Chapter 6

Pricing

©2022 | Basic Marketing

by Salman Zaheer
Digital version of the book is available for FREE: https://archive.org/details/basic-marketing-2020
1
Printed copy can be obtained from: https://www.readings.com.pk/pages/BookDetails.aspx?BookID=1370613
Chapter-6

Table of Contents

Opening Scenario: Pricing Motorcycles

• Price
• Pricing Objectives( Intentions)
• Factors to Consider While Setting Price
• Pricing Strategies

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Chapter-6

Opening Scenario

Pricing Motorcycles

• Pakistan is world's 5th largest market of motorcycles with 7,500 new

motorcycles being sold daily.
• Pakistan Honda is the market leader despite being higher in price
than others.
• In 1963 – Atlas Autos Ltd. was founded, then in 1990 it merged with
another company to become Atlas Honda Ltd. (AHL).
• Launched 4-Stroke bike that were not common in Pakistan plus 2-
stroke bike as well which has some issues.
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Opening Scenario

• The first issue they faced was they required a balance of oil
to be added along with petrol that was a headache.
• Secondly, they had lower fuel consumption.
• Thirdly, those often required maintenance.
• On the other side 4-stroke bikes were free from all of these
problems but were pricier.
• In 1990s, motorcycle CD70 emphasizing the fuel efficiency
of bike that it was capable of going up to 80km in just a
litre of petrol.
• In 2001 tariffs dropped and Chinese motorcycles entered
the market which were low in price. 4
Chapter-6

Opening Scenario
• As a result, sales of industry boosted at 30% which looked
mature earlier on.
• This new growth was coming from new lower-price bikes
and Honda started shrinking because of Price difference.
• Honda made the decision to reduce prices for short term and
planned to install a new plant to reduce costs (for long-term
price drop).
• AHL managed to do this successfully and in the next six
years, sales boosted from 60,000 motorcycles per year in
2000 to 460,000 in 2006.
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Opening Scenario

• AHL started operations of another production line

in Sheikhupura in 2016 that has now doubled the
capacity to 1.2 million units.
• One plant is in Karachi that produces 150,000
units making the total capability to 1.35 million
motorcycles/year.

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Price
• Price: The amount of money a buyer pays a seller in
exchange for products and services.
• (Pricing decision can be made for short-term while other
Ps usually require long-term change process.
• For example, a soft drink manufacturer can announce
today that they are offering Rs. 5 off or they may end
such an offer within a day.
In technological products prices
• Many factors influence price changing, Technological fall faster as PLC is shorter.
changes.
• For example, Intel.
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Price Spent (Where it Goes?)

• From the price that we pay for a product, a major chunk of it is not
the cost of actual product.
• A rough estimate about a product such as shoe of Rs. 1,000, it
might have such a cost break-up:
• Rs. 200 (retailer margin with shop rent, utilities and salary)
• Rs. 200 (distribution)
• Rs. 150 (government taxes)
• Rs. 150 (company profit)
• Rs. 300 (actual manufacturing cost of shoe)
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Price Spent (Where it Goes?)

• Cost break-ups are observable in publishing business as
usually if the actual cost of printing and designing is
Rs.900.
• 500 page full colour book then 5% might be author's
(royalties).
• 25% of wholesaler and then another 25% of retailer.
• The consumer would be getting the book for Rs.1,500 to
2,000 out of which real printing cost may be only Rs.900.
• Each layer is adding value.
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Pricing Objectives (Intentions)

• Pricing Objective: Specifying role of pricing in an
organization's strategic plan. It can be gaining market
share, or profit maximization, or just survival etc.
Sales: At times companies are more concerned about
getting sales than profits.
• This is often required when a company launches a new
product in an existing industry.
• Comparisons are often made with the sales of the same
period in the last year to see how much change has been
observed.
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Pricing Objectives (Intentions)

Market share: Market share is the ratio of unit sales
to those of the industry.
• Market share is also often related with a firm's
profitability.
• BMW or Porsche in Pakistan do not have market
share as their pricing objective as they earn with
even fewer sales.
• Overall car sales rose by 20% as more than 2 lac
cars sold in fiscal year 2017-189 with Corolla as
market leader and Suzuki Mehran being next.
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Pricing Objectives (Intentions)

