging carefully. Once you have decided which type of
packaging is most suitable for your product you can concentrate on its design. Your design should
communicate the main benefits of your product and encourage people to buy your product rather
than that of your competitors. Innovative packaging decisions themselves help create new
customer classes. For example Amul’s 10 gm or 25 gm cheese packs rue widely used by Indian
Airlines and other institutional clients. If your business is involved in trading goods you must be
both clear and honest on all packaging and labeling. If you're misleading in any way you could find
yourself committing a criminal offence under the Consumer Protection from Unfair Trading
Regulations 2008.

Labelling
Labeling is regarded as part of marketing because packaging decision making involves the
consideration of the labeling requirements. In international trade, many countries insist that
labeling should be done in the absence of such a statutory requirement. Statutory obligations are
important aspects of labeling. Many countries have laid down labeling requirements in respect of a
number for commodities.
According to the regulations labeling of food items should disclose information about a number
of aspects like date of manufacturing, expiry date or optimum storage period for good which do not
have an indefinite storage period, composition, storage conditions, necessary method of use, if
necessary etc.
The label may be a simple tag attached to the product or an elaborately designed graphic that is
part of the package. It might carry only the brand name, or a great deal of information. Even if the
seller prefers a simple label, the law may require more. Labels perform several functions. First, the
label identifies the product or brand-for instance, the name Sunkist stamped on oranges.
The label might also grade the product; canned peaches are grade-labeled A, B, and C. The label
might describe the product: who made it, where it was made, when it was made, what it contains,
how it is to be used, and how to use it safely. Finally, the label might promote the product through
attractive graphics. New technology allows for 360-degree shrink-wrapped labels to surround
containers with bright graphics and accommodate more on-pack product information, replacing
paper labels glued onto cans and bottles.

Product Life Cycle Stages

As consumers, we buy millions of products every year. And just like us, these products have a life
cycle. Older, long-established products eventually become less popular, while in contrast, the
demand for new, more modern goods usually increases quite rapidly after they are launched.
Because most companies understand the different product life cycle stages, and that the products
they sell all have a limited lifespan, the majority of them will invest heavily in new product
development in order to make sure that their businesses continue to grow.

The product life cycle has 4 very clearly defined stages, each with its own characteristics that mean
different things for business that are trying to manage the life cycle of their particular products.
1) Introduction Stage – This stage of the cycle could be the most expensive for a company
launching a new product. The size of the market for the product is small, which means sales are low,
although they will be increasing. On the other hand, the cost of things like research and
development, consumer testing, and the marketing needed to launch the product can be very high,
especially if it’s a competitive sector.

2) Growth Stage – The growth stage is typically characterized by a strong growth in sales and
profits, and because the company can start to benefit from economies of scale in production, the
profit margins, as well as the overall amount of profit, will increase. This makes it possible for
businesses to invest more money in the promotional activity to maximize the potential of this
growth stage.

3) Maturity Stage – During the maturity stage, the product is established and the aim for the
manufacturer is now to maintain the market share they have built up. This is probably the most
competitive time for most products and businesses need to invest wisely in any marketing they
undertake. They also need to consider any product modifications or improvements to the
production process which might give them a competitive advantage.

4) Decline Stage – Eventually, the market for a product will start to shrink, and this is what’s
known as the decline stage. This shrinkage could be due to the market becoming saturated (i.e. all
the customers who will buy the product have already purchased it), or because the consumers are
switching to a different type of product. While this decline may be inevitable, it may still be possible
for companies to make some profit by switching to less-expensive production methods and cheaper
markets.

Identifying PLC stages

Identifying the stage of a product is an art more than a science, but it's possible to find patterns in
some of the general product features at each stage. Identifying product stages when the product is
in transition is very difficult.[citation needed] More recently, it has been shown that user-generated
contents (UGC) (e.g., in the form of online product reviews) has the potential to reveal buyer
personality characteristics that can in turn be used to identify product life cycle stage.

Stages

Identifying
features Introduction Growth Maturity Decline

Sales Low High High Low

Investment cost Very high High (lower than intro stage) Low Low

Competition Low or no competition High Very high Very High

Profit Low High High Low

New Product Development

New Product development is a journey. It’s the road which leads to the actual product and then the
actual product to the market. Every product goes through a number of stages before
being introduced in the market. These are as follows:

Idea Generation
The first stage of the New Product Development is the idea generation. Ideas come from
everywhere, can be of any form, and can be numerous. This stage involves creating a large pool of
ideas from various sources, which include –
 Internal sources – many companies give incentives to their employees to come up with
workable ideas.
 SWOT analysis – Company may review its strength, weakness, opportunities and threats
and come up with a good feasible idea.
 Market research – Companies constantly reviews the changing needs, wants, and trends in
the market.
 Customers – Sometimes reviews and feedbacks from the customers or even their ideas can
help companies generate new product ideas.
 Competition – Competitors SWOT analysis can help the company generate ideas.

