PRICE DECISION

UNIT IV
 PRICING DECISION
Meaning, Importance and Objectives; Factors influencing price determination;
Pricing strategies, Geographic pricing strategies.
 PRICE
▪Price is the amount the consumer must exchange to receive
the offering or product. Payment may be in the form of
money, goods, services, favors or anything else that has
value to the other party.
▪Price is also a key element in the marketing mix because
it relates directly to the generation of total revenue. The
following equation is an important one for the entire
organization:

Profits = total revenues – total costs or

Cost: A marketer should be careful to analyze all costs so that they can be included in the
total costing for a product. A company must keep in mind both fixed as well as variable cost
while setting the price.
Generally, there are two major types of costs which are as follow.
Fixed Cost: The fixed cost is such cost that remains fixed and does not change with the
changing level of production or sales. The example includes rent paid for the building,
interest paid on loan, salaries to employee staff etc.
Variable Cost: The variable cost is that kind of cost which changes with the change in the
level of production and sales. For example, each car produced includes the variable cost of
tires, metal sheets, Misc. items etc. that change with the increase or decrease in the quantity
of production and sales.
Competition: It affects prices significantly. The organization
matches the prices with the competitors and adjusts the prices
more or less than the competitors. The organization also assesses
that how the competitors respond to changes in the prices.
Different market conditions require different sets of pricing
strategies.
FOR EXAMPLE:
-- Monopoly in which there is only a single seller who can offer
its products or services at different rates. As the seller is single
and the buyers are much more, therefore the seller charges a
relatively higher price because there is no fear of competition.
-- Monopolistic Competition in which there are many sellers
and buyers who offer their products not at a single price but at
a range of prices. The difference in the price range is due to the
differentiated product or service offering by the sellers (can be
in shape of features, quality or style etc.) Customers can feel the
difference between the products and hence pay different price
for them.
Price competition: A policy whereby a marketer emphasizes price as an issue, and matches or beats the
prices of competitors.
-- Sellers using this approach may be prepared and able to change prices frequently, particularly
in response to competitors altering their prices.
-- A major drawback of price competition is that competitors may also have the flexibility to adjust their
prices to match or beat another company’s price cuts.
EXAMPLE: Budget airline engages in price competition and stresses its low prices in its
advertisements.
à Non-price competition: A policy in which a seller elects not to focus on price but to emphasize other
factors instead.
-- A seller elects not to focus on price but instead emphasizes distinctive product features, service, product
quality, promotion, packaging or other factors to distinguish the product from competing brands.
-- Organizations that use non-price competition aim to increase unit sales in other ways.
EXAMPLE: Sony sells flat screen televisions and other electronics in a highly competitive market and
charges higher prices than other manufacturers for them. Sony can achieve this because its emphasis on
high product quality distinguishes it from its competitors and allows it to set higher prices.
Buyers’ perceptions: When making pricing decisions, marketers should be concerned with
two vital questions.
-- How will customers interpret prices?
1. An internal reference price is a price developed in the buyer’s mind through
experience with the product. It is a belief that a product should cost approximately a
certain amount. For example, most consumers have a reasonable idea of how much to pay
for a can of soft drink, a loaf of bread or a litre of milk.
2. An external reference price is a comparison price provided by others, such as
retailers or manufacturers.
-- How will customers respond to the price?
In the context of price, buyers can be characterized according to their degree of value
consciousness and price consciousness
-- Value-conscious consumers are concerned about both the price and the quality of a
product.
-- Price-conscious consumers strive to pay low prices.
Government Regulations: The government has the power to regulate the activities of
business firms, so that they do not charge high prices and don’t indulge in anti-social
activities. The government does this by passing various acts; For example- the MRTP Act,
Consumer Protection Act, etc.

