CHAPTER 7: Price

What do you already know about this concept (prior

knowledge)??

What do you think this topic is about?

What do you want to learn out of this topic?

 Setting expectations

Recognize price is assigning value

Pricing objectives + importance + philosophy

Factors that determine product value

Pricing Strategies

Price changes + Pricing policies

Something paid for using rooms Rent
& apartments

Something paid for borrowed

money & loan Interest

Something paid for using public

transport, taxi, airplane
Fare

Something paid for using

teaching & learning at schools Fee
Something paid by
organizations to their Salary
employees

Something paid to daily

Wages
workers

Something paid for extra Incentives, bonus,

work

Something paid to Commission

middlemen, agent
 Price
Price is the value exchanged in monetary terms to
receive products, services, utility & benefit
Cost: Time, search, psychological, convenience
Benefit: Functional, Image, Personnel, service

Forms of Value: To provide value to another person, it must

take on a form that they are willing to pay for. Product itself,
subscription, shared resource, resale, lease, agency, audience
aggregation, loan, insurance, seed capital (start-up fund)
 Price..
Price is value customer exchange (in monetary terms) to
receive utility

Pricing is determining suitable value for the product

To the seller: price is revenue and profit

To the consumer: price is what you give up to get what you
want.
At right level of price ORGN. Should both earn revenue &
satisfy customers
 Pricing Situations
Pricing new product is difficult & ambiguous (risk +
outcome)
External factors (shortage, inflation, stagnant demand)
trigger price change

Difficult to differentiate price among similar products

(product lines) Ex: Theatre

In competitive rivalry (one or many), price changes trigger

shock effect
 Pricing Objectives
Profit Oriented Objectives:
 Maximize Profit
 Target return

Sales Oriented Objectives:

 Increase sales volume
 Increase market share
Status-quo objectives:
 Stabilization (fixed price)
 Meeting competition
 1. Maximize Profit
Charging high price for short + long run

2 Strategies: 1) Profit on single line/segment, 2) Profit on

entire sales

Offer famous, well demanded products up front with less

margin/profit

Small companies implement this w/ cost based price

 2. Achieve target return
Implement desire rate of return to cover up Investment,
costs & anticipated profit for a year

% of return depends on competitors, market mechanisms

& industry forces

Markets w/ less competition charge high return for short

run. NTC sim
 1. Sales Maximization

Focused on increasing in No.# of sales w/ customers

Sales volume will cover margin & increase profit

Assumption: Produce a lot, achieve lower per unit cost,

sell a lot, earn profit over long run
 2. Maintain or Increase market share

Right pricing (subject to business performance) helps to

maintain MKT share, gain new MKT & expand in related
category

Market share is % of company business among total

industry business

Methods: Low cost leadership,

 III. Status-Quo Objectives

Concerned maintaining current market share & image,

Minimization of market risks

1. Stabilization of price

2. Meeting competition
 1. Price Stabilization

Maintaining same-fixed level of price to sustain

goodwill, image & brand.
 To tackle fluctuation in demand (variation)

Suitable for market leader companies

 2. Meeting Competition

Always matching PRICE of market leader to reduce any

price disadvantage

Depending on market leader, ORGN. Can increase or decrease

to match market

Helps to maintain same market position

To Consumer

To Firm

To Economy
 To Economy
Allocation of goods & services
1. Goods & services are distributed as per income level

2. Payment as Rent, Wages, Interest & Profit

3. National Savings

4. Source of inform from public services i.e. electricity,

public utilities
 To Firm
1. Determines market demand

2. Source of revenue

3.Competetive tool

4. Positioning/Image building
 To Consumer
1. Select goods & services as per capacity

2. Price suggests quality

Factors Affecting Price Determination

1. Internal Price Factors

 Pricing objectives

 Level of ORGN. Involvement (centralized &

decentralized)
 Marketing Mix

 Product Differentiation
 Cost
Factors Affecting Price Determination

2. External Price Factors

 Demand of product/service

 Competitive situation
 Supplier characteristics
 Distribution system

 Economic condition
 Government control
 1. Price Objectives:
 Profit Max = Price higher
 Sales Max = Price lower
 Status-Quo= Price stagnant

2. Level of ORGN. Involvement:

 Centralized: High involvement to standardize price
 Decentralized: Have different price for different
units, even for same product
 3. Marketing Mix
Affected by other Ps
Specialized or own distribution wings
Expensive or cheap media
Nature of product. Luxurious or service oriented products
4. Product differentiation
Differentiated products= more freedom in setting price
Ex: Different price for different brand of soap although use for
identical purpose