Idea Screening
Ideas can be many, but good ideas are few. This second step of new product development involves
finding those good and feasible ideas and discarding those which aren’t. Many factors play a part
here, these include –
 Company’s strength,
 Company’s weakness,
 Customer needs,
 Ongoing trends,
 Expected ROI,
 Affordability, etc.

Concept Development & Testing

The third step of the new product development includes concept development and testing. A
concept is a detailed strategy or blueprint version of the idea. Basically, when an idea is developed
in every aspect so as to make it presentable, it is called a concept.

All the ideas that pass the screening stage are turned into concepts for testing purpose. You
wouldn’t want to launch a product without its concept being tested. The concept is now brought to
the target market. Some selected customers from the target group are chosen to test the concept.
Information is provided to them to help them visualize the product. It is followed by questions from
both sides. Business tries to know what the customer feels about the concept. Does the product
fulfil the customer’s need or want? Will they buy it when it’s actually launched? Their feedback
helps the business to develop the concept further.
Business Strategy Analysis & Development
The testing results help the business in coming up with the final concept to be developed into a
product. Now that the business has a finalized concept, it’s time for it to analyse and decide
the marketing, branding, and other business strategies that will be used. Estimated product
profitability, marketing mix, and other product strategies are decided for the product.
Other important analytics includes
 Competition of the product
 Costs involved
 Pricing strategies
 Breakeven point, etc.

Product Development
Once all the strategies are approved, the product concept is transformed into an actual tangible
product. This development stage of new product development results in building up of a prototype
or a limited production model. All the branding and other strategies decided previously are tested
and applied in this stage.

Test Marketing
Unlike concept testing, the prototype is introduced for research and feedback in the test marketing
phase. Customers feedback are taken and further changes, if required, are made to the product. This
process is of utmost importance as it validates the whole concept and makes the company ready for
the launch.

Commercialization
The product is ready, so should be the marketing strategies. The marketing mix is now put to use.
The final decisions are to be made. Markets are decided for the product to launch in. This stage
involves briefing different departments about the duties and targets. Every minor and major
decision is made before the final introduction stage of the new product development.
Introduction
This stage involves the final introduction of the product in the market. This stage is the initial stage
of the actual product life cycle.

Definition of Price
A value that will purchase a finite quantity, weight, or other measure of a good or service.
As the consideration given in exchange for transfer of ownership, price forms the essential basis of
commercial transactions. It may be fixed by a contract, left to be determined by an agreed upon
formula at a future date, or discovered or negotiated during the course of dealings between the
parties involved.
In commerce, price is determined by what
(1) a buyer is willing to pay,
(2) a seller is willing to accept, and
(3) the competition is allowing to be charged. With product, promotion, and place of marketing mix,
it is one of the business variables over which organizations can exercise some degree of control.

It is a criminal offense to manipulate prices (see price fixing) in collusion with other suppliers, and
to give a misleading indication of price such as charging for items that are reasonably expected to
be included in the advertised, list.

Definition of Pricing
Method adopted by a firm to set its selling price. It usually depends on the firm's average costs, and
on the customer's perceived value of the product in comparison to his or her perceived value of the
competing products. Different pricing methods place varying degree of emphasis on selection,
estimation, and evaluation of costs, comparative analysis, and market situation. See also pricing
strategy.

Description: There are several pricing strategies:

Premium pricing: high price is used as a defining criterion. Such pricing strategies work in segments
and industries where a strong competitive advantage exists for the company. Example: Porche in
cars and Gillette in blades.

Penetration pricing: price is set artificially low to gain market share quickly. This is done when a
new product is being launched. It is understood that prices will be raised once the promotion
period is over and market share objectives are achieved. Example: Mobile phone rates in India;
housing loans etc.

Economy pricing: no-frills price. Margins are wafer thin; overheads like marketing and advertising
costs are very low. Targets the mass market and high market share. Example: Friendly wash
detergents; Nirma; local tea producers.

Skimming strategy: high price is charged for a product till such time as competitors allow after
which prices can be dropped. The idea is to recover maximum money before the product or
segment attracts more competitors who will lower profits for all concerned. Example: the earliest
prices for mobile phones, VCRs and other electronic items where a few players ruled attracted
lower cost Asian players.
Importance of Pricing in Business
Effect of Price on Profit Margins

The price you set affects your profit margin per unit sold, with higher prices giving you a higher profit per
item if you don’t lose sales. However, higher prices that lead to lower sales volumes can decrease, or wipe out,
your profits, because your overhead costs per unit increase as you sell fewer units.

Effect of Price on Sales Volumes

One of the most obvious affects pricing will have on your business is an increase or decrease in sales volume.
Economists study price elasticity, or the response of consumer purchasing to a price change. Increasing your
prices might lower your sales volume only slightly, helping you make up for decreased volume with higher
total profits generated by higher margins. Lowering your prices can increase your profits if your sales jump
significantly, decreasing your overhead expense per unit. Test the market’s response to price increases by
changing prices in targeted areas before instituting an across-the-board price increase.

