NKUMBA UNIVERSITY

SCHOOL OF BUSINESS ADMINISTRATION

NAME:

INDEX NO:

STUDENT NUMBER:

COURSE MBA

COURSE UNIT MANAGERIAL ECONOMICS

LECTURER DR. LUTAAYA SAIDAT

Question

Critically examine the concept of pricing as used in managerial economics

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Introduction

Price is the value that is put to a product or service and is the result of a complex set of
calculations, research and understanding and risk taking ability. A pricing strategy takes into
account segments, ability to pay, market conditions, competitor actions, trade margins and input
costs, amongst others. It is targeted at the defined customers and against competitors.

According to Prof. K.C. Kite, “Pricing is a managerial task that involves establishing pricing
objectives, identifying the factors governing the price, ascertaining their relevance and
significance, determining the product value in monetary terms and formulation of price policies
and the strategies, implementing them and controlling them for the best results”. Pricing is not an
end in itself but a means to achieve marketing objectives of the firm. Thus, pricing refers to the
value determination process for a good or service, and encompasses the determination of interest
rates for loans, charges for rentals, fees for services, and prices for goods.

Therefore, the pricing strategy of a firm should be designed to achieve specific objectives. Like
other operating objectives, the objectives of pricing are derived from the overall objectives of the
firm. The basic objectives of a firm are survival and growth.

Pricing is not an end in itself but a means to achieve marketing objectives of the firm. Therefore,
the pricing strategy of a firm should be designed to achieve specific objectives. Like other
operating objectives, the objectives of pricing are derived from the overall objectives of the firm.
The basic objectives of a firm are survival and growth.

The objectives of pricing should be clearly defined because without clear cut objectives a sound
price structure cannot be developed. In practice very few firms define their pricing objectives in
unambiguous terms. The specific objectives of pricing may vary from firm to firm and even for
the same firm at different points of time. Most firms have multiple pricing objectives.

The main objectives of pricing followed by different firms are as follows:

Target Rate of Return: Firms following this objective design their pricing strategy in such a way
that will yield desired return on total investment (ROI). Rate of return refers to the amount of net
profits divided by investment or capital employed. This goal often leads to cost plus pricing. The
price of a product or service is determined by adding the expected margin of profit to the cost of

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production and distribution. In order to fix the price, the firm estimates the amount of total profit
required to earn the expected rate of return. Target rate of return is an important pricing objective
and an increasing number of firms follow this goal due to several reasons. Firstly, it ensures a
reasonable return to the investors. Secondly, it does not lead to public criticism. Thirdly, the rate
of return can be used to evaluate and compare the performance of different products of the firm.
Fourthly, it provides a measure of restraint and a guideline for judging improvement in a new
product line.

Price Stabilization: This goal is adopted in industries having a few firms. In an oligopolistic
situation where one firm is very big and all others are small, the big firm acts as the price leader
and other firms follow it. All the firms try to avoid price wars. No firm is willing to cut its prices
for fear of retaliation by other firms. In order to avoid fluctuations in prices, they may even
forgo maximizing profits during the period of scarce supply or prosperity. This objective is
followed in case of products which are vulnerable to price wars or which are advertised at the
national level. Price stability helps in planned and regular production in the long run. However, it
may create rigidity in pricing.

Target Share of the Market: In an expanding market, market share is a better indicator of a
firm’s success than the target rate of return. When the market has a potential for growth, a firm
earning the target rate of return may, in fact, be decaying if its share of the market is decreasing.
Therefore, maintenance or improvement in the market share is a more worthwhile objective in
growing markets. Market share measures a firm’s sales vis-a-vis the sales of its competitors.

Facing Competition: Under conditions of intense competition, a firm may seek to meet or
prevent competition. It may fix prices at a very low level (even below cost) to eliminate its
competitors or to prevent the entry of new firms in the market. Some firms follow this practice
while introducing a new product. This goal is not very popular and cannot be adopted on a
regular basis. In the long run, a firm cannot survive if it continues to charge less than the cost of
the product or service.

Profit Maximization: Traditionally, profit maximization is considered to be the objective of

pricing. The classical economic theory suggests the fixation of prices in such a way that the
marginal cost is equal to marginal revenue where profits are maximized. Even today some firms

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are not very conscious of social responsibilities and try to maximize profits. But in recent years
there has been a change in the philosophy of business and profit maximization is not considered
rational business behaviour. In practice, no firm states explicitly that profit maximization is its
pricing objective due to the fear of public criticism and government regulation.