5. Cost
Involves fixed + variable cost
Fixed cost=uncontrolled, variable=controlled
Production, distribution, selling, advertising
 2. External Price Factors
1. Demand of product/service
 Price is the function of demand f (dx) = p
 Income of consumers, consumer preference
 Buying patterns & influences
 Demographic, geographic, socio-cultural

2. Competitive situation:
 If competitor is large(strong offering), firm accepts market price
 Product w/ no substitute (monopoly + differentiation), firm sets
price (leader)
 Too much competition = reasonable price
 3. Supplier (middemen) Characteristics
If price of raw materials Product price
 Scarcity in supply Product price
 Bargaining power of supplier Product price

4. Distribution System:
 If ORGN. Has to invest on Dist. Network, price will be higher
 Too many channels in DIST. – commission expenses
 5. Economic Condition
Trade cycles like prosperity(Output Max.), boom, growth, recession(short),
depression (long), Inflation, Shortage
Rising sales  attracts competition  loose price freedom
Prosperity + Purchasing power = high prices wont affect
demand
Low economic condition  Prices affect consumption &
demand
Recession  reduce price, maintain market position
Boom  Increase price for revenue Max.
Price as a tool to steer profits against higher costs, maintaining
profit margin,
Phase out weak products during shortage.
 6. GOVT. Control
Government regulates price of Public enterprises
Regulation of price on telecom, electricity, food, salt,
petroleum, water
Industrial products & operations depend on electricity,
petroleum, water
Government policy on Income tax, Sales tax, Import
Export Duty influences pricing
Approaches/Methods to Pricing, Bundle of cost, demand & competition

1. Cost oriented
- Cost Plus
- Target Return
- Break Even

2. Demand Oriented
- Perceived value
- Value based (Value added)
- Demand differential
3. Competition Oriented
- Going rate
- Sealed-bid
 1. Cost Plus
Adding standard markup (rate of return) to the cost of
production
Mark Up = Fixed + Variable Cost + (Profit %)

1. Producers can project their cost than demand. Even of

the demand changes, they can adjust price
2. When all firms in industry use Cost Plus, price
competition will minimal, price will be same
3. Sellers earn acceptable return on investment & don’t
suppress buyers when consumers demand is peak
 2. Target profit pricing
Policy where ORGN.s determine the price level that yields
it’s desired return on investment
Rate of return is estimated from total sales or investment

Helps ORGN. To recover fixed target return on investment

from price
Implication: If sales continue at specified price level,
ORGN. can earn significant profit
Suitable for: For monopoly, large investment on public
utilities & want fair return on their costs
 3. Break-Even Approach
Maintain a level of sales or output where firm’s total cost
and total revenue are equal cost
Optimum price (breakeven) is where a firm’s revenue
equals cost
 Approaches to Pricing
1. Cost oriented
- Cost Plus
- Target Return
- Break Even

2. Demand Oriented
- Perceived value
- Value based (Value added)
- Demand differential
3. Competition Oriented
- Going rate
- Sealed-bid
 1. Perceived value pricing
Marking price based on customer’s perception of value
than sellers cost

Marking justified level of price compared to benefit

Organizations can ask customers how much they are

willing to pay for value increment
Organizations can create experiment w/ customers to find
perceived value
 Steps in value based pricing
Identify product features, performance & company
services
Conduct market survey to evaluate customer response on
said features

Conduct ranking of perceived value

Figure out right level of price customers are willing to

pay
 Wheels of value

• Forms of Cost • Forms of Benefit

• Expenses • Time benefit
• Raw materials cost • Add-ons benefit
• Salary • Convenience
• Operations
• Advertising
• Time, search, convenience,
psychological
 2. Value price/Value-Added Pricing
Using right bundle of features, quality, & service at
justifiable price. Avoid irrelevant add-ons that Price
Price should match w/ customer purchasing power

Important Consideration: Customers put emphasis on

benefit delivered by seller i.e repair, installation, delivery

Value from seller will prevent future costs.

