Pricing Decision and its Strategies

Lecture
 Pricing
Pricing is the process whereby a business sets the price at which it will sell its products and services, and may be part of
the business's marketing plan.

Philip Kotler define“ Price is the amount of money charged for a product or service.”

Stanton define “ Price is the amount of money or goods needed to acquire some combination of another goods and its
companying services.”

 Pricing is simply the “money charged for a product or service”.

 It is everything that a “ customer has to give up” in order to acquire a product or service.
 The “price is not the same thing as cost”.
 Pricing is a fundamental aspect of financial modeling and is one of the four Ps of the marketing mix
 Price is the only revenue generating element amongst the four Ps, the rest being cost centers.
 It contributes to the “perception” of a product or service by customers.
 Factors Affecting Pricing Decisions
Internal Factors External Factors
 The external factors are those factors that are not
 The internal factors are factors that can be controlled,
within reach of the organisation.
determine and process by the organisation.  Many other external factors determine, control and
 They are also known as organisational factors.
influence the pricing decision.

 Competitors
 Cost of the Product  Demand for the product
 Company Objectives  Suppliers of raw materials and other
 Organisational Factors
 goods.
Marketing Mix  Economic Conditions
 Product Differentiation  Nature and behaviour of consumers
 Top Level Management
 or
Stages of Product Life
 customers.
Brand Image and Reputation in Market  Government Regulations
 Product Quality  Ethical Consideration or Codes
 Market Share Cycle
of Conduct
 Seasonal Effect
 Objectives of Pricing
Profit- related Competition Related Customer Related
Sales Related Objectives Other Objectives
Objectives Objectives Objectives

Maximum Current To Face

To Win Sales Growth Market penetration
Profit Competition
Of Customers
Confidence
Target on To Keep Promoting a new
Target Share product
Investment Competitors To Satisfy
Away maintaining Inage
and reputation
Customers Increase in market
To Achieve Share
Quality Leadership To skim the cream
by Pricing from the market

To Remove Price stability

Competitors
Survival and
growth
6 Essential Steps In Setting Price For A Product
Step 1: Selecting the Pricing Objective.

Step 2: Determining Demand.

Step 3: Estimating Costs.

Step 4: Analyzing Competitors' Costs, Prices, and Offers.

Step 5: Selecting a Pricing Method.

Step 6: Selecting the Final Price.

 Pricing Strategies or Methods
Going Rate Market Skimming Premium Pricing/ Honeymoon
Cost-Plus Pricing
Method Pricing Image Pricing pricing

Break-Even Perceived- Complementary

Pricing Value Limit Pricing Offset pricing
pricing
Pricing
Mark-up Pricing Sealed Bid Peak Load Contingency
Pricing Method Parity pricing
Pricing pricing
Marginal Cost
Value Pricing Optional-product
Pricing Bundle Pricing Discrete pricing
Pricing
Target Differential / Penetration Diversionary Everyday low
Return Flexible Pricing pricing
Pricing prices
Pricing
Early Cash Geographical Guaranteed Experience curve
Recovery Pricing pricing Odd pricing
Pricing pricing
 Pricing Strategies or Methods
Internet Pricing
Exit fees Predatory Pricing
Models

Price lining Competitive pricing Priority Pricing:

strategy

Price signalling Yield Management Flat-Rate Pricing: Precedence Model:

Strategies
Psychological Auction Smart Market
Usage-Sensitive
pricing Type Mechanism Model:
Pricing:
Economy pricing pricing
or No Frill Low Dynamic Pricing Transaction-Based
Price Pricing:
 Pricing Strategies or Methods
 It is one of the simplest pricing method wherein the manufacturer calculates the cost of
Cost-Plus Pricing 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.

It is a form of cost-plus pricing, but here the profit margin is presented as a percentage of
expected return on sales. The formula for mark-up pricing is:
Mark-up Pricing

It is a method wherein the firm determines the price on the basis of a target rate of return on
the investment i.e. what the firm expects from the investments made in the venture.
Target Here, the firm calculates the amount invested in the business activities and then determine the
Return return they expect from these assuming a particular quantity of the product is sold.
Pricing
 Pricing Strategies or Methods
 It is a method adopted by the firms to determine that how much should be produced or sold
Break-Even at a minimum to ensure that the project does not lose money.
Pricing  This method is similar to break-even analysis, here the company needs to price the products
such that it generates profit after recovering the fixed and variable costs. (equal to or more
than the point at which the sales revenue matches the cost of goods sold).

 The primary aim of the company adopting this pricing method is to meet its marginal cost and
Marginal Cost overheads.
Pricing  The marginal costing method is suitable for entering the industries which are dominated by
giant players, posing a fierce competition for the organization to sustain in the business.

 When it comes to rapidly growing technological products or the ones with a short life cycle,
the cost needs to recover as early as possible.
Early Cash  This method is very similar to target return pricing; the only difference is that it considers a
Recovery Pricing high value of return on investment owing to a short recovery period.
 Pricing Methods
 In this pricing method, the firms consider the competitor’s price as a base in determining the
Going Rate price of its own offerings. It is just Follow the crowd’ method where the company price its
Method product similar to the competitor’s product price
 If the market leader reduces the price of its product, the organization also needs to
decrease its product price, even if the latter’s cost of production is high.
 When it comes to industrial marketing or government projects, the supplier needs to bid
specific product price, which he/she assumes to be the lowest, in a sealed quotation.
Sealed Bid  In other words, the organization needs to fill a tender, which indicates its costing and
Pricing Method competitiveness. Also called tender pricing.
 The pricing should be done smartly by estimating the profit margin at different price levels
and enclosing the most competitive price.

