Sba 5

CHAPTER 5: PRICING METHODS AND STRATEGIES
Pricing is the marketing function that involves determination of value of a product or

service in monetary terms before it is offered in the market for sale.
Price is the marketing mix element that produced revenue. Price refers to the exchange
value in terms of money of products and services which provide a bundle of satisfaction to the
consumer. The price of a product increases with increase in sales revenue.
According to Prof. K.C. Kite, “It 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.”
Objectives
 Maximize profits & return on investment
 Exploit competitive positioning
 Increase market share and market demand
 Face the competition
 Achieve price stability
 Resource mobilization
 Long run welfare of the firm
Factors influencing are:

METHODS/APPROACHES TO PRICING
1. Cost-based – based on cost of production

 Mark-up/Cost plus pricing – selling price includes total cost plus mark-up/margin that
the firm desires
 Full cost or Absorption cost pricing – selling price includes full cost of production and
sales plus a mark-up required (desired) by the firm. It makes use of standard costing
techniques. The cost includes:
 Break-even or Target return pricing – firm determines the break-even point (volume
of sales required to reach a no profit, no loss situation then sets prices in order to
achieve a certain level of return on investment.
2. Market/Customer/Demand based
 What the traffic can bear – The seller sets the maximum price that the buyers are
willing to pay under given circumstances.
 Skimming Pricing – The seller sets a relatively high price when the product is
introduced and then lowers the price over time.
 Penetration pricing – The product is introduced at low prices initially and the price is
increased subsequently with increase in demand and market share.
3. Completion based
 Going rate or Parity pricing – Price is determined on the basis of price of competitor’s
product price is set similar to the price of competitor’s product.
 Discount pricing – Price of the product is set below the price of competitor’s product.
 Premium pricing – Price is set above the price charged by the competitors for similar
product.
 Tender/Sealed bid pricing – A contractor or tender for the production of the product is
floated in the market and many parties submit their proposals. The party with the
lowest bid or quote gets the tender and the quoted amount is the price.
4. Other methods
 Differentiated pricing – Different prices are charged from different customers on the
basis of:
o Customer segments
o Time
o Location/area
o Product quantity
o Product attributes
 Affordability/Social welfare – In case of essential commodities, prices are set in such
a way that all sections of people in the society can afford it. Price may also be below
the cost of product due to subsidies provided by the government.
Pricing Strategies
 Product line pricing – prices are set on the basis of well-established price points of other
products in the product line
 Optional pricing – a base price is set for the basic product ad prices are set for optional
features, services along with the main product
 Bundle pricing – sellers offer a bundle or package of different products or services for a
lower price that they would charge if the customer bought all of them separately.
 Skimming pricing – the seller tries to skim the profit from the market by charging a high
price in the initial stages and lowers the price in the long run.
 Value based pricing – seller sets the prices according to the value perceived by the customer
of the product/service.
 Loss leader pricing – prices are set very low, sometimes below cost to encourage sales of
other products or a retail outlet.
 Captive pricing – a special price is offered to loyal customers.
 Psychological pricing – prices are set according to emotional appeals that influence buying
decisions.
 Promotional pricing – prices are set below MRP to stimulate purchases and increase
awareness. It includes – pricing for special events, low interest financing, cash rebates,
warranties & discounts.
 Discount pricing – it involves reduction of prices from MRP for performing certain
activities. It includes cash discounts, quantity discounts, and seasonal discounts.
 Discriminatory pricing – seller sells a product at two or more prices based on customer
segments, location, time and availability of products or brand image.
 Going rate pricing – price is set on the basis of prevailing market rate.
 EDLP (everyday low prices) – retail stores offer low prices to customers every day in
comparison with competitors to promote sales and increase footfall without any special
occasion, event or discount.

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CHAPTER 5: PRICING METHODS AND STRATEGIES

Pricing is the marketing function that involves determination of value of a product or

Factors influencing are:

1. Cost-based – based on cost of production

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