• Mobile phone brands have also gone through an interesting
rise and fall.
• Nokia had 40% market in 2011 but has less than 1% in
2020.
Survival: Sometimes overall GDP of the country
goes down or an industry is going through contraction, in
such situations sole survival instead of profit and market
share becomes an issue.
• Companies sometimes layoff employees and bring prices
down (even below cost if needed) so they can remain in
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business and survive these difficult times.
Chapter-6

Pricing Objectives (Intentions)

Social responsibility: Motive by the company, where sales or profits are
secondary.
• For example, MIA Corporation is importer of various air-conditioning brands
in Pakistan such as Acson and McQuay.
• MIA's CEO claims that the textile division is not making any profit but they
are not closing it because there are 200 employees.
• Two-hundred stoves (kitchens) are operational, meaning 200 families are
being fed.
• They are only keeping it for the sake of people and not for profit.

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Pricing Objectives (Intentions)

Profit: Profit making is kept in mind while establishing a
company as it is quite central to sustain a company.
• We as humans need money to fulfil most needs.
• However, if money making becomes the 'prime' purpose of a
company then this may break some ethical boundaries.
• Heavy usage of disposable diapers is extremely dangerous
for children, as they become irritated because of the impurity
on their body and grow up to be stubborn children.

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Pricing Objectives (Intentions)

Purpose of any business/corporation should be:
i. Serving Consumers (creation of The Creator).
ii. Reducing Unemployment.
iii. Profit Making: Earning for own self.

Profit is often assumed to be the very purpose of

pricing, while a man hasn't been created only to
make money. The race for riches. Majority of time
during man's life is spent attempting to fulfil his
desire to earn money.
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Factors to Consider When Setting Prices

• Customer perception of value might vary from product to
product or country to country.
• Big Mac (famous burger brand of McDonald) is most
expensive in Switzerland.
There are two broad ways of setting prices.
• Value-based Pricing: Setting price based on buyers’
perception of value rather than on the seller’s cost.
• Cost-based Pricing: Setting prices based on the costs for
producing, distributing, and selling the product plus a fair rate
of return for effort and risk.
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Chapter-6

Factors to Consider When Setting Prices

There are two types of costs:
Fixed Costs: Costs that remain constant regardless of production or
sales level.
• FC (Fixed costs): These do not change with production
Variable Costs: Part of costs that vary depending on the number of units
being produced.
• VC (Variable costs): These vary depending on production level i.e.
no. of units produced
TC (Total cost) = FC + VC

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Costs at Different Levels of Production

If a company is making a limited number of units

then it cannot reduce much cost and Vice Versa.
• Experience Curve: The drop in average per unit cost that
comes with accumulated production experience.
• A company starts to make a new product it lacks the
experience to do this efficiently.
• With passage of time it learns and starts looking for ways
to reduce the time to do repetitive tasks.
• Costs fall down so it becomes possible for the company to
reduce the prices as well. 18
Chapter-6

Law of Demand and Supply

Demand curve: A curve that shows the number of

units the market will be willing to buy in a given time
period, at different prices.
• For example, suppose price of a cancer drug is
doubled, it will barely result in reduced demand.
• Law of demand and supply say that sales and prices
are inversely proportional.
• As prices go up sales fall as lesser number of people
want to buy an expensive product and vice versa.
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Pricing Strategies

There are various approaches to setting up prices.

Market-Skimming Pricing: Setting a high price for a
new product and then gradually reducing it over time.
• Companies want to gain profit from innovators who
are eager to try the latest product.
• This pricing strategy is often tried in high-
technological products as companies recover R&D
costs.
Market skimming pricing is often
practiced in technological products as
mobile phones or video game consoles.
Sony's PS4 was launched in 2013 for a
price of $400, reduced to $350 in 2015
and then to $300 in 2016 upon launch of
PS4 Slim.
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Pricing Strategies
• Market-Penetration Pricing: Setting a low price for a
new product in order to attract a large number of
buyers and a large market share.
• This strategy is mostly used when a company
introduces a new product in the market when
already several brands are present in market.
• This approach is suited for products that have elastic Ikea, world's largest furniture retailer had to
demand curves. lower its prices in China to penetrate the
market.