 This pricing method is adopted when different prices have to be charged from the different
group of customers. The prices can also vary with respect to time, area, and product form.
Differential /  E.g. The best example of differential pricing is Mineral Water. The price of Mineral Water
Flexible Pricing varies in hotels, railway stations, retail stores.
 Pricing Methods
 In Perceived-Value Pricing method, a firm sets the price of a product by considering what
Perceived- product image a customer carries in his mind and how much he is willing to pay for it.
Value  In this pricing method, the manufacturer decides the price on the basis of customer’s
Pricing perception of the goods and services taking into consideration all the elements that influence
the customer’s perception.

 Under this pricing method companies design the low priced products and maintain the high-
quality offering.
Value Pricing  Here the prices are not kept low, but the product is re-engineered to reduce the cost of
production and maintain the quality simultaneously.

 It is a practice in which the same goods and services are priced differently based on the
buyer's geographic location.
Geographical  The difference in price might be based on the shipping cost, the taxes each location charges,
pricing or the amount people in the location are willing to pay.
 Pricing Methods
 The skimming method is usually implemented in case of specialty, luxury or innovative
Market Skimming products.
Pricing  Here, the company avails the profit opportunity in the initial stage of marketing by selling
the products at a high price in a non-price-sensitive market segment.
 Later, the prices are dropped down gradually to sustain in the market.

 This is defensive pricing strategy. The company price its products immensely low (and this
Limit Pricing price is known as entry forestalling price), to retain the monopoly in the market.
 It is done to discourage the entry of competitors by presenting the business as unattractive
and non-profitable.

 The peak load method is demand-based pricing, where the companies charge high prices in
the peak seasons or period when the demand for the product is quite high.
Peak Load  However, in the off-peak time or season when the demand falls, the prices are kept low.
Pricing  It is applied for seasonal product pricing, airline travel pricing, tourism package pricing, etc.
 Pricing Methods
 Bundling refers to compiling of two or more products together and selling it as a single
product. The company prices the complete bundle at a single price known as the offer
Bundle Pricing price.
 Price bundling is combining several products or services into a single comprehensive package
for an all-inclusive reduced price. Despite the fact that the items are sold for discounted
prices, it can increase profits because it promotes the purchase of more than one item.
 It is an approach that can be considered at the time of market entry.
 In this approach, the price of a product is initially set low in an effort to penetrate the
Pricing or
Pricing to Gain market quickly.
 Low prices and low margins also act as a deterrent, preventing potential rivals from entering
Market
the market since they would have to undercut the low margins to gain a foothold
 Odd pricing is a pricing method aimed at maximizing profit by making micro-adjustments
in pricing structure. It relies on the assumption that consumers are calculation-averse and will
therefore only read the first digits of a price when making their purchasing decision. It refers to a
price ending in 1,3,5,7,9 just under a round number.
Odd pricing  Even pricing refers to a price ending in a whole number or in tenths (e.g., $0.50, $6.10, $55.00).
The idea is that a price ending in .99 sounds cheaper in the mind of the customer than those
ending in .00.
 Pricing Methods
 Premium pricing, also called image pricing or prestige pricing, is a pricing strategy of
Premium Pricing/ marking the price of the product higher than the industry standards/competitors’ products.
Image Pricing  The idea is to encourage a perception among the buyers that the product has a more utility or a
higher value when compared to competitors’ products just because it is sold at a premium
price.

Complementary pricing is an umbrella category of "captive-market" pricing tactics.

Complementary It refers to a method in which one of two or more complementary products (a DeskJet printer, for
pricing example) is priced to maximize sales volume, while the complementary product (printer ink
cartridges) are priced at a much higher level in order to cover any shortfall sustained by the first
product.

 Contingency pricing is the process where a fee is only charged contingent on certain results.
Contingency  It is widely used in professional services such as legal services and consultancy services.
pricing  In the United Kingdom, a contingency fee is known as a conditional fee
 Pricing Methods
 Discrete Pricing occurs when prices are set at a level that the price comes within the
competence of the decision making unit (DMU).
Discrete pricing
 This method of pricing is often used in B2B contexts where the purchasing officer may be
authorized to make purchases up to a predetermined level, beyond which decisions must go to
a committee for authorization.

 This occurs where a low basic price may be quoted for a service or parts of a service to
Diversionary develop an image of a low price structure.
pricing  Restaurants may offer a basic meal at an attractive price to encourage custom though most
diners may finish up eating from other higher priced menus.

 Guaranteed pricing is a variant of contingency pricing. It refers to the practice of including an

undertaking or promise that certain results or outcomes will be achieved.
Guaranteed  Employment agencies may only charge fees when clients obtain suitable employment; estate
Pricing agents may only take commission if a property actually sells.
 Concept Check Question
Ques. Market Skimming Pricing is related to

(A) Setting a low price to "skim off" a large number of consumers.

(B) Setting an initially-high price which falls as competitors enter the market.
(C) Setting a high price which consumers perceive as indicating high quality.
(D) Setting a low price to enter a new market

(B) Setting an initially-high price which falls as competitors enter the market :Market Skimming is a method of
pricing involving setting a high initial price for a high-end product to attract buyers with suitable resources who
also have a strong want for the product. The purpose of Market Skimming is to secure as much revenue from the
product before competitors enter the market. When this happens the seller usually lowers the price of their high-
end product considerably to corner the low-end of the market also
Thank You