Improving Public Image: Another objective of pricing may be to enhance the firm’s public
image. The firm may launch a premium product at a high price for this purpose. Alternatively, it
may offer the new product at a low price to appeal to the common buyer. The pricing policy
should be consistent with the established reputation of the firm. In addition to the foregoing,
business firms may design their pricing policy to achieve the goals of full capacity utilization,
market exploration, diversification, etc.

Some reasons of pricing include:

Most Flexible Marketing Mix Variable: For marketers’ price is the most adjustable of all
marketing decisions. Unlike product and distribution decisions, which can take months or years
to change, or some forms of promotion which can be time consuming to alter (e.g., television
advertisement), price can be changed very rapidly. The flexibility of pricing decisions is
particularly important in times when the marketer seeks to quickly stimulate demand or respond
to competitor price actions. For instance, a marketer can agree to a field salesperson’s request to
lower price for a potential prospect during a phone conversation. Likewise a marketer in charge
of online operations can raise prices on hot selling products with the click of a few website
buttons.

Setting the Right Price: Pricing decisions made hastily without sufficient research, analysis, and
strategic evaluation can lead to the marketing organization losing revenue. Prices set too low
may mean the company is missing out on additional profits that could be earned if the target
market is willing to spend more to acquire the product. Additionally, attempts to raise an initially
low priced product to a higher price may be met to customer resistance as they may feel the
marketer is attempting to take advantage of their customers. Prices set too high can also impact
revenue as it prevents interested customers from purchasing the product. Setting the right price
level often takes considerable market knowledge and, especially with new products, testing of
different pricing options.

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Trigger of First Impressions: Often times customers’ perception of a product is formed as soon
as they learn the price, such as when a product is first seen when walking down the aisle of a
store. While the final decision to make a purchase may be based on the value offered by the
entire marketing offering (i.e., entire product), it is possible the customer will not evaluate a
marketer’s product at all based on price alone. It is important for marketers to know if customers
are more likely to dismiss a product when all they know is its price. If so, pricing may become
the most important of all marketing decisions if it can be shown that customers are avoiding
learning more about the product because of the price.

Important Part of Sales Promotion: Many times price adjustments are part of sales promotions
that lower price for a short term to stimulate interest in the product. However, marketers must
guard against the temptation to adjust prices too frequently since continually increasing and
decreasing price can lead customers to be conditioned to anticipate price reductions and,
consequently, withhold purchase until the price reduction occurs again.

Firms may choose various kinds of pricing for their various products these are:

Odd Pricing: It may be a price ending in an odd number. Bata Shoe Company pricing one of its
pair shoes at 299.95 is an example of odd pricing. Such a pricing is adopted by the sellers of
specialty or convenient goods.

Psychological Pricing: The prices under this method are fixed at a full number. The price
settlers feel such a price has an apparent psychological significance from the viewpoint of
buyers. This differs from the concept of odd pricing in that the curve doesn’t necessarily have
any segments positively inclined.

Customary Prices: Such prices are fixed by the custom. Soft drinks are priced by their
customary bases, such a pricing is usually adopted by chain stores.

Pricing at Prevailing Prices: This kind of pricing is undertaken to meet the competition. It is
also called ‘Pricing at the market. Such a strategy presumes a market in elasticity of demand
below the current price.

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Prestige Pricing: Many customers judge the quality of a product by its price. In their opinion
lower priced product is inferior, and higher priced product is superior. This pricing is applied
generally to luxury goods.

Price Lining: This policy of pricing is usually found among retailers. Technically it is closely
related to both psychological and customary prices. Under this policy the pricing decisions are
made only initially and such fixed prices remain constant over long periods of time.

Geographic Pricing: The manufacturer sometimes adopts different prices in different markets
without creating any ill will among customers, e.g., Petrol is priced depending upon the distance
from the storage area to the retail outlet.

FOB Pricing (Free on Board): Here the buyer will have to incur the cost of transit and in the
later the price quoted is inclusive of transits charges.

Dual Pricing: When the manufacture sells the same product at two or more different prices in
the same market it is ‘Dual Market Pricing’. This is possible only if different brands are
marketed. It is adopted in railways where passengers are charged differently for the same journey
and traveling in different classes. This is also referred to as ‘Discriminatory Pricing’.

