Pricing

Pricing decisions are clearly complex and difficult, and many marketers neglect
their pricing strategies. Holistic marketers must take into account many factors in
making pricing decisions—the company, the customers, the competition, and the
marketing environment. Pricing decisions must be consistent with the firm’s
marketing strategy and its target markets and brand positionings.
Price and cost are two different things. Whereas the price of a product is what you, the
consumer must pay to obtain it, the cost is what the business pays to make it.
Consumer response to price is not entirely based on objective assessment of its
functional/physical attributes. It also includes intangibles like trust, status symbol etc.
Pricing of antiques, Apple, Ray Ban are not as distinguished as they are as brands with
their intangible attributes. Tata salt is preferred even at higher price
In commodity market, where are too many sellers and product is same--marketers are
price takers. But in situations, where marketers differentiate their offerings through other
3Ps-promotion, advertising, product features, packaging, imagery, after sale service,
channel, marketers gain control over pricing decision and become price makers.

Factors/considerations influencing price decision

While deciding the price, important considerations/ factors influencing pricing decision
are costs, consumers, competitors and company.
 Company
objectives

Consumers Price Competition

Cost

Cost Considerations

• Fixed costs: These remain fixed and they do not change with production volume.
• Variable costs: these costs are closely related to production volume. That is
production volume increase the cost goes up and it comes down as production
declines
• Total cost: it is total of the above two elements.
• Marginal cost and marginal revenue
It starts with estimate for cost per unit and add certain % of markup to arrive at price, If
you want to arrive at lower or higher selling price, it can be influenced by the working on
the cost factor or through % of markup-resulting into certain level of sales and profits.

Consumer Considerations
It is essential to understand how much consumers are willing to buy at different price
levels
The consumer side is represented in the marketing equation though demand curve. The
demand curve represents relationship between price and quantity demanded.
Price elasticity of demand---change in quantity demanded due to a change in price.
Demand is elastic –-when higher proportionate change in demand for a small change in
price The marketer can increase the revenue by decreasing the price.
Inelastic or less elastic demand: when there is small change in demand to a significant
change in price. This means the price decreases in this situation would decrease the
revenue and price increases would increase the revenue
Price Sensitivity of consumers: degree to which price of a product affects consumers’
purchasing behavior. It depends upon:
• Kind of product category-less sensitivity for necessity item and high for premium
item salt-less sensitivity or frozen food-more sensitivity
• Substitutes- ready substitute availability makes consumer more price sensitive.
• Consumers’ knowledge and Ease of price comparison increases the sensitivity
• Price of product relative to income-if small % of total income- price sensitivity is
less.

Competition considerations-pricing decisions are taken in relation to products and

prices of competitors. Meet Competition’s Pricing, Maintain Existing Prices
• It is important to anticipate how competitors are likely to respond to price
decisions. Competitive reactions to price changes depends upon how these
are interpreted. High prices may induce firms to enter the market
• Maturity stage of market forces competitors to be extremely sensitive to price
changes of rivals. Price reductions are read as attempts of consumer
poaching and therefore are met with fierce retaliation.
• Presence of small number of competitors creates high awareness about other
companies pricing strategies and thus increases their sensitivity for each
others prices, makes them keep watchful eye on each other. Coke and Pepsi
• Lack of product differentiation makes competitors sensitive to price changes.
Product uniformity creates the perception of commodity and hence adds
fluidity to consumer preferences. Price reduction can potentially lead to
spiralling reactions in such cases.
• If the market in which the firm operates is characterized by consumers, who
are informed, then this enhances these consumers sensitivity to price.
• Price changes invite competitive reactions and can lead to price wars

