Pricing in Marketing

Definition: Pricing is the method of determining the value a producer will get in the exchange of goods
and services. Simply, pricing method is used to set the price of producer’s offerings relevant to both the
producer and the customer.

Every business operates with the primary objective of earning profits, and the same can be realized
through the Pricing methods adopted by the firms.

While setting the price of a product or service the following points have to be kept in mind:

 Nature of the product/service.

 The price of similar product/service in the market.
 Target audience i.e. for whom the product is manufactured (high, medium or lower class)
 The cost of production viz. Labor cost, raw material cost, machinery cost, inventory cost, transit
cost, etc.
 External factors such as Economy, Government policies, Legal issues, etc.

Pricing Objectives

The objective once set gives the path to the business i.e. in which direction to go. The following are the
pricing objectives that clears the purpose for which the business exists:
 1. Survival: The foremost Pricing Objective of any firm is to set the price that is optimum and
help the product or service to survive in the market. Each firm faces the danger of getting
ruled out from the market because of the intense competition, a mature market or change in
customer’s tastes and preferences, etc.Thus, a firm must set the price covering the fixed and
variable cost incurred without adding any profit margin to it. The survival should be the short
term objective once the firm gets a hold in the market it must strive for the additional profits.
The New Firms entering into the market adopts this type of pricing objective.
2. Maximizing the current profits: Many firms try to maximize their current profits by
estimating the Demand and Supply of goods and services in the market. Pricing is done in line
with the product’s demand in the customers and the substitutes available to fulfill that demand.
Higher the demand higher will be the price charged. Seasonal supply and demand of goods
and services are the best examples that can be quoted here.
3. Capturing huge market share: Many firms charge low prices for their offerings to capture
greater market share. The reason for keeping the price low is to have an increased sales resulting
from the Economies of Scale. Higher sales volume lead to lower production cost and increased
profits in the long run.This strategy of keeping the price low is also known as Market
Penetration Pricing. This pricing method is generally used when competition is intense and
customers are price sensitive. FMCG industry is the best example to supplement this.
4. Market Skimming: Market skimming means charging a high price for the product and
services offered by the firms which are innovative, and uses modern technology. The prices are
comparatively kept high due to the high cost of production incurred because of modern
technology. Mobile phones, Electronic Gadgets are the best examples of skimming pricing
that are launched at a very high cost and gets cheaper with the span of time.
5. Product –Quality Leadership: Many firms keep the price of their goods and services in
accordance with the Quality Perceived by the customers. Generally, the luxury goods create
their high quality, taste, and status image in the minds of customers for which they are willing
to pay high prices. Luxury cars such as BMW, Mercedes, Jaguar, etc. create the high quality
with high-status image among the customers.

Pricing Methods
Definition: The Pricing Methods are the ways in which the price of goods and services can be
calculated by considering all the factors such as the product/service, competition, target audience,
product’s life cycle, firm’s vision of expansion, etc. influencing the pricing strategy as a whole.

The pricing methods can be broadly classified into two parts:

1. Cost Oriented Pricing Method

2. Market Oriented Pricing Method
 Cost-Oriented Pricing
Method: Many firms consider the Cost of Production as a base for calculating the price of the finished
goods. Cost-oriented pricing method covers the following ways of pricing:

 Cost-Plus Pricing: It is one of the simplest pricing method wherein the manufacturer calculates
the cost of production incurred and add a certain percentage of markup to it to realize the selling
price. The markup is the percentage of profit calculated on total cost i.e. fixed and variable cost.

E.g. If the Cost of Production of product-A is Rs 500 with a markup of 25% on total cost, the
selling price will be calculated asSelling Price= cost of production + Cost of Production x
Markup Percentage/100
Selling Price=500+500 x 0.25= 625
Thus, a firm earns a profit of Rs 125 (Profit=Selling price- Cost price)

 Markup pricing- This pricing method is the variation of cost plus pricing wherein the
percentage of markup is calculated on the selling price.E.g. If the unit cost of a chocolate is Rs
16 and producer wants to earn the markup of 20% on sales then mark up price will be:

Markup Price= Unit Cost/ 1-desired return on sales

Markup Price= 16/1-0.20 = 20
Thus, the producer will charge Rs 20 for one chocolate and will earn a profit of Rs 4 per unit.