Price and Business Positioning

The price you set sends a message to some consumers about your business, product or service, creating a
perceived value. This affects your brand, image or position in the marketplace. For example, higher prices tell
some consumers that you have higher quality, or you wouldn’t be able to charge those prices. Other
consumers look for low-priced products and services, believing they’ll get the quality they need at a low price.

Offering sales, discounts, rebates and closeouts can send the message you can’t sell your products or services
at your regular price, or tell buyers they have a short-term opportunity to get a bargain.

Market Share and Competition

The price you set makes you more or less competitive in the marketplace, affecting your share of the market’s
volume. Some businesses lower prices temporarily to gain market share from competitors, who can’t respond
to and meet a price decrease. After consumers have had time to try your product and develop a brand
preference or loyalty, you can raise your prices again to a level that won’t cause them to leave you.

Predatory pricing is the practice of selling a product or service below cost for the specific purpose of taking
market share away from a competitor or closing it down, then raising prices on consumers when they have
fewer, or no options after that competitor is gone. This is illegal.

The Use of Loss Leaders

Some businesses price products or services at or below cost to get customers into their businesses, who then
spend more money elsewhere. For example, big-box retailers might buy large quantities of tennis balls,
selling them at or below cost to entice affluent tennis players who use many cans of balls during the year into
their stores. By placing the low-cost balls at the back of the store, they hope to generate impulse buys as the
shopper walks to the sports area and back to the front. Restaurants offer low-margin specials to offer a
change-of-pace to regular diners to keep their normal business, or to let regulars bring friends who want
upscale dishes at a moderately priced eatery.
Factors affecting price determination
Main factors affecting price determination of product are:
1. Product Cost
2. The Utility and Demand
3. Extent of Competition in the Market
4. Government and Legal Regulations
5. Pricing Objectives
6. Marketing Methods Used.

1. Product Cost:
The most important factor affecting the price of a product is its cost. Product cost refers to the total of fixed
costs, variable costs and semi variable costs incurred during the production, distribution and selling of the
product. Fixed costs are those costs which remain fixed at all the levels of production or sales.
For example, rent of building, salary, etc. Variable costs refer to the costs which are directly related to
the levels of production or sales. For example, costs of raw material, labour costs etc. Semi variable costs are
those which change with the level of activity but not in direct proportion. For example, fixed salary of Rs
12,000 + upto 6% graded commission on increase in volume of sales.
The price for a commodity is determined on the basis of the total cost. So sometimes, while entering a
new market or launching a new product, business firm has to keep its price below the cost level but in the
long rim, it is necessary for a firm to cover more than its total cost if it wants to survive amidst cut-throat
competition.

2. The Utility and Demand:

Usually, consumers demand more units of a product when its price is low and vice versa. However, when the
demand for a product is elastic, little variation in the price may result in large changes in quantity demanded.
In case of inelastic demand, a change in the prices does not affect the demand significantly. Thus, a firm can
charge higher profits in case of inelastic demand.
Moreover, the buyer is ready to pay up to that point where he perceives utility from product to be at
least equal to price paid. Thus, both utility and demand for a product affect its price.

3. Extent of Competition in the Market:

The next important factor affecting the price for a product is the nature and degree of competition in the
market. A firm can fix any price for its product if the degree of competition is low.
However, when the level of competition is very high, the price of a product is determined on the basis
of price of competitors’ products, their features and quality etc. For example, MRF Tyre company cannot fix
the prices of its Tyres without considering the prices of Bridgestone Tyre Company, Goodyear Tyre company
etc.
4. Government and Legal Regulations:
The firms which have monopoly in the market, usually charge high price for their products. In order to
protect the interest of the public, the government intervenes and regulates the prices of the commodities for
this purpose; it declares some products as essential products for example. Life saving drugs etc.

5. Pricing Objectives:
Another important factor, affecting the price of a product or service is the pricing objectives.
Following are the pricing objectives of any business:
(a) Profit Maximisation: Usually the objective of any business is to maximise the profit. During short run, a
firm can earn maximum profit by charging high price. However, during long run, a firm reduces price per unit
to capture bigger share of the market and hence earn high profits through increased sales.
(b) Obtaining Market Share Leadership: If the firm’s objective is to obtain a big market share, it keeps the
price per unit low so that there is an increase in sales.
(c) Surviving in a Competitive Market: If a firm is not able to face the competition and is finding difficulties
in surviving, it may resort to free offer, discount or may try to liquidate its stock even at BOP (Best Obtainable
Price).
(d) Attaining Product Quality Leadership: Generally, firm charges higher prices to cover high quality and
high cost if it’s backed by above objective.

6. Marketing Methods Used:

The various marketing methods such as distribution system, quality of salesmen, advertising, type of
packaging, customer services, etc. also affect the price of a product. For example, a firm will charge high profit
if it is using expensive material for packing its product.

