Pricing Decision

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What is Price?
• Price is the exchange value of goods & services in
terms of money.

• The only element in the marketing mix that

produces revenue , rest all represent cost to the
company.
• Nowadays, product doesn’t mean only physical
object but it also includes various services

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 …Cont’d

• Thus, we may define price as the amount

which is charged by a seller from a buyer for
product and its accompanying services

• What Is Price?

To
To the
the seller...
seller... To
To the
the consumer...
consumer...
Price
Price is
is revenue
revenue Price
Price isis what
what you
you give
give
and
and profit
profit source
source up
up to
to get
get what
what you
you want
want

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 Three Components of Price
• Original Cost
• Selling Cost
– Service expenses
– Marketing expenses
– Administrative expenses
• Profit margin

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 Pricing
• It is the art of translating the value of product
or service into quantitative terms
• It is rather a process

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 The Three C’s Model
for Price Setting

Low Price Customers’ High Price

Costs Competitors’ assessment
prices and of unique
No possible prices of No possible
profit at product demand at
substitutes features
this price this price

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 Importance of Price
• Means of allocating resources

• Regulates demand

• A competitive weapon

• Determinant of profitability

• Importance for Customers

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Procedure or Process for determining Price

1. Selecting the Target

Market

2. Identify the Potential

Customers

3. Estimating the demand

4. Analyzing competitors’
costs, prices, and offers

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 …Cont’d
5. Establish expected market
share

6. Select Pricing Strategy

7. Consider Marketing Policies

of the Company

8. Select the specific price

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 Objectives of Pricing
 Survival
 Profit Maximization
 Target return on investment
 Price stability
 Market share
 Prevent competition
 Public image
 Market penetration
 Cash flow
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 Factors Affecting Pricing Decisions

EXTERNAL FACTORS
INTERNAL FACTORS • Product Demand
• Pricing Objectives • Elasticity of Demand
•Cost of Production • Competition level
•Marketing Mix • Economic Conditions
•Product • Government
•Differentiation regulations
•Organizational • Consumer Behavior
Consideration • Distribution Channel
•Product Life Cycle

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 WAYS TO SELECT BASE PRICE LEVELS

i. Demand oriented – focus on consumer preference

ii. Cost oriented – focus on business’s expenses
iii. Competition oriented – focus on the marketplace players
iv. Value Pricing
v. Product Line Pricing
vi. Tender Pricing
vii. Affordability-Based Pricing
viii. Differentiated Pricing
ix. Psychological Pricing

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 i. DEMAND ORIENTED APPROACHES

 Skimming Pricing
– high initial price

Market-skimming pricing is a strategy with high initial prices to

“skim” revenue layers from the market
Product quality and image must support the price
Buyers must want the product at the price
Competitors should not be able to enter the market easily

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 i. DEMAND ORIENTED APPROACHES…

 Penetration Pricing
– low initial price

Market-penetration pricing
sets a low initial price in order to
penetrate the market quickly and deeply
to attract a large number of buyers quickly
to gain market share as market is Price
sensitive.

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 i. DEMAND ORIENTED APPROACHES…

 Prestige Pricing – high price = quality and status

 Yield Management Pricing

– peak and non peak prices

 Bundle Pricing- 2 products priced as one.

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 ii. Cost Oriented Approaches

1. Cost-Plus Pricing Method:

– Price per unit=
Total cost + Total Estimated Profit
Number of units
2. Mark-Up Pricing Method:
Price per unit= Total cost per unit+ 20% of the cost
Less complicated for fixing resale prices
Generally used by wholesalers and retailers

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 ii. Cost Oriented Approaches..

3. Marginal Cost Pricing Method:

– Also known as Incremental cost pricing method
– Fixed cost is ignored and price is calculated
considering marginal costs
4. Break-Even Pricing Method:
– Revenue is at least equal to cost
– BEP= Total Fixed Cost
SP Per unit- Variable Cost per unit

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iii. Competition oriented Pricing

Companies opt for competition-based. Competitors price gives

a benchmark.
• Premium pricing
• Discount Pricing
• Parity Pricing

iv. Value Pricing

Value pricing is based on the assumption that the objective of

pricing is not to recover costs, but to realize the value of the
product perceived by the customers. When marketers deliver
value in excess of costs, their profits will be ensured along with
customer loyalty.
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v. Product Line Pricing

Companies that market different product lines, they need not

fix optimal price for each product, independent of other
products in the line. Prices of different products can be fixed in
such a way that the product line as a whole is priced optimally
which will result in optimal sales of all products put together
and optimum total profits from the line.

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vi. Tender Pricing

This option is more applicable to business markets where

institutional customers normally call for competitive bidding.

vii. Affordability-Based Pricing

In the context of products which form essential commodities

group which meet the basic needs of all segments of
consumers, affordability-based pricing.

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viii. Differentiated Pricing

Different prices are changed for the same product by the

company, in different market segments or zone. Price
differentiation is also made occasionally, based on customer
class rather than geographic marketing territory. Another
variation which is commonly used is done on the purchase
volume. Price is less for bulk quantity and higher for small
volume buyers.

ix. Psychological Pricing

Consumer buying decisions are influenced mostly by

psychological factors. Many markets take this into account and
try to avoid the psychological barrier in respect to price with
psychological pricing. Exp. Rs. 299/- instead of Rs. 300/-
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Pricing Strategies Matrix

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 Pricing Strategies and Product Life Cycle
Pricing under Introductory Stage
Intensive advertising campaign is launched for introducing new
product. Two main pricing strategies may be followed:
Skimming Low Penetration
If the product is new if the new product is simple
invention and there is no and similar to the products
substitute of the product in already available in the
the market, the market, the manufacturer
manufacturer can adopt will have to select low
this policy. penetration price policy.
Relatively high price per unit is fixed as product is generally
meant for those customers who have a strong need and ability
to pay a relatively high price.
The main objective is to recover maximum investment as soon
as possible. PIET
Pricing Strategies and Product Life Cycle…
Pricing under Growth Stage
This stage depicts high rate of growth in sales volume and entry of a
number of competitors in the market. Therefore, the marketer must
be very vigilant in this stage and make sure that the price is
competitive, because it is the time when the marketer can earn
maximum profits through maximum sales.

If initially skimming pricing then, marketer may either switch to

penetration pricing, when significant competition first appears, or
alternatively reduce his price in several successive steps.

Contrary to it, if he used penetration pricing during introductory

stage, he is likely to continue with that strategy during market
growth stage. But, if he feels that there is no close competition to
the product, little higher price may be fixed.

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Pricing Strategies and Product Life Cycle…
Pricing under Maturity Stage
Characterized by a decline in growth rate of the sales and low
profit margins. Therefore, at this stage the marketer should
use the pricing strategy for defensive purposed to hold those
market segments which are still profitable.

During this stage new competitors may enter with some

superior the competitors. Therefore, price reduction is
necessary so that attraction of the consumers may be
continued.

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Pricing Strategies and Product Life Cycle…
Pricing under Declining Stage
The sales begin to diminish until they reach a level where the
company decide that the product is no longer viable. The
marketer should follow the ‘Break-Even Point Pricing Strategy’
so that loss is avoided.

Price discrimination strategy can be adopted at this stage, if

somewhere it is possible.

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