MARKETING MANAGEMENT

WELCOME
TO
THE CLASS
OF
PRICING CONCEPT
BY
DARA RAJENDRABABU
 TOPICS TO DISCUSS

• Meaning and Definition of

Price and Pricing Different Factors Affecting
Objectives Methods/Approaches Pricing
LEARNING OUTCOMES
• Introduction and Definitions Price.
• Understanding The Different Methods/Approaches of
Pricing.

• Understanding the Factors Affecting Pricing.

 MEANING OF PRICING
Pricing is a process of fixing the value that a manufacturer will
receive in the exchange of services and goods. Pricing method is
exercised to adjust the cost of the producer’s offerings suitable
to both the manufacturer and the customer. The pricing depends
on the company’s average prices, and the buyer’s perceived
value of an item, as compared to the perceived value of
competitors product.
Price is the marketing mix element that produces 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.
 Every businessperson starts a business with a motive and
intention of earning profits. This ambition can be acquired by
the pricing method of a firm. While fixing the cost of a product
and services the following point should be considered:
The identity of the goods and services
 The cost of similar goods and services in the market

 The target audience for whom the goods and services are
produces
 The total cost of production (raw material, labour cost,
machinery cost, transit, inventory cost etc).
 External elements like government rules and regulations,
policies, economy, etc.,
 It refers to the task of translating into quantitative terms
(monetary terms) the value of a product or a unit of service to
customers. It involves –
 Establishing pricing objectives

 Identifying factors affecting price

 Determining the product value in monetary terms

 Formulating pricing policies

 Developing pricing strategies

 Setting prices and engaging in implementation and control of

prices for maximum revenue
 DEFINITIONS
According to Kotler and Armstrong (2009, p. 263) the price
is “the amount of money charged for a product or service, or
the sum of all the values that customers give up in order to
gain the benefit of having or using a product or service.”
Stanton define Price as : “ Price is the amount of money or
goods needed to acquire some combination of another
goods and its companying services.” Price is the element of
the marketing mix who stable in certain period but at one
moment the price might be increase or decrease and price
become as the single element that revenue from the selling.
 PRICING OBJECTIVE
Pricing objectives are the goals that guide your business in
setting the cost of a product or service to your existing or
potential consumers.
A pricing objective underpins the pricing process for a
product and it should reflect your company's marketing,
financial, strategic and product goals, as well as consumer
price expectations and the levels of your available stock and
production resources.
Some examples of pricing objectives include maximising
profits, increasing sales volume, matching competitors'
prices, deterring competitors – or just pure survival.
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 fulfil 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.
METHODS/APPROACHES TO PRICING
 COST BASED – BASED ON COST OF
PRODUCTION
1 Mark-up / Cost plus pricing – Selling price includes total
cost plus mark-up /margin that the firm desires.
 Mark up Price = Unit cost (VC + FC)/(1 – desired return on
sale)
2 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 –
 Fixed Cost + Variable Cost + Selling and administrative cost
+ Advertisement cost
3 Break even or Target return pricing – Firm determines the
breakeven point i.e. the 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.
 T.R.P = Unit Cost + (Desired return X Invested Capital)/Unit
Sales
 MARKET / CUSTOMER / DEMAND
BASED
1 What the traffic can bear – The seller sets the maximum price
that the buyers are willing to pay under given circumstances.
2 Skimming Pricing – The seller sets a relatively high price
when the product is introduced and then lowers the price over
time.
3 Penetration Pricing – The product is introduced at low prices
initially and the price is increased subsequently with increase
in demand and market share.
 COMPETITION BASED
1 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.
2 Discount Pricing – Price of the product is set below the price
of competitor’s product.
3 Premium Pricing – Price is set above the price charged by the
competitors for similar product.
4 Tender / Sealed bid pricing – A contract 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.
 OTHER METHODS
1 Differentiated pricing – Different prices are charged from
different customers on the basis of –
 Customer segments

