Considerations Involved in Developing a Pricing Policy:

The formulation of a pricing policy involves various considerations, including:

(i) Competitive Situation:

The pricing policy should be devised based on the competitive scenario in the market. Understanding
whether the firm operates in a perfectly competitive or imperfectly competitive environment is
crucial. In perfect competition, where producers lack price control, pricing policy holds particular
significance in imperfect competition.

Example: Potato Corner operates in a shopping mall with several other food vendors. To stand out,
they adopt a pricing strategy that offers a variety of flavored fries at a slightly higher price point than
generic fries sold by competitors in the food court.
Explanation: Potato Corner differentiates itself by offering unique and flavored fries, and the slightly
higher price communicates the perceived quality and uniqueness of their product.

(ii) Goal of Profit and Sales:

Businesses employ pricing strategies to maximize profits and stimulate profitable sales combinations.
The primary aim is for sales to generate increased profits for the company.

Example: During a promotional event, Potato Corner introduces a discounted combo deal to boost
sales volume. The goal is to attract more customers to purchase a combination of fries and beverages
at a lower overall price.
Explanation: The emphasis on sales during the promotion aligns with the goal of maximizing overall
revenue by offering a compelling deal that encourages higher purchase quantities.

(iii) Long Range Welfare of the Firm:

Example: Potato Corner, known for its innovative flavors, decides to maintain a moderate price range
to discourage potential competitors from replicating their concept. This strategy aims to protect the
uniqueness of their product.
Explanation: By avoiding excessively high prices, Potato Corner aims to maintain a balance that
safeguards its market position and deters new entrants seeking to replicate their success.

(iv) Flexibility:

Pricing policies must exhibit flexibility to adapt to changes in economic conditions and the dynamics
of various customer industries. In highly competitive markets, firms may have limited pricing
discretion. Flexibility is also essential to accommodate cyclical variations.

Example: Potato Corner regularly introduces limited-time special flavors based on customer feedback
and seasonal trends. The flexible pricing approach allows them to experiment with pricing for these
unique offerings.
Explanation: Adapting prices based on changing consumer preferences and introducing seasonal
offerings demonstrates flexibility and responsiveness to market dynamics.
(v) Government Policy:

Government regulations can impact pricing decisions. Authorities may discourage firms from forming
combinations to set high prices, especially for essential commodities. Government intervention in
pricing introduces political considerations into the pricing process.

Example: In compliance with local regulations, Potato Corner adheres to pricing transparency by
prominently displaying prices on their menu boards. They ensure compliance with government
guidelines on fair pricing practices.
Explanation: Government policies influence how Potato Corner communicates prices to consumers,
ensuring transparency and fairness in their pricing practices.s.

(vi) Overall Goals of Business:

Pricing serves as a means to achieve broader business goals. Survival is a fundamental objective, and
more specific goals relate to growth rate, market share, control maintenance, and, ultimately, profit.
These objectives may not always align, necessitating careful consideration of the impact of pricing on
other business practices.

Example: Potato Corner aims to expand its market share in a new city. They adopt an aggressive
pricing strategy, offering promotional discounts to attract a larger customer base and establish a
strong presence.
Explanation: The pricing strategy aligns with the broader business goal of market share growth,
emphasizing the importance of acquiring a significant customer base in the new location.

(vii) Price Sensitivity:

Factors influencing price sensitivity, such as consumer behavior variability, marketing effectiveness,
product nature, and post-sales service importance, should be taken into account. Businesses should
avoid overemphasizing price sensitivity and recognize other factors that mitigate its impact.

Example: Potato Corner recognizes that its target market values unique and flavorful snacks. Despite
economic fluctuations, they maintain premium pricing for their distinctively flavored fries, relying on
brand loyalty and perceived value.
Explanation: Understanding the less price-sensitive nature of their target market allows Potato Corner
to maintain premium prices that resonate with customers seeking a unique and high-quality snacking
experience.

(viii) Routinisation of Pricing:

Firms faced with numerous pricing decisions, particularly in highly competitive markets with uncertain
demand and cost data, may resort to using mechanical formulas. This routine approach, known as
routinised pricing, becomes necessary in situations where pricing discretion is limited.