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Pricing Strategies

• Using such predatory pricing where rivals

cannot make money is also one of the
prime reasons why marketing is criticized.
Using this approach one company made
money but what about all those
competitors and their employees who lost
their jobs.
• Should a company really be that heart-less
while running after money?

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Pricing Strategies

• Product-Line Pricing: Giving different prices

to products of same line (category).
• Optional-Product Pricing: The pricing of
extra or accessory product along with main
product.
• Captive-Product Pricing: Pricing products
that must be used with the main product.

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Pricing Strategies

• By-Product Pricing: Setting a price for by products in

order to make the main product's price more
competitive.
• Product Bundle Pricing: Clipping multiple products
together and setting a single price for it.

Fast food brands often utilize 'product

bundle pricing' by clipping burger,
French fries and soft drink.

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Pricing Strategies

• Pricing Promotional: Short term reduction in the price of a

product to increase sales.
• For sale: Having 'for sale' tag leaves an impression that
product is being offered at a better price than what a customer
would buy it for otherwise.
• Cash discount: In many B2B such extra discount offers are
common that encourage purchasers to pay bill on cash or
sooner.
• Quantity discount: Discounts offered for purchasing larger
volume of products are called quantity discounts.
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Pricing Strategies

• Functional/trade discount: Sometimes a channel member is asked

to perform either certain functions such as picking or dropping the
product or so.
• Seasonal discount: These are concessions offered by brands on those
products that are out of season.
• Allowances: It is the promotional money paid by the manufacturer to
retailer to feature its products in some way.
• Rebates: Rebate is giving back some of the money in some other
form. For example, if you buy this product then you can get 3%
discount on education.
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Pricing Strategies

• Segmented Pricing: Selling a product at two or more prices when differences in prices
are not based on costs, instead different customer segments are charged differently.
• Psychological Pricing: Using different tactics to leave a psychological impact on the
customer such as ending the product price with '9'.
Prestige pricing: A company at times keeps the price higher than competitor only to
give the impression to customer that their product is of higher quality as a number of
customers often assume that.
Odd-pricing: It is a pricing strategy in which a company prices just below the next
bigger number.
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Pricing Strategies

Fixed rate vs. price flexibility: It is also a company's choice to

either opt for a fix rate for all customers or alternately leave it to
negotiations.
• Some customers have the habit of arguing so some
companies go for a higher asking price to let the customer
think that some advantage was gained after bargain.
• Alternately, more profit could be earned from those who don't
ask for a price reduction.

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Pricing Strategies
• Geographical Pricing: Pricing on basis of geographical zones.
• FOB (free on board) pricing: It means that the buyer has to pay for
shipment.
• Uniform-delivered pricing: In it a firm charges exactly the same price
irrespective of the buyer's location or distance from seller.
• Zone pricing: In it the company sets zones and customers in a zone pay
the same price.
• Basing-point pricing: Some city is set as a basing point by seller, all
customers pay freight from it.
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Pricing Strategies
• Dynamic Pricing: Varying the price of the product, depending
on the changing marketing conditions.
• This practice is quite common in both the airline industry as
well as in hotels.
• Some companies like Alaska Airline even offer different
quotes for every customer by analysing their online search
patterns.
• Not in every market either strategy could be used as product
type also has a role. Airlines and hotels use dynamic
• Multinationals may use one strategy in a country and another pricing, they readjust on need and
demand basis very rapidly.
in second.
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 ‫ُك‬
‫َج َز ا ُم‬
‫ُهللا‬
THANK YOU!

©2022 | Basic Marketing

by Salman Zaheer
Digital version of the book is available for FREE: https://archive.org/details/basic-marketing-2020
Printed copy can be obtained from: https://www.readings.com.pk/pages/BookDetails.aspx?BookID=1370613