Pricing Methods
An organization has various options for selecting a pricing method. Prices are based on three dimensions that
are cost, demand, and competition. The organization can use any of the dimensions or combination of
dimensions to set the price of a product. Below Figure- shows different pricing methods:
Various Pricing Methods
Cost-based Pricing: Cost-based pricing refers to a pricing method in which some percentage of desired profit
margins is added to the cost of the product to obtain the final price. In other words, cost-based pricing can be
defined as a pricing method in which a certain percentage of the total cost of production is added to the cost
of the product to determine its selling price. Cost-based pricing can be of two types, namely, cost-plus pricing
and markup pricing. These two types of cost-based pricing are as follows:

i. Cost-plus Pricing: Refers to the simplest method of determining the price of a product. In cost-plus pricing
method, a fixed percentage, also called mark-up percentage, of the total cost (as a profit) is added to the total
cost to set the price. For example, XYZ organization bears the total cost of Rs. 100 per unit for producing a
product. It adds Rs. 50 per unit to the price of product as’ profit. In such a case, the final price of a product of
the organization would be Rs. 150. Cost-plus pricing is also known as average cost pricing. This is the most
commonly used method in manufacturing organizations. In economics, the general formula given for setting
price in case of cost-plus pricing is as follows:

P = AVC + AVC (M)

AVC= Average Variable Cost
M = Mark-up percentage
AVC (m) = Gross profit margin
Mark-up percentage (M) is fixed in which AFC and net profit margin (NPM) are covered.
AVC (m) = AFC+ NPM

ii. For determining average variable cost, the first step is to fix prices. This is done by estimating the volume of
the output for a given period of time. The planned output or normal level of production is taken into account
to estimate the output.
The second step is to calculate Total Variable Cost (TVC) of the output. TVC includes direct costs,
such as cost incurred in labor, electricity, and transportation. Once TVC is calculated, AVC is obtained by
dividing TVC by output, Q. [AVC= TVC/Q]. The price is then fixed by adding the mark-up of some percentage
of AVC to the profit [P = AVC + AVC (m)].

iii. The advantages of cost-plus pricing method are as follows:

a. Requires minimum information
b. Involves simplicity of calculation
c. Insures sellers against the unexpected changes in costs
The disadvantages of cost-plus pricing method are as follows:
a. Ignores price strategies of competitors
b. Ignores the role of customers

iv. Markup Pricing: Refers to a pricing method in which the fixed amount or the percentage of cost of the
product is added to product’s price to get the selling price of the product. Markup pricing is more common in
retailing in which a retailer sells the product to earn profit. For example, if a retailer has taken a product from
the wholesaler for Rs. 100, then he/she might add up a markup of Rs. 20 to gain profit. It is mostly expressed
by the following formulae:
a. Markup as the percentage of cost= (Markup/Cost) *100
b. Markup as the percentage of selling price= (Markup/ Selling Price)*100
c. For example, the product is sold for Rs. 500 whose cost was Rs. 400. The mark up as a percentage to cost is
equal to (100/400)*100 =25. The mark up as a percentage of the selling price equals (100/500)*100= 20.

Demand-based Pricing:
Demand-based pricing refers to a pricing method in which the price of a product is finalized according to its
demand. If the demand of a product is more, an organization prefers to set high prices for products to gain
profit; whereas, if the demand of a product is less, the low prices are charged to attract the customers.
The success of demand-based pricing depends on the ability of marketers to analyze the demand.
This type of pricing can be seen in the hospitality and travel industries. For instance, airlines during the
period of low demand charge less rates as compared to the period of high demand. Demand-based pricing
helps the organization to earn more profit if the customers accept the product at the price more than its cost.

Competition-based Pricing:
Competition-based pricing refers to a method in which an organization considers the prices of competitors’
products to set the prices of its own products. The organization may charge higher, lower, or equal prices as
compared to the prices of its competitors.
The aviation industry is the best example of competition-based pricing where airlines charge the
same or fewer prices for same routes as charged by their competitors. In addition, the introductory prices
charged by publishing organizations for textbooks are determined according to the competitors’ prices.

Other Pricing Methods:

In addition to the pricing methods, there are other methods that are discussed as follows:
i. Value Pricing: Implies a method in which an organization tries to win loyal customers by charging low
prices for their high- quality products. The organization aims to become a low cost producer without
sacrificing the quality. It can deliver high- quality products at low prices by improving its research and
development process. Value pricing is also called value-optimized pricing.

ii. Target Return Pricing: Helps in achieving the required rate of return on investment done for a product. In
other words, the price of a product is fixed on the basis of expected profit.

iii. Going Rate Pricing: Implies a method in which an organization sets the price of a product according to
the prevailing price trends in the market. Thus, the pricing strategy adopted by the organization can be same
or similar to other organizations. However, in this type of pricing, the prices set by the market leaders are
followed by all the organizations in the industry.

iv. Transfer Pricing: Involves selling of goods and services within the departments of the organization. It is
done to manage the profit and loss ratios of different departments within the organization. One department
of an organization can sell its products to other departments at low prices. Sometimes, transfer pricing is
used to show higher profits in the organization by showing fake sales of products within departments.
It is essential to establish policies for pricing of its products or services or ideas just as it is for all the aspects
of business decision-making. Without definite price policies, each price decision is a time-consuming, tedious
and a pell-mell affair.