Example: Potato Corner employs a dynamic pricing model for events and festivals, adjusting prices
based on demand and competitor offerings. This automated approach ensures competitiveness
during dynamic market conditions.
Explanation: In a context where demand and competitor actions vary, Potato Corner's dynamic pricing
model allows them to make timely adjustments, demonstrating a routinised approach to pricing in
specific scenarios.
Nature of Pricing:

Economic Exchange: In a market economy, pricing serves as the mechanism facilitating the exchange
of goods and services. It mirrors the equilibrium between supply and demand, along with the
perceived value associated with the offering.

This involves understanding the market forces of supply and demand and setting prices accordingly.
Example for Jollibee: Jollibee adjusts its pricing based on local economic conditions and customer
purchasing power in different regions. For instance, prices may vary in urban areas compared to rural
locations to optimize economic exchange.

Signal of Value: The pricing of a product or service communicates valuable information to consumers
regarding its quality, exclusivity, and the level of investment required. Higher prices often suggest
superior quality or exclusivity, while lower prices may indicate affordability or broad accessibility.

in this context, involve making deliberate decisions on how to use pricing as a signaling tool.
Example for Jollibee: Jollibee adopts a premium pricing strategy for its signature products, positioning
them as high-quality and exclusive within the fast-food industry. This pricing policy sends a signal of
value, emphasizing the unique taste and quality associated with Jollibee's offerings.

Revenue Generation: Pricing plays a direct role in shaping a company's revenue. By establishing an
appropriate price point, a business can optimize its income and profitability, crucial for ensuring long-
term sustainability and fostering growth.

Businesses need to adopt pricing strategies that align with their revenue goals. This may involve cost-
plus pricing, value-based pricing, or penetration pricing, depending on the business's overall strategy.
Example for Jollibee: Jollibee's pricing policies focus on generating revenue through a combination of
cost-plus pricing and value-based pricing. For popular and unique menu items, prices are set higher to
capture the perceived value, contributing to overall revenue

Competitive Differentiation: Strategic pricing can be leveraged to position a product or service within
the market. For instance, opting for a premium price positions a product as high-end, whereas a lower
price can be employed for broad mass-market appeal.

Businesses can adopt a differentiation pricing policy by setting prices to position their products or
services uniquely in the market.
Example for Jollibee: Jollibee differentiates itself from competitors through pricing. It may employ a
skimming pricing strategy for new and innovative menu items, positioning itself as a provider of
premium and distinct fast-food options in the market.

Importance of Pricing:

Profit Maximization: Proper pricing enables a company to maximize its profits by striking a balance
between covering costs, generating profit, and remaining competitive in the market.

Businesses must decide on pricing structures and levels that allow them to cover costs, generate
profit, and sustain operations. Pricing policies might involve adjusting prices based on cost changes,
market conditions, or competitor actions.
Example for Jollibee: Jollibee carefully analyzes its cost structures, market conditions, and competitor
actions to adjust prices for maximum profit. The pricing policies involve periodic evaluations and
adjustments to ensure sustained profitability while staying competitive.
Market Positioning: Pricing contributes to defining a company's position relative to competitors in
the market. A premium price can position a brand as high-quality, while a lower price may highlight
affordability.

A pricing policy might involve consistently offering lower prices to establish a position as a cost leader
or adopting premium pricing to position as a luxury brand.
Example for Jollibee: Jollibee strategically positions itself in the market by consistently offering
affordable prices for its core menu items, making it a cost leader in the fast-food industry. This pricing
policy aligns with its goal of catering to a broad customer base.

Customer Perception: The pricing of a product or service actively shapes consumer perceptions,
communicating messages related to value, quality, and exclusivity. This, in turn, influences a
customer's inclination to make a purchase.

A value-based pricing policy, for instance, focuses on aligning prices with the perceived value
customers derive from a product or service.
Example for Jollibee: Jollibee's value-based pricing policy aims to create a positive customer
perception by aligning prices with the perceived value of its products. Customers associate Jollibee
with quality and value, reinforcing a positive perception that encourages repeat business.

Market Entry and Expansion: Pricing emerges as a pivotal factor when entering new markets or
expanding existing ones. It plays a determining role in how well a product or service is received and
whether it can successfully establish a presence in new demographics or geographic areas.

This may involve adapting prices to suit local economic conditions or using penetration pricing to
quickly gain market share.
Example for Jollibee: When entering new markets, Jollibee may use penetration pricing, offering initial
discounts or promotional bundles to quickly gain market share. This pricing strategy facilitates a
smoother market entry and helps establish a strong presence in new locations.