Administered Pricing: This applies to the practice of pricing the products for the markets not on
the basis of cost, competitive pressures or the laws of supply and demand but purely on the basis
of the policy decisions of the sellers. These kinds of price remain unchanged for substantial
periods of time.

Factors Influencing Pricing Decisions in an organization

Among the many factors influencing the pricing decisions, the three major influences are
customers, competitors and costs.

Customers: Managers examine pricing problems through the eyes of their customers. Increasing
prices may cause the loss of a customer to a competitor or it may cause a customer to choose a
less expensive substitute product.

Competitors: No business operates in a vacuum. Competitors’ reactions also influence pricing

decisions. A competitor’s aggressive pricing may force a business to lower its prices to be

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competitive. On the other hand, a business without a competitor can set higher prices. A business
with knowledge of its competitor’s technology, plant capacity and operating policies is able to
estimate its competitors’ cost, which is valuable information in setting prices. Managers consider
both their domestic and international competition in making pricing decisions. Firms with excess
capacity because demand is low in domestic markets may price aggressively in their export
markets.

Costs: Costs influence prices because they affect supply. The lower the cost relative to the price,
the greater the quantity of product the company is willing to supply. A product that is consist-
ently priced below its cost can drain large amounts of resources from an organization.

In making pricing decisions, all above three factors are important. However, when setting prices,
companies weigh customers, competitors and costs differently. Companies selling homogeneous
products in highly competitive markets must accept the market price. In less competitive
markets, products are differentiated and managers have some discretion in setting prices. As
competition further decreases, the key factor affecting pricing decisions is the customers’
willingness to pay, not costs or competitors. Pricing strategy is now being accepted as a tool for
providing customer satisfaction and continuous improvement of the product as well.

Factors Affecting Pricing Decisions in managerial economics

Several factors influence the pricing decisions of a firm and they can be divided into two broad
divisions, namely internal factors and external factors.

Internal Factors Influencing Pricing Decisions:

The factors influencing pricing decisions are divided into internal and external factors on the
basis of whether the management has control over the factors or not. If the management has
control over the factors, it will come under internal factors, if not it will come under external
factors. So the internal factors are within the control of the management and are particularly
related to the internal environment of a firm.

The internal factors affecting pricing decisions are:

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Company Objectives: This has considerable influence on the pricing decisions of a firm. Pricing
policies and strategies must be in conformity with the firm’s pricing objectives. For example- if a
company desires a targeted rate of return on capital investment, then the pricing decisions are so
made that the total sales revenue from all products, exceeds the total cost by a sufficient margin,
to provide the desired return on the total capital investment.

Organization Structure: Another significant internal factor affecting pricing decisions is the
organizational structure of the firm. Generally, the top management has full authority for framing
pricing objectives and policies. Some firms allow workers’ participation in decision making and
therefore in such firms, all the employees give their views and suggestions for the pricing policy.
This is helpful to the firm if the firm has several products, requiring frequent pricing decisions
and where prices differ in different markets. Similarly, the marketing manager also helps and
assists the top management in framing the pricing policies and strategies. The determination of
the selling price is a major policy decision for the firm and the cost accountant can make an
important contribution to this decision making process by providing the management with costs,
which are relevant to the pricing decision at hand.

Marketing Mix: Price, product, promotion and place are the four ‘p’s of a marketing mix. The
pricing policy of a firm must consider the other components of a marketing mix as well, because
these factors are closely related. Moreover, these factors will change according to changing
market conditions and will be different for each market. Thus, marketing research and the
marketing information system can be utilized to form the appropriate pricing policy.

Product Differentiation: If a product is different from its competitive products, with features
such as a new style, design, package, etc., then it can fetch a higher price in the market. For
example- Lee, Arrow and Park Avenue shirts, are sold at a high price in the market. Thus, if the
product has distinguishing features, then the firm has greater freedom in fixing the prices and
customers will also be willing to pay that price.

Cost of the Product: Pricing decisions are based on the cost production. If a product is priced
less than the cost of production, the firm has to suffer the loss. But the cost of production can be
reduced, by coordinating the activities of production properly, the firm can reduce the price
accordingly.

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The external factors affecting the pricing decision of a firm are:

Demand: Market demand for a product or service has great impact on pricing. If there is no
demand for the product, the product cannot be sold at all. If the product enjoys good demand, the
pricing decision can be aimed to utilize this trend.