Company considerations/objectives-pricing decisions are derived from organizational

considerations/objectives- like short-term or long-term goals, survival objective, market
share objective, growth objective of the firm, profit objective, phase out inventory, block
entry of competitors etc.
Orgn considerations- financial resources, policies, efficiencies available in ogrn to bring
down the costs like production efficiency, how economies of scale work for orgn etc.
• Overall mktg obj which can be short run or long run- to maximize profits in
long or short target time period- pricing needs to be contributing to the
objectives.
• Pricing is not decided independently, pricing has to be coordinated with the
other 3Ps product, price, promotion strategies. For example, if it is a premium
product, price will be higher
• Target customers- Co. needs to consider behaviour of its target customers
while taking pricing decision. Every price that you charge-there is going to be
influence on your demand
 • Competitive situation of the co. needs to be considered while taking pricing
decision- reactions of competitors
• Other External factors like Economic factors -general condition of economy-
recession or booming, changes taking place in tech, changes in consumers’
side- income, lifestyle, attitude, changes in resellers also influence the pricing
decisions. You have fairly good idea about these factors but these are not so
much controllable by marketer. Orgn. has to adapt its strategies including
pricing strategy in line with changes taking place in external factors.

•To be dominant players in the soft drink market

Organizational
goal

•To achive market share dominance in the soft drink

market
Marketing goal
and objective •To capture 40 percent market share

•To penetrate the market

•Low price to attract new consumers and achieve brand
Pricing objective switching

Pricing Objectives can be broadly classified as: (discussed below in detail)

Profit Related—Profit Maximization, Target Rate of Return, Satisfactory Profit
Sales Volume related—Market share, Sales Maximization Sales Maximization is: Short-term
objective to maximize sales, ignores profits, competition, and the marketing environment, May
be used to sell off excess inventory
Competition Related- Above or belove or at the same level of the competitive prices
 Profit riented

a es riented

tatus uo/Competition re ated

Company objectives-pricing decisions are derived from organizational objectives like

short-term or long-term goals like survival, market share and its growth, profits, phase
out inventory, block entry of competitors, appropriate brand image, price quality
leadership etc. Broadly pricing objectives can be classified in 3 categories like:
Volume oriented Objectives-The volume implies sales or turnover that a firm
achieves. It can be expressed as market share, sales maximization

• Market share-A company’s product sales as a percentage of total sales for that
industry.
Sales Maximization- Short-term objective to maximize sales
Ignores profits, competition, and the marketing environment, May be used to sell
off excess inventory
• Volume is related to profits; bigger volume helps achieve scale of economy in
costs. Large market share gives good image to the company and discourages
competitors entry into the market.

Profits oriented Objectives- Target profits or profit maximization. Profit max. can be
done either through high price (Apple)or low-price (Micromax) game. When the firm
enjoys a cost advantage or is a price leader or the new product is innovative, and
competition is not likely to appear soon.
Its limitations are accurate estimation of demand for a price and other limitation is not
taking into consideration competitors' reactions to your price changes.
Competition oriented objectives- prices in relation to competing prices. It can be
similar, less or higher than competitors’ prices. Status quo pricing is when you choose
to sell your products at a price that everyone else sells their product for.
This pricing is used when no one wants to “rock the boat” and possibly set off a price
war. Especially in the maturity stage, when every firm tries to protect its market share,
price cuts are fiercely retaliated against. So, firms use non-price strategies to capture
market share like- sales promotions, advertising, channel promotions to get more sales
but do not touch the prices.
Status quo pricing is also used when the product is undifferentiated.
Sometimes, companies adopt aggressive pricing or pricing below competition to capture
market share form competitors, but it can lead to matching prices by competitors.

Pricing Methods/Approach/strategy
A major factor in determining the profitability of any product is establishing a base price.
There are three methods of setting a product’s base price:
• Cost orientated or Cost-plus method- cost/unit to the company and desired
profit/unit
• Perceived value orientated method
• Competition orientated method

Selecting the pricing method depends upon:

Target customers and how much they will be willing to spend; demand function

• The costs to your business

• What prices competitors are currently selling at;

• The customer value of your product.