 Target-Return pricing– In this kind of pricing method the firm set the price to yield a required
Rate of Return on Investment (ROI) from the sale of goods and services.E.g. If soap
manufacturer invested Rs 1,00,000 in the business and expects 20% ROI i.e. Rs 20,000, the
target return price is given by:
 Target return price= Unit Cost + (Desired Return x capital invested)/ unit salesTarget Return
Price=16 + (0.20 x 100000)/5000Target Return Price= Rs 20

What is a Pricing Strategy?

A pricing strategy is an approach taken by businesses to decide how much to charge for their goods and
services. The interaction between margin, price, and selling level is given specific consideration while
pricing products. Therefore, it’s important and complicated to design a proper pricing plan that ensures
business success.

The price is a component that affects a company’s revenue significantly. It forms the key variable in the
company’s financial modeling and affects its income, profits, and investments in the long term. Price
reflects the idea of a business and shows its behavior towards competitors and the value it gives
customers.

Types

The following are a few pricing strategies that businesses adopt:-

#1 – Price Skimming:

A skimming pricing strategy is a pricing technique in which a business sets its initial price high and
gradually lowers it when more competitors enter the market. This is ideal for businesses that are
entering an emerging market. Here, businesses maximizes profit utilizing the price demand of certain
markets. They possess the first-mover advantage, where they are the first to introduce or market the
product or service. The skimming pricing strategy makes a profit in the early stages of the product or
service’s market until other competitors enter and supply increases.

#2 – Pricing for market penetration:

It is the opposite of price skimming. Skimming starts with huge prices, and the penetration pricing
strategy uses low prices to enter the market. This is done to attract the existing consumer base of the
competitors. Once there is establishment of a reliable pool of consumers, the costs slowly
increase. Penetration pricing strategy depends mostly on the ability of the business to bear the losses
made in the initial years. Big MNCs especially employ this to get a strong footing in developing
countries’ markets.

#3 – Premium pricing:

Premium pricing strategy involves businesses that create high-quality products and market them to
high-income or net-worth individuals. The key here is to manufacture unique, high-quality designs and
products that convince the users to pay such huge amounts. The premium pricing strategy targets the
luxury goods market.

#4 – Economy pricing:
The strategy targets customers who prefer to save money. Big companies employ the strategy to make
customers feel they are in control. Walmart in the U.S. is an example where they offer deals that please
customers. This does depend on the overhead costs and the value of the products.

#5 – Bundle pricing:

As the name suggests, it is a strategy where a business sells a bundle of goods together. Typically, the
total of the goods is lower than the individual products sold separately. This helps in moving the
inventory and selling the stocks that are left over. The strategy has the potential to make profits (or save
from losses) on low-value items.

#6 – Value-based Pricing:

A concept is similar to premium-based pricing. Here, the business decides the price based on the
customer’s valuation of the product’s worth. This is best suited for unique products.

#7 – Dynamic Pricing:

A dynamic pricing strategy in marketing involves changing the price of the items based on the present
market demand.
What Is Advertising?
Advertising is the action of calling public attention to an offering through paid announcements by an
identified sponsor.

According to Kotler –

Advertising is any paid form of non-personal presentation & promotion of ideas, goods, or services by
an identified sponsor.

According to the Advertising Association of the UK –

Advertising is any communication, usually paid-for, specifically intended to inform and/or influence
one or more people.

Simply, advertising is a process of developing a paid communication message intended to inform

people about something or to influence them to buy, try, or do something.

Characteristics Of Advertising
 Paid Form: Advertising requires the advertiser (also called sponsor) to pay to create an
advertising message, buy advertising media slot, and monitor advertising efforts.
 Tool For Promotion: Advertising is an element of the promotion mix of an organisation.
 One Way Communication: Advertising is a one-way communication where brands
communicate to the customers through different mediums.
 Personal Or Non-Personal: Advertising can be non-personal as in the case of TV, radio, or
newspaper advertisements, or highly personal as in the case of social media and other cookie-
based advertisements.

Types Of Advertising
Advertising activities can be categorised into above-the-line, below-the-line, and through-the-line
advertising according to their penetration level.

 Above-the-line advertising includes activities that are largely non-targeted and have a wide
reach. Examples of above-the-line advertising are TV, radio, & newspaper advertisements.
 Below-the-line advertising includes conversion-focused activities which are directed toward a
specific target group. Examples of below-the-line advertising are billboards, sponsorships, in-
store advertising, etc.
 Through-the-line advertising includes activities which involve the use of both ATL & BTL
strategies simultaneously. These are directed towards brand building and conversions and make
use of targeted (personalised) advertisement strategies. Examples of through-the-line
advertising are cookie-based advertising, digital marketing strategies, etc.
Advertising activities can also be categorised into 5 types based on the advertising medium used. These
types of advertisements are:

 Print Advertising: Newspaper, magazines, & brochure advertisements, etc.