Competition: There has been a revolutionary change experienced in the Indian market after the
liberalization and opening up of the economy. The impact of competition is more pronounced
than in the earlier days. The market is flooded with too many products, both Indian and foreign.
The number, size and pricing strategy, followed by competitors have a significant role to play in
the pricing decision. If the product cannot be differentiated with special features, a firm cannot
charge a higher price than that of its competitors.

Buyers: If there are no ready takers for the product, it is said to have failed in the market. Pricing
decision is thus related to the characters, nature and preferences of the buyers.

Suppliers: They supply the required items of production to the firm. As already pointed out, the
firm can reduce the price, if it can reduce the cost of production. If not, the usual tendency is to
charge the increased cost of production to the consumer. For example- the price hike for petrol or
diesel will automatically increase the price of vegetables, fruits, provisions, etc. If a firm could
get the required raw materials at reasonable rates from suppliers, then it can also price the goods
at a less rate.

Economic Conditions: This also affects the pricing decision of a firm. In a depressed economy,
business activities will be considerably less, but in a boom condition, there will be hectic
business activity. Therefore, economic conditions affect the demand for goods and services. So,
in a depressed economy, in order to accelerate business one sells goods at a lesser price, but in a
boom period, goods can be sold at a high price.

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

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government does this by passing various acts; For example- the MRTP Act, Consumer
Protection Act, etc. 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.

The factors that can influence price decisions may be divided into two groups:

Internal Factors:

They are generally within the control of the organization. At times they are called ‘built-in
factors’ and these are costs and objectives.

Costs: The most decisive factor is the cost of production. It involves finding I out cost per unit
and adding necessary profit with the cost of production to arrive at the price. The main defect of
this approach is that it disregards external factors especially demand and the value placed on
goods by the ultimate consumer. Whatever be the cost of production, there is a price at which the
consumer is willing to buy.

Objectives: Large manufacturing companies establish marketing goals/ objectives and pricing
contributes its share in achieving such goals.

These goals may together be termed as ‘Pricing Policies’ which may be classified into:

 Target Rate of Return,

 Stability in prices,
 Maintenance or increase in the share of the market,
 Meeting or preventing competition, and
 Maximizing profits.

Marketing Mix: Price is 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.

External Factors:

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These factors are generally beyond the control of an organization, but they have to be
considered.

These factors include:

Demand; In a consumer-oriented market, the consumers influence the price. The value of a given
product to the consumer is the prime consideration. Marketing research is used as an effective
aid in ascertaining the consumer demand.

Competition – No manufacturer is free to fix his price without considering Competition unless
he has a monopoly. It is difficult to determine how far competition prices range from that of
direct substitutes to that of other items which are close substitutes. Convenience goods have a
wide range of competing products while shopping and speciality goods have a narrow group of
competitors.

Distribution Channels – Compensation paid for the services of the middlemen between the
manufacturer and the ultimate consumer must be included in the ultimate price the consumer
pays. Because of these costs, it sometimes happens that the price of the product becomes so high
that the consumer rejects it.

Political and Legal Aspects – Government interference, such as control of prices, levying of
taxes etc. are other considerations which affect the pricing of the products.

Short-Run vs. Long-Run Pricing Decisions:

The time horizon of the decision is critical in computing the relevant costs in a pricing decision.
The two ends of the time horizon are: Short-Run and Long-Run.

Short-Run Pricing Decisions:

Short-run decisions include pricing for a one-time-only special order with no long term im-
plications. The time horizon is typically six months or less. Business firms can encounter
situations where they are faced with the opportunity of bidding for a one-time special order in

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competition with other suppliers. In this situation, only the incremental costs of undertaking the
order should be taken into account. It is likely that most of the resources required to fill the order
have already been acquired and the cost of these resources will be incurred whether or not the
bid is accepted by the customer.

In manufacturing companies, incremental costs of one-time special order will include:

(i) Additional materials required to comply with the order.

(ii) Additional labour, overtime and other labour costs.

(iii) Power, fuel and maintenance costs for the machinery and equipment required to fulfill the
order.

In service companies, incremental costs of providing some additional services would be very
less. For instance, the incremental cost of accepting one-time special business by a hotel would
comprise the cost of additional meals, bathroom facilities and laundering.

