Pricing

•Price denotes two aspects

Revenue to Perceived
the seller value to the
buyer

Question is what is the right price

for the product?
Consumer Seller Shareholders

Get value for Could sell Earned higher

their money desire profits
volume
 OBJECTIVES OF PRICING

1. Survival
2. Rate of growth and sales maximization
3. Market shares
4. Target return on investment
5. Preventing competition
6. Making money
7. Price stabilisation
 FACTORS AFFECTING PRICING

1. Costs
2. Demand and Consumer Psychology
3. Competition
4. Profit
5. Government Policy
 Types of pricing

Cost Plus Pricing

In cost-plus pricing method, a fixed percentage, also
called mark-up percentage, of the total cost (as a profit)
is added to the total cost to set the price.
For example, XYZ organization bears the

total cost of Rs. 100 per unit for producing a product. It

adds Rs. 20 per unit to the price of product as’ profit. In
such a case, the final price of a product of the organization
would be Rs. 120.
 Cost-plus pricing is also known as average cost
pricing or full cost pricing or mark-up pricing . This
is the most commonly used method in
manufacturing organizations.
 In this method, following decisions related to price
should be made:-
1. Estimation of cost
2. Choice of fair profit margin
Marginal cost pricing:

• Adopted when demand is slack and market is highly

competitive.

• Here price is fix on the basis of variable cost,

instead full cost.

•It is also known as incremental cost pricing.

 Types of pricing
Advantages:

• This method is very useful to beat competition. It is

also used by firms to enter a new market.

• It is very useful in case of goods of public utility

where profitability is not the objective.

Limitation :
Cannot be adopted as a long term strategy.
 Types of pricing
Penetration Pricing :
• Adopted generally in the case of new product.
• firm charge a low price, even lower than ongoing price.
•The principle of marginal costing may be used for this
purpose.
• In this case, the firms set a low price of the product in the
initial stage. As the product catches the market, price is
generally raised up.
•Short run policy
 Types of pricing
Penetration price policy would be suitable when :
Lead time i.e the period of distinctiveness is fairly long.
When cost structure shows decreasing trend over time.

Examples: Reliance brought a kind of revolution in Indian

mobile phone industry by this strategy in a market which was
dominated by BSNL.

Nirma is another example of success of this strategy in

entering a market largely catered by big brands like HLL and
 Types of pricing
Penetration price policy is possible in following
conditions-
•In short run, product should be highly elastic. i.e
elasticity greater than unity.
•Economies of large scale production
•The potential market ought to fairly large
• High cross elasticity of demand
•The product by nature should be such that it can easily
accepted and adopted by the consumers.
 Skimming Pricing
 Price skimming is a product pricing
strategy by which a firm charges the
highest initial price that customers will
pay and then lowers it over time.
 As the demand of the first customers is satisfied and
competition enters the market, the firm lowers the price
to attract another, more price-sensitive segment of the
population.
 This approach contrasts with the penetration pricing
model, which focuses on releasing a lower-priced product
to grab as much market share as possible.
 Firms often use skimming to recover the cost of
development. Skimming is a useful strategy in the
following contexts:
• There are enough prospective customers willing to buy
the product at a high price.
• The high price does not attract competitors.
• The high price is interpreted as a sign of high quality.
• Good examples of price skimming include innovative electronic products, such as the
Apple iPhone and Sony PlayStation 3. For example, the PlayStation 3 was originally
sold at $599 in the US market, but it has been gradually reduced to below $200.
• Apple’s pricing strategy on its smartphone lineup follows the price skimming strategy
to a tee. Apple releases new iPhone models every year and
prices of the newer iPhones are quite high, in fact much higher than the rest of the
competition.
 Barometric Price Leadership
◦ One firm in an industry will initiate a price
change in response to economic conditions.
◦ The other firms may or may not follow this
leader.
◦ Leader may change.
 Dominant Price Leadership
◦ One firm is recognized as the industry leader.
◦ Dominant firm sets price with the realization
that the smaller firms will follow and charge
the same price.
  Cyclical Pricing
• Cyclical Pricing refers to appropriate pricing strategy at different stages of Business Cycle.
Every Business Cycle consists of four phases: Recession, Depression, Recovery and Prosperity.
Contraction comprises of the first two phases and the last two phases constitute expansion.
• The recession phase is basically the downturn phase of an economy, which is characterized by
decline in aggregate demand, wage rate etc. During recovery, some macroeconomic variables
including these above-mentioned variables change, following the change in GDP.

• Business Cycles cause decline in aggregate economic activity,
which results in fall in purchasing power of the consumers. As a
result of this, it is argued that strategies are to be revised and
appropriate pricing policies need to be adopted depending on
the phase of Business Cycle the economy passes through.
• There lies a difference in opinion regarding
appropriate pricing policy during various phases of
Business Cycle
 (1) Rigid Pricing
 (2) Flexible Pricing



 Transfer Pricing
• Modern companies are subdivided into several groups or divisions.
• Each of these divisions may be charged with a profit objective.
 As the product moves through these divisions on the way to the consumer it is
“sold” or transferred from one division to another at a “transfer price.”
• If each division is allowed to choose its own transfer price without any
coordination, the final price of the product to consumers may not maximize
profits for the firm as a whole.
• Firms must pay special attention toward designing a transfer pricing
mechanism that is geared toward maximizing total company profit.
• Design of the optimal transfer pricing mechanism is complicated by
the fact that
◦ each division may be able to sell its product in external markets as
well as internally.
◦ each division may be able to procure inputs from external markets
as well as internally.
 While setting the price, marketers

a) Select the pricing objective

b) Estimate demand
c) Analysis competitors cost, offers and prices
d) All of the above
 _______ is a pricing strategy for newly introduced products
that results in a high initial product price. This price is
reduced over time as demand at the higher price is satisfied.
 a) Prestige pricing
 b) Price lining
c) Skimming
d) Incremental pricing
 Internal pricing between departments of the same firm
is called:

a) Transfer pricing
b) Internal Pricing

c) Cost plus pricing

d) Odd- even pricing

 A profit calculated by adding a percentage to the
costs of production is called

a) Mark – up
b) Break Even

c) Margin