4

PRICING
STRATEGIES

Learning Objectives
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After studying this Chapter you should able to :

d" Understand the meaning of price, pricing, objectives of pricing,
price determination.

d" Analyse the factors influencing pricing policy.

d" Discuss methods of pricing policies and strategies.

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 4.2 PRICING STRATEGIES
4.1 NATURE OF PRICE AND PRICING

What is price?
Price may be defined as the value of product attributes
expressed in monetary terms which a consumer pays or is expected
to pay in exchange and anticipation of the expected or offered
utility.
Price goes by many names. Price is the rent paid to apartment,
tuition fee for education, fee to a physician, fare to railway, taxi
and bus companies. Local utilities call their price a rate, insurance
company calls it premium, guest lecturer accept his charges as
honorarium, even income taxes are the price we pay for the
privilege of making money.
However, price is not synonymous with value and utility. Value
is of quantitative measure of the exchange power of a product
relative to other products. Utility, on the other hand, refers to the
consumer needs satisfYing attribute of a product usually expressed
in qualitative terms. But both value and utility concepts are
essential to the determination of price.
What is pricing?
Pricing is the function of determining product value in
monetary terms by the marketing management of a company before
it is offered to the target consumer for sale.
The managerial tasks involved in product pricing include
establishing the pricing objectives, identifying the price governing
factors, ascertaining their relevance and relative importance,
determining product value in monetary terms and formulation of
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price policies and strategies.

4.2 FACTORS INFLUENCING PRICING DECISION/

POLICY (OBJECTIVES/DETERMINANTS/
OF PRICING POLICY)
The company's pricing decisions are influenced by a number of
internal company factors and external environmental
considerations. These factors are illustrated in the following
figure 4.1 :

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 PRICING STRATEGIES 4.3
INTERNAL FACTORS EXTERNAL FACTORS
Marketing objectives Nature of the market and
Marketing mix demand competition, other
- PRICING
Costs I- environmental factors
DECISIONS
Organisation Economy
Resellers
Govt.

Fig. 4.1. Factors affecting price decisions.

1. Internal Factors
(a) Objectives of Pricing: The first step in setting price is the
decision of the company with regard to what it wants to accomplish
with the particular product. If the company has selected target
market and market positioning. The pricing is easier. The clearer
firm is about its objectives, the easier it is to set price. The common
objectives may be survival, profit maximisation, market slUIIe
maximisation and product quality leadership.
(i) Survival : Companies with the problems of over capacity,
intense competition and changing consumer wants must set a low
price because profits are less important than survival. As long as
their prices cover variable costs and some fixed costs, they can stay
in business. Tr(Jubled companies to keep plant going and the
inventories turning over keep survival objective.
Current Profit Maximisation: Some companies want to
(ii)
set a price that will maximise current profits. They estimate the
demand and costs associated with alternative prices and choose the
price that will product the maximum current profit. In this
company emphasises current financial performance rather than
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long run performance.

(iii) Market Share Leadership: There are some companies
who are interested in dominant market share. This is based on the
belief that the company owing the largest market share will enjoy
the lowest costs and highest long run profit. They go after market
share leadership by resting prices as low as possible.
(iv) Product Quality Leadership: The objectives of being the
product quality leader normally calls for charging a high price to
cover the high product quality and high cost of Rand D.

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 4.4 PRICING STRATEGIES
Other Objectives
There are some other specific objectives in setting prices. They
are as follows :
(a) Low prices are set to prevent competition.

(b) Setting prices at competitor's levels to stabilise the market.

(c) Price are set to maintain loyalty and support of resellers.

(d) Prices are set to prevent government intervention.

(e) Prices are temporarily reduced to create excitement for a

product.
(/) One product price may be set to help the sales of other
products.
Thus, pricing plays an important role in helping to accomplish
the company's objectives at many levels.
(b) Marketing Mix Strategy: The marketer must consider the
total marketing mix when setting prices. If the product is positioned
on non-price factors, then decisions about quality, promotion and
distribution will strongly influence price. If price is a key
positioning factor, then price will strongly influence decisions on
the other marketing mix elements. Price decisions must be co-
ordinated with product design distribution and promotion decisions
to form a consistent and effective marketing program. Decisions
made for other marketing mix variables may affect pricing
decisions.
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Generally companies make their pricing decision first and then

bases other marketing mix decisions on the price it wants to charge
for the product. For example, IBM designed PC Tr. to sell at a price
that was competitive with other moderately priced personal
computers. Here, price is a key product positioning factor that
defined the products market, competition and design.
(c) Costs: Cost is another powerful factor. The company wants
to charge a price that covers all its costs for producing, distributing
and selling the product, including a fair rate of return for its effort