More value at less cost and Higher price Higher value
strategy
 Value Pricing Strategy
High Quality (benefit) Low Price:
 Used to increase loyal customer base
 Planned at long run
 Offer highly beneficial, quality product at fair price
 Includes right bundle of quality & service
High Quality (benefit) High Price:
 Maintain premium price among similar competitors,
build premium image, & differentiate offering
Value added features DIFFN: company’s offer &
justify higher price
 3. Demand differential pricing
 Is simply price discrimination strategy
 Marking different price of same product to different
customers on the basis of income, paying capacity,
product features, geography
 Charging multiple prices for same product w/o
additional cost burden to company
 Approaches to Pricing
1. Cost oriented
- Cost Plus
- Target Return
- Break Even

2. Demand Oriented
- Perceived value
- Value based (Value added)
- Demand differential
3. Competition Oriented
- Going rate
- Sealed-bid
 1. Going-rate pricing

 Company matches price, par to market &

competitive offering
 Keeping price average to competitors when product
is non differentiable (Milk, Sugar, Cement)
 In case of differentiated product, company has
freedom to set upper and lower bound price
compared to competitor
 Is suitable when costs are difficult to forecast
 2. Sealed Bid Pricing
 Setting price level to receive contract & project
assignment with bidding documents
 Bidder tries to maintain price at lowest level (up to
limit) to receive assignment
 Bidders can use marketing intelligence to predict
possible competitive offerings
 Reaction to price change
1. Buyers reaction to price change
- Price elasticity of demand
- Perceptual factors in buyer’s reaction

2. Competitors reaction to price change

- When there is one large competitor
- When there are more than one competitors
 1. Price elasticity
 Portion of change in demand due to change in price

 Inelastic demand: Price increases & demand remains

the same. Products with few substitute
To evaluate price elasticity
 Direct attitude survey
 Stat. Analysis between price and quantity demanded
 Price response with selected users
 Inference of substitute product. Anyone like to
change induction instead of gasoline?
 2. Perceptual factors in buyers reaction
 Perception is Exposure – Attention – Interpretation

 Correct price level should justify price reduction

 Price sensitivity: degree to which price changes affect
consumer purchase behavior
 Price sensitive & w/o substitute: Consumers are
concerned on frequent purchase Vegetables, cereals,
milk, meat
 Price insensitive & substitute: Customer do not notice
 1. When there is only 1 competitor
 Market leader competitor has freedom to set price

 Small competitors have forced to follow market

leader’s price limits
 Price decrease by large competitors will force others to
change strategy
 1. When there are more than 1 competitors
 Competitors differ in market share, product offering,
expansion strategies, low price for best product
 In complex situation, different price response is
necessary
 If competitors are known & evenly matched, everyone
can maintain average price
 Pricing Policy
 1. Geographical Pricing

 2. Price discounts & allowances

 3. Promotional Pricing

 4. Discriminatory Pricing

 5. Product mix Pricing

 1. Geographic Pricing
 Company declares price as per location & distance of
delivery
 Meaning: Company charges high transportation charge
to far away location(delivery) & vice-versa
 Some prices are uniform regardless of distance
 Types of Geographical Pricing: Free on Board (FoB) ,
Uniform Delivery, Cost & Freight (C&F)
 2. Price Discounts & Allowance
 Cash Discount: Who pay & clear bill up-front, PoP

 Quantity Discount: Who buy in bulk in large quantity

 Allowances: Reward paid to retailers (Marts, Stores)
for giving rack space, highlighting products in store
 Seasonal Discount: Price reduction in off-season. To
buy new stock & empty old. Send-off old stock for cash
 Trade-In Allowance: Given in exchange-offer. Price
reduction: returning old & buying new.
 3. Promotional Pricing (even below cost, sell temporarily)

 Loss Leader: Most famous/common items are marked

lowest price to win customers confidence when they
compare price elsewhere
 Special Event Pricing: Stores & sellers reduce price on
special occasions (festivals, new years, holidays,
exhibitions
 Cash Rebates: Given to buyers who buy products in
specific purchase period & fulfill conditions (housing)
 Psychological Pricing: Marking artificial pricing to
appeal massive price reduction & savings
 Contd…. of previous
 Low interest financing: Companies facilitating buyers
for lowest possible interest rate from Banks

 Longer payment terms: To make monthly payment

EMI, EQI amount smaller
 4. Discriminatory pricing
 Customers are charged different prices for same
product/service on the basis of income, location….