In most situations, incremental costs to be incurred relate to unit-level activities. The companies
have already resources incurred for batch, product and service-sustaining activities.

According to Colin Drury, any bid for one-time special orders that is based on covering
only short-term incremental costs must meet all of the following conditions:

1. Sufficient capacity is available for all resources that are required to fulfill the order. If some
resources are fully utilized, opportunity costs of scarce resources must be covered by the bid
price.

2. The bid price will not affect the future selling prices and the customer will not expect repeat
business to be priced to cover short term incremental costs.

3. The order will utilize unused capacity for only a short period and capacity will be released for
use on more profitable opportunities. If more profitable opportunities do not exist and a short
term focus is always adopted to utilize unused capacity, then the effect of pricing a series of
special orders over several periods to cover incremental costs constitutes a long term decision.

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Thus, the situation arises whereby the decision to reduce capacity is continually deferred and
short-term incremental costs are used for long-term decisions.

Long-Run Pricing Decisions:

Short-run pricing decisions are not appropriate for long-run pricing policy since short-run pricing
policy is subject to short-run demand and supply conditions. Most firms use full cost information
while setting long-run pricing decisions. In the long-run, firms can adjust the supply of virtually
all of their activity resources.

Therefore, a product or service should be priced to cover all of the resources that are committed
to it. If a firm is unable to generate sufficient revenues to cover the long run costs of all its
products and its business sustaining costs, then it will make losses and will not be able to
survive. There is a need for determining accurately the long-run or full costs of individual
products or services so that product pricing decisions for the long-run can be made satisfactorily.

Target Pricing: A target price is the estimated price for a product or service that potential
customers will be willing to pay. This estimate is based on an understanding of customers’
perceived value for a product and competitors’ responses. The target price forms the basis for
calculating target costs. A target cost is the estimated long-run cost of a product or service and
when a product or service is sold, the target price enables the company to achieve targeted profit.
Target cost is derived by subtracting the target profit from the target price.

The following are the different types of pricing

Premium pricing: It is a type of pricing which involves establishing a price higher than your
competitors to achieve a premium positioning. You can use this kind of pricing when your
product or service presents some unique features or core advantages, or when the company has a
unique competitive advantage compared to its rivals. For example, Audi and Mercedes are
premium brands of cars because they are far above the rest in their product design as well as in
their marketing communications.

Penetration pricing: It is a commonly used pricing method amongst the various types of pricing
is designed to capture market share by entering the market with a low price as compared to the
competition. The penetration pricing strategy is used in order to attract more customers and to

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make the customer switch from current brands existing in the market. The main target group is
price sensitive customers. Once a market share is captured, the prices are increased by the
company. However, this is a sensitive strategy to apply as the market might be penetrated by yet
another new entrant. Or the margins are so low that the company does not survive. And finally,
this strategy never creates long term brand loyalty in the mind of customers. This strategy is used
mainly to increase brand awareness and start with a small market share.

Economy pricing: This type of pricing takes a very low cost approach. Just the bare minimum to
keep prices low and attract a specific segment of the market that is highly price sensitive.
Examples of companies focusing on this type of pricing include Walmart, Lidl and Aldi.

Skimming price: Skimming is a type of pricing used by companies that have a significant
competitive advantage and which can gain maximum revenue advantage before other
competitors begin offering similar products or substitutes. It can be the case for innovative
electronics entering the marketing before the products are copied by close competitors or
Chinese manufacturers.

After being copied, the product loses its premium value and hence the price has to be dropped
immediately. Thus, to get maximum margins from their products, innovative companies keep
launching new variants so that customers are always in the discovery phase and paying the
required premium.

Psychological pricing: It is a type of pricing which can be translated into a small incentive that
can make a huge impact psychologically on customers. Customers are more willing to buy the
necessary products at $4,99 than products costing $5. The difference in price is actually
completely irrelevant. However, it makes a great difference in the mind of the customers. This
strategy can frequently be seen in the supermarkets and small shops.

Neutral strategy; This type of pricing focuses on keeping the price at the same level for all four
periods of the product lifecycl. However, with this type of strategy, there is no opportunity to
make higher profits and at the same time, it doesn’t allow for increasing the market share. Also,
when the product declines in turnover, keeping the same price effects the margins thereby
causing an early demise. This pricing is used very rarely.