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 PRICING STRATEGIES 4.5
and risks. However, the company must carefully watch its costs.
If the costs are more than the competitors, then company will have
to charge a higher price or make less profits than competitors.
(d) Organisational Considerations : Different people set
prices in organisations based on the size and natur~ of
organisations. In small companies, prices are set· by top
management, in large organisations marketing or sales dept. set
prices. In industrial markets sales people may be allowed to
negotiate with consumers and fix prices within certain ranges.
there are' companies where there is a pricing dept. Sales managers,
production managers, finance managers and Accountants all exert
influence on pricing determination.

2. External Factors
(a) The market and demand: Buyers balance the price of a
product against the benefits of owning it. Therefore, before setting
prices the marketer must understand the relationship between
price and demand for its product. This requires an understanding
of methods for measuring the price-demand relationship.

1. Pricing in Different Types of Markets

Pricing varies with different types of markets, economists
analyse 4 types of markets each presenting a different pricing
challenge. They are as follows :
(a) Pricing Under Pure Competition
It is a competitive market situation characterised by :
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(i) Many buyers and sellers trading a homogeneous

commodity such as wheat, rice, copper etc., None of them
is big enough to significantly influence the supply of goods
and price.
(ii) There is complete freedom for firms to enter and leave the
industry.
In this situation a seller cannot charge more than the going
price nor would sellers charge less than the market price because
they can sell all they want at the market price. In these markets

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 4.6 PRICING STRATEGIES
buyers and sellers are Price-takers rather than price makers. To
the extent that sellers cannot establish any differential features
in their offer, they cannot sell their goods for any more than the
market price. Sellers in these markets do not spend much time on
marketing strategy, since the role of marketing research product
development, pricing, advertising and sales promotion is minimal
as long as the market stays purely competitive. As the price is
always given, the seller has to simply make quantity adjustments
to the market price in a manner that maximises his profits.

(b) Pricing Under Monopolistic Competition

It is an imperfect version of both monopoly and pure
competition. It is characterised by large number of buyers and
sellers, each seller produces a product which is unique and
differentiable from that of its competitors and there is freedom for
competitors to enter the industry. The product may be physically
varied such as in quality, features, style or the variation may be
in the service.
In this situation buyers see different offers and will pay
different amounts. Sellers try to develop differentiated offers for
different segment groups. Sellers can earn above average rates of
return by distinguishing their offers. Thus sellers transact over
a range of prices rather than a single market price.

(c) Pricing Under Oligopolistic Competition

Oligopoly is a market situation characterised by the presence
of few large sellers who compete amongst themselves for the larger
share of market. In this kind of market situation, differences in
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prices are tied to the product difference. In the absence of product

differences, price has the tendency to be uniform. Each seller is
alert to competitors strategies and moves. For example, a steel
company slashes its price by 10% buyers quickly move to this
company. Competitors will have to respond by lowering their prices
or increasing their services. On the other hand, if the oligopolist
raised the price, the competitors' might not follow this lead.
Oligopolists, in developing their pricing and marketing strategies
must pay as much attention to competitors behaviour as to
customers behaviour.

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 PRICING STRATEGIES 4.7
(d) Pricing Under Pure Monopoly
It consists of one seller. The seller may be Govt. or a private
regulated monopoly (power corporation), or a private non-regulated
monopoly (where there are no competitors). In this situation, the
monopolist would seek to establish the combination of price and
output that provides it with the maximum total profit. However,
pricing is handled differently in each case. A Govt. monopoly can
set a price, below cost because the product is important to buyers
and they cannot afford to pay full cost or the price might be set to
even quite high, to discourage consumption. In case of regulated
monopoly, the Govt., may permit to set a price that is considered
as a fair return. No regulated monopolies are free to price at what
the market will bear. However, even in monopoly the company may
not charge the full price for several reasons like fear of Govt.
Regulation, desire not to attract competition desire to penetrate the
market etc.

