MARKETING MANAGEMENT
UNIT-5
CONTENTS
– Pricing Policies
• Pricing Procedure
• General Pricing Approaches or Methods of Price
Fixation
• Implications of the Pricing Policy
• Methods of Pricing
• Objectives of Pricing Policy
• Factors Affecting Pricing Decisions
• Different Pricing Strategies
PRICING POLICIES
• As one of the elements of marketing mix, price has a significant
role in product market integration.
• Price is the only element in marketing mix that generates
revenue.
• In simple terms, price may be understood as the amount of
money for which a product or services is made available to
people.
• Broadly speaking, price is the total of all the values exchanged by
customers just so that they can have or use a product or service.
• Price is the value of product attributes and is expressed in
monetary terms.
Pricing Procedure
• The pricing procedure usually comprises the
following steps:
• Develop information base
• Estimate sales and profits
• Anticipate competitive reaction
• Scan the internal environment
• Consider marketing mix components
• Select price policies and strategies
• Determine price
General Pricing Approaches or Methods of Price
Fixation
• Companies set prices by adopting a general pricing approach that
includes one or more of the following three approaches:
1. Cost-based approach
• There are two cost-based pricing approaches. These are as follows:
– Cost-plus pricing
– This is the easiest and commonly used pricing-setting method. In this
method, a standard mark-up is added to the cost of a product to arrive at
its price.
– Break-even pricing and target-profit pricing
– An important cost-oriented pricing method is called target-profit pricing
wherein the company attempts to determine the price that would
generate the profits it wishes to earn.
2. Buyer-based approach
– The buyer-based pricing approach is as follows:
– Perceived-value pricing
– Many companies base their price on the product’s perceived value. They go by
buyer’s perception of the value of a product, and not the seller’s cost, which they
consider the key to pricing. Therefore, pricing starts with an analysis of consumer
needs and value perceptions, and price is set to match consumers’ perceived
value.
3. Competition-based approach
• The competition-based pricing approach is as follows:
– Going-rate pricing
– According to this technique, the organization’s price is based on the competitor’s
prices with little focus on its own costs or demand. The company may charge the
same price as its primary competitors, or a slightly higher or lower price.
– Sealed-bid pricing
– This competitor-oriented pricing is extremely common in contract businesses
where firms bid for jobs. The contractor decides on a price on the basis of
expectations of how competitors will bid rather than on a strict relation to his cost
or demand.
Implications of the Pricing Policy
• A company’s pricing policy reflects the organization’s philosophy.
• Customers’ perceptions about the company and the brand image are shaped to a
significant degree by pricing.
• Customers understand that companies have price flexibility.
• A company may opt to charge a lower price as it wants more people to own and
enjoy its product.
• A company may never run a sales promotion to indicate that its product is always
economically priced.
• It may never indulge in bargaining and insist on fixed price to give the signal that
argumentative customers will not have a better deal with the company.
• A company should be aware that the pricing strategies and tactics of the company
send strong signals about the company’s philosophies and beliefs.
• A company that reduces prices because cost of its raw materials have gone down,
will have a very different perception among customers from a company which
increases price steeply because the demand of its product has gone up.
Methods of Pricing
1. Cost-oriented pricing
• There are two types of cost-oriented pricing: full cost and direct cost.
• Full cost pricing
• Variable and fixed cost per unit is added and the desired profit margin is added to
the total cost.
• This price is true for one volume of sales/output.
• However, if sales/ output decreases, fixed cost per unit will increase, so price
should rise. Therefore, there is an increase in price as sales fall.
• Direct cost pricing
• The desired profit margin is added to the direct cost to get a price. Price does not
cover full costs, and the company would be making a loss.
• The strategy is valid if there is an idle capacity as a margin covers some part of
fixed costs.
• It is useful for services in periods of low demand as they cannot be stored.
2. Competitor-oriented pricing
• These are two types of competitor-oriented pricing. These are as follows
– Going-rate pricing
– There is no product differentiation, i.e., there is some sort of perfect competition. All
companies charge the same price and smaller players follow the price set by market
leaders.
– Competitive bidding
– The usual procedure is to draw up a detailed specification for a product and put it out for a
tender.
– Potential suppliers quote a price which is confidential that is, known to themselves and the
buyer only (sealed bid). A major focus for suppliers is the likely bid prices of competitors.
3. Marketing-oriented pricing
• Prices should be in keeping with the marketing strategy.
• They should be linked to positioning, strategic objectives, promotions,
distribution and product benefits.
• Pricing decisions are dependant on other earlier decisions in the marketing
planning process.
Objectives of Pricing Policy
• Pricing objectives for a business organization may be
several.
• Some objectives may be primary and others may be
secondary, some may be long-term while some short-term.
• However, all pricing objectives are emitted from the
corporate and marketing objectives of the firm.
• Some of the pricing objectives are as follows:
– Target return
– Market penetration
– Market skimming
– Discriminatory pricing or ability to pay pricing
– Stabilizingpricing
Factors Affecting Pricing Decisions
• There are several factors influencing pricing decisions.
These are as follows:
– Price–quality relationship
– Product line pricing
– Explicability
– Competition
– Negotiating margins
– Effect on distributors and retailers
– Earning very high profits
– Political factors
– Charging very low prices
Different Pricing Strategies
• While pricing is an important marketing issue, it is also one of the most puzzling marketing
problems faced by any business firm. For a new product, the going is not easy because
there is not established market or a visible demand.
1. Skimming price
• If the price is high initially, then coupled with heavy promotional expenditure, it may be
possible to launch a new product if conditions are favourable. For example-
• Price-wise, the demand will fluctuate less in the initial stages, since high prices are unlikely
to discourage pioneering consumers. Anew product will command a better price owing to
its novelty.
• If the life of the product is short, a high initial price will help in getting as much out of it
and as fast as possible.
• Such a policycan provide the basis for dividing the market into segments of differing
fluctuations. Bound edition of a book is usually followed by a paperback.
• A high initial price may prove useful if the production skills needed to make the product
are kept secret so that it is difficult and time consuming for competitors to enter on an
economical basis.
2. Penetration price
• In certain situations, it is possible for a business firm to successfully expand the market rapidly.
• As a result, they will obtain larger sales volume and lower unit costs. This is appropriate where:
– Short-run price elasticity is high.
– Substantial cost savings from bulk production exist.
– The mass of consumers accepts the product.
– No strong patent protection exists.
– Threat of potential competition exists.
– A big share of the market is captured quickly.
3. Product-mix pricing strategies
• The strategy to set a product’s price has to often change if the product forms a part of the
product mix. In this case, the firm watches out for a set of prices that maximize the profits on
the total product mix.
• Pricing is a challenge not only because various products have related demand and cost but
because they face stiff competition.
THANKS