Use of each of these three may be suitable under different situations. So,
depending upon the type of product, type of customers, company objectives,
competitive situation, marketers select one of these three approaches/methods to
be used as a dominant approach in deciding the base price.
The other two may be used as supporting considerations for decision on the final
price. For example, if the company is not financially strong, it may go for cost-
based approach. If there are only few sellers in the market and the brands are not
very different from each other, use of competition-oriented method will be
suitable. When there are many companies selling differentiated brands, customer
oriented perceived value pricing method is more appropriate.
Given that one of the basic methods for setting the price is selected and used, it is
important to consider the other two factors of the above mentioned to adapt it to make it
optimum for a given situation because:
Choosing the right pricing strategy for your business will require consideration of
your target market, demand function, cost function, customers’ perceived value,
type of products, competitors’ prices and company objectives.
Cost Oriented—Cost-Plus Pricing Methods

Cost-plus pricing is one of several common approaches used by manufacturers or

product resellers to set prices.

Two common methods are:

Markup pricing and Target Rate of Return
Mark up pricing: In mark- up pricing a desired percentage is simply added to total cost
to arrive at price. For instance, a retailer may add 5% mark up to all of the products that
it sells in the fresh food section. Generally, markups are lower for inexpensive products
and higher for expensive products. It is used primarily by wholesalers and retailers.
Target rate of Return Pricing Method
The manufacturer needs to consider different prices and estimate their probable
impacts on sales volume and profits. The manufacturer will realize desired ROI provided
its costs and estimated sales turn out to be accurate.
• Target return pricing is the pricing policy where the firm determines the price that
would give a target rate of return on its total cost at an estimated volume.
• Adding the return per unit required with the unit cost gives the target return price.
• The target return price can be calculated as:
• Target return price = unit cost + (desired return * invested capital) / unit sales

Customer Oriented Pricing --Perceived Value Pricing

Customers’ oriented pricing rules imply establishment of prices in accordance with
consumer perceptions about product’s value.
It means that companies base their pricing on customers’ perceptions about how much
of money the customer believes a product is worth. Consumers want value for their
money, so evaluate the worth/value of brand’s benefits to them. Value can be in
tangibles and intangibles attributes of the product like performance, durability, warranty,
after sale service, trust, status symbol. Value of TATA salt is more than same kind of salt
without the name TATA.

• Consumers make their purchase decision on the basis of perceived value of

product to them -value includes both tangible and intangible benefits to
customers. Perceived value is made up of a host of inputs, such product
performance, the channel deliverables, the warranty quality, customer support,
and intangibles like reputation, trust, status symbol etc. It is the total value of the
bundle of benefits perceived by the customer.
• The key to this method of pricing is determining the consumer’s perceived value
of the item.
• Price is determined according to consumer perception
• Different brands are sold at different price due to differences in consumers’
perceptions.
• Techniques of perceived value pricing: consumer surveys
• Direct price rating: buyers are shown the product and requested to provide their
estimation of value of product to them in price
• Direct perceived value: group of consumers are asked to give perceived value of
firm’s brand and value of competitors’ brands to them in prices or in points which
are later converted into price
• Attribute method: Products are not perceived in totality rather consumers are
asked for value in monetary terms for different attributes of product and relative
weights/ importance of those attributes to arrive at perceived value of the product

The key to perceived-value pricing is to deliver more unique value than the competitor
and to demonstrate this to prospective buyers. Thus, a company needs to fully
understand the customer’s decision-making process. For example, Goodyear found it
hard to command a price premium for its more expensive new tires despite innovative
new features to extend tread life. Because consumers had no reference price to
compare tires, they tended to gravitate toward the lowest-priced offerings. Goodyear’s
solution was to price its models on expected miles of wear rather than their technical
product features, making product comparisons easier

The company can try to determine the value of its offering in several ways: managerial
judgments within the company, value of similar products, focus groups, surveys,
experimentation, analysis of historical data, and conjoint analysis.