2. Consumer Perceptions of Price and Value

When setting prices, the company must consider consumer
perceptions of price and how these perceptions affect consumers'
buying decisions. Buyer oriented pricing involves understanding
what value consumers place on the benefits they receive from the
product and setting a price consistent with this value. The benefits
include both tangibles and intangibles. When a consumer buys a
meal at a fancy restaurant it is easy to calculate the value of the
meals ingradients. But it is very difficult to measure the value of
other satisfactions such as taste, environment, relaxation,
conversion, and status. And these values vary for different
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consumers and for different situations. Thus consumer consciously

or subconsciously uses these values to evaluate a product's price.
Marketers must try to analyse the co~sumer's motivations for
buying the product and set price according to consumer perceptions
of the product's value.

(3) Competitors Prices and Offers

This is another external factor influencing the company's
pricing decisions. Consumers evaluate a product's price and value
against the prices and values of comparable products. Another

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 4.8 PRICING STRATEGIES
factor here is the nature of competition it faces is also important,
because a high price may attract competition and low price may
discourage competitors or it may dive them out of the market.
The company needs to learn the price and quality of each
competitors offer. The company showed also watch the change in
the pricing of competitors.

(4) Other External Factors

The other external conditions are economic conditions.
Economic factors such as inflation, boom or recession and interest
rates influence pricing decisions because they affect both the costs
of production and consumer perceptions of the product's price and
value.
Resellers reactions are also important. The company should set
prices that allow a fair profit, encourage their support and help
them to sell the product effectively.
Government is another important external influence on pricing
decisions. Marketers need to know the laws affecting price and
make sure their pricing policies are defensible.

4.3 METHODS OF PRICING/APPROACHES

TO PRICING
The price set by a company will be either too low to produce a
profit or too high to produce any demand. The costs set a flow to
the price, consumer perception about the product's value is the
ceiling. The company must consider competitor's prices and other
external and internal factors to find the best price between these
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two extremes. It may be illustrated as follows:

LOW HIGH
PRICE PRICE
No Products Competitors CoIlS"Cfmer No possible
possible costs prices Percep- demand at
profit at external tions of this price
this price factors value
international
factors

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 PRICING STRATEGIES 4.9
Companies solve the pricing issue by selecting a general pricing
approach that includes one or more of these sets analysed below:
1. Cost based method/approach
(a) Cost-plus pricing.
(b) Break-even analysis and target profit pricing.
2. Buyer based method/approach
Perceived value pricing.
3. Competition based method/approach
(a) Going rate pricing.
(b) Sealed-bid pricing.

Cost Based Methods

(1) .Cost-plus Pricing
The cost based method of price determination is one in which
the cost of manufacturing a product serves as the base for price
fIxation. In order to cover an anticipated profIt on the product being
sold, management usually adds to this cost some amount referred
to as Mark-up of tences a certain percent of the cost.
However, use of standard mark ups to set prices is not logical
as it ignores currer..t demand and competition, aspects to get optical
price. Still, markup pricing remains popular for several reasons.
First, sellers have more certainty about costs than about demand.
Second, where all fIrms in the industry use this pricing method,
prices tend to be similar. Therefore, price competition is minimised.
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Third, many people feel that cost-plus pricing is fairer to both

buyers and sellers as sellers do not take advantage of buyers when
the demand is high and vice versa.

(2) Break-even Analysis and Target Profit Pricing

This is another cost-oriented pricing approach. In this the fIrm
tries to determine the price that will produce the profIt it is seeking.
It is known as target pricing. Normally some companies keep 10
to 20 percent profIt on its investment. It is followed by public
utilities also.

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 4.10 PRICING STRATEGIES
Target pricing uses the concept of break-even chart. A break-
even chart shows the total cost and total revenue expected at
different sales volume levels. This pricing method requires the
company to consider different prices, their impact on the
volume necessary to pass the break even point and realise target
profits and the likelihood that this will happen with each possible
price.

Buyer Based Pricing (Buyer Perceived Value Pricing)

Certain companies base their pricing on the product's perceived
value. They see the buyers' perception of value, not the sellers'
cost, as the key to pricing. Here, seller use the non-price variables
in the marketing mix to build up perceived value in the buyer's
minds.
For example a cup of coffee in a self service restaurant is
charged at Rs. 1/-, in a restaurant with service at Rs. 1.50, in a
family restaurant at Rs. 2/-, in a posh area ale room at Rs. 3/- and
in 3 star hotels at Rs. 4/- and in a 5 star hotel at Rs. 8/-. Each
successive restaurant can charge more because of the value added
by the atmosphere.
If the seller charges more than the buyer recogaised value the
company's sales will suffer relative to what they could be. Many
companies overprice their products and their product sell poorly.
Others underprice, these products sell extremely well, but they
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produce less revenue than they would if price was raised to the
perce;ved value-level.