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Captive product pricing; It is a type of pricing which focuses on captive products accompanying
the core products. For example, the ink for a printer is a captive product where the core product
is the printer. When employing this strategy companies usually put a higher price on the captive
products resulting in increased revenue margins, than on the core product.

Optional product pricing; It can be frequently observed in the case of airline companies. For
example, the basic product of KLM Airlines is offering or providing seats in the airplane for
different flights. However, once the customers start purchasing these seats, they are offered
optional features along with the seats. Examples may be extra seat space, more drinks etc.
Because of this optional product, there is more revenue generated from the main product.
Customers are willing to spend for the optional product as well.

Bundling price; Ever hear of the offer of 1 + 1 free? In the supermarket, when two different
products are combined together such as a razor and the lotion for shaving, and they are offered as
a deal, then we get to experience the bundling type of pricing first hand. This strategy is mainly
used to get rid of excess stocks.

Promotional pricing strategy; It is just like Bundling price. But here, the products are bundled
so as to make the customer use the bundled product for the first time. This type of pricing
focuses on buying one, and getting a new type of product for free. Promotional pricing can also
serve as a way to move old stock as well as to increase brand awareness.

Geographical pricing; It involves variations of prices depending on the location where the
product and service is being sold and is mostly influenced by the changes in the currencies as
well as inflation. An example of geographic pricing can also be the sales of heavy machinery,
which are sold after considering the transportation cost of different locations. Click here to read
more on geographical pricing strategy.

The common pricing methods and strategies are discussed below:

Cost-plus Method: The cost involved in the production of any product becomes the prime basis
for determining its price. This cost-plus method is the commonest method used for pricing by the
small-scale enterprises. According to this method, firstly, the total costs, i.e., fixed and variables
costs are worked out. Then, a certain margin for profit is added to total costs because the basic

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objective of running an enterprise is to earn profits. Now, what sum comes after is the selling
price of the product.

To put it in simple equation: Total Cost (Fixed + Variable) + Profit = Selling Price

Skimming Pricing: Under skimming pricing strategy, a Very high price is charged in the
beginning with a view to recover the cost involved within a shorter period of time. This policy is
feasible when the product introduced is innovative and is used mainly by sophisticated group of
customers. However, the high price is usually supported by heavy promotion. This policy cannot
continue for a long period of time because high price of the product attracts other
manufactures/entrepreneurs also to plunge into manufacturing. As a result, the competition sets
in and the prices tend to fall.

Penetration Pricing: This is, in a way, contrary to the skimming pricing policy. Under this
policy, the price of the product is set at a lower level to penetrate into the market. The underlying
idea is to attract as many customers as possible at the very outset. This policy can be adopted
when the customers are very particular for price and when the product is an item of mass
consumption. Once the product is accepted in the market, the price of the product is gradually
increased.

Market Rate Policy: This policy adopts the prevailing market rates for determining the price of
the product, this method is used when the product is indistinguishable from those of the
competitors. This method is also used in case of unbranded products like oils, courier, tailoring
and repairing/servicing.

Variable Price Policy: Under this policy, the price of the same product varies from customers to
customers depending upon the situations prevailing in the market. This method is adopted with
an objective to maximize the profits.

The following are some market situations when the entrepreneurs adopt the variable price
policy:

 There is difference in the size of customers (e.g. a lower price may be offered to bulk
customers).
 There is a difference in the demand and supply powers between the locations.

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  There is a difference in the bargaining powers of various customers.
 There is a difference in the customers’ ability to pay for the same product.
 There is a difference in the knowledge of customers’ about the market price of the
product.

Resale Price Maintenance (RPM): Under this policy, the manufacturers of the product fix prices
for the wholesalers and retailers. The retail prices of the product like drugs and detergents are
printed on the packages. However, the retail price is fixed somewhat higher to meet the cost of
inefficient retailers not selling the goods timely. Its disadvantage is that it deprives of the
customers from the advantage which may accrue to them through competition.

Below Cost Pricing: It is sometimes desirable to sell the goods at a price less than the cost. This
method is used to sell perishable goods to save the firm from excessive losses due to
deterioration in quality with the passage of time. This method is also used to sell goods which
may become obsolete due to changes in fashion. The philosophy behind this method of pricing is
that sale at any price is better than no sale at all.

Competition-Oriented Pricing: Competition-oriented pricing strategy is followed by

manufacturers when:

 The market is highly competitive, and

 The product of one manufacturer is not significantly differentiated from those of others.