 Broadcast Advertising: Television and radio advertisements.
 Outdoor Advertising: Hoardings, banners, flags, wraps, etc.
 Digital Advertising: Advertisements displayed over the internet and digital devices.
 Product/Brand Integration: Product placements in entertainment media like TV shows,
YouTube videos, etc.

What Are The Objectives Of Advertising?

There are 3 main objectives of advertising – to inform about the brand or offering, to persuade to buy or
perform a task and to remind and reinforce the brand message.

To Inform

Advertisements are used to increase brand awareness and brand exposure in the target market.
Informing potential customers about the brand and its products is the first step toward attaining
business goals.

To Persuade

Persuading customers to perform a particular task is a prominent objective of advertising. The tasks
may involve buying or trying the products and services offered, forming a brand image, developing a
favourable attitude towards the brand etc.

To Remind

Another objective of advertising is to reinforce the brand message and to reassure the existing and
potential customers about the brand vision. Advertising helps the brand to maintain top-of-mind
awareness and to avoid competitors stealing the customers. This also helps in the word of mouth
marketing.

Other objectives of advertising are subsets of these three objectives. These subsets are:

 Brand building
 Increasing sales
 Creating demand
 Engagement
 Expanding customer base
 Changing customers’ attitudes, etc.

Importance Of Advertising
To The Customers

 Convenience: Targeted informative advertisements make the customer’s decision-making

process easier as they get to know what suits their requirements and budget.
 Awareness: Advertising educates the customers about different products available in the
market and their features. This knowledge helps customers compare different products and
choose the best product for them.
 Better Quality: Only brands advertise themselves and their products. There are no
advertisements for unbranded products. This ensures better customer quality and a good
business model as no brand wants to waste money on false advertising.

To The Business

 Awareness: Advertising increases brand and product awareness among the people belonging to
the target market.
 Brand Image: Clever advertising helps the business to form the desired brand image and brand
personality in the minds of the customers.
 Product Differentiation: Advertising helps the business differentiate its product from
competitors’ and communicate its features and advantages to the target audience.
 Increases Goodwill: Advertising reiterates brand vision and increases the brand’s goodwill
among its customers.
 Value For Money: Advertising delivers the message to a wide audience and tends to be
value for money when compared to other elements of the promotion mix.

Advantages Of Advertising
 Reduces Per-Unit Cost: The wide appeal of advertisements increases the demand for the
product which benefits the organisation as it capitalises on the economies of scale.
 Helps In Brand Building: Advertisements work effectively in brand building. Brands that
advertise are preferred over those which doesn’t.
 Helps In Launching New Product: Launching a new product is easy when it is backed by an
advertisement.
 Boosts Up Existing Customers’ Confidence In The Brand: Advertisements boost existing
customers’ confidence in the brand as they feel pride when they see an advertisement of the
product or the brand they use.
 Helps In Reducing Customer Turnover: Strategic advertisements for new offers and better
service help reduce customer turnover.
 Attracts New Customers: Attractive advertisements help the brand in gaining new customers
and expanding the business.
 Educates The Customers: Advertisements inform the customers about different products
existing in the market and also educate them on what they should look for in an apt product.
Disadvantages Of Advertising
 Increases The Costs: Advertising is an expense to the business and is added to the cost of the
product. This cost is eventually borne by the end consumer.
 Confuses The Buyer: Too many advertisements with similar claims often confuse the buyer
about what to buy and whether they should buy the product or not.
 Is Sometimes Misleading: Some advertisements use smart strategies to mislead the customers.
 Only For Big Businesses: Advertising is costly, and only big businesses can afford it. This puts
small businesses out of competition with big businesses that get to enjoy a monopoly in the
market.
 Encourages The Sale Of Inferior Products: Effective advertisements even lead to the sale of
inferior products which aren’t good for the consumers.

Advertising Examples
We are surrounded by advertisements. From TV to our mobile phones, we encounter advertisements
everywhere. Following are a few examples of advertising.

TV Advertisements Example

Coca-Cola’s ‘I’d like to buy the world a Coke’, aired in 1971, is one of the the world’s most famous
TV advertisement.

Print Advertisements Example

Jeep’s ‘See whatever you want to see’ is a perfect example of a great print advertisement.

Radio Advertisements Example

Radio advertisements get more attention among the target customers and are also played more often.
Here’s an example of a radio ad by Dove.

