Pricing Decision

Pricing
Pricing is the process of determining what a
company will receive in exchange for its
products. Pricing factors are manufacturing
cost, market place, competition, market
condition, and quality of product. Pricing is a
fundamental aspect of financial modeling and
is one of the four Ps of the marketing mix.
Price is the only revenue generating element
amongst the four Ps, the rest being cost
centers.
Factors Influencing Pricing Decision
Internal Factors:-
• Corporate and Marketing objective of the firm
• The image sought by the firm through pricing
• Price Elasticity of the demand of the product
• The stage of the product in its life cycle.
• Cost of Manufacturing and marketing
• Extend of differentiation practiced
• Other element of the marketing mix of the firm
and their interaction with pricing
Example- Reckitt Benckinser
External Factors:-
• Market Characteristics (Demand,Customer
and competition)
• Buyer behavior
• Bargaining power of major customers
• Bargaining power of major suppliers
• Competitors pricing policy
• Govt. control regulation
• Societal consideration
 Pricing Objectives
• Profit maximization in the short term
• Profit optimization in the long term
• A minimum return on investment
• A minimum return on sales turnover
• Achieving a particular sales volume
• Achieving a particular market share
• Entering new markets
• Target profit on the entire product line irrespective of
profit level in Individual products
• Keeping competition out
• Early cash recovery
 Pricing Methods
Full Cost or Markup Pricing:-
The marketer estimates the total cost ( fixed+
variable) of production or manufacturing a
product and then adds a markup or the margin
that the firm wants. This approach ensures that
all costs are covered but this method ignores the
fact that it is not always necessary that the firm
will be able to sell its entire merchandise at this
price.
It doesn’t consider customer value perception
and also the competitors’ reaction.
• To arrive at Mark Up Price –
Mark Up Price = α / 1 – r
α = Unit cost fixed + variable
r = Expressed return on sales expressed as a
percent

Going Rate or Follow the Crowd :-

This is a method which is competition- oriented. In this
method the firm prices its products at the same level as
that of the competitors. This method assumes that there
will be no price war in the industry.

Despite of its advantage of preventing price war this

method suffers from the serious limitation –
It is not always true that all firms are operating effectively.
• Sealed Bid Pricing :-
In a large number of projects industrial marketing and
marketing to government suppliers are asked to submit their
quotation as a part of tender. The price quoted reflect the firm
cost and its understanding of competition. The lowest price
bidder get the contract.

• Customer Oriented or Perceived Value Pricing :-

There is an increasing trend to price the product on the basis of
customer’s perception of its value. This method takes into
account all other element of the marketing mix and the
Perceived benefit.

Acquisition value ---------------- Perceived benefit or Sacrifice

 Types of Pricing Strategies
• Skimming Pricing – It refers to a firm’s desire to skim the
market by selling at a premium price.
• Penetration Pricing – It is the price kept lower than its
competitor and aims at gaining a foothold in coupe.
• Differentiation Pricing – Differentiating its price across
different market segment.
Ex – Airline business executive will pay full price where family
going on holiday will pay discount.
• Geographic Pricing – A premium in one market and
discounted in other.
• Psychological Pricing- like 499