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Pricing
Pricing
Pricing
MEANING
Price is the exchange value of goods & service in terms of money.
The term ’Price’ denotes money value of a product. It represents
the amount of money for which a product can be exchanged. In
other word, price represent the money which the buyer pays to
the seller for a product.
E.g., We pay rent for house, tuition fees, consultant fee to a
doctor, fare for taxi, wages, salary etc.
It is difficult to decline the price of a product. Because, it doesn’t
mean only the physical aspect but it also includes services &
benefits like warranty, repair facilities, free home delivery, credit
facility etc.
Cont’d…
More the service, higher the price.
So, we can define as Price as the amount which is charged by a seller
from a buyer for product & its accompanying service.
Price of a product has three components:
Original Cost
Selling Cost
Service Expenses
Marketing Expenses
Administration Expenses
Profit Margin
PRICING MEANING
Pricing is the art of translating into quantitative terms(i.e rupees)
the value of the product or service by the marketing manager
before it is offered to target consumers for sale.
Pricing is the process of setting pricing objectives, identifying the
factors governing the price, formulating the pricing policies,
setting the prices, implementing them & controlling them.
DEFINITION
Acc to Prof. K.C. Kite,
“Pricing is a managerial task that involves establishing pricing objectives,
identifying the factors governing the price, ascertaining their relevence &
significance, determining the product value in monetary terms &
formulation of price policies & the strategies, implementing them &
controlling them for the best results”.
IMPORTANCE OF PRICE & MARKETING
MIX
Means of allocating resources.
Price regulates demand.
Price is a competitive weapon
Determinant of profitability
Importance for consumers.
Other advantages are:
Price is a powerful force in attracting the attention of buyers & increasing
sales.
Price governs the class & type of customers who intend to use the
product. High priced product are bought by status conscious persons.
CONT’D…
Price is the most comparable attribute. Sometime the quality of the
product cannot be evaluated by inspection & than consumers judge the
quality with the help of price of the product.
Promotion & advertisement of a product depends on its price.
Product are differentiated with one another on the basis of price.
OBJECTIVE OF PRICING DECISION
Price Stability
Profit Maximisation
Survival
Market Share
Public image
Target return on investment
Cash recovery
Skimming the market cream
Market Peneteration
Preventing Competition
FACTORS AFFECTING PRICING
DECISION
Product Differentiation:
The price of the product also depends upon the characteristics of
the product. In order to attract the customers, different
characteristics are added to the product, such as quality, size,
color change, attractive package, alternative uses etc.
CONT’D…
Organisational Consideration:
Pricing decisions occur at two levels in the organisation. It is the
top management which generally has full authority over pricing.
The marketing manager’s role is to assist the top management in
price determination administer the pricing within policies laid
down by the top management.
Elasticity of demand:
Price elasticity of demand also affect the pricing decision. Price
elasticity means a relative change in demand due to certain
percentage change in price of the commodity.
CONT’D…
Competition:
Competitive conditions affect the pricing decision. No
manufacturer is free to decide his prices without considering
competition unless he has monopoly. It is a crucial factors in
price determination. While deciding the price, the marketer must
know the pricing objectives, policies & strategies, strengths &
weakness of the competitors. This also helps to know the
possibilities for raising or lowering the prices.
Economic Conditions:
Economic Environment of the country is an important factors
affecting the pricing decisions. Inflationary & deflationary
conditions affect the pricing. In the recession period, the price
are reduced to a sizable extent to maintain the level of turnover.
CONT’D…
Government Regulation:
The government of the nation influences the pricing policies in a
number of ways. It regulates the price of the products it makes
available & service it rendered to the community like electricity,
transport, railway, postal etc. Government interference in the
form of taxes & fixation of prices influence the pricing decisions.
Consumer Behaviour:
The behaviour of the consumers & users for the purchase of a
particular product, do affect pricing, particularly if their number
is large. In other words, the composition & behavior of
consumers have great impact on pricing decision.
CONT’D…
Distribution Channel:
A number of intermediaries exist between the manufacturer &
the final consumer. Each of them chargers for their services,
which ultimately add up to the cost . Therefore, longer the
distribution channel, higher will be the price of the product &
vice-versa.
Suppliers:
Suppliers of inputs, especially raw materials & fabricated parts
have great impact on the price of a product. If the suppliers raise
the price, it will lead the manufacturer to increase the price of
the product, which will ultimate affect the consumers.
CONT’D…
Market Position of company:
Market position or the image of the company in the minds of
consumers regarding its product mix, quality, technology,
durability, usefulness, after sale service etc. may also influence
the pricing decisions of the company.
Other Factors:
There are number of factors which directly or indirectly
influence the pricing decisions. Such as: Social & ethical
considerations, Consumer’s reactions towards rising prices, wage
rates, productivity, trade customs etc.
PROCEDURE FOR PRICE
DETERMINATION
After formulating the pricing objective & deciding the pricing
policy, the next step is to determine the price of the product.
There is no specific procedure equally applicable to all firms for
price determination.
Steps are:
Identify the
Select the Target Estimate the
potential
Market demands
customer
Establish Anticipate
Select pricing
expected share of competitive
strategy
market reactions
Consider
company’s Select the specific
marketing price
policies
PRICING POLICIES
Policies are guideline for achieving the objectives. Therefore,
different policies are framed & adopted for achieving different
objectives. Thus, price policy is framed & adopted for achieving
the pricing objectives. Pricing policies provide the framework &
consistency needed by the company to make reasonable,
practicable & effective pricing decisions. It helps the company to
attain its pricing objectives.