Pricing policies and strategies:

A policy frame-work should lead to pricing that is consistent with the company objectives, costs, competition
and demand for the product. A set of price policies and strategies will not only make price setting easier but
also make possible as series of prices at various levels of distribution that are rational and justifiable.
It is all possible because, pricing policies are the guidelines providing a focus within which the
company management administers the policies to match to the market needs. Following are some of the
pricing policies and strategies which are in vogue.

A. Price Variation Policies: Price variation policies are those where in the firm attempts to vary the prices of
its products with a view to match them with the differing market needs. There can be three variations of such
price variation policies. These options open to the firm are:
(1) Variable price policy.
(2) Non-variable price policy and
(3) Single price policy.

1. Variable Price Policy: It is that policy in which the company charges different prices for sale of its like
goods at a given time to similar buyers purchasing in comparable quantities under similar conditions of sale.
This is, prices charged differ from buyer to buyer.
This variable price policy is more apt in small business and where products are not standardized. It
works well where the individual sale transactions of large sums and the bargaining power of individual
purchasers is differing with the size of the transaction.
The greatest advantage of this variable price policy is that it has the highest degree of flexibility as a
promotional tool. But it creates friction and dissatisfaction among the consumers who feel that they are
discriminated. Further, it is a time consuming affair.

2. Non-Variable Price Policy: It is also called as ‘one price’ policy because, the company charges similar
price for sale of like goods at a given time to a class of buyers purchasing in comparable quantities under
similar conditions of sale. Here, the price charged varies from class to class say, wholesalers, sub-wholesalers,
retailers and distributors.
This non-variable price policy is less discriminatory as prices differ from class to class than customer
to customer. It is a popular price policy followed by all those firms which have indirect marketing
arrangements.
There will be no question of price bargaining as the rates are applicable to the class of buyers as a
whole. The greatest satisfaction is that there is no cause for friction and heart-burning among the buyers.
3. Single Price Policy:
It is that price policy wherein all the buyers irrespective of their class, size, or the conditions of
purchases are charged similar purchase price under similar conditions of sale. This is the price policy that has
no touch of discrimination and it is constructive in the sense that it helps in building goodwill. It is equally
easy to administer as there is no scope for bargaining. Instead of speaking on price of the product, the sales
army can utilize its time on product quality, service and outstand ability.
However, this price policy does not find favour with quantity buyers who feel that they should have
been charged much lower prices than the small-lot purchasers. As a result, such buyers may be lost to
competitors unless the product is really known by its brand. This feeling is easily accommodated by product
differentiation and market segmentation.

B. Geographic Price Policies: Geographical price policies are fully reflective of the practical problems of
consumers and producers or the sellers locating geographically and the emergent transportation costs of
linking them. Take our own country where production centres are highly concentrated while the
consumption centres are widely dispersed.
Thus, the cities like Mumbai, Chennai, Calcutta, Delhi, Ahmadabad, Bangalore, Hyderabad where we
have industrial conglomeration while the demand for the products produced in these comes from far off
places. Taking transport costs as major thrust, pricing policies are designed. The major geographical pricing
policies are:
(1) Point of origin price policy.
(2) Freight absorption price policy.

1. Point of Origin Price Policy:

It is that type of geographic pricing policy in which a firm quotes ex- factory price and makes no allowance for
the transportation costs necessary to move the goods to the point of destination. There can be two variations
in this policy namely, ‘ex-factory’ and ‘free on rail’ (F.O.R).
Price under ex- factory pricing holds buyer responsible for all the transportation costs both freight
and cartage from the factory point. On the other hand, F.O.R. price is the one in which the company bears
cartage or carriage till the transport agency or the railway station. That is, the buyers are to meet freight from
the transport agency or the railway station to the point of destination.
Point of origin price policy leads to the establishment of the geographical monopoly for the firm
because, the transportation costs separate those firms located in distant areas from competing with the local
producers. It guarantees better price realization in local markets wherever the products enjoy relatively
inelastic demand.
Further, price quotations and price administration are simplified. However, a firm cannot enter
national market unless its products are distinctive enjoying inelastic demand and strong brand loyalty and
where competitors find it difficult to enter.
2. Freight Absorption Price Policy:
Freight absorption price policy is one that absorbs the transportation costs fully or partly. That is, the price
quoted is inclusive of transportation costs. In other words, the buyers do not bear directly freight and other
transportation charges though the price includes such charges.
There can be three variations of this freight absorption price policy namely:
(1) Uniform delivered price policy.
(2) Zonal price policy and
(3) Base point price policy.
‘Uniform Delivered Price Policy’ is popularly known as ‘postage stamp’ price or ‘F.O.R. Destination’ price. It is
one in which the firm absorbs full transportation costs and delivers the goods to all the buyers at their ends at
a uniform price irrespective of location and distance.
Thus, buyers from Goa, Mumbai, Kolkata, Chennai, and Delhi and so on all are to pay a uniform price
that includes full freight absorption by the firm. Under actual business conditions, the firm averages the total
freight charges for all customers and ads in full or part to the basic price so as to arrive at the final price to be
quoted. It implies that the firm’s net return differs from location to location of the buyers. This policy is fully
used to expand market as a non- price competitive measure. This is of special significance in catching distant
markets.