Caterpillar uses perceived value to set prices on its construction equipment. It might
price its tractor at $100,000, although a similar competitor’s tractor might be priced at
$90,000. When a prospective customer asks a Caterpillar dealer why he should pay
$10,000 more for the Caterpillar tractor, the dealer answers:
$90,000 is the tractor’s price if it is only equivalent to the competitor’s tractor
$7,000 is the price premium for Caterpillar’s superior durability
$6,000 is the price premium for Caterpillar’s superior reliability
$5,000 is the price premium for Caterpillar’s superior service
$2,000 is the price premium for Caterpillar’s longer warranty on parts
$110,000 is the normal price to cover Caterpillar’s superior value –
$10,000 discount $100,000 final price
The Caterpillar dealer is able to show that although the customer is asked to pay a
$10,000 premium, he is actually getting $20,000 extra value! The customer chooses the
Caterpillar tractor because he is convinced its lifetime operating costs will be lower

Competition-Oriented Pricing
After learning their competitors’ prices, marketers may elect to take one of three actions
• Price above the competition • Price below the competition • Price in line with the
competition (going-rate pricing)
Going-rate pricing
In going-rate pricing, the firm bases its price largely on competitors’ prices. In
oligopolistic industries that sell a commodity such as steel, paper, or fertilizer, all firms
normally charge the same price. Smaller firms “follow the leader,” changing their prices
when the market leader’s prices change rather than when their own demand or costs
change. Some may charge a small premium or discount, but they preserve the
difference. Going-rate pricing is quite popular where competitive response is uncertain,
firms feel the going price is a good solution because it is thought to reflect the industry’s
collective wisdom.

To adjust base prices, marketers may employ any one or more of the following
pricing strategies:
• Product mix pricing • Geographical and international pricing • Psychological and
promotional pricing • Discounts and allowance
Company must also consider additional factors like-- the impact of other marketing
activities, company pricing policies, gain-and-risk-sharing pricing, and the impact of
price on other parties.

Steps in Determining Prices

There are six basic steps that are used to determine prices:
• Establish pricing objectives • Determine costs • Estimate demand • Study
competition • Decide on a pricing strategy and set prices

Step 1: Selecting the Pricing Objective (already discussed above)

Company objectives-pricing decisions are derived from organizational aims like short-
term or long-term goals like survival, market share and its growth, profits, phase out
inventory, block entry of competitors, appropriate brand image, price quality leadership
etc. Broadly pricing objectives can be classified in 3 categories like:
Volume oriented Objectives-The volume implies sales or turnover that a firm
achieves. It can be expressed as market share, sales maximization
Profits oriented Objectives- Target profits or profit maximization.
Competition oriented objectives- prices in relation to competing prices. It can be
similar, less or higher than competitors’ prices.