As such, under competition-oriented pricing strategy, same price is fixed by all competitive
producers. For example, Coca-Cola and Pepsi, manufacturers fight each other everywhere in
India or abroad, charging the same price for their product.

Follow the Leader Pricing: Under this policy, one firm i.e. the price leader with dominant
market share sets the price; and other firms in the industry follow that price. Followers match
price cuts or price rises, as initiated by the leader. Some firms, however, may match price cuts
but not price rises initiated by the leader; when recessionary conditions prevail in the market. Or
some firms may match price rise but not price-cuts initiated by the leader; when boom conditions
prevail in the market.

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Penetration Pricing: This is a typical pricing strategy followed by many manufacturers for
introducing a new product by them. As per this strategy, a manufacturer sets a low price for his
product; so as to penetrate into a new market for popularizing his product; and capture a large
market share over a period of time, by establishing goodwill as ‘low-price seller’.

Penetration pricing strategy is suitable when:

 There is high competition in the market, and

 Demand is highly elastic and very sensitive to price changes.

Under penetration pricing strategy, the manufacturer may increase the price subsequently; once
brand popularity is established by the manufacturer, in the market.

Discriminating Pricing: According to Mrs. Joan Robinson, “The act of selling the same article
produced under a single control, at different prices to different buyers, is known as price-
discrimination”. Price-discrimination is common in case of professional services e.g. those of
doctor’s or lawyer’s; who may charge different fee from different customers, on the basis of their
ability to pay. Price discrimination is possible when customers are separated from each other, on
the basis of their (market) location. For example, such kind of price discrimination is found in
case of seating in cinema halls, in airline services etc. Price discriminating may occur, on the
basis of the use to which the product is put by different customers. For example, electricity
boards charge different price per unit when electricity is used for domestic or commercial
purposes.

Loss-Leader Pricing: This pricing strategy is favorite among retailers. They sharply cut prices
on one or few popular items (even below its cost) to attract customers. The items on which prices
are cut are called loss leaders. Having attracted in this way; they may charge very high prices for
some of their other products; which consumers may pay thinking that the price is just reasonable.

In fact under this pricing strategy, loss suffered in case of ‘loss-leader-product’; is compensated
through higher prices charged for other products.

Keep Out Pricing: It is a pre-emotive pricing policy involving fixation of low prices to
discourage or prevent the entry of new firms into the industry. This policy can be adopted only
by big firms who have large resources at their command. However, it is a very risky policy and

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may lead to severe losses to the firms. Moreover, it may not be possible for the firm to raise
prices subsequently; once people get used to buying at lower rates.

Psychological Pricing: Under psychological pricing strategy, price is so fixed that it appears to
be somewhat lesser; and influences the mind of the buyer to buy the product. For example, a
price fixed at Rs. 299 instead of straightway Rs. 300 is an instance of psychological pricing
strategy.

Differential Pricing for Product-Life-Cycle Stages: Under this pricing strategy, the
manufacturer has different price policies in view of the product- life cycle stage a product is
passing though. For example, a manufacturer may fix a low price when the product is in the
introduction stage; may slightly raise the price during the growth stage; may stabilize the price at
the saturation stage and may finally reduce the price when the product is passing through the
declining stage.

Conclusion

Pricing of a product or service refers to the fixation of a selling price to a product or service
provided by the firm. Selling price is the amount for which customers are charged for some
product manufactured or for a service provided by the firm. The pricing decisions are influenced
by both internal and external factors. Pricing is a managerial task that involves establishing
pricing objectives, identifying the factors governing the price, ascertaining their relevance and
significance, determining the product value in monetary terms and formulation of price policies
and the strategies, implementing them and controlling them for the best results. Pricing
objectives may be classified into three categories: Sales volume objectives including sales
maximization and improvement in market share, Profitability objectives consisting of profit
maximization and target rate of return and Status quo objectives comprising price stabilization,
maintaining market share, facing competition and covering costs.

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References

 Yogesh Maheswari, Managerial Economics, Phi Learning, Newdelhi, 2005 Gupta G.S.,
 Managerial Economics, Tata Mcgraw-Hill, New Delhi Moyer &Harris,
 Managerial Economics, Cengage Learning, Newdelhi, 2005 Geetika, Ghosh & Choudhury, ,
 Managerial Economics, Tata Mcgrawhill, Newdelhi, 2011

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