There are number of pricing policies are:
On the Basis of Cost & Demand
On the Basis of Price-Level
On the Basis of Flexibility
On the Basis of Geographical Condition
On the Basis of Specialty
ON THE BASIS OF COST & DEMAND
Cost-Oriented Pricing Policy
Cost-Based
Pricing
Demand-Based
Pricing
Competition-
Based Pricing
A) COST BASED PRICING METHOD
Cost of production is the most important variable & most
important determinant of pricing the product. The cost includes
the cost related to production & distribution of goods & service
like payment for materials, labour, overheads etc. Methods of
determining price on the basis of cost are:
Cost-plus pricing method or Mark-up pricing method
Marginal cost pricing method
Break-even pricing method
Target return pricing method
1) COST-PLUS PRICING METHOD
It is a simplest & ideal method for price determination. The price
of a product is determined by adding desirable profit with total
cost per unit of product. Formula is:
The cost of manufacturing (i.e. Total Cost) acts as a base for price
fixation. Selling price is determine on the basis of (i) Cost of
production, (ii) Selling expenses, (iii) Interest, (iv) Expected
profit margins.
2) MARGINAL COST PRICING
METHOD
It also known as Incremental Cost Pricing Method. First method are
based on total cost which comprise fixed cost & variable cost.
This method, the fixed cost is ignored & the price is determine
on the basis of additional variable cost associate with an
additional unit of output. The cost of producing & selling one
more unit i.e. the last unit is taken as the base for the pricing.
3) BREAK-EVEN PRICING METHOD
This methods helps in knowing the level of output where the
revenues will be equal to cost, assuming a certain selling price.
This point is known as Break-Even Point. At this point costs are
fully covered. Thus, it considers both fixed costs & variable costs.
Sales above this point results in profit where as sales below it
gives losses to the seller. Break-Even Point represents that level
of production at which there is no profit & no loss.
Total Fixed cost
BEP(in units) =
Selling price per unit-Variable cost per unit
4) TARGET RETURN PRICING
It also known as rate of Return Pricing Method. Under this method
first of all, an arbitrary desired rate of profit on the capital
invested is determined. After that total desired profit is calculated
on the basis of this rate of return. Total desired profit is then
added to the total cost of production & thus the price per unit of
the product is determined.
Total cost of production+ Total desired profit at desired rate of return
Cash Seasonal
Discount Discount
Quantity Trade
Discount Discount
CASH DISCOUNT
Cash discount is most commonly used & allowed by
manufacturers as well as traders with a view to encouraging their
customers to make the cash payments. It is granted to all such
buyers who pay their bills in cash or within a specified period of
time. Cash discount is given on the net amount payable after
deducting trade & quantity discounts. On account of cash
discount, the customer receives the product at less price (sale
price-cash discount) & seller receive payment immediately.
Advantages are:
It encourages timely payments
It reduces the risk of bad debts.
It improves liquidity position of the manufacturer.
TRADE DISCOUNT
Also known as ‘Functional Discount’. Trade discount is allowed in
the form of deduction from the list price. Manufacturers give this
type of discount to wholesalers & retailers as a consideration for
the remaining marketing function to be performed by them.
E.g., the wholesalers keeping excess stock of goods with them
receive more discount. Similarly, such firms are given additional
discount who provide the customers a facility of credit & finance.
Advantages are:
It makes price structure flexible.
It is provides for marketing services rendered by the retailers.
It helps in adjusting the list price & the current market price until the
new price list is printed.
QUANTITY DISCOUNT
Quantity discount is allowed to encourage a customer to
purchase the commodities in bulk quantity or to concentrate his
purchase with a particular seller.
Quantity discount is termed as patronage discount because the
more business a buyer gives to a seller, the greater is a discount.
Quantity discount may be allowed in different form:
In percentage form
In rupee value
In physical units
CONT’D…
Advantages are:
Slow moving products can be sold faster.
It stabilizes orders irrespective of changes in season.
It encourages bulk purchases, thus helping the firm to get large-scale
economies.
On account of this discount the number of transactions reduced & sale
problem are solved.
The real price could have reduced through quantity discount & the seller
can take the benefit of price elasticity.
SEASONAL DISCOUNT
It is allowed on those products, which have seasonal demand.
E.g., refrigerator, Air conditioners, coolers, woolen garments,
blankets, heaters etc. it is allowed on purchases during slack
season. This enable the manufacturer or seller to level out his
production schedule & reduce production & inventory cost.
REBATES
Rebates are deductions of the quoted prices. Rebate is a
concession given to the buyer to compensate him of the loss of
value satisfaction suffered by him. Such dissatisfaction may be
because of defective goods supplied to him, delay in delivery,
goods damaged in transit, possible deterioration in quality on the
shelves etc.
CONT’D….
Advantages are:
It has psychological elevation of granting at a time too many concession s,
thus boosting the sales.
It acts as an instrument of clearing the stock.
It also act as an instrument of wiping off the tears by compensating the
value dissatisfaction suffered.
PREMIUMS
There are occasions, where the actual price paid is higher than
the quoted price. The manufacturer at many occasions add
premium to the price quoted for say warranties, extra durability,
special after sale service etc. It doesn’t mean that discounts are
not allowed. Premiums are generally charged on the products
which require costlier after sale services.
E.g., Tractor, generating set, boiler, air cooling plant etc
Original price of Television Rs.12,000
Less:5% Cash Discount Rs. 6oo
Rs. 11,400
Add: Warrantee on picture tube Rs. 1,000
Add: Extra for sale services Rs. 100
Net price payable Rs. 12,500
CONT’D…
Advantages are:
Buyer is guaranteed for repair, replacement & maintenance.
Seller is compensated for his expenditure on sale services &
replacements.
ALLOWANCES
There may be special types of allowances offered to retailers,
who are expected to perform promotional activities to push up
the sales.
E.g., Advertisement allowance, window display allowance, free
sample allowance, free display material etc.