Digital Advertisements Example

Digital advertisements are advertisements made especially for the internet and digital devices users.
The primary objective of digital ads is to drive traffic to business’s URLs. These ads can be video,
image, or text ads.

Digital video ads aren’t restricted to a 30-second or 50-second slot. An example of a digital video ad is
this advertisement by Airbnb.

One might see digital image ads while visiting websites like Feedough, Facebook, and Twitter.
Outdoor Advertising Example

These include hoardings, banners, flags, wraps, etc. An example of an outdoor advertisement is this
hoarding by Audi.

Advertising vs Public Relations

While both advertising and public relations are an essential part of the promotional mix, there are some
key differences between them.

Advertising Public Relations

Advertising is a paid form of
Public relations is a strategic communication process
promotion that uses persuasive
Definition that builds mutually beneficial relationships between
techniques to influence consumers’
an organisation and its public.
buying behaviour.
The objectives of advertising are to The objectives of public relations are to build
raise awareness about a product or goodwill and understanding between an organisation
Objectives
service, to persuade customers to and its public, to promote the organisation’s products
buy it, and build brand loyalty. or services, and to influence behaviour.
Advertising is important because it
Public relations is important because it helps
helps businesses promote their
Importance businesses build positive relationships with their
products or services to a wide
customers and other stakeholders.
audience.
Public relations is earned media, meaning businesses
try to earn positive coverage from journalists and
Paid or Advertising is usually paid for by
other influencers. This can be done through PR
earned businesses.
campaigns, events, and good old-fashioned media
relations.

Social and Economical Aspects of Advertising

“Every coin has two sides”

Advertising is praised but also criticized by critics in their own ways. Advertising has many positive
impacts along with its negative pictures. As the President of American Association of Advertising
Agencies, John O’ Toole has described advertise is something else. It is not related to studies, but it
educates. It is not a journalist but gives all information. And it is not an entertaining device but
entertains everyone.

Now let’s go through the economic and social aspects of advertising.

Economic role of Advertising

Value of Products:

The advertised products are not always the best products in the market. There are some unadvertised
products also present which are good enough. But advertising helps increase value for the products by
showing the positive image of the product which in turn helps convincing customers to buy it.
Advertising educates consumers about the uses of the products hence increasing its value in minds of
the consumers. For e.g. mobile phones were first considered as necessity but nowadays the cell phones
come with number of features which makes them mode of convenience for consumers.

Effect on Prices:

Some advertised products do cost more than unadvertised products but the vice versa is also true. But if
there is more competition in the market for those products, the prices have to come down, for e.g.,
canned juices from various brands. Thus some professional like chartered accountants and doctors are
not allowed to advertise.

But some products do not advertise much, and they don’t need much of it and even their prices are high
but they are still the leaders in market as they have their brand name. e.g., Porsche cars

Effect on consumer demand and choices:

Even if the product is heavily advertised, it does not mean that the demand or say consumption rates
will also increase. The product has to be different with better quality, and more variety than others. For
E.g., Kellogg’s cornflakes have variety of flavors with different ranges to offer for different age groups
and now also for people who want to loose weight thus giving consumers different choices to select
from.

Effect on business cycle:

Advertising no doubt helps in employing more number of people. It increases the pay rolls of people
working in this field. It helps collecting more revenues for sellers which they use for betterment of
product and services. But there are some bad effects of advertisements on business cycle also.
Sometimes, consumer may find the foreign product better than going for the national brand. This will
definitely effect the production which may in turn affect the GDP of the country.

The economic aspects are supported by the Abundance Principle which says producing more products
and services than the consumption rate which helps firstly keeping consumers informed about the
options they have and secondly helps sellers for playing in healthy and competitive atmosphere with
their self interest.

Social role of Advertising:

There are some positive and some negative aspects of advertising on the social ground. They are as
follows.
Deception in Advertising:

The relation between the buyers and sellers is maintained if the buyers are satisfied with what they saw
in advertise and what they got after buying that product. If seller shows a false or deceptive image and
an exaggerated image of the product in the advertisement, then the relation between the seller and
buyers can’t be healthy. These problems can be overcome if the seller keep their ads clean and displays
right image of the product.

The Subliminal Advertising:

Capturing the Minds of the consumers is the main intention of these ads. The ads are made in such a
way that the consumers don’t even realizes that the ad has made an impact on their minds and this
results in buying the product which they don’t even need. But “All ads don’t impress all consumers at
all times”, because majority of consumers buy products on basis of the price and needs.