Step 2: Determining Demand

Each price will lead to a different level of demand and have a different impact on a
company’s marketing objectives. Marketers need to know how responsive, or elastic,
demand is to a change in price. Estimation of changes in demand to different prices to
be done. It is to measure demand elasticity. The first step in estimating demand is to
understand what affects price sensitivity. Check the customers for their price sensitivity
and check for demand elasticity.
Step 3: Estimating Costs
Types of costs and levels of production
For price decision, management also needs to know how its costs vary with different
levels of production. A company’s costs take two forms, fixed and variable. Total costs,
which is the sum of the fixed and variable costs for any given level of production.
Average cost- is the cost per unit at that level of production; it equals total costs divided
by production. Decline in the average cost with accumulated production experience is
called the experience curve or learning curve.
tep 4: Ana yzing Competitors’ Costs, Prices, and ffers
Firm must take competitors’ prices, and possible price reactions into account while
setting price. Now the firm can decide whether it can charge more, the same, or less
than the competitor.
If the firm’s offer contains features not offered by the nearest competitor, it should
evaluate their worth to the customer and add that value to the competitor’s price. If the
competitor’s offer contains some features not offered by the firm, the firm should
subtract their value from its own price.
Competitors are most likely to react when the number of firms is few, the product is
homogeneous, and buyers are highly informed.
How can a firm anticipate a competitor’s reactions? If the competitor has a market share
objective, it is likely to match price differences or changes. If it has a profit-maximization
objective, it may react by increasing its advertising budget or improving product quality.
The problem is complicated because the competitor can put different interpretations on
your price changes.
Step 5: Selecting a Pricing Method
Given the customers’ demand schedule, the cost function, and competitors’ prices, the
company is now ready to select a price. One of these may be used to set the basic price
depending upon the situation.
Three major types in price setting:
Costs-plus pricing
Competitor oriented pricing,
Customers’ oriented
(Already discussed above)
Step 6: Selecting the Final Price Pricing
it is narrowing the range from which the company must select its final price. The
company must consider additional factors like-- the impact of other marketing activities
(3Ps), the impact of price on other parties like suppliers, dealers, marketing environment
etc.
Impact of other marketing activities
The final price must take into account the brand’s quality. If selling online, you can sell
at lower price or if through store, it has to be high due to high costs
Brands with average relative quality but high relative advertising budgets could charge
premium prices. Consumers are willing to pay higher prices for known rather than for
unknown products. Conversely, brands with low quality and low advertising charged the
lowest prices.
Impact of price on other parties
How will distributors and dealers feel about the contemplated price? If they don’t make
enough profit, they may choose not to bring the product to market. Will the sales force
be willing to sell at that price? How will competitors react? Will suppliers raise their
prices when they see the company’s price?
What is Price Adjustment/Adaptation?
Adapting the Price across different factors and over time:
1. Companies usually do not set a single price but rather develop a pricing structure
that reflects price variations across product mix, geographical regions, market-segment
requirements, purchase timing, order levels, delivery frequency, guarantees, service
contracts, and other factors.
2. Prices set by a company do not always remain the same. Over time, the original price
established for almost any product will have to be adjusted. The marketing executive
will find it necessary to change the product’s price several times during the course of its
life cycle.
Adjusting the base prices determined through either of 3 methods discussed
above
To adjust base prices, marketers may employ any one or more of the following pricing
strategies:

Different price-adaptation strategies are:

• Product mix pricing
• Geographical and international pricing
• Psychological and promotional pricing
• Price Discounts and allowances
Discriminatory pricing
Dynamic pricing

Involve adjusting prices to maximize the profitability from selling a group of products
rather than for just one item.
These strategies include:
Price line pricing and
bundle pricing
Captive product pricing
Price line pricing-- is a pricing technique that sets prices for all the products in a product
line in a way to maximise the total sale of all items of product line. Pricing of different
models of mobile phone, car, camera, TV. The price difference between different sizes
and models is kept in a way to motivate the customer to buy little more priced higher
model. Thus, it increases the profitability. F

Price bundling occurs when different offerings are sold together at a price that’s
typically lower than the total price a customer would pay by buying each offering
separately. ’ . It helps n increasing the sale and
profitability.
Captive product pricing Captive product pricing sets the price for one product low but
compensates for that low price by setting high prices for the supplies needed to operate
that product. you buy a razor and must purchase specific razor blades for it, you have
experienced captive pricing. The blades are often more expensive than the razor
because customers do not have the option of choosing blades from another
manufacturer.
Geographical Pricing-- to decide whether to charge different prices in different
geographic areas. how to price its products to different customers in different locations,
states and countries Should the company charge higher prices to distant customers to
cover the higher shipping costs, or a lower price to win additional business? How should
it account for exchange rates and the strength of different currencies? McDonald’s
different pricing strategies in US and India
Price Discounts and Allowances
In addition to deciding about the base price of products and services, marketing managers must
also set policies regarding the use of discounts and allowances for Middlemen and include
them in the final price.