‘Zonal Price Policy’ is one under which the firm divides its markets into zones and quotes uniform prices to all
the buyers located in the identified zone. That is, the prices quoted will differ from zone to zone rather than a
single price all over the country. The price arrived at is the addition of average transportation costs to the
basic price.
As a result, buyers located in close zones are penalized and those located at distances are subsidized.
Thus, there is a partial absorption of the transport costs in real sense. This, policy, therefore, stabilises the
prices within a zone and simplifies calculation of transport charges.

‘Base Point Price Policy’ like zonal pricing policy it implies partial absorption of the transport costs by the
firm. However, the price is quoted by adding transport costs computed up to the buyers’ location by reference
to one geographic location, not necessarily the factory and that location is called as ‘base-point’.
In other words, the buyers pay ex-factory price plus freight computed from the nearest base point
irrespective of the actual freight incurred by the firm. In such a deal, it is quite possible that the actual freight
paid by the company may be less than what is charged to the buyer. This difference enjoyed by the pricing
firm is known as ‘phantom freight’. Depending on the number of base points, such policy can be single base-
point price policy or multiple-base point price policy.
This price policy is normally the collective decision of all the firms that believe in base-point pricing.
However, this price policy encourages price rigidities and discriminates against local buyers who are forced
to pay ‘phantom freight’ for no fault of theirs. That is why; it is controversial price policy with collusive
overtones.

C. Price Differential Price Policies: The price policies that involve price differentials are those the pricing
firm accepts the gap between the price ‘quoted to the consumers or dealers and the actual price charged.
Thus, price differential represents the differences between the price quoted and the price charged to the
buyer.
Such price differentials have been accepted as part of pricing strategies to encourage buyers, to meet
competitive pressure, to attain financial objective and finally to compensate the buyers for the loss of value
satisfaction.
By ‘price differential’ we mean that the final price will be less than the quoted price. It is not always
true because, it may mean price hike too. Thus, discounts and rebates reduce the basic price quoted while
warranty charges might increase it that is they are the subtractions and additions to the price quoted.
Therefore, the forms of price differentials are discount rebates and premiums.

Discounts: Discount is the price differential that reduces the quoted price so that the buyer pays much less
than the quoted price. Discount is an allowance made to the buyers in consideration on marketing services
rendered. Discount can be of three types namely, trade quantity and cash.

‘Trade discount’ or functional discount is the deduction allowed of the quoted price with reference to specific
position enjoyed by the buyers in the channel of distribution. The aim is to compensate the intermediaries of
the distribution channel for their valuable service rendered. It is a percentage deduction of the quoted price.

Say, it the firm quotes a price of Rs. 3,000 per ton and allows a trade discount of 10 per cent to the
wholesalers and retailers, and then the actual price payable by the wholesalers and retailers will be Rs. 2,700.
If the retailers are given 20 per cent off, then the price to the retailers will be Rs. 2,400 per tonne.

In other words, the manufacturer may allow 30 per cent to the wholesaler and wholesalers may allow back
20 per cent to the retailers so that they retain 10 per cent. Trade discount varies from industry to industry,
company to company and product to product in a company. It depends on the length of the channel and the
nature of functions performed by intermediaries.

The merits of granting trade discount to the company are:

1. An attractive discount lures the intermediaries to operate in the channel.
2. Price can be differentiated without varying it so as to match it with customer demand elasticity.
3. Large discounts help in increasing the sales as the benefit of discount may be passed on to them also. The
only difficult aspect is how to assess the functions and the performance of intermediaries for fixing a standard
rate of discount.
‘Quantity discount’ is the deduction allowed off the quoted price to the buyers on the basis of quantities
bought. It is generally allowed on the aggregate of all or specific classes of product purchases measured in
rupee value or physical units or in terms of purchases at time or purchases over a period of time or beyond a
specific floor volume. For instance, the following schedule may operate in case of a firm:
Schedule of Quantity Discount:
Schedule of Quantity Discount

Thus, if a buyer purchases 1,001 units, the rate actually applicable will be 47.5 per cent (effective) and the
rate per unit will be Rs. 44.65. Hence the total amount of discount enjoyed by him on 1,001 units will be of the
order of Rs. 2,352.35.
Now this discount may be on a single purchase or the cumulative purchases made over a period. Again, the
slab rates make it clear that prices quoted are reduced with the increase in the quantity purchased and
increase in the rate of discount.

The merits of granting quantity discount are:

1. They encourage bulk purchase or orders that will be economical to handle.
2. Slow moving items or ‘self-warmers’ can be moved faster with this bait of quantity discount.
3. They stabilise orders booked irrespective of changes in seasons and thus production can be kept in balance.
As against these merits, there are some problems too. Those buyers who do not qualify marginally are likely
to oppose this idea as they are disappointed and demoralised.
Again, it is difficult to design anti-discriminatory, anti-competitive discount schedule. Violation of
these conditions is a legal offence under the MRTP Act.