 Customer segment pricing: Setting different

price/discount for student, adult, children, female
 Location pricing: Charged in terms of facility used &
non-native category. Movie in sofa, Exhibition Main
Stall, International student fee
 Product-version price: Higher version, upgrades of
same product charged higher. 2 GB & 4GB ram mobile
 Contd…. of previous
 Timing pricing: Price charged by on the basis on time
considering demand, revenue conversion (yield) &
usage. ExNcell/NTC night data, call pack
 In airlines there is comparatively low price for early
booking and high price for late booking
 5. Product-Mix pricing
 Aimed to maximize profit on total product mixes

(1) Product-Line pricing, (2) Optional-Feature pricing,

(3) Captive-Product pricing, (4) Two-Part pricing, (5)
By-Product pricing, (6) Product-Bundling pricing
 1. Product-Line pricing
 Meaning: Product line is a mix of inter-related items on
the basis of cost, demand, usage…

 Strategy: Setting different price points (range) for

different product lines
 Implication: Customers reference low, average & high
quality to different price points so that that company
can stimulate & prioritize demand
 Example: If the difference between Sano Lassi & Thulo
Lassi is Rs 5, demand for Thulo Lassi will peak
 2. Optional-Feature pricing
 Meaning: Pricing optional or accessory products along
with the main product

 Strategy: To maximize revenue & make main (core)

product appeal affordable
 Implication: Low price to main (core, basic) product
which attracts customers & high price to optional
product to up and cross sell.
 Example: KTM lounges w/ making MoMo affordable
& drinks, Sishah cocktails most expensive to enjoy
 3. Captive-Product pricing
 Meaning: High pricing items (add-ons) that must be
used with the main product

 Strategy: Main products are priced low, Add-ons are

price high

 Implication: Maximize revenue from add-ons or

secondary products. Add-ons have high mark-up %

 Example: Printer Rs 10,000  cartilage refill Rs 3000

 4. Two-part pricing
 Meaning: Setting fixed fee for standard (basic) usage
and additional price for additional usage

 Strategy: Manage production & distribution capacity

 Implication: Maximize revenue based on usage rate,

customer paying capacity, make product available to
all level of consumer
 Example: Rs 380 for upto 50 unit of electricity. A
dedicated feeder for industry
 5. By-Product Pricing
 Meaning: Marking a suitable price level of by products
to make main product more affordable

 Strategy: Make low margin initially to captivate, attract

and arouse customer interest

 Implication: Maximize revenue by additional services

and add-ons

 Example: Rs 100 for food fest – concert ticket entry

and minimum Rs 200 on food items on stall
Harpic Parent
Company Reckitt
Benckiser

SaniFresh Parent
Company  Dabur
Odonil  Dabur
Odopic  Dabur
 6. Product-Bundle
 Meaning: Pricing bundle of the product sold together at
reduced price

 Strategy: Helps to sock out related & non-selling items

 Implication: Promotes sales of poorly performing items

 Limitation: Many buyers would like to purchase entire
bundle, probably they many never use bundled item
 Example: Combo meal, dinner set, flower + gamala,
sausage + momo
 Pricing Strategies( Last topic)
1. Product Life Cycle Strategy
2. Price Change Strategy
3.Price Response Strategy
4.Discount & Allowance
5.Geographical Pricing Strategy
6.Psychological Pricing Strategy
 1. Product Life Cycle Pricing Strategy
Setting prices for the introduction, growth, maturity,
saturation and decline stage

At introduction stage there are Market Skimming and

Market Penetration Strategy, Competitive Pricing

During launching phase the basic product can be an

innovative product, modified product & imitated product
 (i) Market-skimming strategy
Meaning: Charging high prices $$$ for a new product
initially, under the condition that customers will pay high
prices for a new product
 Designed to: Skim maximum revenue from the
segment who are willing to pay high price
 Nature of customer: High value customers, who are
willing to pay high. Few sales but company earns more

 Suitable: When product is innovative & unique

 Suitability of Market-Skimming
Launching new product w/ new unique features,
appealing & preferred by consumers

Demand is inelastic (even if price increases, demand

remains constant)

When copyright, patent, registered trademark protects

new product- regardless of price, product generates
revenue
 (ii) Market-penetration strategy
Meaning: Is setting LOW Price for a new product
initially to aimed to penetrate & gain mass market

 Designed to: Capture higher number of customer and

larger market share & gain large sales revenue/volume

Suitable: As market should be price sensitive

 Implication: When the sales increase, it will reduce

cost and increase profit margin
 Suitability of Market-Penetration
A large mass market w/ price sensitive (elastic) demand

Implication of economies of scale: Per unit reduction as

out goes on increases

Assumption of pre-existing price competition in the

market
 (iii) Competitive pricing
Setting price average to the competitor or average to
market leader.
 (1a) Pricing in growth stage
Nature: Sales & demand are rising

Objectives: Gain- Maximize market share

Pricing: market-penetration strategy

Verdict: Reduce the price

 (1b) Pricing in maturity stage
Nature: Almost available & interested customers have
your product
Objectives: Maximize profit as customers are on peak.
Defend existing customers & revenue
Pricing: Match or beat competitors