Effect on Our Value System:

The advertisers use puffing tactics, endorsements from celebrities, and play emotionally, which makes
ads so powerful that the consumers like helpless preys buy those products.

These ads make poor people buy products which they can’t afford, people picking up bad habits like
smoking and drinking, and buy products just because their favorite actor endorsed that product. This
affects in increased the cost of whole society and loss of values of our own selves.

Offensiveness:

Some ads are so offensive that they are not acceptable by the buyers. For example, the ads of denim
jeans showed girls wearing very less clothes and making a sex appeal. These kinds of ads are irrelevant
to the actual product. Btu then there is some ads which are educative also and now accepted by people.
Earlier ads giving information about birth control pills was considered offensive but now the same ads
are considered educative and important.

But at the last, there are some great positive aspects which help

 Development of society and growth of technologies

 Employment
 Gives choices to buyers with self interest
 Welcomes healthy competition
 Improving standard of living.
 Give information on social, economical and health issues.
Distribution Channels
A distribution channel is the network of individuals and organizations involved in getting a product or service
from the producer to the customer. Distribution channels are also known as marketing channels or marketing
distribution channels.

Types of Distribution Channels/Level

1. Direct Channel (Zero Level)

As the name suggests, a direct channel or zero level is a distribution level through which an
organisation directly sells its products to the customers with the involvement of any intermediary. For
example, jewellers use direct channels, Apple sells its products directly to the customers through its
stores, Amazon sells directly to the consumers, etc. Some of the most common types of direct channels
of distribution are Direct sales by appointing salesmen, through Internet, teleshopping, mail order
house, etc.

2. Indirect Channels

When a middleman or intermediary is involved in the distribution process, it means the organisation is
using Indirect Channels of Distribution. The indirect channels of distribution can be classified into
three categories; viz., One Level Channel, Two Level Channel, and Three Level Channel.

i) One-Level Channel
One level channel means that there is only one intermediary involved between the manufacturer and the
customer to sell the goods. This intermediary is known as a retailer. In simple terms, under one level
channel, the organisations supply their products to the retailers who sell them to the customers directly.
For example, goods like clothes, shoes, accessories, etc., are sold by companies with the help of a
retailer.

ii) Two-Level Channel

A most commonly used channel of distribution that involves two intermediaries for the sale of products
is known as Two Level Channel. The intermediaries involved are wholesalers and retailers. The
producer sells their products to wholesalers in bulk quantity, who sells them to small retailers, who
ultimately supply the products to the customers. This channel is generally used to sell convenient goods
like soaps, milk, milk products, soft drinks, etc. For example, Hindustan Unilever Limited sells its
goods like detergent, tea leaves, etc., through wholesalers and retailers.

iii) Three-Level Channel

Three level channel means that there are three intermediaries involved between the manufacturer and
the customer for the sale of products. The three intermediaries involved are Agent Distribution,
Wholesalers, and Retailers. It is usually used when the goods are distributed across the country and
for that different distributors are appointed for different areas. For example, wholesalers purchase
goods from different distributors, like North India Distributors and then pass the goods to the retailers,
who ultimately sell the goods to customers.
3. Hybrid. Hybrid channels combine the characteristics of direct and indirect channels. The seller uses both
direct and indirect methods. For example, a manufacturer might sell an item on its e-commerce website, but
then an intermediary delivers the physical product to the customer. The customer still has a direct interaction
with the seller, but an intermediary is also involved.

Examples of distribution channel intermediaries

Intermediaries are used in indirect channels to distribute, sell and promote goods and services.
Intermediaries may more commonly be referred to as middlemen. Examples of intermediaries include
the following:

 Wholesalers are intermediaries between manufacturers and retailers.

 Agents represent a person or entity and serve as an intermediary between buyers and sellers.
 Brokers are similar to agents but represent a person or entity on a limited, per-transaction basis.
 Catalogs are collections of products gathered in a publication and distributed at regular
intervals.
 Consultants are individuals who connect distributors with intermediaries lower on the supply
chain and give advice on how to distribute product effectively.
 Distributors are in direct contact with the manufacturer but sell to end users.
 Retailers either buy from the manufacturer or another intermediary and distribute to consumers
through shops, grocery stores or websites.
 Independent software vendors are vendors that sell their software using a marketplace.
 Managed service providers (MSPs) offer managed software services.
 Online marketplaces are e-commerce sites that connect buyers and sellers.
 Original equipment manufacturers, or OEMs, are companies that sell a product and markets
itself as the company that originally manufactured the product.
 Value-added resellers (VARs) are resellers that add value to a product or service before
reselling it.