‘Cash discount’ is the deduction from the invoice price granted to all those who clear their bills within the
desired dead-line. It is a reward to the buyer for timely or prompt payment of the amount due. The cash
discount rates are based on the prevailing rates in the market at a given point of time.

For instance, if a buyer has bought goods worth Rs. 1,000 and is eligible for 20 per cent trade discount and 5
per cent cash discount for clearing the bill within a fortnight, he enjoys the discounts on quoted price of Rs.
1,000 as under:

Merits of granting quantity discount

The advantages of granting cash discount are:

1. It encourages prompt or timely payment.

2. Liquidity of the company can be improved, particularly when the money market is tight. However, this cash
discount should be used carefully because; indiscriminate use at all the times only increases the costs.

Rebates:
‘Rebate’ is a deduction of the quoted price. Many a times, the buyers suffer loss of value satisfaction caused by
certain factors. The causes of such dissatisfaction may be defective goods delivered, delays caused in delivery,
goods damaged in transit, possible deterioration in quality on the shelves.

In order to accommodate these genuine claims, concessions are given in the form of rebate. One cannot think
of standard rates of rebate. Only the merit of the individual case in respect of which rate can be decided.
For instance, in case of ‘second hands’ may be in case of cloth, suit-cases, ready garments, soap cakes, and the
like anything between 25 per cent to 45 per cent of the ‘firsts’ quoted prices. It is worth remembering that the
rebates are calculated before calculating the discounts.

For instance, if VIP Luggage Company quotes a price of Rs. 550 for the ‘first’ quality 20″ suitcases, and the
buyer is allowed 30 per cent rebate, 20 per cent trade discount and 5 per cent cash discount, the actual
amount payable will be:

Rebates
The Merits of Granting Rebate to Buyers are:
1. It acts as an instrument of wiping off the tears by compensating the value dissatisfaction suffered.
2. It has psychological elevation of granting at times too many concessions thus boosting the sales of the
defective. However, as there cannot be one standard rate of rebate, buyers have the feeling of partial
satisfaction and resentment which affect the firm’s goodwill.

Premiums:
All the earlier four points were those that reduced the net price payable by the buyer. However, at times,
opposite is also true. There are occasions where the actual price paid will be higher than the quoted price.
Thus, consumer durable manufacturing units can add premium to the price quoted for one reason or the
other.
It does not mean that discounts are not given. Even after enjoying discounts, the prices paid might be
higher. It is not that all companies resort to this premium adding. Thus, a tractor or fridge, oil engine, or
generator units are likely to add extras for say warrantees, special after-sale services, and extra durability and
so on. Let us take the case of television manufacturing company.

D. Leader Price Policy:

Leader pricing is one where the firm in the industry initiates the price changes and these price changes are so
effective that other firms follow suit. It is the one of price approximation by followers to that of initiator in the
industry.
In marketing jargon the former is called as “price follower” and the latter as “price leader”. This
pricing policy works on the principle that there is some truth and wisdom in following the established and
giant units. This normally occurs in all those industries where the products are highly standardised and
produced on mass scale. It may be a cigarette, sugar, cement, fertiliser, steel, tea, soaps, paints, type-writers
and so on.
A company can afford to a price leader only when it enjoys lion’s share of market; is well informed
about its demand, supply and cost conditions; has the reputation for sound pricing policies over the years,
and above all the management has all the drive and initiative. Many times, it pays to be the price follower than
the price leader.
The price leader has several options of effecting changes such as maintaining the price, raising
relative perceived quality, reduce price, increase and price improve quality or launch low price fighter line.
E. Psychological Pricing:
Psychological pricing is to do with creating a typical consumer perception so that the consumer is made to
buy the product. That is, the prices fixed influence the psyche of customer and spur him to action. It is mostly
the price policy followed by consumer durables.
Thus, shoes companies in India have played with the consumer psychology by pricing say, Mocasin
pair at Rs. 399.95 instead of pricing at Rs. 400.00 straight. It means two things; for the customer one that
things are cheaper and that the manufacturers are not exploiting the consumers because, they are true to the
last paisa. It is an advantage to the seller as it multiplies the sales.

F. New Product Pricing Policies:

Basically, price determination process involved in case of new products need not be very much different from
those of existing products. However, there are distinct price objectives involved in case of new products.
Larger latitude of pricing objectives is possible in case of new products; pricing flexibility is also greater.
There is growing competition and limited accepted prices when the new product is in the growth,
maturity and decline stage. Further, as product is yet to see light of the day, much depends on external
factors.
In case of new products, there can be two possible price policies namely:
1. Skimming price policy and
2. Penetration price policy.