 Time

 Location/Area

 Product Quantity

 Product attributes

2 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.
FACTORS AFFECTING PRICING
 INTERNAL FACTORS
Internal factors are internal to organization and, hence,
are controllable. These factors play vital role in pricing
decisions. They are also known as organizational factors.
Manager, who is responsible to set price and formulae
pricing policies and strategies, is required to know
adequately about these factors.
1 Top Level Management
Top-level management has a full authority over the issues related
to pricing. Marketing manager’s role is administrative. The
philosophy of top-level management is reflected in forms of
pricing also. How does top management perceive the price?
How far is pricing considered as a tool for earning profits, and
what is importance of price for overall performance? In short,
overall management philosophy and practice have a direct
impact on pricing decision. Price of the product may be high or
low; may be fixed or variable; or may be equal or discriminative
depends on top-level management.
2 Elements of Marketing Mix
Price is one of the important elements of marketing mix.
Therefore, it must be integrated to other elements (promotion,
product, and distribution) of marketing mix. So, pricing
decisions must be linked with these elements so as to consider
the effect of price on promotion, product and distribution, and
effect of these three elements on price.
For example, high quality product should be sold at a high price.
When a company spends heavily on advertising, sales
promotion, personal selling and publicity, the selling costs will
go up, and consequently, price of the product will be high. In the
same way, high distribution costs are also reflected in forms of
high selling price.
3 Degree of Product Differentiation
Product differentiation is an important guideline in pricing
decisions. Product differentiation can be defined as the degree
to which company’s product is perceived different as against
the products offered by the close competitors, or to what
extent the product is superior to that of competitors’ in terms
of competitive advantages. The theory is, the higher the
product differentiation, the more will be freedom to set the
price, and the higher the price will be.
4 Costs
Costs and profits are two dominant factors having direct
impact on selling price. Here, costs include product
development costs, production costs, and marketing costs. It
is very simple that costs and price have direct positive
correlation. However, production and marketing costs are
more important in determining price.
5 Objectives of Company
Company’s objectives affect price of the product. Price is set
in accordance with general and marketing objectives. Pricing
policies must the company’s objectives. There are many
objectives, and price is set to achieve them.
6 Stages of Product Life Cycle
Each stage of product life cycle needs different marketing
strategies, including pricing strategies. Pricing depends upon
the stage in which company’s product is passing through.
Price is kept high or low, allowances or discounts are allowed
or not, etc., depend on the stage of product life cycle.
7 Product Quality
Quality affects price level. Mostly, a high-quality-product is
sold at a high price and vice versa. Customers are also ready
to pay high price for a quality product.
8 Brand Image and Reputation in Market
Price doesn’t include only costs and profits. Brand image and reputation of the
company are also added in the value of product. Generally, the company with
reputed and established brand charges high price for its products.
9 Category of Product
Over and above costs, profits, brand image, objectives and other variables, the
product category must be considered. Product may be imitative, luxury, novel,
perishable, fashionable, consumable, durable, etc. Similarly, product may be
reflective of status, position, and prestige. Buyers pay price not only for the
basic contents, but also for psychological and social implications.
10 Market Share
Market share is the desired proportion of sales a company wants to achieve
from the total sales in an industry. Market share may be absolute or relative.
Relative market share can be calculated with reference to close competitors. If
company is not satisfied with the current market share, price may be reduced,
discounts may be offered, or credit facility may be provided to attract more
buyers.
 EXTERNAL FACTORS
External factors are also known as environmental or
uncontrollable factors. Compared to internal factors, they are
more powerful.
Pricing decisions should be taken after analyzing following
external factors:
1 Demand for the Product
Demand is the single most important factor affecting price of
product and pricing policies. Demand creation or demand
management is the prime task of marketing management. So,
price is set at a level at which there is the desired impact on
the product demand. Company must set price according to
purchase capacity of its buyers.
Here, there is reciprocal effect between demand and price, i.e.,
price affects demand and demand affects price level.
However, demand is more powerful than price. So, marketer
takes decision as per demand. Price is kept high when demand
is high, and price is kept low when demand of the product is
low. Price is constantly adjusted to create and/or maintain the
expected level of demand.
2 Competition
A marketer has to work in a competitive situation. To face
competitors, defeat them, or prevent their entry by effective
marketing strategies is one of the basic objective
organizations. Therefore, pricing decision is taken
accordingly.
A marketer formulates pricing policies and strategies to
respond competitors, or, sometimes, to misguide competitors.
When all the marketing decisions are taken with reference to
competition, how can price be an exception?
Sometimes, a company follows a strong competitor’s pricing
policies assuming that the leader is right. Price level,
allowances, discount, credit facility, and other related
decisions are largely imitated.
3 Price of Raw Materials and other Inputs
The price of raw materials and other inputs affect pricing
decisions. Change in price of needed inputs has direct positive
effect on the price of finished product. For example, if price of
raw materials increases, company has to raise its selling price
to offset increased costs.
4 Buyers Behaviour
It is essential to consider buyer behaviour while taking pricing
decision. Marketer should analyze consumer behaviour to set
effective pricing policies. Consumer behaviour includes the
study of social, cultural, personal, and economic factors
related to consumers. The key characteristics of consumers
provide a clue to set an appropriate price for the product.
5 Government Rules and Restrictions
A company cannot set its pricing policies against rules and regulations
prescribed by the governments. Governments have formulated at least
30 Acts to protect the interest of customers. Out of them, certain Acts
are directly related to pricing aspects. Marketing manager must set
pricing within limit of the legal framework to avoid unnecessary
interference from the outside. Adequate knowledge of these legal
provisions is considered to be very important for the manager.
6 Ethical Consideration or Codes of Conduct
Ethics play a vital role in price determination. Ethics may be said as
moral values or ethical code that govern managerial actions. If a
company wants to fulfill its social obligations and when it believes to
work within limits of the ethics prescribed, it always charges
reasonable price for its products. Moral values restrict managerial
behaviour.
7 Seasonal Effect
Certain products have seasonal demand. In peak season, demand is
high; while in slack season, demand reduces considerably. To balance
the demand or to minimize the seasonal-demand fluctuations, the
company changes its price level and pricing policies. For example,
during a peak season, price may be kept high and vice versa. Discount,
credit sales, and price allowances are important issues related to
seasonal factor.
8 Economic Condition
This is an important factor affecting pricing decisions. Inflationary or
deflationary condition, depression, recovery or prosperity condition
influences the demand to a great extent. The overall health of economy
has tremendous impact on price level and degree of variation in price
of the product. For example, price is kept high during inflationary
conditions. A manager should keep in mind the macro picture of
economy while setting price for the product.