To quote one case, Nestle has advertised that they are giving one Kit Kat chocolate free
with another product of the company, the MILO beverage. Actually, the company
increased the price of MILO, by adding the price of a bar of KIT KAT to it.This attracted
the attention of the MRTP enquiry committee. The company was asked to cancel the
offer and was also punished for wrong trade practices.
Marketing Mix: Price is not the only one of the elements of
marketing mix. It must be coordinated with other elements, i.e.,
product, place and promotion. Decisions made for other elements
may affect pricing decisions. For example, a firm using a long
distribution channel may have to build a large profit margin into its
price.
Pricing Objectives of the Company: Pricing objectives focus on what a
company wants to achieve through establishing prices. These objectives should
be clear, concise, and understood by all involved in pricing decisions.
-- A target return objective: It sets a specific level of profit as an objective.
Often this amount is stated as a percentage of capital investment. A large
manufacturer such as Motorola might aim for a 15 percent return on
investment.
-- Market Share Objectives: Often the objective of a pricing strategy is to
maximize sales (either in dollars or in units) or to increase market share.
Setting a price intended to increase unit sales or market share simply mean
pricing the product lower than the competition?
-- Profit Maximization objective: Determine price and cost levels that permit
company to realize maximum profits.
PRICING STRATEGIES
Pricing new products (New Product Pricing): The strategic decision of pricing new
products can be best understood by examining the policies at the boundaries of the
continuum – from skimming (high initial price) to penetration (low initial price).
à Skimming price: A relatively high price, often charged at the beginning of a product’s
life. The price is systematically lowered as time goes by. A skimming policy enables the
marketer to capture early profits, then reduce the price to reach segments that are more
price sensitive. It also enables the innovator to recover high developmental costs quicker.
The policy of using skimming at the outset, followed by penetration pricing as the product
matures, is termed time segmentation.
à Penetration pricing: Setting a relatively low price during the initial stage of a product’s
life. A strategy that seeks the maximum number of buyers by charging low prices.
-- It is appropriate when there is high price elasticity of demand, strong threat of imminent
competition and opportunity for a substantial reduction in production costs as volume
expands.
-- To discourage competition from entering the market by quickly taking a large market
share.
Geographic Aspects of Pricing: Geographic pricing involves reductions for transport
costs or other costs associated with the physical distance between the buyer and the
seller.
-- FOB (Free on Board) factory price: It indicates the price of the merchandise at the
factory before it is loaded on to the carrier vehicle; it thus excludes transport costs.
The buyer must pay for shipping.
-- FOB destination price: It means the producer absorbs the costs of shipping the
merchandise to customers.
-- Uniform Delivered (geographic) Pricing: Uniform geographic pricing, sometimes
called postage stamp pricing, may be used. The same price is charged to all
customers regardless of geographic location, and the price is based on average
shipping costs for all customers.
-- Zone Pricing: Zone prices are regional prices where prices are adjusted for major
geographic zones as the transport costs increase.
Product line pricing: In Product line pricing, the various items in the line may be
differentiated by pricing them appropriately to indicate, for example, an economy
version, a standard version and a superior version.

Odd/Even Pricing: Odd pricing simply means that the price is not expressed in whole
Rupees., while even pricing is a whole-Rupees amount (Rs. 399 versus Rs. 400, for
example). Odd pricing originally came about before the advent of sales taxes. Now,
the rationale for this pricing is very different and it is often regarded as a key
element of psychological pricing, or creating a perception about price merely from the
image the numbers provide the customer.
 Everyday Low Pricing (EDLP) and High/Low Pricing:

Everyday Low Pricing (EDLP): The rise of Walmart as one of the world’s
largest corporations has brought the concept of everyday low pricing (EDLP) to
the forefront of global consumer consciousness. The fundamental philosophy
behind EDLP is to reduce investment in promotion and transfer part of the
savings to lower price. Thus, firms practicing an EDLP strategy typically report
substantially reduced promotional expenditures on their financial statements.
High/Low Pricing: The antithesis to EDLP is a high/low pricing strategy, in
which firms rely on periodic heavy promotional pricing, primarily
communicated through advertising and sales promotion, to build traffic and
sales volume. The promotional investment is offset by somewhat higher
everyday prices.
Captive-product pricing (Buy In – Follow on’ strategy): Setting a price for products that
must be used along with a main product, such as blades for a razor. In the case of services,
captive- product pricing is called two-part pricing. The price of the service is broken into a
fixed fee plus a variable usage rate. Thus, at any amusement parks, you pay a daily ticket
or season pass charge plus additional fees for food and other in-park features.
Price Bundling: When customers are given the opportunity to purchase a package deal at
a reduced price compared to what the individual components of the package would cost
separately, the firm is using a price bundling strategy.
Example: Products can be bundled or unbundled for pricing purposes. The bundled approach
gives a single price for the entire offering. For example, mobile telephone providers (e.g. Jio)
sell a package consisting of a smartphone plus SIM and Internet network access. They could sell
these products as separate items, but they choose also to sell them as a price bundle by giving
a discount to consumers on the smartphone if they buy all three products together.
Auction Pricing: Auctions have been around for centuries. In an auction, in
which individuals competitively bid against each other and the purchase goes
to the high bidder, the market truly sets the price (although some minimum bid
amount is often established by the seller). As a strategy, auction pricing has
gained in prominence as Internet commerce has come of age.
Cost Based Pricing: Cost-based pricing methods are fairly common. Price is determined by
adding a percentage to the product’s cost to achieve the desired profit margin.
-- Markup Pricing: In markup pricing a certain predetermined percentage of product’s cost,
called markup, is added to the cost of the product to determine the price.

Example: Let us suppose a watch manufacturer has the following costs and
sales forecast:
Fixed Costs = Rs. 4000,000
Average Variable Cost Per Unit = Rs. 300 Forecasted
sales = 40,000 units.
The watch manufacturer’s unit cost is given by:
= 300 + 4000,000/ 40,000= Rs,. 400
If the watch manufacturer aims to earn 20 per cent markup on sales, the markup price would
be Rs,. 480
Target Return Pricing (Cost-Plus): Some companies use target-return pricing method
and find out the price that would ensure a certain fair rate of Return on Investment
(ROI).
Supposing the watch manufacturer has invested 8 crores in business and wants a 20
per cent return on investment.
Then the target-return price can be calculated by:

= ` 400 + 0.2× 80,000,000/ 40,000 = ` Rs. 800 Price Per