Competition Based ~ethods

(1) Going-rate Pricing

In going rate pricing the company bases its price largely on
competitors p. ices, with less attention paid to its own costs or
demand. The company may charge the same, more or less than

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 PRICING STRATEGIES 4.11
its major competitors. Normally, in oligopolistic competition where
the smaller firms follow the leader and change their prices when
the market leaders prices change, rather than when their own
demand or cost changes.

(2) Sealed-bid Pricing

Pricing to bid for jobs is sealed bid pricing. The firm bases its
price on expectations of how competitors will price rather than on
a rigid relation to the firm's costs or demand. The purpose is to
win the contract and therefore pricing. is lower than the others.
However, firm cannot set its price below a certain level. It
cannot price below cost without worsening its position. But, the
margin of profit normally depends upon the toughness of
competition.
Thus, the company can select one or a combination of three
general pricing approaches-cost based, buyer based or competition
based approach.

4.4 PUBLIC POLICY IN RELATION TO

PRICING IN INDIA
The Govt. intervention in shaping prices and price policies of
companies is very important. Price matters have aroused so much
heat in the debates of Parliament and state Assemblies. It has
resulted in SI) many Public demonstrations and has prominent place
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in the press. In relation to pricing the following 4 objectives have

guided Govt. actions in India.
1. Protection of consumers interest from price rise.
2. Ensuring fair return on investment to those industries
which are positioned at the commanding heights of the
economy.
3. Protection of producers of agricultural products against
vicissitudes of prices.

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 4.12 PRiCiNG STRATEGIES
4. Prevention of trade restrictive and anti-competitive pricing
detrimental to the interests of consumers and the
economy.
These 4 objectives are achieved by 3 measures of price
regulation. They are price control, price research and monitoring
and price related prosecution.

4.5 PRICE CONTROLS

Price controls refers to Governmental directives of statutory,
executive and advisory to companies in respect of price
determination. Price control may be exercised mainly in 3 ways,
namely, by imposing statutory price control, by inducing voluntary
price control and by acting as a price leader.

Statutory Price Control

It is determination of product price by the Govt. itself. For this
purpose, Govt. refers the pricing problem to the Bureau of
Industrial cost and prices (BICP) which analyses the cost structure
of the concerned industry and recommends to the Govt. the
price mechanism and structure relevant to the product under
question.
At present, the prices of steel, cement, fertilisers, sugar and
drugs to name a few are under statutory price control. The
companies manufacturing these products are assured retention
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prices i.e., their costs and a fair return on investment.

Some products are allowed to follow a dual pricing system

where a manufacturer is required compulsorily sell a part of its
production to Govt. at a low price called levy price. The rest of
production may be sold in the open market at any
price manufacturer feels fit. It is followed for sugar production in
India.

The statutory price control also envisages the support

prices for certain agricultural products such as cotton, jute,

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 PRICING STRATEGIES 4.13

food grains etc. so as to protect cultivators from price

fluctuations. Accordingly, the cotton corporation of India,
jute corporation of India and Food Corporation of India offer to
procure relevant products at these support prices and prevent price
decline.

Voluntary Price Control

It refers to the formulation of price control, measures by the
respective industry association or some such body representing the
industry's interests under the directions of and according to
guidelines provided by the government. The product prices are fixed
and adhered to not under any statutory obligation but under a
voluntary obligation with the price monitoring and mechanism and
adequate penalty provisions for breaches.

Price Leaderships
The Govt. has also attempted to shape and regulate the prices
of some products by asking public sector companies to act as 'Price
Leaders' in their respective product areas. For example
Modern Bakeries has been a 'Price Leader' and is successful in
containing the rise in prices of large number of small bakeries.
Similarly, the milk prices is controlled by Diary Development
Corporation of India.

2. Price Research and Monitoring

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Govt. has set up relevant institutions which analyse and

monitor prices, study cost structures of different industries and
suggest control measures and schemes. These institutions
include Tariff commission and the BICP. These institutions
are also empowered to call for any data, record or papers
pertaining to any of the industries. Govt. has appointed expert
officials to provide appropriate technical and cost accounting
informations.