Verdict: Reduce the price w/ non-price strategy like

loyalty bonus, upgrade, after sales, free-delivery,
exchange offer
 (1c) Pricing in saturation stage
Nature: Everyone has your product, no new customers
join in
Objectives: Product improvement, modification & brand
differentiation
Pricing: Reduction

Verdict: Reduce the price w/ non-price strategy like

loyalty bonus, upgrade, after sales, free-delivery,
exchange offer
 (1d) Pricing in decline stage
Nature: Only specific & loyal customers remain w/ you

Objectives: Reduce expenses, phase out inactive products

& outlets
Pricing: Reduction

Verdict: Massive reduction in par or below cost to secure

possible cash flow
 2nd. Price Change Strategy
Centered around four strategies

2a) Maintain the price, 2b) Maintain price w/ non price

counter attack, 2c) Price reduction, 2d) Price increase w/
counter-attack
 (2a) Maintaining the price
Meaning: Bluntly maintain the price in anticipation of
following scenario

Fear: Price reduction may hamper profits, so let’s not do

it
Arrogance: Our brands are competitive, price reduction
won't decrease our market share
Speculation: Maintaining the price at current level
(regardless of competition) will regain market share in
 (2b) Maintaining price w/ non-price counter attack
Meaning: Operate w/ current level of price as company
provides non-priced services. Maintain price & add
value. Orgn. operates at lower margin

Like: Guarantee, warranty, reliable service, after sales,

good communication

Implication: Affordable to maintain price & invest on

quality improvements to cut costs.
 (2c) Price reduction
Meaning: Directly aimed at price reduction considering
market scenario

Fear: Should reduce the price b/c once market share is

lost, we may never gain it
Judgment: Market demand is price-sensitive, we should
reduce to stay at market

Speculation: Costs will fall w/ volume in future

 (2d) Price increase w/ product counter attack
Meaning: Increasing price w/ product related strategies to
maintain overall REVENUE

Example: Fighter brand, redesigning product, new

features, free repair, maintenance

Strategy: Introduce cheaper & new brands, maintain a

safety cushion to counter attacking products
 Price Response
Competitive pricing: When product is homogeneous,
reducing price together w/ competitor
Non Price Competition: Focus on guarantee and value added
differentiation to repel price competition

Do Nothing: If others reduce price b/c of excess stock, end of

season sale & stock clearance.
 5. Geographical Pricing
Meaning: Pricing product based on cost of transport,
delivery, location, order level, purchase timing…
Includes: 5a) Point of Production (PoP) and 5b) Uniform
delivery pricing

5a) Point of Production: Price discrimination between on-site-

visit purchase & goods distributed to distance location.

Goods purchased on-site receives wholesome discount. Goods

delivered to distance includes transport & distribution cost & is
expensive
 5b. Uniform delivery pricing
Meaning: Keeping same delivery charge to all buyers
regardless of distance, region, territory
Free On-Board (FoB) price: Concerned w/ ImportExport.
Producer charges price up to nearest shipping point, export
platform, collection or dispatch center.
Cost & Freight (C&F) price: Export price that covers cost of
production + cargo/consignment load excluding insurance

Cost, Insurance, Freight (CIF) price: Charge that includes cost

of production, cargo transport/load & insurance upto importer’s
collection center/port
 2. Price Discounts & Allowance
 Cash Discount: Who pay & clear bill up-front, PoP

 Quantity Discount: Who buy in bulk in large quantity

 Allowances: Reward paid to retailers (Marts, Stores)
for giving rack space, highlighting products in store
 Seasonal Discount: Price reduction in off-season. To
buy new stock & empty old. Send-off old stock for cash
 Trade-In Allowance: Given in exchange-offer. Price
reduction: returning old & buying new.
 6. Psychological pricing
Meaning: Setting price level to arouse emotional buying
aspect
Examples: Odd-Even price, prestige/premium price, Customary
price, Superficial discounting price

Some price setting appeal to larger psychological appeal to

customers
Task:

Design a Psychological Pricing for a cloth

having price above 2000
 Contd…
Odd-Even price: Setting price w/ psychological appeal
that Odd prices are better value & best buying
significance.
Prestige pricing: Setting high price to appeal to consumer that
product is high quality, luxury & rarity in same product line.
For high value product, lower price distorts sales
Customary pricing: Is based on price level which customers anchor a
certain price point to a product from past. Customers put certain value
to product based on past experience. Hajmola Re 1, (4 pcs. to 3 pcs.)

Superficial Discounting: Concerned w/ deceptive lower-down

that appears as massive reduction and savings to customer.
 Thank you
End of Chapter 7