Trade discounts and allowances- It is deciding the various commissions, allowances

and discounts to be given to wholesalers or retailers while deciding the list price. For
example, for better shelf space for your brand, bulk order, early payment, contribution
for advertising your brand, for extra efforts company’s exchange schemes, selling
efforts during off-season etc.
Promotional Pricing: it can be in the form of:
loss-leader pricing, Special event pricing Diwali sales, cash rebates, low-interest
financing, longer payment terms, longer warranties and free maintenance or at reduced
prices, etc.
Loss-leader pricing. Supermarkets and department stores often drop the price on few
well-known brands to stimulate additional store traffic. The goal is to get shoppers to
buy many more items in addition to the low-priced items.
Psychological pricing- is a way businesses set prices to influence how customers
perceive the value of a product or service.
Odd-even pricing-- For example, instead of being priced at $10.00, a product will be
priced at $9.99.
Psychological discounting--This strategy sets an artificially high price and then offers the
product at substantial savings; for example, “Was $359, now $299.

Prestige pricing occurs when a higher price is utilized to give an offering a high-
quality image. Many times, two different stores carry the same product, but one
’
Optional product pricing involves selling accompanying products separately. It helps in
lowering the price of the main product for psychological effect on customers.Prices for
accessories or options sold with the main product. E.g., car accessories like
mats/AC/Stereo, are to be bought separately when you buy a car.

Two-part pricing means there are two different charges customers pay. Minimum
fixed part in your mobile bill and variable charges depending upon usage. Price for
basic pizza or Subway and extra price for optional toppings,
Price discrimination
Companies often adjust their basic price to accommodate differences in customers,
products, locations, and so on.
Price discrimination--The strategy is: when almost same or slightly different versions
product are sold at different prices. Difference in prices charged is not same as
difference in their costs or different prices even when the costs are same.
1. Consumer based discrimination- Different customer groups pay different prices for
the same product or service. E.g., fruit sellers who charge different prices from
different consumer or strategy of lower prices for students, senior citizens for
different services/products
2. Place based discrimination- popcorn in cinema halls are sold for more price, seats
at the back of cinema halls are priced higher though the cost of seats is same
3. Time based discrimination-happy hours prices, off season tickets for airlines, hotel
room prices are lower though the costs to the firm remain same
 4. Product based--Difference in prices of slightly different models of speakers, TVs
which is not same as difference in their costs.
5. Channel pricing: same product is priced differently for different channels-online
and offline channels, vending machine and grocery shops

Dynamic pricing. is a tool used to maximise revenue by "selling a suitable product, to a

suitable client, for a suitable price in a suitable time".1
Airlines have long employed this strategy, adjusting their ticket prices according to
demand, seasonality, and flight time. For instance, Uber prices often spike during peak
travel times and decrease during off-peak hours.

Pricing strategies for new product

Market Skimming Pricing
Market Penetration Pricing

• Price skimming sets prices higher to attract customers most

interested in the product or service to maximize short-term profits.
• Penetration pricing uses lower prices to build a customer base for
new products or services.
• The right strategy depends on whether a company wants to
maximize market share, total profit, customer value or profit
margin.

Businesses adopt a skim pricing model for several purposes, including:

• Generating high short-term profit
• Attracting early adopters

Big brands like Apple and Nike tend to do well with price skimming and provide
excellent price skimming examples to examine:
• Apple periodically introduces new iPhones with the latest features at a high
price, attracts price-insensitive customers who value having the latest device
to hit stores, and then sells them at lower prices to price-sensitive customers
as newer versions are introduced.
• Nike, an athletic apparel market leader, regularly introduces new designs at
higher prices, relying on early adopters and loyal customers to purchase
products at the introductory price. These prices can last for several months
before Nike lowers the cost to sell remaining inventory to price-sensitive
customers.
Penetration pricing is a pricing strategy where a business offers a low price
initially to attract a large portion of customers and gain market share.

Pricing penetration works best when:

• The product has an elastic demand curve (the change in the price affects the
product demand significantly).
• It is easy to achieve economies of scale.
• The market is large enough with sufficient demand.