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 4.14 PRICING STRATEGIES
--------------------------------------~~~~~~~
3. Price Related Prosecution
Govt. in order to control prices issues certain orders for the
prosecution and penalisation of those who commit breach of its
provisions. Besides, to safeguard consumer interest, the monopolies
and restrictive Trade Practices Act 1969 has provisions for
prohibiting restrictive trade practices, discriminatory and anti-
competitive prices and resale price maintenance. The packaged
commodities (Regulation) Order, 1975, has provisions which
prescribe every packaged product has to exhibit the maximum
retail price to be charged to consumer.
Thus, an analysis of price regulatory measures described above
reveal that in India Govt. intervention in the price determination
and administration is wide and deep. It is particularly so in respect
of those products considered essential, to consumers. Therefore,
Govt. attitude, parliament and assembly debates, legislative
provisions, social obligations are important decision in-puts in
formulating price policies.

SUMMARY
Price refers to the value of product attributes expressed in monetary
terms which a consumer pays or is expected to pay in exchange and
anticipation ofthe expected or offered utility.
Value is of Quantitative measure of the exchange power ofa product
relative to other product.
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Utility, on the otherhand refers to the consumer needs satisfying

attribute of a product usually expressed in Qualitative terms. Utility
is the power of a commodity to satisfy human needs, and wants. Both
value and utility concepts are essential to the determination of price.
Pricing is the way or mechanism in arriving at the price of a product
or service. In other words pricing is the function of determining
product value in monetary terms before it is offered to the target
consumers for sale.

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 PRICING STRATEGIES 4.15

The factors influencing pricing decisions can be grouped into internal

and external factors. Internal factors include marketing objectives,
marketing mix (4 Ps), costs, and the nature of organisation, external
factors are nature of market, demand level competition, government
policy, resellers reactions, inflation, recession, interest rates, and
soon.
The method of fixing price of a product or service is called pricing
approach. The important are costs, competition perception and the
like. Under cost based pricing the different approaches arE~~ost plus
or make-up, break-even, and so on. In competition based approach of
pricing, the methods are-going rate pricing, sealed-bid pricing, return
on investment and the like. According to buyers perception, the pricing
is done on the basis of perceived value of a product.

Key Words
• Price • Price taker
• Pricing • Price maker
• Marketing mix • Monopolistic competition
• Cost plus pricing • Oligopolistic competition
• Break-even pricing • Monopoly
• Target profit pricing • BICP
• Going rate pricing • PDS
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• Sealed bid pricing

( QUESTIONS)

SECTION-A
(Conceptual Type-2 Marks)
1. Define price.
2. What is utility?

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 4.16 PRICING STRATEGIES
3. What do you mean by value of a product ?
4. What is pricing?
5. What are marketing objectives?
6. Name the internal factors influencing pricing decisions.
7. State the external factors influencing pricing decisions.
8. State any two objectives of pricing.
9. What do you mean by market leadership?
10. What is marketing mix strategy ?
11. Who is a price maker?
12. Who is a price Taker?
13. What is price competition?
14. What is monopolistic competition?
15. What is oligopolistic competition?
16. Who are competitors to the FMCG leader HLL ?
17. Name the competitors ofIndian Airlines.
18. Who is the leader in Texttile sector is India?
19. What is cost plus pricing?
20. What is BEP ?
21. What is going rate pricing?
22. What is sealed-bid pricing?
23. Expand BICP.
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SECTION-B
(Analytical Type-S Marks)
1. Explain the terms 'price' 'utility' 'value' and pricing.
2. Explain any three internal factors influencing pricing decisions.
3. Briefly discuss the pricing objective.
4. How pricing is arrived at monopolistic and oligopolistic competition?
5. Analyse cost plus, going rate, and administered pricing.

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 PRICING STRAfEGIES 4.17
SECTION-C
(Essay Type-1S Marks)
1. Define price. Discuss with examples of your choice of pricing
objective.
2. Briefly analyse the internal and external factors influencing pricing
decisions.
3. Explain in brief the pricing under different types of markets.
4. Assume you are the marketing manager of a leading Textile
industry, what factors you considered in finding the price of suitings,
shirtings and dress materials.
5. What is price war ? imagine that you are the CEO of reliance inform,
under the volatile competition scenario, How do you fix up the prices
for different facilities that you offer?
6. What is pricing strategy? How do you evolve pricing strategy in case
of Airlines. ?
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