1. Skimming Price Policy: Skimming price policy sets high initial price to first profit from price inelastic
customers, and then successively lowering the prices, often under increasing competitive conditions, to the
levels that more price sensitive customers are willing to pay. It sets introductory prices at high levels relative
to costs to “skim the cream” off the market.
As there is no immediate competition and there are price inelastic customers, the firm finds it easier
and safer to set initial new product prices as high as possible relative to costs and to lower the prices
gradually as the market conditions dictate.It is essentially a slow risk strategy and allows the sellers to
recover their investment rapidly though the higher returns that tempts the competitors to enter the arena.
This skimming pricing policy is going to be very successful under the following conditions:
1. Where the demand is relatively inelastic because, the customers know little about the product and close
rivals are few.
2. Where the market can be broken down into segments with different price elasticities of demand.
3. Where little is known about the cost or price elasticity of the product.
4. Where it is essential to minimise the risk as one can move down then move up in the prices. The companies
with high price tags ride the storms of depression easier than the cut-price merchants as their high margins
support them.
5. Where the firm is efforting to ‘up-market’ its product so as to improve further on quality, service and
expenditure on marketing costs and so capitalise on its efforts.
2. Penetration Price Policy:
As opposed to the concept of skimming price strategy, it is an attempt to set new product prices low relative
to the costs. It involves setting low initial price to establish market share, pre-empt the competitors and/or to
capitalise production economies. By setting low initial prices, the competitors are kept away and this makes
possible for the firm to enlarge its share by generating larger sales volume.

The conditions which favour penetration pricing policy are:

1. Where there is high price elasticity of demand. That is, the firm is depending on low prices to attract more
customers to new product.
2. Where large scale economies are possible, it is because, large sales volume means lower unit cost.
3. Where there is a strong threat of competition; here only a low price can ward off potential entrants to the
market.
4. Where there is unutilised capacity; it is because, the price policy that increases the demand has no meaning
unless the firm is in a position to meet the demand created.
5. Where market segments are not there so that high price may be accepted.

G. Promotional Pricing:
The intention of promotional pricing is to stimulate early purchase on the part of consumers. Companies
follow good many strategies to achieve this goal. These are:

1. Loss Leader Pricing: Most of the supermarkets and departmental stores reduce the prices of products on
well known brands to attract more and more customers to increase sales. This pays if the additional revenue.
Sales compensates for the lower margins on the loss-leader-items. Manufacturers of loss-leader
brands generally object to this practice because it can dilute the brand image and bring more complaints from
retailers who charge the list-price.
Manufacturers have tried to restrain the intermediaries from loss- leader pricing through lobbying
for retail-price maintenance laws but these laws have been revoked.

2. Special Event Pricing: Sellers fix special prices in certain seasons and events to draw more customers.
Mostly seasonal products make it possible to make good margin. The event of reopening of schools and
colleges in June, there good demand for student’s needs. Even in case of eventful festivals, sellers make good
margin and money by charging uniquely higher and bargain prices. In India marriage season attracts people
to buy gold and jewelleries and clothes between Octobers to May.

3. Cash Rebates: In case of consumer durable goods-especially white goods like two- wheelers, autos, cars,
fans, fridges, washing machines and home appliances including electronic goods, cash rebate is given.
Thus, MUL in case of each model it makes a cash rebate ranging between Rs. 10,000 to 35,000,
depending on the model. This is for a specific period. Rebates can help in clearing inventories without cutting
the list price.
4. Low or Zero Interest Financing: Instead of cutting the product’s prices; the companies can offer goods at
zero or low rate of interest the finance. This is a credit transaction but there is a guarantee of recovery and
hard sell goods are pushed off. This is very much common in case of consumer durables. This helps the
consumers too. Further, the investment inventories are cut on the part of the manufacturers and distributors.

5. Longer Period Payments: Consumers hesitate to buy products like cars, two wheelers, ready flats, and
travelling. In such cases, they do not mind paying comparatively higher rates of interest, but the period of
payment is extended to make monthly instalment quite handy. This is good proposal for both dealers and
customers.

6. Warranties and Service Contracts: We see that companies have been tempted to extend warranty period
which never heard earlier. Thus, LG Washing Machine has 7 year warranty. Asian paints have 8 year
warranty. Similarly in case of TV sets and other electronic goods warranty period is extended because of
which consumers come forward to buy these products without any hesitation. Added to this, they extend
service contracts at reasonable costs.

7. Psychological Discounting: One is aware of discounts from normal prices are legitimate form of
promotional pricing. Now more and more companies are adopting what is known as psychological
discounting. It means that the price is originally at a high level much more than that of normal. Later, high
rate of discount is given, where the seller is at gain always.
Such tactics are highly objectionable as it is not ethical and legitimate. It is a day-light robbery. Thus,
a woollen sweater is originally priced at say Rs. 1100, but is sold at say Rs. 880, only with attractive
presentation of price tag.
Promotional pricing strategies are very often a zero-sum game. If they work competitors imitate
them and they lose their effectiveness. If they do not work, they waste money that could have been put into
other marketing tools, such as building up product quality and service or strengthening product image
through advertising.
One is to think twice; to what extent these tactics can be applied and used for mutual gain of the
dealers and the consumers. There is great risk of consumer loyalty.